This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include information concerning Lifetime Brands, Inc.'s (the "Company's") plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, in Management's Discussion and Analysis of Financial Condition and Results of Operations. When used in this Quarterly Report on Form 10-Q, the words "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, the Company's examination of historical operating trends, are based upon the Company's current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company's assumptions will prove correct.

There are a number of risks and uncertainties that could cause the Company's actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Important factors that could cause the Company's actual results to differ materially from those expressed as forward-looking statements are set forth in the Company's 2008 Annual Report on Form 10-K in Part I, Item 1A under the heading Risk Factors. Such risks, uncertainties and other important factors include, among others:

• Risks associated with indebtedness;

• Changes in general economic and business conditions which could affect customer payment practices or consumer spending;

• Customer risks;

• The Company's dependence on third-party foreign sources of supply and foreign manufacturing;

• Changes in demand for the Company's products and the success of new products;

• The level of competition in the Company's industry;

• Industry trends;

• Fluctuations in costs of raw materials;

• Increases in costs relating to manufacturing and transportation of products;

• Complexities associated with a multi-channel and multi-brand business;

• The Company's relationship with key licensors;

• Encroachments on the Company's intellectual property;

• The Company's relationship with key customers;

• Product liability claims or product recalls;

• The timing of delivery of products to customers;

• Departure of key personnel;

• Internal development of products by the Company's customers;

• Noncompliance with applicable regulations including the Sarbanes-Oxley Act of 2002;

• Risks associated with the Company's Internet operations;

• Future acquisitions and integration of acquired businesses;

• Technological risks;

• Network security risks; and

• The seasonal nature of the Company's business.

There may be other factors that may cause the Company's actual results to differ materially from the forward-looking statements. Except as may be required by law, the Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

The Company is one of North America's leading resources for nationally branded food preparation, tabletop and home décor products. The Company's three major product categories are Food Preparation, Tabletop and Home Décor. The Company markets several product lines within each of these product categories and under each of the Company's brands, primarily targeting moderate to premium price points, through every major level of trade. The Company's competitive advantage is based on availability and use of its brands, an emphasis on innovation and new product development and sourcing capabilities. The Company owns or licenses a number of the leading brands in its industry including Farberware®, KitchenAid®, Cuisinart®, Pfaltzgraff® and Mikasa®. Historically, the Company's sales growth has come from expanding product offerings within the Company's current categories by developing existing brands, and acquiring new brands and product categories. Key factors in the Company's growth strategy have been, and will continue to be, the selective use and management of the Company's brands, and the Company's ability to provide a stream of new products and designs. A significant element of this strategy is the Company's in-house design and development team that creates new products, packaging and merchandising concepts.

EFFECTS OF THE CURRENT ECONOMIC ENVIRONMENT

The Company's financial performance in 2008 was negatively affected by unfavorable global economic conditions. Continued or further deteriorating economic conditions would likely have an adverse impact on the Company's sales volumes, pricing levels and profitability in 2009. As economic conditions change, trends in discretionary consumer spending also become unpredictable and subject to reductions due to uncertainties about the future. If consumers reduce discretionary spending, purchases of the Company's products may also decline. A general reduction in consumer discretionary spending due to the recession or uncertainties regarding future economic prospects could continue to have a material adverse effect on the Company's financial condition and results of operations.

2009 INFLUENZA OUTBREAK

In April 2009, public health authorities reported an outbreak of influenza that has the potential to become pandemic. A severe and prolonged outbreak may have a significant negative effect on overall economic activity, including the demand for the Company's products. In response to such an outbreak, public health authorities may recommend that people stay at home or call for employers to close facilities. Significant absenteeism or closing the Company's facilities would have an adverse effect on the Company's business. The Company is unable to predict whether such events will occur or the magnitude of the effect they may have on the Company's business.

BUSINESS SEGMENTS

The Company operates in two reportable business segments; the wholesale segment which is the Company's primary business that designs, markets and distributes its products to retailers and distributors, and the direct-to-consumer segment, through its Pfaltzgraff® and Mikasa® Internet websites and the Company's Pfaltzgraff® mail-order catalogs. During the 2008 period, the Company also operated retail stores utilizing the Pfaltzgraff® and Farberware® names that were included in the direct-to-consumer segment. However, the Company ceased operating these retail stores by December 31, 2008.

