10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended          December 31, 2006                                                                                         

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________________________ to ________________________________

Commission file number 1-2661

CSS INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-1920657
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1845 Walnut Street, Philadelphia, PA	19103
(Address of principal executive offices)	(Zip Code)

(215) 569-9900

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  Accelerated filer x Non-accelerated filer 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

 Yes x No

As of January 19, 2007, there were 10,738,645 shares of common stock outstanding which excludes shares which may still be issued upon exercise of stock options.

CSS INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

	PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations and Comprehensive Income - Three and nine months ended December 31, 2006 and 2005	3
Condensed Consolidated Balance Sheets - December 31, 2006 and March 31, 2006	4
Consolidated Statements of Cash Flows - Nine months ended December 31, 2006 and 2005	5
Notes to Consolidated Financial Statements	6-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	14-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	20
PART II - OTHER INFORMATION
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 6. Exhibits	23
Signatures	24

2

CSS INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2006			2005			2006			2005
SALES	$	264,065		$	251,796		$	485,428		$	473,333
COSTS AND EXPENSES
Cost of sales		197,695			189,367			360,761			357,808
Selling, general and administrative expenses		26,424			23,867			73,917			66,868
Restructuring expenses		1,745			3			1,745			37
Interest expense, net		1,446			1,483			2,663			2,982
Other income, net		(130	)		(47	)		(358	)		(182	)
		227,180			214,673			438,728			427,513
INCOME BEFORE INCOME TAXES		36,885			37,123			46,700			45,820
INCOME TAX PROVISION		13,595			13,199			17,214			16,312
NET INCOME	$	23,290		$	23,924		$	29,486		$	29,508
NET INCOME PER COMMON SHARE
Basic	$	2.19		$	2.27		$	2.79		$	2.81
Diluted	$	2.13		$	2.18		$	2.71		$	2.69
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		10,641			10,538			10,565			10,483
Diluted		10,931			10,979			10,863			10,967
CASH DIVIDENDS PER SHARE OF COMMON STOCK	$	.12		$	.12		$	.36		$	.36
COMPREHENSIVE INCOME
Net income	$	23,290		$	23,924		$	29,486		$	29,508
Foreign currency translation adjustment		-			-			3			-
Comprehensive income	$	23,290		$	23,924		$	29,489		$	29,508

See notes to consolidated financial statements.

3

CSS INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

	December 31,		March 31,
	2006		2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	10,303	$	57,656
Accounts receivable, net		223,944		35,582
Inventories		66,455		103,770
Deferred income taxes		7,718		7,898
Assets held for sale		2,796		-
Other current assets		13,234		18,906
Total current assets		324,450		223,812
PROPERTY, PLANT AND EQUIPMENT, NET		61,307		70,868
OTHER ASSETS
Goodwill		30,952		30,952
Intangible assets, net		4,351		4,422
Other		3,807		4,095
Total other assets		39,110		39,469
Total assets	$	424,867	$	334,149
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes payable	$	42,400	$	-
Current portion of long-term debt		10,195		10,169
Accrued customer programs		16,516		10,791
Accrued restructuring expenses		1,232		4
Other current liabilities		61,498		41,366
Total current liabilities		131,841		62,330
LONG-TERM DEBT, NET OF CURRENT PORTION		20,441		30,518
LONG-TERM OBLIGATIONS		3,300		3,533
DEFERRED INCOME TAXES		5,080		5,258
STOCKHOLDERS’ EQUITY		264,205		232,510
Total liabilities and stockholders’ equity	$	424,867	$	334,149

See notes to consolidated financial statements.

4

CSS INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended
	December 31,
	2006			2005
Cash flows from operating activities:
Net income	$	29,486		$	29,508
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization		10,564			10,460
Provision for doubtful accounts		202			479
Asset impairments		422			-
Deferred tax provision (benefit)		1			(224	)
(Gain) loss on sale of assets		(16	)		61
Share-based compensation expense		2,131			172
Changes in assets and liabilities:
Increase in accounts receivable		(188,564	)		(163,400	)
Decrease in inventory		37,315			16,936
Decrease in other assets		5,855			361
Increase in other liabilities		20,070			14,876
Increase in accrued taxes		6,802			15,934
Total adjustments		(105,218	)		(104,345	)
Net cash used for operating activities		(75,732	)		(74,837	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(4,036	)		(6,930	)
Proceeds from sale of assets		16			335
Net cash used for investing activities		(4,020	)		(6,595	)
Cash flows from financing activities:
Borrowings on long-term obligations		-			729
Payments on long-term obligations		(10,080	)		(10,373	)
Borrowings on notes payable		168,560			227,795
Repayments on notes payable		(126,160	)		(169,895	)
Dividends paid		(3,801	)		(3,783	)
Purchase of treasury stock		(303	)		(6,101	)
Proceeds from exercise of stock options		2,987			4,103
Tax benefit realized for stock options exercised		1,193			-
Net cash provided by financing activities		32,396			42,475
Effect of exchange rate changes on cash		3			-
Net decrease in cash and cash equivalents		(47,353	)		(38,957	)
Cash and cash equivalents at beginning of period		57,656			57,333
Cash and cash equivalents at end of period	$	10,303		$	18,376

See notes to consolidated financial statements.

5

CSS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation -

CSS Industries, Inc. (collectively with its subsidiaries, “CSS” or the “Company”) has prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

Principles of Consolidation -

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Nature of Business -

CSS is a consumer products company primarily engaged in the design, manufacture, procurement, distribution and sale of seasonal and social expression products, principally to mass market retailers. These products include gift wrap, gift bags, boxed greeting cards, gift tags, tissue paper, paper and vinyl decorations, classroom exchange Valentines, decorative ribbons and bows, Halloween masks, costumes, make-up and novelties, Easter egg dyes and novelties, and craft and educational products. The seasonal nature of CSS’ business has historically resulted in lower sales levels and operating losses in the first and fourth quarters and comparatively higher sales levels and operating profits in the second and third quarters of the Company’s fiscal year which ends March 31, thereby causing significant fluctuations in the quarterly results of operations of the Company.

Reclassification -

Certain prior period amounts have been reclassified to conform with the current year classification.

Foreign Currency Translation and Transactions -

Translation adjustments are charged or credited to a separate component of stockholders’ equity. Gains and losses on foreign currency transactions are not material and are included in other income, net in the consolidated statements of operations.

6

Use of Estimates -

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Judgments and assessments of uncertainties are required in applying the Company’s accounting policies in many areas. Such estimates pertain to the valuation of inventory and accounts receivable, the assessment of the recoverability of goodwill and other intangible assets, income tax accounting, the valuation of share-based awards and resolution of litigation and other proceedings. Actual results could differ from these estimates.

Inventories -

The Company records inventory at the date of taking title which generally occurs upon receipt or prior to receipt dependent on supplier shipping terms. The Company adjusts unsaleable and slow-moving inventory to its estimated net realizable value. Substantially all of the Company’s inventories are stated at the lower of first-in, first-out (FIFO) cost or market. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost or market. Inventories consisted of the following (in thousands):

	December 31,		March 31,
	2006		2006
Raw material	$	15,932	$	22,881
Work-in-process		16,141		35,741
Finished goods		34,382		45,148
	$	66,455	$	103,770

Assets Held for Sale -

Assets held for sale in the amount of $2,796,000 represents two former manufacturing facilities and a separate distribution facility which the Company is in the process of selling. The Company expects to sell these facilities within the next 12 months for an amount greater than the current carrying value. The Company ceased depreciating these facilities at the time they were classified as held for sale.

Revenue Recognition -

The Company recognizes revenue from product sales when the goods are shipped and title and risk of loss passes to the customer. Provisions for returns, allowances, rebates to customers and other adjustments are provided in the same period that the related sales are recorded.

7

Net Income Per Common Share -

The following table sets forth the computation of basic and diluted net income per common share for the three and nine months ended December 31, 2006 and 2005 (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2006		2005		2006		2005
Numerator:
Net income	$	23,290	$	23,924	$	29,486	$	29,508
Denominator:
Weighted average shares outstanding for basic income per common share		10,641		10,538		10,565		10,483
Effect of dilutive stock options		290		441		298		484
Adjusted weighted average shares outstanding for diluted income per common share		10,931		10,979		10,863		10,967
Basic net income per common share	$	2.19	$	2.27	$	2.79	$	2.81
Diluted net income per common share	$	2.13	$	2.18	$	2.71	$	2.69

Statements of Cash Flows -

For purposes of the consolidated statements of cash flows, the Company considers all holdings of highly liquid debt instruments with a purchased maturity of three months or less to be cash equivalents.

