**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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|            | x      | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                               |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|       |   | ** **                                                                                                                                |
|       |   | **For the  quarterly period ended June 30, 2007**                                                                                         |
| ** ** |
| **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: 1-8681**

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**RUSSBERRIE AND COMPANY, INC.**

(Exact name of registrant as specified in its charter)

| **New Jersey**(State of or other jurisdiction of  incorporation or organization)  |   | **22-1815337**(I.R.S. Employer Identification Number) |
|-----------------------------------------------------------------------------------|--------|-------------------------------------------------------|
| ** **                                                                        |   | ** **                                            |
| **111  Bauer Drive, Oakland, New Jersey**(Address of principal executive offices) |   | **07436**(Zip Code)                                   |

 

**(201) 337-9000**

(Registrant’s Telephone Number, including area code**)**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x              No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Large accelerated filer o             Acceleratedfiler x             Non-acceleratedfiler o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o             No x

The number of shares outstanding of each of theregistrant’s classes of common stock, as of July 26, 2007 was as follows:

|                                   | ** ** | **OUTSTANDING**       |
|-----------------------------------|------------|-----------------------|
| **CLASS**                         | ** ** | **At July  26, 2007** |
| Common Stock,  $0.10 stated value |       | 21,146,314            |

 

 

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**RUSS BERRIE AND COMPANY, INC.**

**INDEX**
| **PART I – FINANCIAL  INFORMATION** |   |
|------------------------------------------|--------|
|                                     |   |
| Item 1.                                  |   | Financial  Statements (unaudited) |   |
|                                     |   |   |   |
| a)                                       |   | Consolidated  Balance Sheets as of June 30, 2007 and December 31, 2006 |   |
|                                     |   |   |   |
| b)                                       |   | Consolidated  Statements of Operations for the three and six months ended June 30, 2007 and  2006 |   |
|                                     |   |   |   |
| c)                                       |   | Consolidated  Statements of Cash Flows for the six months ended June 30, 2007 and 2006 |   |
|                                     |   |   |   |
| d)                                       |   | Notes to  Unaudited Consolidated Financial Statements |   |
|                                     |   |   |   |
| Item 2.                                  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                     |   |   |   |
| Item 3.                                  |   | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                     |   |   |   |
| Item 4.                                  |   | Controls and Procedures |   |
|                                     |   |
| **PART II – OTHER INFORMATION**     |   |
|                                     |   |
| Item 1A.                                 |   | Risk Factors |   |
|                                     |   |   |   |
| Item 4.                                  |   | Submission of  Matters to a Vote of Security Holders |   |
|                                     |   |   |   |
| Item 5.                                  |   | Other Information |   |
|                                     |   |   |   |
| Item 6.                                  |   | Exhibits |   |
|                                     |   |   |   |
| Signatures                               |   |
|                                     |   |
| Exhibit Index                            |   |

 

2

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**PART 1 - FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

**RUSSBERRIE AND COMPANY, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in Thousands, except shareand per share data)(UNAUDITED)**
| ** **                                                                                                                                                     | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Assets**                                                                                                                                                     | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                                                     |       | $                           | 14,278     |                            | $          | 11,526 |   |
| Accounts  receivable, trade, less allowances of $1,852 in 2007 and $1,402 in 2006                                                                              |       | 58,771                      |       | 55,976                          |       |
| Inventories, net                                                                                                                                               |       | 58,646                      |       | 48,026                          |       |
| Prepaid expenses  and other current assets                                                                                                                     |       | 4,732                       |       | 12,025                          |       |
| Income tax  receivable                                                                                                                                         |       | 589                         |       | 2,200                           |       |
| Deferred income  taxes                                                                                                                                         |       | 2,365                       |       | 2,331                           |       |
| **Total  current assets**                                                                                                                                      |       | 139,381                     |       | 132,084                         |       |
| Property, plant  and equipment, net                                                                                                                            |       | 12,637                      |       | 13,993                          |       |
| Goodwill                                                                                                                                                       |       | 89,242                      |       | 89,242                          |       |
| Intangible  assets                                                                                                                                             |       | 61,582                      |       | 61,600                          |       |
| Restricted cash                                                                                                                                                |       | 872                         |       | 824                             |       |
| Deferred income  taxes                                                                                                                                         |       | 1,106                       |       | 957                             |       |
| Other assets                                                                                                                                                   |       | 5,544                       |       | 5,067                           |       |
| **Total  assets**                                                                                                                                              |       | $                           | 310,364    |                            | $          | 303,767 |   |
| **Liabilities and Shareholders’  Equity**                                                                                                                 | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Current liabilities:                                                                                                                                           |       |                        |       |                            |       |
| Current portion  of long-term debt                                                                                                                             |       | $                           | 10,000     |                            | $          | 9,000 |   |
| Short-term debt                                                                                                                                                |       | 26,684                      |       | 21,832                          |       |
| Accounts payable                                                                                                                                               |       | 17,260                      |       | 16,286                          |       |
| Accrued expenses                                                                                                                                               |       | 22,362                      |       | 24,056                          |       |
| Income taxes  payable                                                                                                                                          |       | 5,064                       |       | 15,038                          |       |
| **Total  current liabilities**                                                                                                                                 |       | 81,370                      |       | 86,212                          |       |
| Income taxes  payable long-term                                                                                                                                |       | 9,785                       |       |                            |       |
| Deferred income  taxes                                                                                                                                         |       | 2,146                       |       | 160                             |       |
| Long-term debt,  excluding current portion                                                                                                                     |       | 18,000                      |       | 23,500                          |       |
| Other long-term  liabilities                                                                                                                                   |       | 3,389                       |       | 3,231                           |       |
| **Total  liabilities**                                                                                                                                         |       | 114,690                     |       | 113,103                         |       |
| ** **                                                                                                                                                     |       |                        |       |                            |       |
| Commitments and  contingencies                                                                                                                                 |       |                        |       |                            |       |
| Shareholders’ equity:                                                                                                                                     |       |                        |       |                            |       |
| Common stock:  $0.10 stated value; authorized 50,000,000 shares; issued 26,727,780 and  26,712,780 shares at June 30, 2007 and December 31, 2006, respectively |       | 2,674                       |       | 2,673                           |       |
| Additional paid  in capital                                                                                                                                    |       | 91,970                      |       | 91,836                          |       |
| Retained  earnings                                                                                                                                             |       | 194,231                     |       | 191,320                         |       |
| Accumulated  other comprehensive income                                                                                                                        |       | 16,499                      |       | 14,985                          |       |
| Treasury stock,  at cost, 5,613,284 shares at June 30, 2007 and 5,636,284 at December 31, 2006                                                                 |       | (109,700                    | )          | (110,150                        | )          |
| **Total  shareholders’ equity**                                                                                                                           |       | 195,674                     |       | 190,664                         |       |
| **Total liabilities and  shareholders’ equity**                                                                                                           |       | $                           | 310,364    |                            | $          | 303,767 |   |

 

*The accompanying notes are an integral part of theunaudited consolidated financial statements.*

3

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**RUSSBERRIE AND COMPANY, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin Thousands, Except Share and Per Share Data)**

**(UNAUDITED)**
| ** **                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                                                           |       | $                                                   | 70,714     |                                              | $          | 65,653 |   | $ | 145,787 |   | $ | 142,799 |   |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Cost of sales                                                                       |       | 42,346                                              |       | 39,198                                            |       | 86,092 |   | 84,171 |   |
| ** **                                                                          | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross profit**                                                                    |       | 28,368                                              |       | 26,455                                            |       | 59,695 |   | 58,628 |   |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Selling, general  and administrative expenses                                       |       | 25,680                                              |       | 27,895                                            |       | 52,138 |   | 60,049 |   |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Operating income (loss)**                                                         |       | 2,688                                               |       | (1,440                                            | )          | 7,557 |   | (1,421 | ) |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Other (expense)  income:                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense, including amortization and  write-off of deferred financing costs |       | (1,277                                              | )          | (1,569                                            | )          | (2,512 | ) | (7,364 | ) |
| Interest and investment income                                                      |       | 153                                                 |       | 111                                               |       | 344 |   | 223 |   |
| Other, net                                                                          |       | (45                                                 | )          | (68                                               | )          | (123 | ) | 337 |   |
|                                                                                |       | (1,169                                              | )          | (1,526                                            | )          | (2,291 | ) | (6,804 | ) |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Income (loss) before income tax provision**                                       |       | 1,519                                               |       | (2,966                                            | )          | 5,266 |   | (8,225 | ) |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Income tax  provision                                                               |       | 1,154                                               |       | 3,009                                             |       | 2,355 |   | 2,742 |   |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Net income (loss)**                                                               |       | $                                                   | 365        |                                              | $          | (5,975 | ) | $ | 2,911 |   | $ | (10,967 | ) |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Net  income (loss) per share:**                                                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                               |       | $                                                   | 0.02       |                                              | $          | (0.29 | ) | $ | 0.14 |   | $ | (0.53 | ) |
| Diluted                                                                             |       | $                                                   | 0.02       |                                              | $          | (0.29 | ) | $ | 0.14 |   | $ | (0.53 | ) |
|                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Weighted  average shares:**                                                       | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                               |       | 21,080,000                                          |       | 20,840,000                                        |       | 21,078,000 |   | 20,838,000 |   |
| Diluted                                                                             |       | 21,228,000                                          |       | 20,840,000                                        |       | 21,191,000 |   | 20,838,000 |   |