MIKASA® ACQUISITION

In June 2008, the Company acquired the business and certain assets of Mikasa, Inc. Net sales from Mikasa® during the three months ended March 31, 2009 were $8.3 million.

INVESTMENT IN GRUPO VASCONIA, S.A.B.

The Company owns approximately 30% of the capital stock of Grupo Vasconia, S.A.B. ("Vasconia"), a manufacturer and distributor of aluminum disks, cookware and related items. Shares of Vasconia capital stock are traded on the Bolsa Mexicana de Valores, S.A. de C.V., the Mexico Stock Exchange, under the symbol VASCONI.MX. The Company accounts for its investment in Vasconia using the equity method of accounting and has recorded its proportionate share of Vasconia's net income for the three months ended March 31, 2009, net of taxes, as equity in earnings of Grupo Vasconia, S.A.B.

The Company's business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2008, 2007 and 2006, net sales for the third and fourth quarters accounted for 61%, 61% and 65% of total annual net sales, respectively. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period.

ADOPTION OF ACCOUNTING PRINCIPLE

Effective January 1, 2009, the Company adopted the provisions of FASB Staff Position Accounting Principles Board ("APB") No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-1") on a retrospective basis. FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash, or other assets, on conversion (including partial cash settlement), to separately account for the liability (debt) and equity (conversion option) components in a manner that reflects the issuer's non-convertible debt borrowing rate with the resulting debt discount amortized as additional non-cash interest expense over the life of the convertible debt. Accordingly, the accompanying December 31, 2008 condensed consolidated balance sheet and March 31, 2008 unaudited condensed consolidated statement of operations and cash flows have been adjusted to reflect the application of the provisions of FSP APB 14-1.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Other than the adoption of FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), described in Notes A and F to the condensed consolidated financial statements, there have been no material changes to the Company's critical accounting policies and estimates from the information provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates included in the Company's Annual Report on Form 10-K dated December 31, 2008.

RESULTS OF OPERATIONS



The following table sets forth statement of operations data of the Company as a
percentage of net sales for the periods indicated:



                                                            Three Months Ended
                                                                March 31,
                                                            2009         2008
Net sales                                                   100.0   %   100.0    %

Cost of sales                                               64.5          60.7
Distribution expenses                                       12.2          13.6
Selling, general and administrative expenses                26.1          31.7
Restructuring expenses                                       0.9           2.9

Loss from operations                                        (3.7)        (8.9)
Interest expense                                           (3.2)          (2.7)
Loss before income taxes and equity in earnings of Grupo   (6.9)        (11.6)
Vasconia, S.A.B.

Income tax benefit                                          (0.1)          4.9
Equity in earnings of Grupo Vasconia, S.A.B.                0.5            0.3
Net loss                                                    (6.5)   %     (6.4)  %

Net Sales

Net sales for the three months ended March 31, 2009 were $90.2 million, a decrease of 8.1% compared to net sales of $98.2 million for the 2008 period.

Net sales for the wholesale segment for the three months ended March 31, 2009 were $83.6 million, an increase of $3.2 million or 4.0% compared to net sales of $80.4 million for the 2008 period. Excluding Mikasa® net sales of $8.3 million, net sales for the wholesale segment were $75.3 million for the three months ended March 31, 2009. Excluding Mikasa® net sales, the Company experienced a decrease primarily in sales volume from its Food preparation product category. The decline reflects the continuing economic weakness and retailers' inventory management.

Net sales for the direct-to-consumer segment for the three months ended March 31, 2009 were $6.6 million compared to $17.8 million for the 2008 period. Excluding sales attributable to the retail stores that the Company closed by the end of 2008, sales for the direct-to-consumer segment in the 2008 period were $6.2 million. The increase in sales for the direct-to-consumer segment in the 2009 period, excluding the retail store sales in the 2008 period, was primarily attributable to added sales from the Mikasa® Internet website. The increase was offset, in part, by lower shipping revenue due to a free shipping promotion during the 2009 quarter.

Cost of sales

Cost of sales for the three months ended March 31, 2009 were $58.1 million compared to $59.6 million for the 2008 period. Cost of sales as a percentage of net sales was 64.5% for the three months ended March 31, 2009 compared to 60.7% for the 2008 period.