(2) SHARE-BASED COMPENSATION:

Under the terms of the 2004 Equity Compensation Plan (“2004 Plan”), the Human Resources Committee (“Committee”) of the Board of Directors may grant incentive stock options, non-qualified stock options, restricted stock grants, stock appreciation rights, stock bonuses and other awards to officers and other employees. Grants under the 2004 Plan may be made through August 3, 2014. The term of each grant is at the discretion of the Committee, but in no event greater than ten years from the date of grant. The Committee has discretion to determine the date or dates on which granted options become exercisable. All options outstanding as of December 31, 2006 become exercisable at the rate of 25% per year commencing one year after the date of grant. At December 31, 2006, options to acquire 1,337,775 shares were available for grant under the 2004 Plan.

Under the terms of the CSS Industries, Inc. 2006 Stock Option Plan for Non-Employee Directors (“2006 Plan”), non-qualified stock options to purchase up to 200,000 shares of common stock are available for grant to non-employee directors at exercise prices of not less than fair market value of the underlying common stock on the date of grant. Under the 2006 Plan, options to purchase 4,000 shares of the Company’s common stock are granted automatically to each non-employee director on the last day that the Company’s common stock is traded in November from 2006 to 2010. Each option will expire five years after the date the option is granted and commencing one year after the date of grant, options begin vesting and are exercisable at the rate of 25% per year. At December 31, 2006, options to acquire 180,000 shares were available for grant under the 2006 Plan.

8

Prior to April 1, 2006, the Company accounted for its equity incentive plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment,” using the modified prospective transition method. Under that transition method, stock compensation cost recognized in fiscal 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R, and c) compensation cost for all share-based payments modified, repurchased, or cancelled subsequent to April 1, 2006. Compensation cost is recognized on a straight-line basis over the vesting period during which employees perform related services. In accordance with the modified prospective transition method, the consolidated financial statements for fiscal 2006 have not been restated to reflect the impact of SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions resulting from share-based payment arrangements as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires that the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those share awards (referred to as excess tax benefits) be classified as financing cash flows. The $1,193,000 excess tax benefit classified as a financing cash inflow for the nine months ended December 31, 2006 would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123R.

Compensation cost related to stock options recognized in operating results (included in selling, general and administrative expenses) was $719,000 and $2,131,000 in the three and nine months ended December 31, 2006, respectively. The associated future income tax benefit recognized was $172,000 and $497,000 in the three and nine months ended December 31, 2006, respectively. For the three and nine months ended December 31, 2006, basic and diluted income per share was $.05 and $.15 lower, respectively, than if the Company had continued to account for share-based compensation under APB Opinion No. 25.

The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock option plans for the three and nine months ended December 31, 2005:

	Three Months Ended			Nine Months Ended
	December 31, 2005			December 31, 2005
(in thousands, except per share data)
Net income, as reported	$	23,924		$	29,508
Add: Total stock-based employee compensation expense included in the determination of net income as reported, net of tax effects		-			111
Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects		(588	)		(1,825	)
Pro forma net income	$	23,336		$	27,794
Net income per share:
Basic - as reported	$	2.27		$	2.81
Basic - pro forma	$	2.21		$	2.65
Diluted - as reported	$	2.18		$	2.69
Diluted - pro forma	$	2.13		$	2.53

9

Upon exercise of stock options, the Company issues shares from treasury stock. Expected volatilities are based on historical volatility of the Company’s common stock. The expected life of the option is estimated using historical data pertaining to option exercises and employee terminations. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant.

The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions:

	For the Three Months						For the Nine Months
	Ended December 31,						Ended December 31,
	2006			2005			2006			2005
Expected dividend yield at time of grant		1.52	%		1.39	%		1.60	%		1.43	%
Expected stock price volatility		31	%		36	%		25	%		35	%
Risk-free interest rate		4.52	%		4.43	%		4.91	%		4.06	%
Expected life of option		4.7 years			6.3 years			4.7 years			4.9 years

Transactions from April 1, 2006 through December 31, 2006 under the Company’s stock option plans were as

follows:

	Number of Shares			Option Price per Share		Weighted Average Price		Weighted Average Life Remaining		Aggregate Intrinsic Value (in thousands)
Options outstanding at April 1, 2006		1,737,606		$	12.71 - 36.60	$	24.35
Granted		394,100			27.60 - 33.24		30.01
Exercised		(291,846	)		12.71 - 34.12		17.23
Canceled		(146,138	)		16.70 - 35.00		32.32
Options outstanding at December 31, 2006		1,693,722		$	12.71 - 36.60	$	26.22		4.0 years	$	15,538
Options exercisable at December 31, 2006		916,468		$	12.71 - 36.60	$	21.97		3.7 years	$	12,294

The weighted average fair value of options granted during the nine months ended December 31, 2006 and 2005 was $7.85 and $10.81, respectively.

The total intrinsic value of options exercised during the nine months ended December 31, 2006 was $3,936,000. As of December 31, 2006, there was $6,086,000 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s equity incentive plans.

(3) DERIVATIVE FINANCIAL INSTRUMENTS:

The Company enters into foreign currency forward contracts in order to reduce the impact of certain foreign currency fluctuations. Firmly committed transactions and the related receivables and payables may be hedged with foreign currency forward contracts. Gains and losses arising from foreign currency forward contracts are recognized in income or expense as offsets of gains and losses resulting from the underlying hedged transactions. As of December 31, 2006, the notional amount of open foreign currency forward contracts was $19,184,000 and the related unrealized gain was $714,000. As of March 31, 2006, the notional amount of open foreign currency forward contracts was $494,000 and the related unrealized loss was immaterial.

(4) BUSINESS RESTRUCTURING:

On November 27, 2006, the Board of Directors of the Company approved a restructuring plan to combine the operations of its Cleo Inc (“Cleo”) and Berwick Offray LLC (“Berwick Offray”) subsidiaries, to close Cleo’s Maysville, Kentucky production facility and to exit a non-material, non-core business. This restructuring was undertaken in order to improve profitability and efficiency through the elimination of redundant back office functions, certain senior management positions and excess manufacturing capacity. In connection with the restructuring plan, the Company estimates that it will incur pre-tax restructuring expenses of approximately $2,600,000, including termination costs of approximately $1,545,000 and other restructuring costs of $1,055,000. Also, in connection with the restructuring plan, the Company recorded an impairment of fixed assets at the effected facilities of $422,000 which is included in restructuring expenses. The Company expects to complete the restructuring plan by September 30, 2007. During the three months ended December 31, 2006, total costs of $1,745,000 are included in restructuring expenses. As part of the restructuring plan, the Company recorded a restructuring reserve of $1,323,000, including severance related to 29 employees. During the third quarter and nine months ended December 31, 2006, the Company made payments of $91,000.

10

Selected information relating to the aforementioned restructuring follows (in thousands):

	Termination Costs			Other Costs			Total
Initial accrual	$	1,200		$	123		$	1,323
Cash paid - fiscal 2007		(26	)		(65	)		(91	)
Restructuring reserve as of December 31, 2006	$	1,174		$	58		$	1,232

On May 5, 2004, a subsidiary of the Company announced a restructuring of its business and established a restructuring reserve related to its administrative office located in Minneapolis, Minnesota. This restructuring was undertaken in order to gain efficiencies within the business unit and was substantially completed by the first quarter of fiscal 2006. As part of this restructuring plan, the Company accrued $377,000 for termination costs and costs related to the restructuring of the administrative office. As of the end of fiscal 2005, the Company had communicated termination of employment to 33 employees. In fiscal 2005, the Company increased the restructuring reserve in the amount of $255,000 related to the ratable recognition of retention bonuses for employees providing service until their termination date. Additionally, during fiscal 2005, there was an increase in the restructuring reserve in the amount of $177,000 related to unutilized office space and of $398,000 related to other restructuring expenses. The Company increased the restructuring reserve by $37,000 during fiscal 2006 primarily related to the ratable recognition of retention bonuses for employees providing service until their termination. Final payments for termination costs of $4,000 were made in the first quarter of fiscal 2007.

(5) GOODWILL AND INTANGIBLES:

The Company performs the required annual impairment test of the carrying amount of goodwill and indefinite-lived intangible assets in the fourth quarter of its fiscal year.