 

*The accompanying notes are anintegral part of the unaudited consolidated financial statements.*

4

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**RUSSBERRIE AND COMPANY, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in Thousands)(UNAUDITED)**
| ** **                                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                                   |       | $                                                 | 2,911      |   | $ | (10,967 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                                        |       | 2,343                                             |       | 2,746 |   |
| Amortization and write-off of deferred financing  costs                                              |       | 316                                               |       | 2,848 |   |
| Accounts receivable allowance                                                                        |       | 1,093                                             |       | 550 |   |
| Provision for inventory reserve                                                                      |       | 1,689                                             |       | 1,377 |   |
| Deferred income taxes                                                                                |       | 1,937                                             |       | 2,012 |   |
| Share-based compensation expense                                                                     |       | 86                                                |       | — |   |
| Other                                                                                                |       | 321                                               |       | (434 | ) |
| Change in assets and liabilities:                                                                    |       |                                              |       |   |   |
| Restricted cash                                                                                      |       | 12                                                |       | (20 | ) |
| Accounts receivable                                                                                  |       | (3,268                                            | )          | 2,491 |   |
| Income tax receivable                                                                                |       | 1,848                                             |       | 537 |   |
| Inventories                                                                                          |       | (11,513                                           | )          | 4,541 |   |
| Prepaid expenses and other current assets                                                            |       | 7,255                                             |       | 603 |   |
| Other assets                                                                                         |       | (788                                              | )          | (55 | ) |
| Accounts payable                                                                                     |       | 1,502                                             |       | (8,787 | ) |
| Accrued expenses                                                                                     |       | (2,781                                            | )          | (2,141 | ) |
| Accrued income taxes                                                                                 |       | (394                                              | )          | (1,852 | ) |
| Total adjustments                                                                                    |       | (342                                              | )          | 4,416 |   |
| Net cash provided by (used in) operating activities                                                  |       | 2,569                                             |       | (6,551 | ) |
|                                                                                                 |       |                                              |       |   |   |
| **Cash  flows from investing activities:**                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Proceeds from  sale of property, plant and equipment                                                 |       | —                                            |       | 75 |   |
| Capital  expenditures                                                                                |       | (1,149                                            | )          | (324 | ) |
| Net cash used in investing activities                                                                |       | (1,149                                            | )          | (249 | ) |
|                                                                                                 |       |                                              |       |   |   |
| **Cash  flows from financing activities:**                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Proceeds from  issuance of common stock                                                              |       | 501                                               |       | 262 |   |
| Issuance of  long-term debt                                                                          |       | 55                                                |       | 59,250 |   |
| Repayment of  long-term debt                                                                         |       | (5,500                                            | )          | (78,320 | ) |
| Net borrowing on  revolving credit facility                                                          |       | 5,853                                             |       | 9,783 |   |
| Payment of  deferred financing costs                                                                 |       | —                                            |       | (2,509 | ) |
| Net cash provided by (used in) financing activities                                                  |       | 909                                               |       | (11,534 | ) |
|                                                                                                 |       |                                              |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                        |       | 423                                               |       | — |   |
| Net decrease in  cash and cash equivalents                                                           |       | 2,752                                             |       | (18,334 | ) |
| Cash and cash  equivalents at beginning of period                                                    |       | 11,526                                            |       | 28,667 |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                                 | 14,278     |   | $ | 10,333 |   |
| **Cash  paid during the period for:**                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Interest expense                                                                                     |       | $                                                 | 2,046      |   | $ | 2,941 |   |
| Income taxes                                                                                         |       | $                                                 | 538        |   | $ | 2,092 |   |

 

*The accompanying notes are anintegral part of the unaudited consolidated financial statements*

5

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**NOTE 1 - INTERIM CONSOLIDATEDFINANCIAL STATEMENTS**

Theaccompanying unaudited interim consolidated financial statements have beenprepared by Russ Berrie and Company, Inc. and its subsidiaries (the “Company”)in accordance with accounting principles generally accepted in the UnitedStates of America for interim financial reporting and the instructions to theQuarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included infinancial statements prepared under generally accepted accounting principleshave been condensed or omitted pursuant to such principles andregulations.  The information furnished reflects all adjustments, whichare, in the opinion of management, of a normal recurring nature and necessaryfor a fair presentation of the Company’s consolidated financial position,results of operations and cash flows for the interim periods presented. Results for interim periods are not necessarily an indication of results to beexpected for the year.

The Company currently operates in two segments: (i)its gift segment and (ii) its infant and juvenile segment.  This segmentation of the Company’s operationsreflects how the chief operating decision makers currently view the results ofoperations.

The Company’s gift segment designs, manufacturesthrough third parties and markets a wide variety of gift products to retailstores throughout the United States and throughout the world via the Company’sinternational wholly-owned subsidiaries and independent distributors.

The Company’s infant and juvenile segment designs,manufactures through third parties and markets products in a number of babycategories including, among others, infant bedding and accessories, bath toysand accessories, developmental toys, feeding items and baby comfortingproducts. The infant and juvenile segment consists of Sassy, Inc. (“Sassy”),and Kids Line LLC (“Kids Line”).  Theseproducts are sold to consumers, primarily in the United States, and certainforeign countries through mass merchandisers, toy, specialty, food, drug andindependent retailers, apparel stores, military post exchanges and othervenues.

Certain prior year amounts have been reclassified toconform to the 2007 presentation.

This Quarterly Report on Form 10-Q should be read inconjunction with the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006 (the “2006 10-K”), and the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2007.

**NOTE 2 - SHAREHOLDERS’ EQUITY**

On January 1, 2006, the Company adopted the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-BasedPayment” (“SFAS 123R”), which requires the costs resulting from all share-basedpayment transactions to be recognized in the financial statements at their fairvalues. The Company adopted SFAS 123R using the modified prospectiveapplication method under which the provisions of SFAS 123R apply to new awardsand to awards modified, repurchased, or cancelled after the adoption date.  Results for prior periods have not beenrestated.

The fair value of options granted is estimated on the date of grant usinga Black-Scholes options pricing model. Expected volatilities are calculatedbased on the historical volatility of the Company’s stock. Management monitorsstock option exercise and employee termination patterns to estimate forfeituresrates within the valuation model. The Company has established separate groupsfor employees and directors for valuation purposes. The expected holding periodof stock options represents the period of time that stock options are expectedto be outstanding. The risk-free interest rate is based on the Treasury noteinterest rate in effect on the date of grant for the expected term of the stockoption.

***Stock Plans***

The Company currently maintains the 2004 Stock Option, Restricted andNon-Restricted Stock Plan (the “2004 Option Plan”) and the Amended and Restated2004 Employee Stock Purchase Plan (the “2004 ESPP”).  As of January 1, 2007, there were anaggregate of 1,513,720 shares of common stock reserved for issuance under the2004 Option Plan and the 2004 ESPP.   The Company also continues to have options outstanding under the 1999and 1994 Stock Option and Restricted Stock Plans, the 1999 and 1994 StockOption Plans and the 1999 and 1994 Stock Option Plans for Outside Directors,(collectively, the “Predecessor Plans”). No awards could be made after December 31, 2003 with respect to the 1999Predecessor Plans and after December 31, 1998 with respect to the 1994Predecessor Plans.  See Notes 2 and 18 ofthe Notes to Consolidated Financial Statements of the 2006 10-K for furtherdetails with respect to option plans.

6

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

The exercise price for options issued under the 2004 Option Plan and thePredecessor Plans is generally equal to the closing price of the Company’scommon stock as of the date the option is granted. Generally, stock optionsunder the 2004 Option Plan and the Predecessor Plans vest over a period rangingfrom one to five years from the grant date unless otherwise stated by thespecific grant. Options generally expire 10 years from the date of grant.

***Stock Options***

The following table summarizes activity regarding outstanding options asof June 30, 2007, and changes during the six months ended June 30, 2007:
| ** **                                | ** ** | **Options** | ** ** | **Weighted  Average  ExercisePrice  per Option** | ** ** | **Option Price per Share** | ** **            | **Weighted  Average  Remaining  Contractual  Term  (years)** | ** ** | **Aggregate  Intrinsic Value  $(000)** | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------------------------------------------------|------------|-------------------------------------------|-----------------------|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | ** **  | ** ** | ** **                                            | ** ** | ** **                                | ** **            | ** **                                                   | ** ** | ** **                                  | ** ** |
| Options  outstanding at December 31, 2006 |       | 1,516,740   |       | $                                                     | 17.99      |                                      | $ 11.19 - $34.80 |                                                         | 7.5        |                                        | $          | 1,620 |   |
| Granted                                   |       | —      |       | —                                                |       | —                                    |                  |                                                         |       |                                        |       |
| Exercised                                 |       | (38,000     | )          | 13.15                                                 |       | $ 13.05 - $13.74                     |                  |                                                         |       |                                        |       |
| Forfeited/cancelled                       |       | (107,305    | )          | $                                                     | 14.85      |                                      | $ 13.06 - $18.50 |                                                         |       |                                        |       |   |
| Options  outstanding at June 30, 2007     |       | 1,371,435   |       | $                                                     | 18.37      |                                      | $ 11.19 - $34.80 |                                                         | 6.9        |                                        | $          | 3,412 |   |
| Vested and exercisable  at June 30, 2007  |       | 1,311,435   |       | $                                                     | 18.52      |                                      |                  |                                                         | 6.8        |                                        | $          | 3,198 |   |

 

There were no stock options granted during the three and six months endedJune 30, 2007.