Cost of sales as a percentage of net sales for the wholesale segment was 67.0% for the three months ended March 31, 2009 compared to 63.2% for the 2008 period. The decline in gross margin reflects a shift in product and customer mix. Gross margins during the 2009 period also reflects, in cost of sales, inventory that was purchased during 2008 when commodity and transportation costs were higher than they are currently.

Cost of sales as a percentage of net sales for the direct-to-consumer segment decreased to 32.6% for the three months ended March 31, 2009 from 49.3% for the 2008 period. The increase in gross margin was primarily attributable to the low margins that resulted from the going-out-of-business sales during the 2008 period and to a lesser extent higher margins generated by the Mikasa® Internet website in the 2009 period.

Distribution expenses

Distribution expenses for the three months ended March 31, 2009 were $11.0 million compared to $13.4 million for the 2008 period. Distribution expenses as a percentage of net sales were 12.2% for the three months ended March 31, 2009 and 13.6% for the 2008 period.

Distribution expenses as a percentage of net sales for the wholesale segment were 10.1% for the three months ended March 31, 2009 compared to 12.7% for the 2008 period. The decrease was primarily attributable to the elimination in the 2009 period of the duplicative expenses that were incurred in the 2008 period as the Company consolidated its West Coast distribution centers and improved labor efficiency.

Distribution expenses as a percentage of net sales for the direct-to-consumer segment were approximately 39.8% for the three months ended March 31, 2009 compared to 17.4% for the 2008 period. The increase is primarily attributable to the closing of the Company's retail stores which did not incur the high level of freight and labor costs associated with fulfilling orders incurred by the Company's catalog and Internet business. In addition, due to the winding down of the Company's York, Pennsylvania distribution centers, the Company incurred substantial inefficiencies in the facility during the 2009 period.

Selling, general and administrative expenses for the three months ended March 31, 2009 were $23.6 million, a decrease of 24.1% from $31.1 million for the 2008 period.

Selling, general and administrative expenses for the three months ended March 31, 2009 for the wholesale segment were $18.4 million, a decrease of $600,000 or 3.2% from the $19.0 million for the 2008 period. As a percentage of net sales, selling, general and administrative expenses were 22.0% for the three months ended March 31, 2009 compared to 23.6% for the 2008 period. The decrease was primarily attributable to the Company's efforts to lower expenses, including selling expenses, such as amounts spent for travel, trade shows and advertising. The decrease was partially offset by the additional cost to operate the Mikasa® business.

Selling, general and administrative expenses for the three months ended March 31, 2009 for the direct-to-consumer segment were $2.5 million compared to $9.5 million for the 2008 period. The decrease was due to the retail operations that were ceased in 2008. Total selling, general and administrative expenses for the Internet and catalog businesses were consistent in both periods.

Unallocated corporate expenses for the three months ended March 31, 2009 and 2008 were $2.7 million and $2.6 million, respectively. The increase was primarily attributable to an increase in consulting related expenses offset in part by lower stock option expense.

Restructuring expenses

During the three months ended March 31, 2009, the Company recorded restructuring expenses of $824,000 consisting principally of lease obligations and employee related expenses related to the 2008 restructuring initiative that commenced in the third quarter of 2008.

Interest expense

Interest expense for the three months ended March 31, 2009 was $2.9 million compared to $2.7 million for the 2008 period. The increase in interest expense was primarily attributable to higher average interest rates and to a lesser extent higher average borrowings during the 2009 period.

Income tax benefit (provision)

The income tax provision for the three months ended March 31, 2009 was $135,000 compared to an income tax benefit of $4.9 million for the 2008 period. The Company's effective tax rate in the 2009 period reflects a reduction in the valuation allowance recoverable against certain deferred tax assets and a provision for minimum state taxes.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of cash to fund liquidity needs are: (i) cash provided by operating activities and (ii) borrowings available under its Credit Facility. The Company's primary uses of funds consist of working capital requirements, capital expenditures and payment of principal and interest on its debt.

At March 31, 2009, the Company had cash and cash equivalents of $2.0 million, compared to $3.5 million at December 31, 2008.

Borrowings under the Company's Credit Facility were $79.7 million at March 31, 2009 which represents a decrease of $9.6 million from December 31, 2008.