Included in intangible assets, net in the accompanying condensed consolidated balance sheets are the following acquired intangible assets (in thousands):

	December 31,		March 31,
	2006		2006
Tradenames	$	4,290	$	4,290
Non-compete and other, net		61		132
	$	4,351	$	4,422

11

Amortization expense related to intangible assets was $24,000 and $23,000 for the quarters ended December 31, 2006 and 2005, respectively, and $71,000 and $70,000 for the nine months ended December 31, 2006 and 2005, respectively. The aggregate estimated amortization expense for intangible assets remaining as of December 31, 2006 is as follows (in thousands):

Fiscal 2007	$	23
Fiscal 2008		38
Total	$	61

(6) COMMITMENTS AND CONTINGENCIES:

On August 31, 2006, the United States Court of International Trade (“CIT”) denied the Company’s appeal challenging the imposition of antidumping duties on certain tissue paper products imported from China. As described in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, in the proceedings before the CIT the Company was seeking reversal of the March 2005 final determination of the United States International Trade Commission (“ITC”) that, in part, resulted in the imposition of such duties. The Company is now contesting the final determination of the ITC in proceedings before the United States Court of Appeals for the Federal Circuit, which proceedings were initiated by the Company on October 27, 2006.

In the fiscal year ended March 31, 2005, the Company recognized an expense of approximately $2,300,000 for these duties, reflecting the maximum liability of the Company’s Cleo subsidiary for duties relating to subject tissue paper products imported from China during the 2005 fiscal year based on the applicable deposit rates established by the United States Commerce Department. The amount of Cleo’s actual liability for tissue duties pertaining to the fiscal year ended March 31, 2005, which liability is capped at the deposit rates in effect with respect to the period of time that the subject products were imported by Cleo, will be determined at the time of “liquidation” of the applicable entries by the United States Customs & Border Protection. Liquidation of the applicable entries has been enjoined pending the outcome of the Company’s appeal.

CSS and its subsidiaries are also involved in ordinary, routine legal proceedings that are not considered by management to be material. In the opinion of Company counsel and management, the ultimate liabilities resulting from such lawsuits and claims will not materially affect the financial position of the Company or its results of operations or cash flows.

(7) ACCOUNTING PRONOUNCEMENTS:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (fiscal 2009 for the Company). The Company is currently assessing the impact of SFAS No. 157 on its financial position and results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company does not expect SAB 108 will have a material impact on the Company’s financial position or results of operations.

12

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation requires that the Company recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based solely on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 will be effective for the Company beginning April 1, 2007 with the cumulative effect (if any) of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 requires retrospective application to prior periods’ financial statements for voluntary changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The provisions of this statement were effective for the Company beginning April 1, 2006. The Company’s financial position, results of operations or cash flows will only be impacted by SFAS No. 154 if it implements changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS No. 151 now requires that these costs be expensed as current period charges. In addition, this statement requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement were effective for the Company beginning April 1, 2006. The adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

STRATEGIC OVERVIEW

Approximately 75% of the Company’s sales are attributable to seasonal (Christmas, Valentine’s Day, Easter and Halloween) products, with the remainder being attributable to everyday products. Seasonal products are sold primarily to mass market retailers and the Company typically has a relatively high market share in many of these categories. Most of these markets have shown little or no growth in recent years, and the Company continues to confront significant cost pressure as its competitors source certain products from overseas and its customers increase direct sourcing from overseas factories. Increasing customer concentration has increased their bargaining power which has also contributed to price pressure.

The Company has taken several measures to respond to cost and price pressures. CSS has increased its investment in product and packaging design and product knowledge to assure it can continue to provide unique added value to its customers. In addition, CSS substantially expanded an office and showroom in Hong Kong to better meet customers’ buying needs and to be able to provide alternatively sourced products at competitive prices. CSS also increased its focus on efficiency and productivity in its North American production and distribution facilities to maintain its competitiveness domestically.

The Company’s everyday craft and floral product lines have higher inherent growth potential due to CSS’ relatively low current market share. The Company has established project teams to pursue top line sales growth in these and other areas.

Historically, significant growth at CSS has come through acquisitions. Management anticipates that it will continue to utilize acquisitions to stimulate further growth.

LITIGATION

On August 31, 2006, the United States Court of International Trade (“CIT”) denied the Company’s appeal challenging the imposition of antidumping duties on certain tissue paper products imported from China. As described in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, in the proceedings before the CIT the Company was seeking reversal of the March 2005 final determination of the United States International Trade Commission (“ITC”) that, in part, resulted in the imposition of such duties. The Company is now contesting the final determination of the ITC in proceedings before the United States Court of Appeals for the Federal Circuit, which proceedings were initiated by the Company on October 27, 2006.

In the fiscal year ended March 31, 2005, the Company recognized an expense of approximately $2,300,000 for these duties, reflecting the maximum liability of the Company’s Cleo Inc (“Cleo”) subsidiary for duties relating to subject tissue paper products imported from China during the 2005 fiscal year based on the applicable deposit rates established by the United States Commerce Department. The amount of Cleo’s actual liability for tissue duties pertaining to the fiscal year ended March 31, 2005, which liability is capped at the deposit rates in effect with respect to the period of time that the subject products were imported by Cleo, will be determined at the time of “liquidation” of the applicable entries by the United States Customs & Border Protection. Liquidation of the applicable entries has been enjoined pending the outcome of the Company’s appeal.

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CSS and its subsidiaries are also involved in ordinary, routine legal proceedings that are not considered by management to be material. In the opinion of Company counsel and management, the ultimate liabilities resulting from such lawsuits and claims will not materially affect the financial position of the Company or its results of operations or cash flows.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The significant accounting policies of the Company are described in the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in many areas. Following are some of the areas requiring significant judgments and estimates: revenue; cash flow and valuation assumptions in performing asset impairment tests of long-lived assets and goodwill; valuation reserves for inventory and accounts receivable; income tax accounting; the valuation of share-based awards and resolution of litigation and other proceedings. There have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, except for the accounting for share-based compensation as described below.

Share-Based Compensation

Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” using the modified prospective transition method and began accounting for its share-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123R, share-based compensation cost is estimated at the grant date based on the fair-value of the award and is expensed ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops its estimates based on historical data and market information which can change significantly over time.

The Company uses the Black-Scholes option valuation model to value employee stock awards. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life and forfeiture rate assumptions are also derived from historical data. The Company recognizes compensation expense using the straight-line amortization method for share-based compensation awards with graded vesting. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different.

RESULTS OF OPERATIONS

Seasonality

The seasonal nature of CSS’ business has historically resulted in lower sales levels and operating losses in the first and fourth quarters and comparatively higher shipment levels and operating profits in the second and third quarters of the Company’s fiscal year which ends March 31, thereby causing significant fluctuations in the quarterly results of operations of the Company.

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Nine Months Ended December 31, 2006 Compared to Nine Months Ended December 31, 2005

Sales for the nine months ended December 31, 2006 increased 3% to $485,428,000 from $473,333,000 in 2005 primarily due to higher sales of Christmas gift wrap and boxed greeting cards, partially offset by lower sales of all-occasion cards, tissue, gift bags and ribbons and bows.

Cost of sales, as a percentage of sales, was 74% in 2006 and 76% in 2005. The improvement in cost of sales is primarily due to improved margins achieved in the gift wrap, gift bag and tissue product lines and the impact of higher sales of gift wrap and Christmas boxed greeting cards, partially offset by lower margins on Halloween products and incremental costs of $604,000 associated with the restructuring plan which includes $570,000 related to the write-down of inventory.

Selling, general and administrative (“SG&A”) expenses, as a percentage of sales, were 15% in 2006 and 14% in 2005. The increase in SG&A expenses, as a percentage of sales, is primarily due to incremental share-based compensation expense related to the adoption of SFAS No. 123R, increases in severance, incentive compensation and consulting costs and incremental costs of $285,000 associated with the restructuring plan established in the current year.

Restructuring expenses were $1,745,000 in 2006 and $37,000 in 2005. The increase in restructuring expenses was due to the establishment of a restructuring plan in the current year to combine the operations of the Cleo and Berwick Offray (“Berwick Offray”) subsidiaries, to close Cleo’s Maysville, Kentucky production facility and to exit a non-material, non-core business. See Note 4 to the consolidated financial statements for further discussion.

Interest expense, net was $2,663,000 in 2006 and $2,982,000 in 2005.The decrease in interest expense was primarily due to lower borrowing levels during 2006 compared to the same period in the prior year.

Income taxes, as a percentage of income before taxes, were 37% in 2006 and 36% in 2005. The increase in the effective tax rate is primarily due to a portion of the stock option expense recorded as a result of the adoption of SFAS No. 123R not being deductible for tax purposes.

Net income for the nine months ended December 31, 2006 was $29,486,000, or $2.71 per diluted share, compared to $29,508,000, or $2.69 per diluted share in 2005. The impact of improved margins was substantially offset by the expensing of stock options due to the current year adoption of SFAS No. 123R, restructuring costs and higher severance, incentive compensation and consulting costs. Excluding costs relating to the restructuring plan and incremental stock option expense related to the Company’s adoption of SFAS No. 123R, net income increased 11% to $32,780,000, or $3.02 per diluted share, for the nine months ended December 31, 2006.

Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005

Sales for the three months ended December 31, 2006 increased 5% to $264,065,000 from $251,796,000 in 2005 primarily due to increased sales of gift wrap, Christmas boxed greeting cards and ribbons and bows as well as the earlier timing of Easter shipments from the fourth quarter to the third quarter in the current fiscal year, partially offset by lower sales of all-occasion cards, tissue, gift tags and gift bags.

Cost of sales, as a percentage of sales, was 75% in 2006 and 2005. Improved margins achieved in the gift bag, gift wrap and tissue product lines were substantially offset by lower margins on ribbons and bows and incremental costs of $604,000 associated with the restructuring plan which includes $570,000 related to the write-down of inventory.

SG&A expenses, as a percentage of sales, were 10% in 2006 and 9% in 2005. The increase in SG&A expenses, as a percentage of sales, is primarily due to incremental share-based compensation expense related to the adoption of SFAS No. 123R, increases in incentive compensation and incremental costs of $285,000 associated with the restructuring plan established in the current year.

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Restructuring expenses were $1,745,000 in 2006 and $3,000 in 2005. The increase in restructuring expenses was due to the establishment of a restructuring plan in the current year to combine the operations of the Cleo and Berwick Offray subsidiaries, to close Cleo’s Maysville, Kentucky production facility and to exit a non-material, non-core business. See Note 4 to the consolidated financial statements for further discussion.

Interest expense, net of $1,446,000 in 2006 was relatively consistent with interest expense, net of $1,483,000 in 2005.

Income taxes, as a percentage of income before taxes, were 37% in 2006 and 36% in 2005. The increase in the effective tax rate is primarily due to a portion of the stock option expense recorded as a result of the adoption of SFAS No. 123R not being tax deductible for tax purposes.

Net income for the three months ended December 31, 2006 was $23,290,000, or $2.13 per diluted share, compared to $23,924,000, or $2.18 per diluted share in 2005. The decrease in net income is primarily attributable to the expensing of stock options due to the current year adoption of SFAS No. 123R, higher incentive compensation cost and restructuring costs as described above, partially offset by improved margins. Excluding costs relating to the restructuring plan and incremental stock option expense related to the Company’s adoption of SFAS No. 123R, net income increased 7% to $25,503,000, or $2.33 per diluted share, for the quarter ended December 31, 2006.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2006, the Company had working capital of $192,609,000 and stockholders' equity of $264,205,000. The increase in accounts receivable from March 31, 2006 reflects seasonal billings of current year Christmas accounts receivables, net of current year collections. The decrease in inventories reflects the normal seasonal shipments during the fiscal 2007 shipping season. The increase in accrued restructuring expenses is due to the establishment of a restructuring plan in the current year to combine the operations of the Cleo and Berwick Offray subsidiaries, to close Cleo’s Maysville, Kentucky production facility and to exit a non-material, non-core business. The increase in other current liabilities was due to increased accruals for income taxes, sales commissions, royalties and employee benefits. The increase in stockholders’ equity was primarily attributable to year-to-date net income and capital contributed upon exercise of employee stock options, partially offset by payments of cash dividends.

The Company relies primarily on cash generated from its operations and seasonal borrowings to meet its liquidity requirements. Historically, a significant portion of the Company’s revenues are seasonal with approximately 80% of sales recognized in the second and third quarters. As payment for sales of Christmas related products is usually not received until after the holiday selling season in accordance with general industry practice, short-term borrowing needs increase throughout the second and third quarters peaking prior to Christmas and dropping thereafter. Seasonal financing requirements are met under a $50,000,000 revolving credit facility with five banks and an accounts receivable securitization facility with an issuer of receivables-backed commercial paper. This facility has a funding limit of $100,000,000 during peak seasonal periods and $25,000,000 during off-peak seasonal periods. In addition, the Company has outstanding $30,000,000 of 4.48% senior notes due ratably in annual $10,000,000 installments through December 2009. These financing facilities are available to fund the Company’s seasonal borrowing needs and to provide the Company with sources of capital for general corporate purposes, including acquisitions as permitted under the revolving credit facility. At December 31, 2006, there was $30,000,000 of long-term borrowings outstanding related to the senior notes and $42,400,000 outstanding under the Company’s short-term credit facilities. In addition, the Company has a minor amount of capital leases outstanding. Based on its current operating plan, the Company believes its sources of available capital are adequate to meet its future cash needs for at least the next 12 months.

As of December 31, 2006, the Company’s letter of credit commitments are as follows (in thousands):

	Less than 1 Year		1-3 Years		4-5 Years		After 5 Years		Total
Letters of credit	$	6,383	$	-	$	-	$	-	$	6,383

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The Company has letters of credit that guarantee funding of workers compensation claims as well as obligations to certain vendors. The Company has no financial guarantees or other arrangements with any third parties or related parties other than its subsidiaries.

In the ordinary course of business, the Company enters into arrangements with vendors to purchase merchandise in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if cancelled.

RECONCILIATION OF CERTAIN NON-GAAP MEASURES

Management believes that presentation of results of operations adjusted to eliminate the affects of incremental, non-recurring costs related to a restructuring plan and the impact of the Company’s adoption of SFAS No. 123R in fiscal 2007 provides useful information to investors because it enhances comparability between the current year and prior year reporting periods.

(in thousands, except per share data)

	Nine Months Ended December 31, 2006
	Income Before Income Taxes		Net Income		Diluted Earnings Per Share
As reported	$	46,700	$	29,486	$	2.71
- Restructuring expenses		1,745		1,102		.10
- Inventory write-downs due to facility closure		570		360		.03
- Other incremental costs related to restructuring plan		319		201		.02
- Expensing stock options - SFAS No. 123R		2,131		1,631		.15
Non-GAAP measurement	$	51,465	$	32,780	$	3.02

	Three Months Ended December 31, 2006
	Income Before Income Taxes		Net Income		Diluted Earnings Per Share
As reported	$	36,885	$	23,290	$	2.13
- Restructuring expenses		1,745		1,102		.10
- Inventory write-downs due to facility closure		570		360		.03
- Other incremental costs related to restructuring plan		319		201		.02
- Expensing stock options - SFAS No. 123R		719		550		.05
Non-GAAP measurement	$	40,238	$	25,503	$	2.33

Diluted earnings per share for the nine months ended December 31, 2006 does not add due to rounding.

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LABOR RELATIONS

With the exception of the bargaining units at the gift wrap facilities in Memphis, Tennessee and the ribbon manufacturing facilities in Hagerstown, Maryland, which totaled approximately 880 employees as of December 31, 2006, CSS employees are not represented by labor unions. Because of the seasonal nature of certain of its businesses, the number of production employees fluctuates during the year. The collective bargaining agreement with the labor union representing Cleo’s production and maintenance employees at the Cleo gift wrap plant and warehouses in Memphis, Tennessee remains in effect until December 31, 2007. A new collective bargaining agreement with the labor union representing the Hagerstown-based production and maintenance employees was concluded in the third quarter of fiscal 2007 and remains in effect until December 31, 2009.

ACCOUNTING PRONOUNCEMENTS

See Note 7 to the Consolidated Financial Statements for information concerning recent accounting pronouncements and the impact of those standards.

FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the Company’s expectation that it will sell facilities held for sale within the next 12 months for an amount greater than the current carrying value; improved profitability and efficiency from the Company’s restructuring plan to combine the operations of its Cleo and Berwick Offray subsidiaries; estimated future expenses in connection with such restructuring plan; continued use of acquisitions to stimulate further growth; the Company’s expected ultimate liabilities from lawsuits and claims; the expected future impact of changes in accounting principles; and the anticipated effects of measures taken by the Company to respond to cost and price pressures. Forward-looking statements are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management as to future events and financial performance with respect to the Company’s operations. Forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect the events or circumstances arising after the date as of which they were made. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including without limitation, general market conditions, increased competition, increased operating costs, including labor-related and energy costs and costs relating to the imposition or retrospective application of duties on imported products, currency risks and other risks associated with international markets, risks associated with the combination of the operations of the Company’s Cleo and Berwick Offray subsidiaries, including restructuring costs and the risk that such costs may exceed the expected amounts described herein, the risk that customers may become insolvent, costs of compliance with governmental regulations and government investigations, liability associated with non-compliance with governmental regulations, including regulations pertaining to the environment, Federal and state employment laws, and import and export controls and customs laws, and other factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006 and in the Company’s previous filings with the Securities and Exchange Commission. As a result of these factors, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to the impact of interest rate changes and manages this exposure through the use of variable-rate and fixed-rate debt. The Company does not enter into contracts for trading purposes and does not use leveraged instruments. The market risks associated with debt obligations and other significant instruments as of December 31, 2006 have not materially changed from March 31, 2006 (see Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006).