Share-based compensation expense related to the Company’s stock optionsrecorded in the consolidated statements of operations for the three and sixmonths ended June 30, 2007 was approximately ($26,000) and $11,000,respectively.  The credit of $26,000 forthe three months ended June 30, 2007 related to a change in estimatedforfeitures for options granted in November 2006 that were forfeited during thefirst six months of 2007.  Nocompensation cost related to stock options was capitalized in inventory or anyother assets for the three and six months ended June 30, 2007 and 2006. For thethree and six months ended June 30, 2007 and 2006, there were no excess taxbenefits recognized resulting from share-based compensation cost.

***Non-vested Stock Options***

As of June 30, 2007, there was approximately$232,000 of total unrecognized compensation cost related to 60,000non-vested stock options granted under the 2004 Option Plan on November 1,2006. This cost is expected to be recognized over a weighted-average period of4.3 years.

Asummary of the Company’s non-vested stock options at June 30, 2007 and changes during the six months ended June 30, 2007 is presented below:
|                                        | ** ** | ** ** | ** ** | **Weighted Average**     | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Grant Date Fair** | ** ** |
| **Non-vested stock options** | ** ** | **Shares** | ** ** | **Value**                     | ** ** |
| Non-vested at  December 31, 2006  |       | 150,000    |       | $                             | 15.05      |   |
| Forfeited                              |       | (90,000    | )          | 15.05                         |       |
| Non-vested at June 30, 2007            |       | 60,000     |       | $                             | 15.05      |   |

 

**EmployeeStock Purchase Plan**

Under the 2004ESPP, eligible employees are provided the opportunity to purchase the Company’scommon stock at a discount.  Pursuant tothis plan, options are granted to participants as of the first trading day ofeach plan year, which is the calendar year, and may be exercised as of the lasttrading day of each plan year, to purchase from the Company the number ofshares of common stock that may be purchased at the relevant purchase pricewith the aggregate amount contributed by each participant.  In each plan year, an eligible employee mayelect to participate

7

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

in the plan byfiling a payroll deduction authorization form for up to 10% (in wholepercentages) of his or her compensation. No employee shall have the right to purchase Company common stock underthe 2004 ESPP which has a fair market value in excess of $25,000 in any planyear.  The purchase price is the lesserof 85% of the closing market price of the Company’s common stock on either thefirst trading day or the last trading day of the plan year.  If an employee does not elect to exercise hisor her option, the total amount credited to his or her account during that planyear is returned to such employee, and his or her option expires.  As of June30, 2007, the 2004 ESPP had approximately 106,000 shares reserved forfuture issuance.

Total share-basedcompensation expense related to the 2004 ESPP was approximately $37,000 and$75,000 for the three and six months ended June 30, 2007.

The fair value ofeach option granted under the 2004 ESPP is estimated on the date of grant usingthe Black-Scholes option-pricing model with the following assumptions:
|                                  | ** ** | **Six Months Ended  June 30** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| Dividend yield                   |       | —                                       |       | — |   |
| Risk-free  interest rate    |       | 4.98                                         | %          | 4.38 | % |
| Volatility                  |       | 36.70                                        | %          | 50.40 | % |
| Expected life  (years)           |       | 1                                            |       | 1 |   |

 

**NOTE 3 - WEIGHTED AVERAGE COMMONSHARES**

Theweighted average common shares outstanding included in the computation of basicand diluted net income (loss) per share is set forth below (in thousands):
| ** **                                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  common shares outstanding                                |       | 21,080                                              |       | 20,840                                            |       | 21,078 |   | 20,838 |   |
| Dilutive effect  of common shares issuable under outstanding stock options |       | 148                                                 |       | —                                            |       | 113 |   | — |   |
| Weighted average common  shares outstanding assuming dilution              |       | 21,228                                              |       | 20,840                                            |       | 21,191 |   | 20,838 |   |

 

The average number of diluted shares outstanding forthe three and six months ended June 30, 2006 excludes shares issuable uponexercise of outstanding stock options, because there was a net loss and suchshares would have been anti-dilutive. Stock options to purchase an aggregate of approximately 1.4 million and1.8 million shares were outstanding at June 30, 2007 and 2006,respectively.  For the three and sixmonths ended June 30, 2007, approximately 0.8 million stock options wereexcluded from the computation of diluted earnings per share because the exerciseprices were greater than the average market price of the common stock duringsuch period.

**NOTE 4 – CONTINGENCY**

InDecember 2004, the Company purchased all of the outstanding equity interestsand warrants in Kids Line, LLC (the “Purchase”), in accordance with the termsand provisions of a Membership Interest Purchase Agreement (the “PurchaseAgreement”).  At closing, the Companypaid approximately $130.6 million, which represented the portion of thepurchase price due at closing plus various transaction costs.  The aggregate purchase price under thePurchase Agreement includes the potential payment of contingent consideration(the “Earnout Consideration”).  TheEarnout Consideration shall equal 11.724% of the Agreed Enterprise Value(described below) of Kids Line as of the last day of the Measurement Period(the three year period ending November 30, 2007).  The Agreed Enterprise Value shall be theproduct of (i) Kids Line’s EBITDA during the twelve (12) months ending November30, 2007 and (ii) the applicable multiple (ranging form zero to eight) as setforth in the Purchase Agreement. Pursuant to the Purchase Agreement, 90% of the estimated EarnoutConsideration is due in December 2007 (which amount is not subject to refund orreturn), and any remaining portion earned, following the determination of thefinal Agreed Upon Enterprise Value, is due in January 2008.  The Company cannot currently determine theprecise amount of the

8

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

Earnout Consideration that will be required to be paidpursuant to the Purchase Agreement. However, based on current projections, the Company anticipates that theEarnout Consideration will be approximately $30 million, although the amountcould be more or less depending on the actual performance of Kids Line for theremaining portion of the Measurement Period. The amount of the Earnout Consideration will be charged to goodwill whenearned.  The Company currentlyanticipates that cash flow from operations and anticipated availability underthe Infantline Credit Agreement (described in Note 5 below) will be sufficientto fund the payment of the Earnout Consideration.  However, there can be no assurance thatunforeseen events or changes in the Company’s business would not have amaterial adverse impact on the ability to pay the Earnout Consideration andtherefore on our liquidity.  As describedin Note 5 (Section 1.A and 1.D) below, the Infantline Borrowers (defined below)have agreed, on a joint and several basis, to assume sole responsibility to paythe Earnout Consideration in place of Russ Berrie and Company, Inc. (“RB”).

**NOTE 5 – DEBT**

In connection withthe Purchase of Kids Line in December 2004, the Company and certain of itssubsidiaries entered into a financing agreement (the “Financing Agreement”).The Financing Agreement consisted of a term loan in the original principalamount of $125.0 million which was scheduled to mature on November 14,2007 (the “2004 Term Loan”).  The Company used the proceeds of the 2004 TermLoan to substantially finance the Purchase and pay fees and expenses relatedthereto.  The 2004 Term Loan was repaid in full and the FinancingAgreement was terminated in connection with the execution of the 2005 CreditAgreement, defined in Note 8 of the Notes to Consolidated Financial Statementsin the 2006 10-K, as of June 28, 2005.  There were no fees paid as aresult of the early termination of the Financing Agreement.  However,during 2005, in connection with the termination of the 2004 Term Loan, theCompany wrote-off the remaining unamortized balance of approximately $4.8million in deferred financing costs.

In order to reduceoverall interest expense and gain increased flexibility with respect to thefinancial covenant structure of the Company’s senior financing, on March 14,2006, the 2005 Credit Agreement was terminated and the obligations thereunderwere refinanced (the “LaSalle Refinancing”). In connection with the LaSalle Refinancing, all outstanding obligations under the 2005 Credit Agreement(approximately $76.5 million) were repaid using proceeds from the InfantlineCredit Agreement defined below, which is part of the LaSalle Refinancing.  The Company paid a fee of approximately $1.3million in connection with the early termination of the 2005 CreditAgreement.  In addition, in 2006, theCompany wrote-off approximately $2.5 million in deferred financing costs inconnection with the LaSalle Refinancing.

As part of the LaSalle Refinancing, the Company formeda wholly-owned Delaware subsidiary, Russ Berrie U.S. Gift, Inc. (“U.S. Gift”),to which it assigned (the “Assignment”) substantially all of its assets andliabilities which pertain primarily to its domestic gift business, such thatseparate loan facilities could be made directly available to each of theCompany’s domestic gift business and its infant and juvenile business.  The Assignment transaction reinforces theoperation of the Company as two separate segments, and the credit facilitiesthat have been extended to each segment are separate and distinct.  There are no cross-default provisions betweenthe Infantline Credit Agreement and Giftline Credit Agreement (which aredescribed below).

Long-term debt at June 30, 2007 and December 31, 2006consists of the following (in thousands):
|                                         | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Term Loan (Infantline Credit Agreement) |       | $                           | 28,000     |                            | $          | 32,500 |   |
| Less current portion                    |       | 10,000                      |       | 9,000                           |       |
| Long-term debt                          |       | $                           | 18,000     |                            | $          | 23,500 |   |

 

At June 30, 2007, therewas approximately $18.5 million borrowed under the Infantline Revolver;approximately $7.8 million borrowed under the Giftline Revolver andapproximately $0.4 million borrowed under the Russ Berrie (UK) Limited BusinessOverdraft Facility (each defined below), all of which is classified as short-termdebt.