The Company has a $150 million secured credit facility that matures on January 31, 2011 (the "Credit Facility"). Borrowings under the Credit Facility are secured by all assets of the Company. At December 31, 2008, the Company was not in compliance with the financial covenants required by the Credit Facility. On March 31, 2009, the Company entered into a waiver and amendment to the Credit Facility (the "Amendment"). Pursuant to the Amendment, the Company's lenders waived the Company's non-compliance with the financial covenants required by the Credit Facility at December 31, 2008. The Amendment modifies the Credit Facility in certain ways including, as follows: (i) changes the maturity date to January 31, 2011, (ii) adds certain asset categories to the borrowing base, (iii) increases the applicable margin rates (including a minimum LIBOR of 1.75%), (iv) revises the minimum EBITDA and fixed charge coverage covenants and adds both a minimum net sales and maximum capital expenditures covenant, (v) eliminates the requirement of maximum leverage and minimum interest coverage ratios, (vi) eliminates the $50 million accordion feature, (vii) revises the minimum excess availability amount and (viii) places restrictions on dividends and acquisitions. The Amendment also provides for a lock-box arrangement with the collateral agent. Pursuant to the Amendment, although the Credit Facility matures on January 31, 2011, the Company is required by current accounting standards to classify the indebtedness as a current liability in the condensed consolidated balance sheets as of March 31, 2009 and December 31, 2008.

At March 31, 2009, the Company had $1.6 million of open letters of credit and $79.7 million of borrowings outstanding under the Credit Facility. Interest rates on outstanding borrowings at March 31, 2009 ranged from 4.75% to 8.37%. Availability under the Credit Facility at March 31, 2009 was $36.4 million (net of $10.0 million of minimum required availability). The Company has interest rate swap and collar agreements with an aggregate notional amount of $55.2 million at March 31, 2009. The Company entered into these agreements to effectively fix the interest rate on a portion of its borrowings under the Credit Facility.

Convertible Notes

The Company has outstanding $75 million aggregate principal amount of 4.75% Convertible Senior Notes due 2011 (the "Notes"). The Notes are convertible into shares of the Company's common stock at a conversion price of $28.00 per share, subject to adjustment in certain events. The Notes bear interest at 4.75% per annum, payable semiannually in arrears on January 15 and July 15 of each year and are unsubordinated except with respect to the Company's debt to the extent secured by the Company's assets. The Notes mature on July 15, 2011. The Company may not redeem the Notes at any time prior to maturity. The Notes are convertible at the option of the holder anytime prior to the close of business on the business day prior to the maturity date. Upon conversion, the Company may elect to deliver either shares of the Company's common stock, cash or a combination of cash and shares of the Company's common stock in satisfaction of the Company's obligations upon conversion of the Notes. If the Notes are not converted prior to the maturity date the Company is required to pay the holders of the Notes the principal amount of the Notes in cash upon maturity.

Effective January 1, 2009, the Company adopted the provisions of FSP APB 14-1 on a retrospective basis. Accordingly, the accompanying December 31, 2008 condensed consolidated balance sheet and March 31, 2008 condensed consolidated statement of operations and cash flows have been adjusted to reflect the application of the provisions of FSP APB 14-1. The cumulative effect of applying the provisions of FSP APB 14-1 resulted in an addition to the accumulated deficit of $3.5 million as of January 1, 2009.

In February 2009, the Company suspended paying a cash dividend on its outstanding shares of common stock.

Operating activities

Cash provided by operating activities was $8.9 million for the three months ended March 31, 2009 compared to cash used by operating activities of $5.3 million in the 2008 period. The increase resulted from improved operating results and a working capital decrease during the 2009 period. The decrease in working capital was primarily attributable to a greater reduction in accounts receivable and inventory levels in the 2009 period compared to the 2008 period.

Investing activities

Cash used in investing activities was $679,000 for the three months ended March 31, 2009 compared to $2.7 million in the 2008 period, all related to capital expenditures. The Company's 2009 planned capital expenditures are estimated not to exceed $6.0 million.

Financing activities

Cash used by financing activities was $9.7 million for the three months ended March 31, 2009 compared to cash provided by financing activities of $4.3 million for the 2008 period. In 2009, net repayments under the Company's Credit Facility were $9.6 million compared to net borrowings of $5.2 million for the 2008 period.