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ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s President and Chief Executive Officer and Vice President - Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the President and Chief Executive Officer and Vice President - Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Controls. There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the Securities and Exchange Commission under the Exchange Act) during the third quarter of fiscal year 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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CSS INDUSTRIES, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1A. Risk Factors

Risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006 have not changed with the exception of the following:

Risks associated with our use of foreign suppliers may adversely affect our business, results of operations and financial condition.

For some of our product lines, particularly our Halloween, Easter, Christmas boxed greeting cards, gift bags, gift tags and tissue paper product lines, we use foreign suppliers to manufacture a portion of our products. Approximately 37% of our sales in fiscal 2006 were related to products sourced from foreign suppliers. Our use of foreign suppliers exposes us to risks inherent in doing business outside of the United States, including risks associated with foreign currency fluctuations, transportation costs and delays, difficulties in maintaining and monitoring quality control, compliance with foreign laws and regulations, costs relating to the imposition or retrospective application of duties on imported products, economic or political instability, international public health issues, and restrictions on the repatriation of profits and assets.

Item. 2.Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On November 30, 2006, CSS issued options to purchase 20,000 shares of its common stock ($.10 par value) to the non-employee members of the Board of Directors of CSS pursuant to CSS’ 2006 Stock Option Plan for Non-Employee Directors (the “2006 Plan”). The 2006 Plan provides for the automatic issuance of an option to purchase 4,000 shares of CSS common stock to each non-employee director of CSS on the last trading day of November of each year from 2006 to 2010. In accordance with the automatic grant provisions of the 2006 Plan, each of the options granted on November 30, 2006: (i) has an exercise price of $30.86 per share, the closing price for shares of CSS common stock on the date of the grant; (ii) becomes exercisable in four equal installments, commencing on the first anniversary of the date of grant and annually thereafter; and (iii) expires five years after the date of grant. No consideration is required to be paid to the Company in connection with the issuance of options under the 2006 Plan, and none was received.

On November 21, 2006, CSS issued 6,000 shares of its common stock ($.10 par value) to a member of the Board of Directors of CSS, upon such director’s exercise of stock options previously granted to such director pursuant to CSS’ 1995 Stock Option Plan for Non-Employee Directors (the “1995 Plan”). The aggregate purchase price for these 6,000 shares of CSS common stock was $96,480, which was paid in cash.

On December 22, 2006, CSS issued 36,000 shares of its common stock ($.10 par value) to a member of the Board of Directors of CSS, upon such director’s exercise of stock options previously granted to such director pursuant to the 1995 Plan and CSS’ 2000 Stock Option Plan for Non-Employee Directors (the “2000 Plan”). The aggregate purchase price for these 36,000 shares of CSS common stock was $664,800, which was paid in cash.

The options granted pursuant to the 1995 Plan, 2000 Plan and 2006 Plan were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and the shares of CSS common stock issued upon exercise of the aforementioned options were not registered under the Securities Act. CSS believes that the issuance of the options, and the issuance of the aforementioned shares of CSS common stock in connection with the exercise of options, was exempt from registration under (a) Section 4(2) of the Securities Act as transactions not involving any public offering and such securities having been acquired for investment and not with a view to distribution, or (b) Rule 701 under the Securities Act as transactions made pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation. All recipients had adequate access to information about CSS. CSS did not engage an underwriter in connection with the foregoing stock option grants and stock issuances.

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Share Repurchase Program

A total of 9,200 shares were repurchased at an average price of $32.90 in the third quarter of fiscal 2007. As of December 31, 2006, there remained an outstanding authorization to repurchase 248,024 shares of outstanding CSS common stock as represented in the table below.

	Total Number of Shares Purchased(1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program(2)		Maximum Number of Shares that May Yet Be Purchased Under the Program (2)
October 1 through October 31, 2006		-	$	-		-		257,224
November 1 through November 30, 2006		-		-		-		257,224
December 1 through December 31, 2006		9,200		32.90		9,200		248,024
Total Third Quarter		9,200	$	32.90		9,200		248,024

(1) All share repurchases were effected in open-market transactions and in accordance with the safe harbor provisions of Rule 10b-18 of the Exchange Act.

(2) The Company’s Board of Directors authorized on February 18, 1998 the repurchase of up to 1,000,000 shares of the Company’s common stock (the “Repurchase Program”). Thereafter, the Company’s Board of Directors increased the number of shares authorized to be repurchased by the Company pursuant to the Repurchase Program as follows: November 9, 1998 (500,000 additional shares); May 4, 1999 (500,000 additional shares); September 28, 1999 (500,000 additional shares); September 26, 2000 (500,000 additional shares); and February 27, 2003 (400,000 additional shares). As a result of the Company’s three-for-two stock split distributed on July 10, 2003, the number of shares authorized for repurchase pursuant to the Repurchase Program was automatically increased to 5,100,000 shares. The aggregate number of shares repurchased by the Company pursuant to the Repurchase Program as of December 31, 2006 was 4,851,976 on a split-adjusted basis. An expiration date has not been established for the Repurchase Program.

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Item 6. Exhibits

Exhibit 10.1 CSS Industries, Inc. Severance Pay Plan for Senior Management and Summary Plan Description.

Exhibit 10.2 Employment Agreement dated as of November 21, 2006 between CSS Industries, Inc. and Robert Collins.

Exhibit 31.1 Certification of the Chief Executive Officer of CSS Industries, Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934.

Exhibit 31.2 Certification of the Chief Financial Officer of CSS Industries, Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934.

Exhibit 32.1 Certification of the Chief Executive Officer of CSS Industries, Inc. required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U. S. C. Section 1350.

Exhibit 32.2 Certification of the Chief Financial Officer of CSS Industries, Inc. required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U. S. C. Section 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CSS INDUSTRIES, INC.
	(Registrant)
Date: February 1, 2007	By:	/s/Christopher J. Munyan
		Christopher J. Munyan
		President and Chief Executive Officer
		(principal executive officer)
Date: February 1, 2007	By:	/s/Clifford E. Pietrafitta
		Clifford E. Pietrafitta
		Vice President - Finance and Chief Financial Officer
		(principal financial and accounting officer)

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EX-10.1

Exhibit 10.1

Issued: 10/04/2006

Revised:              n/a

Effective: 10/09/2006

CSS INDUSTRIES, INC.

SEVERANCE PAY PLAN

FOR SENIOR MANAGEMENT

AND

SUMMARY PLAN DESCRIPTION

Effective October 9, 2006

INTRODUCTION

The purpose of the CSS Industries, Inc. Severance Pay Plan for Senior Management (the “Plan”) is to provide payments on a discretionary basis to certain key employees of CSS Industries, Inc. (“CSS”) and its subsidiaries whose employment is terminated for a reason covered by the Plan. This document is designed to serve as both the Plan document and the summary plan description for the Plan. The legal rights and obligations of any person having an interest in the Plan are determined solely by the provisions of the Plan.

The Plan is intended to alleviate some of the financial hardship that eligible employees may experience when their employment is terminated. In essence, benefits under the Plan are intended to be supplemental unemployment benefits. The benefits under the Plan are not intended as deferred compensation and no individual shall have a vested right in such benefits.

CSS, as the Plan sponsor, has the sole discretion to determine whether an employee may be considered eligible for benefits under the Plan. All actions taken by CSS shall be in its role as the sponsor of the Plan, and not as a fiduciary. Nothing in the Plan will be construed to give any employee the right to receive severance payments or to continue in the employment of CSS and any of its subsidiaries. The Plan is unfunded, has no trustee, and is administered by the Plan Administrator. The Plan is intended to be an “employee welfare benefit plan” within the meaning of section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and 29 C.F.R. § 2510.3-2(b) and is to be administered as a “top-hat” welfare plan exempt from the substantive requirements of ERISA. Please review the section entitled “Amendment and Termination of the Plan” regarding CSS’ reservation of future rights.

The Plan shall be effective as of October 9, 2006 with respect to terminations occurring on or after October 9, 2006, and supersedes all prior severance pay plans, policies, agreements or practices, whether formal or informal, written or unwritten, of CSS and its subsidiaries under which CSS or any of its subsidiaries provided severance benefits prior to the effective date of this Plan, with the exception of any individual employment contract that contains a severance pay provision that provides severance in excess of the amount an employee would be eligible to receive under this Plan. The Plan will continue until terminated as provided herein.

GENERAL INFORMATION

1. Plan Name:     CSS Industries, Inc. Severance Pay Plan for Senior Management

2. Plan Number: 506

3. Plan Sponsor:  CSS Industries, Inc.

1845 Walnut Street, Suite 800

Philadelphia, PA 19103

4. Employer Identification Number: 13-1920657

2

5. Type of Plan: Welfare Benefit - Severance Pay Plan

6. Plan Administrator:   Severance Plan Administrative Committee

CSS Industries, Inc.