1.             The LaSalle Refinancing – Effective March 14, 2006

*A.  The Infantline Credit Agreement*

On March 14, 2006(the “Closing Date”), as amended as of December 22, 2006 (discussed below),Kids Line, LLC (“KL”), and Sassy, Inc. (“Sassy”, and together with KL, the “InfantlineBorrowers”), entered into a credit agreement as borrowers, on a joint andseveral basis, with LaSalle Bank National Association as administrative agentand arranger (the “Agent”), the lenders from time to time party thereto, RussBerrie and Company, Inc. (“RB”) as loan party representative, Sovereign Bank assyndication agent, and Bank of America, N.A. as documentation agent (as

9

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

amended, the “InfantlineCredit Agreement”).  Unless otherwisespecified herein, capitalized terms used but undefined in this Note 5, Section1.A shall have the meanings ascribed to them in the Infantline CreditAgreement.

The commitmentsunder the Infantline Credit Agreement consist of (a) a $35.0 million revolvingcredit facility (the “Infantline Revolver”), with a sub-facility for letters ofcredit in an amount not to exceed $5.0 million, and (b) a $60.0 million termloan facility (the “Term Loan”).  TheInfantline Borrowers drew down approximately $79.7 million on the InfantlineCredit Agreement on the Closing Date, including the full amount of the TermLoan, which reflects the payoff of all amounts outstanding under the 2005Credit Agreement and certain fees and expenses associated with the LaSalleRefinancing.  As of June 30, 2007, theoutstanding balance on the Infantline Revolver was $18.5 million, theoutstanding balance on the Term Loan was $28.0 million and there was $730,000utilized under the letter of credit sub-facility.  At June 30, 2007, availability under theInfantline Revolver was approximately $11.8 million.

As of December 22, 2006, the Infantline CreditAgreement was amended (the “First Amendment”) to permit the repayment andsubsequent reborrowing of up to $20 million under the Term Loan, which isintended to enable the Infantline Borrowers to continue to utilize cash flowsexpected to be generated from operations to repay debt until the EarnoutConsideration becomes due.  The Companycurrently anticipates that cash flows from operations and anticipatedavailability under the Infantline Credit Agreement will be sufficient to fundthe payment of the Earnout Consideration.

Pursuant to theFirst Amendment, the Infantline Borrowers borrowed $20 million under theInfantline Revolver, the outstanding balance of which had previously beenreduced to zero, and utilized the proceeds of such draw to prepay $20 millionof the Term Loan.  The lenders agreed toprovide an additional Term Loan reborrowing commitment (the “TR Commitment”) ofan aggregate maximum principal amount of $20 million, which amounts may only bereborrowed during specified periods and only to fund the payment of the EarnoutConsideration.  Pursuant to the FirstAmendment, the Infantline Borrowers will pay a non-use fee in respect ofundrawn amounts of the TR Commitment at a per annum rate of 0.375% of the dailyaverage of the undrawn amounts.

The InfantlineLoans bear interest at a rate per annum equal to the Base Rate (for Base RateLoans) or the LIBOR Rate (for LIBOR Loans) at the Company’s option, plus anapplicable margin, in accordance with a pricing grid based on the most recentquarter-end Total Debt to EBITDA Ratio, which applicable margin shall rangefrom 1.75% - 2.50% for LIBOR Loans and from 0.25% - 1.00% for Base RateLoans.  The applicable interest ratemargins as of June 30, 2007 were: 1.75% for LIBOR Loans and 0.25% for Base RateLoans.  The weighted average interestrates for the outstanding loans as of June 30, 2007 were as follows:  

|                      | ** ** | **At June 30, 2007** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **LIBOR Loans**                | ** ** | **Base Rate Loans** | ** ** |
| Infantline  Revolver |       | 7.11                                | %          | 8.50 | % |
| Infantline Term Loan |       | 7.11                                | %          | 8.50 | % |

 

Interest is dueand payable (i) with respect to Base Rate Loans, monthly in arrears on the lastday of each calendar month, upon a prepayment and at maturity and (ii) withrespect to LIBOR Loans, on the last day of each Interest Period, upon aprepayment (and if the Interest Period is in excess of three months, on thethree-month anniversary of the first day of such Interest Period), and atmaturity.

In connection withthe execution of the Infantline Credit Agreement, the Infantline Borrowers paidaggregate closing fees of $1.4 million and an aggregate agency fee of$25,000.  An aggregate agency fee of$25,000 will be payable on each anniversary of the Closing Date.  The Infantline Revolver is subject to anannual non-use fee (payable monthly, in arrears, and upon termination of therelevant obligations) of 0.50% for unused amounts under the InfantlineRevolver, an annual letter of credit fee (payable monthly, in arrears, and upontermination of the relevant obligations) for undrawn amounts with respect toeach letter of credit based on the most recent quarter-end Total Debt to EBITDARatio ranging from 1.75% - 2.50% and other customary letter of creditadministration fees.

The principal of the Term Loan will be repaid ininstallments as follows: (a) $0.75 million on the last day of each calendarmonth for the period commencing March, 2006 through and including February, 2008,($9.0 million in 2007), (b) $1.0 million on the last day of each calendar monthfor the period commencing March 2008 through and including February 2009 and(c) $1.25 million on the last day of each calendar month for the periodcommencing March, 2009 through and including February 2011. A final installmentin the aggregate amount of the unpaid principal balance of the Term Loan (inaddition to all outstanding amounts under the Revolving Loan) is due andpayable on March 14, 2011, in each case subject to customary early terminationprovisions (without any prepayment penalty) in accordance with the terms of theInfantline Credit Agreement.

10

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

The InfantlineBorrowers are also required to make prepayments of the Term Loan upon theoccurrence of certain transactions, including most asset sales or debt orequity issuances.   Additionally,commencing in early 2008 with respect to the most recently completed fiscalyear (beginning with fiscal 2007), in the event that the Total Debt to EBITDAratio for such fiscal year exceeds 2.00:1.00, annual mandatory prepayments ofthe Term Loan shall be required in an amount equal to 50% of Excess Cash Flow.

The InfantlineCredit Agreement contains customary affirmative and negative covenants, as wellas the following financial covenants (the “Infantline Financial Covenants”):  (i) a minimum EBITDA test, (ii) a minimumFixed Charge Coverage Ratio, (iii) a maximum Total Debt to EBITDA Ratio and(iv) an annual capital expenditure limitation. In addition, upon the occurrence of an event of default under theInfantline Credit Agreement, the lenders could elect to declare all amountsoutstanding thereunder to be immediately due and payable.  As of June 30, 2007, the Company was incompliance with the Infantline Financial Covenants.

The Infantline Credit Agreement contains significantlimitations on the ability of the Infantline Borrowers to distribute cash toRB, which became a corporate holding company by virtue of the Assignment, forthe purpose of paying dividends to the shareholders of RB or for the purpose ofpaying their allocable portion of RB’s corporate overhead expenses, including acap (subject to certain exceptions) of $2.0 million per year on the amount thatcan be provided to RB to pay such corporate overhead expenses.

As a result of the LaSalle Refinancing, the obligationto pay the Earnout Consideration pursuant to the Kids Line acquisition (seeNote 4) is no longer the obligation of RB, but the joint and several obligationof the Infantline Borrowers.  Withrespect to the Earnout Consideration, the Infantline Borrowers will bepermitted to pay all or a portion of the Earnout Consideration to the extentthat, before and after giving effect to such payment, (i) Excess Revolving LoanAvailability will equal or exceed $3.0 million and (ii) no violation of theInfantline Financial Covenants would then exist, or would, on a pro formabasis, result there from.

In order to securethe obligations of the Infantline Borrowers, (i) the Infantline Borrowers havepledged and have granted security interests to the Agent in substantially allof their existing and future personal property, (ii) each Infantline Borrowerhas guaranteed the performance of the other Infantline Borrower, (iii) Sassygranted a mortgage for the benefit of the Agent and the lenders on its realproperty located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michiganand (iv) the Company pledged 100% of the equity interests of each of the InfantlineBorrowers to the Agent (the “Infantline Pledge Agreement”).  Pursuant to the Infantline Pledge Agreement,RB has agreed that it will function solely as a holding company and will not,without the prior written consent of the Agent, engage in any business oractivity except for specified activities, including those relating to itsinvestments in its subsidiaries existing on the Closing Date, the maintenanceof its existence and compliance with law, the performance of obligations underspecified contracts and other specified ordinary course activities.

*B.  The Giftline Credit Agreement*

On March 14, 2006 as amended on April 11, 2006, August8, 2006, December 28, 2006, and August 8, 2007, U.S. Gift and other specifiedwholly-owned domestic subsidiaries of RB (collectively, the “Giftline Borrowers”),entered into a credit agreement as borrowers, on a joint and several basis,with LaSalle Bank National Association, as issuing bank (the “Issuing Bank”),LaSalle Business Credit, LLC as administrative agent (the “Administrative Agent”),the lenders from time to time party thereto, and RB, as loan partyrepresentative (as amended, the “Giftline Credit Agreement” and, together withthe Infantline Credit Agreement, the “2006 Credit Agreements”).  Unless otherwise specified herein,capitalized terms used but undefined in this Note 5, Section 1.B to theconsolidated financial statements shall have the meanings ascribed to them inthe Giftline Credit Agreement.