1845 Walnut Street, Suite 800

Philadelphia, PA 19103

7. Agent for Service of Legal Process: The Plan Administrator at the address above.

8. Sources of Contributions: The Plan is unfunded and CSS and the Participating Subsidiaries pay the cost of coverage from their assets.

9. Type of Administration: The Plan is administered by the Plan Administrator with benefits provided in accordance with the provisions of this Plan document.

10. Recordkeeping: The Plan and its records are kept on a fiscal year basis, April 1 through March 31. For the first plan year, the records are kept on the short plan year for the period between October 9, 2006 and March 31, 2007.

11. Participating Subsidiaries:The subsidiaries and affiliates of CSS that participate in the Plan are identified in the attached Exhibit B.

DEFINITIONS

Cause: Except to the extent otherwise specified by CSS, a finding by the Employer that you have: (i) violated your Employer’s Code of Ethics Policy; (ii) violated the CSS Anti-Harassment Policy; (iii) violated your Employer’s Drug-Free Workplace Act Policy; (iv) committed insubordination; (v) abused other employees; (vi) engaged in theft; (vii) engaged in dishonesty; (viii) engaged in actions of a criminal nature; (ix) willfully neglected job responsibilities; (x) violated any other CSS or Employer policy; (xi) demonstrated significantly deficient job performance that is a willful failure by you to improve your performance despite communication(s) by your Employer regarding the performance improvement required by the otherwise eligible employees; (xii) committed other act(s) detrimental to your Employer, its parent or subsidiaries, its employees, and/or its customers; or (xiii) engage in or become concerned with, either on your own behalf or on behalf of any other person, firm, or corporation, any business or activity which is the same, similar to, or competitive with that conducted by, engaged in, or developed for later implementation by the Employer.

Code: Internal Revenue Code of 1986, as amended.

Committee: The Human Resources Committee of the Board of Directors of CSS.

Comparable Job: A job with no decrease in total annual compensation (base salary plus target bonus, if applicable), and which would require the affected individual to report to a principal business location that is less than 50 miles from the affected individual’s current principal business location. The Plan Administrator will have the sole discretion to determine whether a job is a Comparable Job for purposes of the Plan.

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CSS: CSS Industries, Inc.

Employer: CSS and any Subsidiary.

Employment Termination Date: The date on which your employment relationship with the Employer is involuntarily terminated by the Employer.

Plan Administrator: The Severance Plan Administrative Committee as designated by CSS to administer the Plan in accordance with its terms, or its delegate.

Release: The release and discharge of the Employer and all affiliated persons and entities from any and all claims, demands and causes of action relating to your employment with the Employer, other than as to any vested benefits to which you may be entitled under any Employer benefit plan, which will be in such form as may be proscribed by the Employer, acting as plan sponsor and as a fiduciary, from time to time and with such modifications as the Employer deems appropriate for your individual situation.

Senior Management Employee: For purposes of this Plan, (A) any employee of CSS who either (i) has the officer title of President, Vice President, Treasurer or Secretary with such entity, or (ii) serves as the Managing Director of CSS Pacific Rim Limited; and (B) any employee of Cleo Inc, Berwick Offray LLC or Paper Magic Group, Inc. who either (i) has the officer title of President of such entity or (ii) has the officer title of Vice President with, and directly reports to the President of, such entity.

Severance Pay: The severance benefits that will be offered to you if you incur a termination of employment with the Employer for a reason set forth in the Plan.

Subsidiary: Any subsidiary of CSS that is designated by the Committee as a participating employer in the Plan and is listed on the attached Exhibit B.

COVERAGE

You will be eligible to participate in this Plan if you are a Senior Management Employee at the time of your termination of employment. You will not be eligible to participate in this Plan if you are not a Senior Management Employee at the time of your termination of employment.

ELIGIBILITY

A.When You Are Eligible

You are eligible for Severance Pay if (i) your employment with your Employer has been terminated by the Employer for any reason other than on account of Cause, your death or you become disabled and you are not otherwise ineligible for severance pay as set forth in section B. below; and (ii) you sign and do not revoke the Employer’s standard Release.

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The foregoing in no way limits the right of the Employer to (i) terminate your employment and (ii) provide severance under other circumstances, in each case, as determined by the Employer in its sole and absolute discretion.

B.When You Are Not Eligible

You are not eligible for Severance Pay in any of the following circumstances:

1. You voluntary resign, including retirement, for any reason or no reason.

2. You are discharged involuntarily for violation of Employer rules, or for Cause, or the Employer discovers following your Employment Termination Date that you engaged in conduct that constitutes Cause during or after your employment with the Employer.

3. You are terminated by your Employer after you are offered a Comparable Job and you refuse to accept the Comparable Job.

4. You have an individual employment contract that contains a severance pay provision that provides severance in excess of the amount you would be eligible to receive under the Plan.

5. Prior to or on your last day of scheduled employment, you die or prior to notification of an Employment Termination Date, you experience a physical or mental condition entitling you to any sick pay, disability or workers compensation.

Notwithstanding any provision of the Plan to the contrary, the Committee, in its sole discretion and acting on behalf of the Employer as the Plan sponsor and not as a fiduciary, reserves the right (a) to determine whether an employee satisfies the eligibility requirements for Severance Pay, (b) to award Severance Pay to a terminated employee not otherwise eligible, (c) to deny benefits to an employee otherwise eligible under the terms of the Plan, (d) to award benefits to any terminated employee in a greater or lesser amount than provided for in the Plan, and/or (e) to pay out benefits in a manner or on a schedule other than provided for in the Plan.

PLAN BENEFITS

Severance Pay

If you are selected to receive Severance Pay under the Plan, as determined by the Committee, the benefit for which you may be eligible may be based upon your years of service, compensation, or any other factors determined to be relevant by the Committee. For example, your past contributions to the Employer’s business, the conditions in the employment market, and other equitable considerations may be relevant factors. However, the Committee may provide a fixed level or schedule of benefits in connection with any special termination program designated by the Committee; provided, that such program shall not provide less benefits than that provided under this Plan. In the absence of any other determination, if your employment is terminated for a reason described above under “When you are Eligible,” your Severance Pay will be equal to your weekly base pay for the period determined in accordance with the chart set forth on the attached Exhibit A.

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Years of service for purposes of the chart in Exhibit A shall be full calendar years measured from your employment commencement date with your Employer (and each anniversary thereof). For purposes of determining your total number of calendar years, you will be provided with credit for all of your years of service with any Employer that participates in this Plan. Therefore, if you transfer between Employers, your service with all such Employers will be counted. For purposes of determining your employment commencement date, the date you first worked for an Employer will be used. If you worked for an entity whose business or assets have been acquired by an Employer, your service with such entity prior to the acquisition will only be counted if determined by the Employer. No partial years of service will be counted. Therefore, if your total years of service includes a period of months that is less than 12, your total years of service will be rounded down to the nearest whole year.

Weekly base pay is your weekly rate of wages or salary in effect on your Employment Termination Date, excluding all extra pay, including, but not limited to, incentive bonuses, overtime pay, commissions, car allowances or other allowances, Employer contributions to the Employer’s 401(k) plan and other deferred compensation arrangements and other Employer paid benefits.

Severance Pay will be paid from the general assets of the Employer and will be paid to you in equal installments according to your Employer’s normal payroll schedule over the severance period determined in accordance with the chart set forth on the attached Exhibit A , provided that payment of Severance Pay shall not commence until the period has expired for revocation of the Release that you must sign to be entitled to Severance Pay. Severance Pay will be subject to all applicable federal, state and local tax withholding requirements.

All fringe benefits, including health and welfare, pension, life insurance, vacation and personal days, will cease on your Employment Termination Date, regardless of whether Severance Pay is made after that date.

If you receive Severance Pay under this Plan and elect health care continuation coverage under the Consolidated Omnibus Reconciliation Act (“COBRA”) following termination of your employment, the Employer will pay for a portion of the monthly COBRA premium, on the same basis as the Employer pays for a portion of such coverage for active employees, for the period Severance Pay is paid to you under the Plan, unless it is earlier discontinued at your request. If continued, normal employee premium deductions will be made from your Severance Pay.

If you die before you have received Severance Pay to which you are entitled under the Plan, your Severance Pay will be paid to your estate.

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If you are eligible to receive Severance Pay under an employment agreement and under the Plan, you will receive the greater of the benefits under the employment agreement or the Plan, but not both.

When Benefits End

Severance Pay and any other benefits will be discontinued immediately if:

1. The Employer determines that you engaged in any of the actions defined above as “Cause,” even if such determination is made following your Employment Termination Date.

2. You breach any term of your Release, post-employment agreement, or other agreement relating to your employment.

CLAIMS PROCEDURE

Any request or claim for Severance Pay shall be deemed to be filed when a written request is made by the claimant or the claimant’s authorized representative which is reasonably calculated to bring the claim to the attention of the Plan Administrator.

The Plan Administrator, or its designee, shall advise the claimant or such claimant’s representative, in writing or in electronic form, of its decision within 90 days of receipt of the claim for Severance Pay, unless special circumstances require an extension of such 90-day period for not more than an additional 90 days. Where such extension is necessary, the claimant shall be given written notice of the delay before the expiration of the initial 90-day period, which notice shall set forth the reasons for the delay and the date the Plan Administrator expects to render its decision. If the extension is necessary because the claimant has failed to submit the information necessary to decide the claim, the Plan Administrator’s period for responding to such claim shall be tolled until the date the claimant responds to the request for additional information. The response shall:

1. be in writing or in electronic form,

2. be written in a manner calculated to be understood by the claimant, and

3. in the case of an adverse benefit determination:

a. set forth the specific reason(s) for the denial of benefits;

b. contain specific references to Plan provisions on which the denial is based;

c. describe any additional material and information, if any, necessary for the claim for benefits to be perfected, and an explanation of why such material or information is necessary; and

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d. describe the Plan’s review procedures and the time limits applicable to such procedures, and include a statement of the claimant’s right to bring a civil action under section 502(a) of the ERISA following an adverse benefit determination on review.

If the claimant fails to appeal the Plan Administrator’s adverse benefit determination, in writing, within 60 days after its receipt by the claimant, the Plan Administrator’s determination shall become final and conclusive.

If the claimant appeals the Plan Administrator’s adverse benefit determination in a timely fashion, the Plan Administrator shall reexamine all issues relevant to the original denial of benefits. Any such claimant or his or her duly authorized representative may review any relevant documents and records, free of charge, including documents and records that were relied upon in making the benefit determination, documents submitted, considered or generated in the course of making the benefit determination (even if such documents were not relied upon in making the benefit determination), and documents that demonstrate compliance, in making the benefit determination, with the Plan’s required administrative processes and safeguards. In addition, the claimant or his duly authorized representative may submit, in writing, any documents, records, comments or other information relating to such claim for benefits. In the course of the review, the Plan Administrator shall take into account all comments, documents, records and other information submitted by the claimant or his duly authorized representative relating to such claim, regardless of whether it was submitted or considered as part of the initial benefit determination.

The Plan Administrator shall advise the claimant or such claimant’s representative, in writing or in electronic form, of its decision within 60 days of receipt of the written appeal, unless special circumstances require an extension of such 60-day period for not more than an additional 60 days. Where such extension is necessary, the claimant shall be given written notice of the delay before the expiration of the initial 60-day period, which notice shall set forth the reasons for the delay and the date the Plan Administrator expects to render its decision. In the event of an adverse benefit determination on appeal, the Plan Administrator shall advise the claimant, in a manner calculated to be understood by the claimant of:

1. the specific reason(s) for the adverse benefit determination;

2. the specific Plan provisions on which the decision was based;

3. the claimant’s right to receive, upon request and free of charge, and reasonable access to, copies of all documents, records and other information relevant to such claim; and

4. a statement describing any voluntary appeals procedures offered by the Plan, the claimant’s right to obtain information about such procedures, and a statement of the claimant’s right to bring an action under section 502(a) of ERISA.

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No person may bring an action for any alleged wrongful denial of Plan benefits in a court of law unless the claims procedures set forth above are exhausted and a final determination is made by the Plan Administrator. If you or other interested person challenges a decision of the Plan Administrator, a review by the court of law will be limited to the facts, evidence and issues presented to the Plan Administrator during the claims procedure set forth above. Facts and evidence that become known to you or other interested person after having exhausted the claims procedure must be brought to the attention of the Plan Administrator for reconsideration of the claims determination. Issues not raised with the Plan Administrator will be deemed waived.

PLAN ADMINISTRATION

The Severance Plan Administrative Committee will be the Plan Administrator of the Plan and the named fiduciary of the Plan for purposes of ERISA. The Severance Plan Administrative Committee shall consist of one or more persons appointed by CSS. The Severance Plan Administrative Committee may, however, delegate to any person, committee or entity any of its power or duties under the Plan.

The Plan Administrator will be the sole judge of the application and interpretation of the Plan, and will have the discretionary authority to construe the provisions of the Plan and to resolve disputed issues of fact. The Committee will have the sole authority to make determinations regarding eligibility for benefits. The decisions of the Plan Administrator and the Committee in all matters relating to the Plan that are within the scope of its authority (including, but not limited to, eligibility for benefits, Plan interpretations, and disputed issues of fact) will be final and binding on all parties.

SECTION 409A

If section 409A of the Code applies to this Plan, the Plan will be administered in accordance with the requirements of section 409A, and if and to the extent required by section 409A of the Code and applicable guidance, distributions to employees who are “key employees” as described in section 409A(a)(2)(B)(i) of the Code will be made, such distributions shall not begin to be paid until 6 months after the key employee’s Employment Termination Date (or if earlier, the date of death of the key employee); provided, that to the extent that the payment of Severance Pay or other amounts payable under the Plan must be delayed for 6 months the affected individual will receive a lump sum payment as soon as administratively practicable after the end of the 6 month period equal to the portion of the Severance Pay or such other amounts that would otherwise have been paid during such 6 month period, but for the requirements to comply with section 409A of the Code, and the remaining portion of the Severance Pay and such other amounts will be paid in accordance with the Employer’s normal payroll practices commencing after the end of such 6 month period for the remainder of the severance period.

AMENDMENT AND TERMINATION OF THE PLAN

CSS reserves the right to amend or terminate the Plan, in whole or in part, at any time and for any reason. An amendment to the Plan may not discontinue or change any payments to a terminated employee who commenced receiving Severance Pay under the Plan prior to the effective date of the amendment of the Plan. If the Plan is terminated, no further benefits will be payable under the Plan to any employee who has not commenced receiving Severance Pay prior to the effective date of such termination.

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NONALIENATION OF BENEFITS

You do not have the power to transfer, assign, anticipate, mortgage or otherwise encumber any rights or any amounts payable under this Plan; nor will any such rights or amounts payable under this Plan be subject to seizure, attachment, execution, garnishment or other legal or equitable process, or for the payment of any debts, judgments, alimony, or separate maintenance, or be transferable by operation of law in the event of bankruptcy, insolvency, or otherwise. In the event you attempt to assign, transfer or dispose of such right, or if an attempt is made to subject such right to such process, such assignment, transfer or disposition will be null and void.

ERISA RIGHTS STATEMENT

As a participant in the Plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA provides that all Plan participants will be entitled to:

Receive Information about the Plan and Benefits

· Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites, all documents governing the Plan, including a copy of the latest annual report (Form 5500 Series) filed by the plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.

· Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan, including copies of the latest annual report (Form 5500 Series) and updated summary plan description. The Plan Administrator may make a reasonable charge for the copies.

Prudent Actions by Plan Fiduciaries

In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of employees and other Plan participants and beneficiaries. No one, including your Employer, or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a welfare benefit or exercising your rights under ERISA.

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Enforcing Your Rights

If your claim for a benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and you do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that the Plan fiduciaries misuse the Plan’s money or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.

Assistance with Your Questions

If you have any questions about the Plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in the telephone directory or the Division of Technical Assistance and Inquires, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, D.C. 20210 (web address: www.dol.gov/dol/pwba). You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publication hotline of the Employee Benefits Security Administration.

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EXHIBIT “A”

SEVERANCE PAY FORMULA

1.CSS’ President and Chief Executive Officer; CSS’ Officers Reporting to CSS’ President; and Presidents of Cleo Inc, Berwick Offray LLC and Paper Magic Group, Inc.:

Years of Continuous Service	Number of Weeks of Severance Pay
0 up to 2 years	26
Over 2 years up to 5 years	39
Over 5 years	52 (The maximum allowance)

2. All other Senior Management Employees:

Years of Continuous Service	Number of Weeks of Severance Pay
0 up to 2 years	12
Over 2 years up to 5 years	26
Over 5 years up to 10 years	39
Over 10 years	52 (The maximum allowance)

EXHIBIT “B”

PARTICIPATING EMPLOYERS

Cleo Inc

Berwick Offray LLC

Paper Magic Group, Inc.