Prior to the August 8, 2007 amendment to the GiftlineCredit Agreement (the “Fourth Amendment”), the Giftline Credit Agreementconsisted of a maximum revolving credit loan commitment (the “Giftline Revolver”)in an amount equal to the lesser of (i) $15.0 million (with a maximumavailability of $13.5 million) and (ii) the then-current Borrowing Base, ineach case minus amounts outstanding under the Canadian Credit Agreement (asdefined below), with a sub-facility for letters of credit to be issued by theIssuing Bank in an amount not to exceed $8.0 million.  The Fourth Amendment increased the aggregate total Commitment under the Giftline CreditAgreement from $15.0 million to $25.0 million, and amended thedefinition of Revolving Loan Availability so that it now equals the differencebetween (a) the lesser of (x) the Maximum Revolving Commitment in effect atsuch time and (b) the Borrowing Base at such time, minus (b) the sum of theaggregate principal amount of all “Loans”, “Specified Hedging Obligations” andthe “Stated Amount” of all “Letters of Credit” outstanding or requested but notyet funded under the Canadian Loan Agreement. The Borrowing Base is primarily a function of a percentage of eligibleaccounts receivable and eligible inventory. As of June 30, 2007, the outstanding balance on the Giftline Revolver was$7.8 million, there was no outstanding balance on the Canadian Revolving Loan(see Section 1.C below), and there was $1.1 million utilized under the Canadiansub-facility for letters of credit.  AtJune 30, 2007, based on available collateral, the unused amount available to beborrowed under the Giftline Revolver was $4.3 million.

11

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

All outstanding amounts under the Giftline Revolverare due and payable on March 14, 2011, subject to earlier termination inaccordance with the terms of the Giftline Credit Agreement.

The Giftline Revolver bears interest at a rate perannum equal to the sum of the Base Rate (for Base Rate Loans) or the LIBOR Rate(for LIBOR Loans), at RB’s option plus an applicable margin, which margin wasoriginally 2.75% for LIBOR Loans and 1.25% for Base Rate Loans.  However, pursuant to the December 28, 2006amendment to the Giftline Credit Agreement (the “Third Amendment”), theinterest rates applicable to the Giftline Revolver were reduced such that theapplicable margin is now determined in accordance with a pricing grid based onthe most recent quarter-end daily Average Excess Revolving Loan Availability,which applicable margins shall range from 2.00% - 2.75% for LIBOR Loans andfrom 0% - 0.50% for Base Rate Loans.  Interest is due and payable in the same manner as with respect to theInfantline Loans.  The applicableinterest rate margins as of June 30, 2007 were 2.25% for LIBOR Loans and 0.25%for Base Rate Loans.  As of June 30,2007, the interest rate was 8.50% for the one outstanding Base Rate loan.  There were no LIBOR loans outstanding as ofJune 30, 2007.

In connection with the execution of the GiftlineCredit Agreement, the Infantline Borrowers paid (on behalf of the GiftlineBorrowers) aggregate closing fees of $0.15 million and an aggregate agency feeof $20,000.  Aggregate agency fees of$20,000 will be payable by the Giftline Borrowers on each anniversary of theClosing Date.  Pursuant to the ThirdAmendment, the Giftline Revolver is subject to an annual non-use fee (payablemonthly, in arrears, and upon termination of the relevant obligations), rangingfrom 0.375% to 0.50% for unused amounts under the Giftline Revolver, and anannual letter of credit fee ranging from 2.00% to 2.75%.  Other fees are as described in the GiftlineCredit Agreement.

Receivable and disbursement bank accounts of theGiftline Borrowers are required to be with the Administrative Agent or itsaffiliates, and cash in such accounts will be swept on a daily basis to paydown outstanding amounts under the Giftline Revolver.

The Giftline Credit Agreement contains customaryaffirmative and negative covenants substantially similar to those applicable tothe Infantline Credit Agreement.  TheGiftline Credit Agreement originally contained the following financialcovenants:  (i) a minimum EBITDA test,(ii) a minimum Excess Revolving Loan Availability requirement of $5.0 million,(iii) an annual capital expenditure limitation and (iv) a minimum Fixed ChargeCoverage Ratio (for quarters commencing with the quarter ended March 31,2008).  On August 8, 2006, the GiftlineCredit Agreement was amended to lower the threshold on the Minimum EBITDAcovenant by $1.0 million per fiscal quarter for each of four consecutive fiscalquarters commencing with the fiscal quarter ending September 30, 2006.  The Third Amendment (i) eliminated in theirentirety both the minimum EBITDA financial covenant and the Fixed ChargeCoverage Ratio financial covenant and (ii) reduced the minimum Excess RevolvingLoan Availability requirement from $5,000,000 to $3,500,000.  The Fourth Amendment eliminated the existingExcess Revolving Loan Availability requirement, and re-instituted a Fixed ChargeCoverage Ratio covenant based on the last day of any fiscal month for theapplicable Computation Period (as defined in the Fourth Amendment) ending onsuch date.  The Fixed Charge CovenantRatio now specifies that the Fixed Charge Coverage Ratio, as determined for theComputation Period ending on the last day of any fiscal month, may not be lessthan 1.1:1.0.  This covenant is onlyapplicable, however, if during the three fiscal month period then ending onsuch date of determination Revolving Loan Availability (defined above) was lessthan $3,500,000 for any three (3) consecutive business day period.  If, however, compliance is required, theGiftline Borrowers will be required to deliver a specified compliance certificateto the Administrative Agent. In addition, the Giftline Borrowers must complywith the Fixed Charge Coverage Ratio covenant for a period of three consecutivefiscal months after they fail to satisfy the test condition set forth above.  As of June 30, 2007, the Company was incompliance with the financial covenants contained in the Giftline CreditAgreement.

In addition to the changes discussed above, the FourthAmendment permits, subject to specified conditions, the mergers of specified inactiveand holding company subsidiaries of RB with and into RB (including certainGiftline Borrowers), and increases the amount of In-Transit Inventory which maybe deemed “Eligible Inventory” under specified circumstances from $3.0 millionto $8.0 million.  Further details withrespect to the Fourth Amendment can be found in Part II, Item 5, “OtherInformation”, of this Quarterly Report on Form 10-Q.

The Giftline Credit Agreement contains significantlimitations on the ability of the Giftline Borrowers to distribute cash to RBfor the purpose of paying dividends to RB’s shareholders or for the purpose ofpaying RB’s corporate overhead expenses, including a cap (subject to certainexceptions) on the amount that can be provided to RB to reimburse for its allocableportion of corporate overhead expenses equal to $4.5 million per year for eachof fiscal years 2006 and 2007, and $5.0 million for each fiscal yearthereafter, of which approximately $3.9 million was paid in 2006 andapproximately $1.5 million was paid during the six months ended June 30,2007.  The Third

12

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

Amendment permits the Giftline Borrowers to paydividends or make distributions to RB if no default or event of default existsor would result there from, and immediately after giving effect to suchpayments, there is at least $1.5 million available to be drawn under theGiftline Revolver.  The amount of anysuch payments to RB cannot exceed the amount of capital contributions made byRB to the Giftline Borrowers after December 28, 2006, which are used by theGiftline Borrowers to pay down the Giftline Revolver minus the total amount ofdividends or other distributions made by the Giftline Borrowers to RB underthis provision of the Giftline Credit Agreement.  As of June 30, 2007, the amount of capitalcontributions made after December 28, 2006 by RB under this provision of theThird Amendment to the Giftline Borrowers was $3.0 million.

In order to secure the obligations of the GiftlineBorrowers, the Giftline Borrowers pledged and have granted security intereststo the Administrative Agent in substantially all of their existing and futurepersonal property, and each Giftline Borrower guaranteed the performance of theother Giftline Borrowers under the Giftline Credit Agreement.  In addition, RB provided a limited recourseguaranty of the obligations of the Giftline Borrowers under the Giftline CreditAgreement.  This guarantee is secured bya lien on the assets intended to be assigned to U.S. Gift pursuant to theAssignment.  RB also pledged 100% of theequity interests of each of the Giftline Borrowers and 65% of its equityinterests in certain of its First Tier Foreign Subsidiaries to theAdministrative Agent (the “Giftline Pledge Agreement”).  The Giftline Pledge Agreement containssubstantially similar limitations on the activities of RB as is set forth inthe Infantline Pledge Agreement.

*C.Canadian Credit Agreement*

As contemplated bythe 2005 Credit Agreement, on June 28, 2005, as amended on August 4, 2005,December 7, 2005 and March 14, 2006, RB’s Canadian subsidiary, Amram’sDistributing Ltd. (“Amrams”), executed a separate Credit Agreement(acknowledged by RB) with the financial institutions party thereto and LaSalleBusiness Credit, a division of ABN AMRO Bank, N.V., Canada Branch, a Canadianbranch of a Netherlands bank, as issuing bank and administrative agent (asamended, the “Canadian Credit Agreement”), and related loan documents withrespect to an original maximum U.S. $10.0 million revolving loan (the “CanadianRevolving Loan”).  RB executed anunsecured Guarantee (the “Canadian Guarantee”) to guarantee the obligations ofAmrams under the Canadian Credit Agreement. In connection with the LaSalle Refinancing, on March 14, 2006, theCanadian Credit Agreement was amended to (i) replace references to the LaSalleCredit Agreement with the Giftline Credit Agreement (such that, among otherconforming changes, a default under the Giftline Credit Agreement will be adefault under the Canadian Credit Agreement), (ii) release RB from the CanadianGuaranty and (iii) provide for a maximum U.S. $5.0 million revolving loan. In connection with the release of RB from the Canadian Guaranty, U.S.Gift executed an unsecured Guarantee to guarantee the obligations of Amramsunder the Canadian Credit Agreement.  Adefault under the Infantline Credit Agreement will not constitute a defaultunder the Canadian Credit Agreement**. **As of****June30, 2007, there were no borrowings under the Canadian Revolving Loan.