 

2

EX-10.2

Exhibit 10.2

November 21, 2006

Personal and Confidential

Mr. Robert Collins

6 Cutters Lane

Montaintop, PA 18707

Dear Bob:

Subject to approval by the Human Resources Committee (the “Committee”) of the Board of Directors of CSS Industries, Inc. (“CSS”), we are pleased to extend an offer of employment to you as President of Paper Magic Group, Inc. (“PMG”) effective November 29, 2006. Effective with, and as a result of, this promotion, you will resign your position as Vice President - Manufacturing of PMG. You acknowledge and agree that there are no other valid oral or written agreements relating to the terms and conditions of your employment with PMG as its President.

1.Compensation - Subject to and conditioned upon approval by the Committee, the compensation package for this position will be as follows:

A.Base Salary - A base salary in the gross amount of Two Hundred Forty Thousand Dollars ($240,000) per annum payable at such times as PMG pays its executives. There will be an annual performance review thereafter and you will then be considered for an increase in base salary consistent with the then current PMG policy.

B.Incentive Compensation - For PMG’s current fiscal year ending March 31, 2007, you will continue to be eligible to participate in the Management Incentive Plan (“MIP”). For purposes of calculating your potential 2007 fiscal year incentive compensation, and depending on the extent of achievement of certain individual, PMG and CSS objectives, you will have the potential of earning incentive compensation based upon (i) 50% of your base salary in effect immediately prior to your promotion hereunder, prorated for the portion of the 2007 fiscal year prior to the effective date of your promotion, and (ii) 80% of your base salary specified in Section 1.A. above, prorated for the remaining portion of the 2007 fiscal year.

For PMG’s fiscal year ending March 31, 2008, depending on the extent of achievement of certain individual, PMG and CSS objectives, you will have the potential of earning for a full fiscal year period incentive compensation with a target opportunity of up to 80% of your then base salary. The financial target objectives of your potential 2008 fiscal year incentive compensation will be determined based upon the actual full 2008 fiscal year financial results of PMG and of CSS.

C.Stock Option Grant - A stock option will be granted to you to acquire 10,000 shares of CSS Common Stock. This grant will in all respects be subject to and in accordance with the provisions of the CSS 2004 Equity Compensation Plan, and the terms of the grant letter to be provided to you at the time of the grant.

Robert Collins

Page  2

November 21, 2006

D.Company Automobile - You will be provided for your use a PMG-owned or leased automobile comparable to the owned or leased automobiles then made available by CSS’ affiliates to President-level officers of such affiliates. You acknowledge and agree that, effective with your promotion hereunder, you will no longer be entitled or eligible to receive the automobile allowance you currently receive in your position as Vice President - Manufacturing of PMG.

2.Benefits Coverage -You will continue to be entitled to participate in those PMG benefit programs available to its officer level personnel in accordance with the applicable terms of these programs.

3.Employment Status - Your employment status with PMG will be that of an employee at-will, and thus this employment status is subject to termination by either you or PMG at any time.

4.Confidential Information. You recognize and acknowledge that by reason of employment by and service to PMG, you have had and will continue to have access to confidential information of PMG, CSS, and their affiliates, including, without limitation, information and knowledge pertaining to products and services offered, inventions, innovations, designs, ideas, plans, trade secrets, proprietary information, computer systems and software, packaging, advertising, distribution and sales methods and systems, sales and profit figures, customer and client lists, and relationships between or among PMG, CSS and their affiliates and dealers, distributors, wholesalers, customers, clients, suppliers and others who have business dealings with PMG, CSS and such affiliates (“Confidential Information”). You acknowledge that such Confidential Information is a valuable and unique asset of PMG, CSS and/or their affiliates, and covenant that you will not, either during or at any time after your employment with PMG, disclose any such Confidential Information to any person for any reason whatsoever (except as your duties described herein may require) without the prior written consent of the Committee, unless such information is in the public domain through no fault of you or except as may be required by law.

5.Non-Competition. During your employment with PMG, and for a period of one year thereafter, you will not, without the prior written consent of the Committee, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with or use or permit your name to be used in connection with, any business or enterprise engaged within any portion of the United States or Canada (collectively, the “Territory”) (whether or not such business is physically located within the Territory) that is engaged in the creation, design, manufacture, distribution or sale of any products or services that are the same or of a similar type then manufactured or otherwise provided by PMG, CSS or by any of their affiliates during your employment with PMG (the “Business”). You recognize that you will be involved in the activity of the Business throughout the Territory, and that more limited geographical limitations on this non-competition covenant (and the non-solicitation covenant set forth in Section 6 of this letter agreement) are therefore not appropriate. The foregoing restriction shall not be construed to prohibit your ownership of not more than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Act of 1933, provided that such ownership represents a passive investment and that neither you nor any group of persons including you in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in business, other than exercising his rights as a shareholder, or seeks to do any of the foregoing.

Robert Collins

Page 3

November 21, 2006

6.No Solicitation. During your employment with PMG, and for a period of one year thereafter, you agree not to, either directly or indirectly, (i) call on or solicit with respect to the Business any person, firm, corporation or other entity who or which at the time of termination of your employment with PMG was, or within two years prior thereto had been, a customer of PMG, CSS or any of their affiliates, or (ii) solicit the employment of any person who was employed by PMG, CSS or by any of their affiliates on a full or part-time basis at any time during the course of your employment with PMG, unless prior to such solicitation of employment, such person’s employment with PMG, CSS or any of their affiliates was terminated.

7.Equitable Relief.

A.You acknowledge that the restrictions contained in Sections 4, 5 and 6 of this letter agreement are reasonable and necessary to protect the legitimate interests of PMG, CSS and their affiliates, that PMG would not have entered into this letter agreement in the absence of such restrictions, and that any violation of any provision of those Sections will result in irreparable injury to PMG, CSS and their affiliates. You represent that your experience and capabilities are such that the restrictions contained in Sections 4 and 5 hereof will not prevent you from obtaining employment or otherwise earning a living at the same general level of economic benefit as is anticipated by this letter agreement. YOU FURTHER REPRESENT AND ACKNOWLEDGE THAT (i) YOU HAVE BEEN ADVISED BY PMG TO CONSULT YOUR OWN LEGAL COUNSEL IN RESPECT OF THIS LETTER AGREEMENT, (ii) THAT YOU HAVE HAD FULL OPPORTUNITY, PRIOR TO EXECUTION OF THIS LETTER AGREEMENT, TO REVIEW THOROUGHLY THIS LETTER AGREEMENT WITH YOUR COUNSEL, AND (iii) YOU HAVE READ AND FULLY UNDERSTAND THE TERMS AND PROVISIONS OF THIS LETTER AGREEMENT.

B.You agree that PMG shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as any other remedies provided by law arising from any violation of Sections 4, 5, and 6 of this letter agreement, which rights shall be cumulative and in addition to any other rights or remedies to which PMG may be entitled. In the event that any of the provisions of Sections 4, 5 and 6 hereof should ever be adjudicated to exceed the time, geographic, product or service, or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, product or service, or other limitations permitted by applicable law.

C.You and PMG irrevocably and unconditionally (i) agree that any suit, action or other legal proceeding arising out of Sections 4, 5 and 6 of this letter agreement, including without limitation, any action commenced by PMG for preliminary or permanent injunctive relief or other equitable relief, may be brought in the United States District Court for the Eastern District of Pennsylvania, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Philadelphia County, Pennsylvania, (ii) consent to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waive any objection to the laying of venue of any such suit, action or proceeding in any such court.

Robert Collins

Page 4

November 21, 2006

D.You agree that PMG may provide a copy of Sections 4, 5 and 6 of this letter agreement to any business or enterprise (i) which you may directly or indirectly own, manage, operate, finance, join, participate in the ownership, management, operation, financing, control or control of, or (ii) with which you may be connected with as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise, or in connection with which you may use or permit your name to be used.

8. Governing Law. This letter agreement shall be governed by and interpreted under the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws provisions.

Please confirm your understanding of the foregoing provisions by executing the enclosed counterpart of this letter and returning this executed counterpart to me.

Sincerely yours,

Christopher J. Munyan

Chairman and Chief Executive Officer

Paper Magic Group, Inc.

The aforementioned is confirmed as of this ___ day of November, 2006:

Robert Collins

cc:William G. Kiesling

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher J. Munyan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 1, 2007

/s/ Christopher J. Munyan

Christopher J. Munyan,

President and Chief Executive Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Clifford E. Pietrafitta, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 1, 2007

/s/ Clifford E. Pietrafitta

Clifford E. Pietrafitta

Vice President - Finance and Chief Financial Officer

(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CSS Industries, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher J. Munyan, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Christopher J. Munyan

Christopher J. Munyan

President and Chief Executive Officer

(principal executive officer)

February 1, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CSS Industries, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Clifford E. Pietrafitta, Vice President - Finance and Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Clifford E. Pietrafitta

Clifford E. Pietrafitta

Vice President - Finance and Chief Financial Officer

(principal financial officer)

February 1, 2007