The Commitments under theCanadian Credit Agreement bear interest at a rate per annum equal to the sum ofthe Base Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) plus anapplicable margin.  As of June 30, 2007, there were no Base Rate or LiborLoans outstanding.

*D. Earnout Security Documents*

All capitalizedterms used but undefined in this Note 5, Section 1.D, shall have the meaningsascribed to them in the Giftline Credit Agreement.

As has been previously reported RB, was obligated topay the Earnout Consideration under the Kids Line Purchase Agreement.  Pursuant to the Letter Agreement dated March14, 2006 between the Infantline Borrowers and California KL Holdings, Inc., andthe other parties thereto (the “Letter Agreement”), the Infantline Borrowershave agreed, on a joint and several basis, to assume sole responsibility to paythe Earnout Consideration in the place of RB. In connection therewith, the Earnout Security Documents have beenamended to effect the partial release of RB as obligor and the full release ofthe security interests granted thereunder by any Giftline Borrowers.  To secure the obligations of the InfantlineBorrowers to pay the Earnout Consideration, the Infantline Borrowers havegranted a subordinated lien on substantially all of their assets, on a jointand several basis, and RB has granted a subordinated lien on the equityinterests of each of the Infantline Borrowers to the Earnout SellersAgent.  All such security interests andliens are subordinated to the senior indebtedness of the Infantline Borrowersarising under the Infantline Credit Agreement. The Earnout Consideration is not secured by the Giftline Borrowers ortheir assets or equity interests.  TheCompany cannot currently determine the precise amount of the EarnoutConsideration that will be required to be paid pursuant to the PurchaseAgreement.  However, based on currentprojections, the Company anticipates that the Earnout Consideration will be approximately$30 million, although the amount could be more or less depending on the actualperformance of Kids Line for the remaining portion of the MeasurementPeriod.  The Company currentlyanticipates that cash flow from operations and anticipated availability underthe Infantline Credit

13

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

Agreement will be sufficient to fund the obligation topay the Earnout Consideration, and that such payment will be permitted underthe terms of the Infantline Credit Agreement and related documentation.  The amount of the Earnout Consideration willbe charged to goodwill.

2.             RussBerrie (UK) Limited Business Overdraft Facility

On March 19, 2007, Russ Berrie UK Limited entered intoa Business Overdraft Facility (the “Facility”) with National Westminster BankPLC (the “Bank”) and The Royal Bank of Scotland plc (“RBS”), acting as agentfor the Bank.  The Facility, as amended,consists of a maximum credit line of £1.5 million.  Interest will be charged on amountsoutstanding under the Facility at an annual rate of 1.5% over the Bank’s BaseRate, which interest rate spread will be increased to 3.5% for any amountsoutstanding in excess of the maximum limit. The Facility is secured by a lien on substantially all of the assets ofRuss Berrie UK Limited.  The Facilityreplaces the Framework Agreement with Barclays Bank Plc described in Item 7 ofthe 2006 10-K, which was terminated as of March 31, 2007.  The Facility, like the Framework Agreementfacility, was established to assist in meeting the working capital requirementsof Russ Berrie UK Limited.   As of June30, 2007, there was approximately $0.4 million of borrowings outstanding underthis facility.

**NOTE 6 – GOODWILL AND INTANGIBLEASSETS**

Thesignificant components of intangible assets consist of the following (inthousands):
|                                              | ** ** | **Weighted  Average  Amortization  Period** | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| MAM distribution  agreement and relationship |       | Indefinite life                             |       | $                       | 10,400     |                        | $          | 10,400 |   |
| Sassy trade name                             |       | Indefinite life                             |       | 7,100                   |       | 7,100                       |       |
| Applause trade  name                         |       | Indefinite life                             |       | 7,646                   |       | 7,646                       |       |
| Kids Line  customer relationships            |       | Indefinite life                             |       | 31,100                  |       | 31,100                      |       |
| Kids Line trade  name                        |       | Indefinite life                             |       | 5,300                   |       | 5,300                       |       |
| Other intangible  assets                     |       | 4.4  years                                  |       | 36                      |       | 54                          |       |
|                                         |       |                                        |       | $                       | 61,582     |                        | $          | 61,600 |   |

 

Other intangible assets as of June 30, 2007 andDecember 31, 2006 include Kids Line and Sassy non-compete agreements, which arebeing amortized over four and five years, respectively, and a patent.  Amortization expense was approximately$18,000 and $13,000 for the six months ended June 30, 2007 and 2006,respectively.

All of the Company’s goodwill is in the infant andjuvenile segment and results from the acquisition of Kids Line, LLC in 2004,and Sassy in 2002.  There were no changesto the carrying amount of goodwill for the six months ended June 30, 2007.

**NOTE 7 – RESTRUCTURING AND RELATED COST**

During 2006, theCompany continued restructuring efforts with respect to its domestic giftbusiness to reduce expenses, right-size the infrastructure consistent with currentbusiness levels, and re-align domestic gift operations to better meet the needsof different distribution channels. During the six months ended June 30, 2006, the Company recorded a $3.6million restructuring charge related to: (i) severance cost of employees at itsPetaluma, California distribution center; (ii) reduced sales staff in its U.S.gift segment; and (iii) a charge of $2.2 million related to down-sizing of itsoperations in Europe.  During the yearended December 31, 2006, the Company recorded aggregate restructuring chargesof $4.2 million.  Restructuring chargesincurred for the U.S. operations in 2006 totaled approximately $1.6 million,which consisted of severance costs related to employees at its Petaluma,California distribution center and additional sales and operational personnelat its Oakland, N.J. operation. International restructuring costs ofapproximately $2.6 million were incurred in 2006 which were comprised primarilyof severance costs.  The Company alsoincurred a one-time charge of $1.3 million during 2006, which is included inselling, general and administrative expenses in connection with the relocationof its distribution facility in the United Kingdom, primarily related to thewrite-off of fixed assets and moving costs. The Company recorded a one-time charge of $0.3 million (not classifiedas a restructuring charge and therefore not reflected in the table below)during the six months ended June 30, 2007, which is included in selling,general and administrative expenses, in connection with the closure of one ofits showrooms for the gift segment.

The Companyreassesses the reserve requirements under the restructuring efforts at the endof each reporting period.  A rollforwardof the restructuring accrual is set forth below (in thousands):

14

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

|                              | ** ** | **Employee**   | ** ** | **Facility**        | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------|------------|---------------------|------------|------------|------------|
| ** **                   | ** ** | **Separation** | ** ** | **Exit Costs** | ** ** | **Total**  | ** ** |
| Balance @  December 31, 2006 |       | $              | 1,041      |                | $          | 65         |       | $ | 1,106 |   |
| 2007 Provision               |       | 193            |       | —              |       | 193        |       |
| Less Payments                |       | 1,003          |       | 65                  |       | 1,068      |       |
| Balance @ June 30, 2007      |       | $              | 231        |                | $          | 0          |       | $ | 231 |   |

 

**NOTE 8 – SEGMENTS OF THE COMPANY AND RELATED INFORMATION**

The Company operates in twosegments: (i) the Company’s gift segment; and (ii) the Company’s infant andjuvenile segment, which includes Sassy, Inc. and Kids Line,LLC.  This segmentation of the Company’soperations reflects how the Company’s chief operating decision makers currentlyview the results of operations.  Thereare no inter-segment revenues to eliminate. Corporate assets and overhead expenses are included in the gift segment.
| ** **                                       | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Dollars in thousands)**             | ** ** | **2007**                                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Gift:**                                        | ** ** | ** **                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                        |       | $                                                     | 33,843     |                                          | $          | 29,158 |   | $ | 70,234 |   | $ | 69,190 |   |
| Selling, general and administrative expenses (a) |       | 18,893                                                |       | 22,398                                        |       | 38,659 |   | 49,429 |   |
| Operating loss                                   |       | (4,589                                                | )          | (11,334                                       | )          | (7,905 | ) | (22,457 | ) |
| Other income (expense)                           |       | (45                                                   | )          | (115                                          | )          | 35 |   | 175 |   |
| Depreciation and amortization                    |       | 995                                                   |       | 1,127                                         |       | 1,980 |   | 2,327 |   |
| Loss before income taxes                         |       | $                                                     | (4,634     | )                                             | $          | (11,449 | ) | $ | (7,870 | ) | $ | (22,282 | ) |
| **Infant  and juvenile:**                        | ** ** | ** **                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                        |       | $                                                     | 36,871     | ** **                                    | $          | 36,495 |   | $ | 75,553 | ** ** | $ | 73,609 | ** ** |
| Selling, general and administrative expenses     |       | 6,787                                                 |       | 5,497                                         |       | 13,479 |   | 10,620 |   |
| Operating income                                 |       | 7,277                                                 |       | 9,894                                         |       | 15,462 |   | 21,036 |   |
| Other expense                                    |       | (1,124                                                | )          | (1,411                                        | )          | (2,326 | ) | (6,979 | ) |
| Depreciation and amortization                    |       | 190                                                   |       | 215                                           |       | 363 |   | 419 |   |
| Income before income taxes                       |       | $                                                     | 6,153      |                                          | $          | 8,483 |   | $ | 13,136 |   | $ | 14,057 |   |
| **Consolidated:**                                | ** ** | ** **                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                        |       | $                                                     | 70,714     |                                          | $          | 65,653 |   | $ | 145,787 |   | $ | 142,799 |   |
| Selling, general and administrative expenses     |       | 25,680                                                |       | 27,895                                        |       | 52,138 |   | 60,049 |   |
| Operating income (loss)                          |       | 2,688                                                 |       | (1,440                                        | )          | 7,557 |   | (1,421 | ) |
| Other expense                                    |       | (1,169                                                | )          | (1,526                                        | )          | (2,291 | ) | (6,804 | ) |
| Depreciation and amortization                    |       | 1,185                                                 |       | 1,342                                         |       | 2,343 |   | 2,746 |   |
| Income (loss)  before income taxes               |       | $                                                     | 1,519      |                                          | $          | (2,966 | ) | $ | 5,266 |   | $ | (8,225 | ) |

 

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(a)          Included in the giftsegment selling, general and administrative expense in the three and six monthsended June 30, 2006 was $1.0 million and $3.7 million, respectively, of chargesassociated with restructuring activities in the U.S. and European giftdivisions and $1.2 million and $2.5 million, respectively, of consulting costsincurred in connection with the development of the PIP.

15

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

Totalassets of each segment were as follows:

| (Dollars in thousands) | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Gift                             |       | $                           | 100,434    |                            | $          | 98,360 |   |
| Infant and juvenile              |       | 209,930                     |       | 205,407                         |       |
| Total                            |       | $                           | 310,364    |                            | $          | 303,767 |   |

 

**Concentrationof Risk**

As disclosed in the 2006 10-K, approximately 87.3% ofthe Company’s purchases are attributable to manufacturers in the People’sRepublic of China.  The supplieraccounting for the greatest dollar volume of purchases accounted for approximately20% and the five largest suppliers accounted for approximately 48% in theaggregate.  The Company utilizes approximately 62 manufacturers in EasternAsia and believes that there are many alternative manufacturers for the Company’sproducts and sources of raw materials.  As a result, the Company does notbelieve there is a concentration of risk associated with any significantmanufacturing relationship. See Item 1A, “Risk Factors”, of the 2006 10-K underthe caption “We rely on foreign suppliers, primarily in the PRC, to manufacturemost of our products, which subjects us to numerous international businessrisks that could increase our costs or disrupt the supply of our products.”

With respect to customers, Toys “R” Us, Inc. andBabies “R” Us, Inc., in the aggregate, accounted for 25.2% and 24.5% of theCompany’s consolidated net sales for the three and six month periods ended June30, 2007, respectively, and 26.2% and 24.8% for the three and six month periodsended June 30, 2006, respectively.  SeeItem 1A, “Risk Factors,” of the 2006 10-K under the caption “Our infant andjuvenile business is dependent on several large customers.”

**NOTE 9 - FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS**

Certain of the Company’s subsidiaries periodicallyenter into foreign currency forward exchange contracts to hedge inventorypurchases, both anticipated and firm commitments, denominated in the UnitedStates dollar. These contracts reduce foreign currency risk caused by changesin exchange rates and are used to offset the currency impact of these inventorypurchases, generally for periods up to 13 months. At June 30, 2007, theCompany’s forward contracts had expiration dates which ranged from one to ninemonths.

The Company accounts for its forward exchangecontracts as an economic hedge, with subsequent changes in fair value recordedin the Consolidated Statements of Operations. Unrealized losses of $277,000 and $14,000 relating to forward contractsare included in accrued expenses as of June 30, 2007 and December 31, 2006,respectively.

The Company has forward contracts to exchange Britishpounds, Canadian dollars and Australian dollars for United States dollars withnotional amounts of $8.6 million and $5.9 million as of June 30, 2007 andDecember 31, 2006, respectively. The Company has forward contracts toexchange United States dollars to Euros with notional amounts of $0 and $2.3million as of June 30, 2007 and December 31, 2006, respectively. TheCompany does not anticipate any material adverse impact on its results ofoperations or financial position from these contracts.

**NOTE 10 - COMPREHENSIVE INCOME (LOSS)**

Comprehensive Income (loss), representing all changesin Shareholders’ Equity during the period other than changes resulting from theissuance or repurchase of the Company’s common stock and payment of dividends,is reconciled to net income (loss) for the three and six months ended June 30,2007 and 2006 as follows (in thousands):
|                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Dollars in thousands)**      | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income  (loss)                        |       | $                                                   | 365        |                                              | $          | (5,975 | ) | $ | 2,911 |   | $ | (10,967 | ) |
| Other  comprehensive income:              |       |                                                |       |                                              |       |   |   |   |   |
| Foreign currency  translation adjustments |       | 1,225                                               |       | 1,181                                             |       | 1,514 |   | 1,232 |   |
| Comprehensive  income (loss)              |       | $                                                   | 1,590      |                                              | $          | (4,794 | ) | $ | 4,425 |   | $ | (9,735 | ) |

 

16

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**NOTE 11 – INCOME TAXES**

In July 2006 theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) and FASB StaffPosition (“FSP”) FSP FIN 48-1 (issued May 2007).  FIN 48 prescribes a comprehensive model forhow a company should recognize, measure, present and disclose in its financialstatements uncertain tax positions that the Company has taken or expects totake on a tax return.  FIN 48 states thata tax benefit from an uncertain tax position may be recognized only if it is “morelikely than not” that the position is sustainable, based on its technicalmerits.  The tax benefit of a qualifyingposition is the largest amount of tax benefit that is greater than 50% likelyof being realized upon settlement with a taxing authority having full knowledgeof all relevant information.  A taxbenefit from an uncertain position was previously recognized if it was probableof being sustained.  Under FIN 48, theliability for unrecognized tax benefits is classified as noncurrent unless theliability is expected to be settled in cash within twelve months of thereporting date.  FIN 48 is effective asof the beginning of the first fiscal year beginning after December 15,2006.  The Company adopted the provisionsof FIN 48 on January 1, 2007.  TheCompany believes that the balance sheet as of December 31, 2006 is consistentwith the implementation of FIN 48.  TheCompany has not made any additional adjustments to its opening balance sheetrelated to the implementation of FIN 48, other than to reclassify the portionof its tax liabilities to non-current which the Company does not anticipatewill settle, or for which the statute of limitations will not close, in thenext twelve months, and the Company has not made any adjustments to its openingretained earnings related to the implementation of FIN 48.

The Companyoperates in multiple tax jurisdictions, both within the United States and outsideof the United States, and faces audits from various tax authorities regardingthe inclusion of certain items in taxable income, the deductibility of certainexpenses, transfer pricing, the utilization and carryforward of various taxcredits, and the utilization of various carryforward items such as charitablecontributions and net operating loss carryforwards.  At January 1, 2007, the amount ofliability for unrecognized tax benefits related to federal, state, and foreigntaxes was approximately $15.1 million, including approximately $0.6 million ofaccrued interest. As of June 30, 2007, the amount of liability forunrecognized tax benefits related to federal, state, and foreign taxes wasapproximately $15.1 million, including approximately $0.6 million ofaccrued interest. The Company has various tax attributes such as NOL’s,charitable contribution carryovers, and foreign tax credit carryovers whichcould be utilized to offset these uncertain tax positions. As ofJanuary 1, 2007, a summary of the tax years that remain subject toexamination in the major tax jurisdictions are:
|        | United States — Federal | 2003 and forward |   |   |
|--------|------------------------------|------------------|--------|--------|
|   | United States — States  | 1999 and forward |   |   |

 

The Company iscurrently under examination in several tax jurisdictions and remains subject toexamination until the statute of limitations expires for the respective taxjurisdiction.  Based upon the expirationof statutes of limitations and/or the conclusion of tax examinations in severaljurisdictions, the Company believes it is reasonably possible that the totalamount of previously unrecognized tax benefits discussed above may decrease byup to $5.2 million within twelve months of June 30, 2007.  If recognized, approximately $1.3 million ofthe decrease would impact the Company’s effective tax rate.  For the remaining amounts, the Companyanticipates that the valuation allowances related to the deferred tax assetsassociated with various tax attributes such as NOL and foreign tax credit carryoverswould be increased based on management’s belief that it is more likely than notthat the full value of these tax attributes would not be realized.

The Company’spolicy is to classify interest and penalties related to unrecognized taxbenefits as income tax expense.

**NOTE 12 – LITIGATION AND COMMITMENTS**

In the ordinary course of its business, the Company isparty to various copyright, patent and trademark infringement, unfaircompetition, breach of contract, customs, employment and other legal actionsincidental to its business, as plaintiff or defendant.  In the opinion of management, the amount ofultimate liability with respect to such actions that are currently pending willnot materially adversely affect the consolidated results of operations,financial condition or cash flows of the Company.

In connection with the Company’s purchase of Kids LineLLC, the aggregate purchase price includes a payment of Earnout Considerationas more fully described in Note 4.  TheCompany cannot currently determine the precise amount of the EarnoutConsideration that will be required to be paid pursuant to the PurchaseAgreement.  However, based on currentprojections, the Company anticipates that the Earnout Consideration will beapproximately $30 million, although the amount could be more or less dependingon the actual performance of Kids Line for the remaining portion of theMeasurement Period.

The Company enters into various license agreementsrelating to trademarks, copyrights, designs, and products which enable theCompany to market items compatible with its product line.  All license agreements other than theagreement with MAM Babyartikel GmbH (which has a remaining term of four years),are for three year terms with extensions if agreed to by both parties.  Several of these license agreements requireprepayments of certain minimum guaranteed royalty amounts.  The amount of minimum guaranteed royaltypayments with respect to all license agreements through the end of theiroriginal terms aggregates to approximately $11.5 million, of which

17

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

approximately $4.6 million remained unpaid at June 30,2007.  Royalty Expense for the three andsix months ended June 30, 2007 was approximately $2.0 million and $3.2 million,respectively, as compared to $0.8 million and $1.8 million for the three andsix months ended June 30, 2006, respectively.

**NOTE 13 – RECENTLY ISSUED ACCOUNTINGSTANDARDS**

In September 2006,the FASB issued SFAS no. 157, *Fair Value Measurement*(“SFAS No. 157”).  SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdiscloses about fair value measurements. SFAS No. 157 is effective for the Company’s year beginning January 1,2009.  The Company is currentlyevaluating the impact of adopting SFAS No. 157 on its consolidated financialposition and results of operations.

InFebruary 2007, FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities.”  SFASNo. 159 provides companies with an option to report selected financial assetsand liabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets and liabilities.  SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007.  TheCompany is currently evaluating the impact, if any, on its consolidatedfinancial statements of SFAS No. 159.

18

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

The financial and business analysis below providesinformation which the Company believes is relevant to an assessment andunderstanding of the Company’s consolidated financial condition, changes infinancial condition and results of operations. This financial and businessanalysis should be read in conjunction with the Company’s consolidatedfinancial statements and accompanying Notes to Unaudited Consolidated FinancialStatements set forth in Part I, Financial Information, Item 1, “FinancialStatements” of this Quarterly Report on Form 10-Q, the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006 (the “2006 10-K”)and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,2007 (the “1st Quarter 10-Q”).

**OVERVIEW**

The Company is a leader in the gift and infant andjuvenile industries. The Company’s gift business designs, manufactures throughthird parties and markets a wide variety of gift products to retail storesthroughout the United States and the world via the Company’s internationalwholly-owned subsidiaries and independent distributors.  The Company’s infant and juvenile businessesdesign, manufacture through third parties and market products in a number ofbaby categories, including, among others, infant bedding and accessories, bathtoys and accessories, developmental toys, feeding items and baby comfortingproducts. These products are sold to consumers, primarily in the United States,and certain foreign countries through mass merchandisers, toy, specialty, food,drug and independent retailers, apparel stores, military post exchanges andother venues.

The Company’s revenues are primarily derived fromsales of its products.  For the sixmonths ended June 30, 2007, 48.2% of revenues were generated by the giftsegment and 51.8% of revenues were generated by the infant and juvenilesegment, as compared to 48.5% and 51.5%, respectively, for the same period inthe prior year.

The Company’s global business strategy for 2006focused on: (i) capitalizing on growth opportunities with respect to its infantand juvenile segment, particularly in international markets, as well as (ii)continued efforts to streamline its gift business, concentrating on moreprofitable product lines and creating operational efficiencies.  The Company believes that it made substantialprogress in successfully implementing this strategy during 2006.  Specifically, revenues in the infant andjuvenile segment continued to grow throughout the year, primarily as a resultof new product development and increased distribution, particularly ininternational markets.  With respect toits gift business, the Company renewed its focus on product categories where itbelieves it can command an authoritative position, and made substantialprogress in rejuvenating its product line. The Company has reduced the number of SKUs offered by its gift segmentfrom approximately 13,000 in 2005 to approximately 5,700 at the end of 2006, andapproximately 70% of the product line developed for 2007 consists of newproduct introductions.

In addition, the Company believes it has substantiallycompleted its gift segment restructuring activities. During 2006, the Companydeveloped and substantially implemented its Profit Improvement Program (“PIP”),which is described in more detail in the Company’s 2006 10-K.  As a result of the successful implementationof the PIP, the Company believes that its gift segment infrastructure is nowappropriately sized in light of the current gift retail environment. Sincemid-2004, the Company has reduced its global gift segment operating expenses byapproximately $40 million, with approximately $25 million of those reductionshaving been achieved from November 2005 through December 2006. TheCompany anticipates that the first full year effect of these annualized expensereductions will be realized in fiscal 2007. See Item 7 of the 2006 10-K for a detailed discussion of the Company’srestructuring activities in recent periods. Although implementation of the PIPhas been largely completed, there are certain additional initiatives that havebeen identified by management but which have not commenced pending a finaldetermination by management of whether their implementation would beappropriate or desirable. As a result, the estimated completion date of thePIP’s implementation and estimates of the range of additional charges to beincurred or other expenditures required in connection therewith cannot bedetermined at this time. The Company may also be required to make certaininvestments to generate the efficiencies and focus on profitable operationsthat the PIP is designed to achieve, which amounts cannot be quantified at thistime.

The Company believes that its 2007 gift product linehas been favorably received by retailers and consumers.  In particular, the Company recentlyintroduced a product range called Shining Stars® that has been very wellreceived to date.  Each “Shining StarsFriend” includes a high-quality plush animal, entitles its owner to name a starin the sky, and provides access to a website that includes a virtual universewhere children of all ages can send e-cards, play customized games and find agalaxy of other fun activities.  Duringthe three months ended June 30, 2007, the Company continued its rollout of theShining Star products.  Presently, theCompany has received orders for significant quantities of Shining Stars productand anticipates that it will sell a substantially greater quantity of thisproduct during the third and fourth quarters of 2007 than it sold in the firstsix months of 2007. The Company has recently secured additional manufacturingcapacity for Shining Stars product to meet anticipated demand and addresscurrent backlog.  However, there can beno assurance that demand for Shining Stars product will continue at currentlevels, that the Company will be able to manufacture adequate supplies ofproduct, that such products will continue to be well received or that existingor future competition for similar products will not have an adverse effect onthe Company’s expectations for the success of the Shining Stars product range.

19

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As a result of the favorable reception to new productintroductions in the gift segment, including Shining Stars, the Company’sbacklog in the gift segment as of June 30, 2007 increased by 222% toapproximately $65 million, as compared to $29 million at June 30, 2006.

**SEGMENTS**

TheCompany currently operates in two segments:  (i) its gift segment and(ii) its infant and juvenile segment.

**RESULTS OF OPERATIONS—THREE MONTHS ENDED JUNE 30, 2007AND 2006**

The Company’s consolidated net sales for the threemonths ended June 30, 2007 increased 7.7% to $70.7 million compared to $65.7million for the three months ended June 30, 2006, primarily as a result of anincrease in gift segment sales of $4.6 million, as well as an increase of $0.4million in the infant and juvenile segment.

The Company’s gift segment net sales for the threemonths ended June 30, 2007 increased 16.1% to $33.8 million compared to $29.2 millionfor the three months ended June 30, 2006, primarily as a result of the rolloutof its Shining Stars product line.  Netsales in the Company’s gift segment were favorably impacted by approximately$0.9 million for the three months ended June 30, 2007 as a result of foreignexchange rates.  Net sales for the infant and juvenile segment for thethree months ended June 30, 2007 increased 1.0% to $36.9 million, compared to$36.5 million for the three months ended June 30, 2006.

Consolidated gross profit of 40.1% of consolidated netsales for the three months ended June 30, 2007 decreased slightly from 40.3% ascompared to the three months ended June 30, 2006.   Gross profit for the Company’s gift segmentincreased to 42.3% of net sales for the three months ended June 30, 2007 from37.9% of net sales for the three months ended June 30, 2006, primarily as aresult of new product introductions throughout the gift segment product linethat command higher margins.  Gross profit for the Company’s infant andjuvenile segment decreased from 42.2% of net sales for the three months endedJune 30, 2006 to 38.1% of net sales for the three months ended June 30, 2007,primarily as a result of competitive pressures, increased raw material costs,product mix and currency exchange expense associated with Sassy’s MAMBabyartikel GmbH contract.

Consolidated selling, general and administrativeexpense was $25.7 million, or 36.3% of consolidated net sales, for the threemonths ended June 30, 2007, compared to $27.9 million, or 42.5% of consolidatednet sales, for the three months ended June 30, 2006.  Selling, general andadministrative expense in the Company’s gift segment decreased by 15.6% or $3.5million to $18.9 million in the second quarter of 2007 from $22.4 million inthe prior year period.  This decrease isa result of expense reductions resulting from implementation of the PIP andsimilar cost reduction initiatives that were implemented in prior yearspartially offset by higher costs, including selling expenses to support highernet sales and approximately $0.5 million of costs related to the exploration ofpotential strategic alternatives and other special charges regarding the giftsegment.   Included in the gift segmentselling, general and administrative expense in the second quarter of 2006 was$1.0 million in charges associated with the restructuring activities in theU.S. and European gift divisions and $1.2 million of consulting costs incurredin connection with the development of the PIP. Selling, general and administrative expense in the Company’s infant andjuvenile segment increased from $5.5 million, or 15.1% of net sales, in thesecond quarter of 2006 to $6.8 million, or 18.4% of net sales, in the secondquarter of 2007, primarily as a result of efforts to support anticipated growthin this segment.

Consolidated other expense was $1.2 million for thethree months ended June 30, 2007 compared to $1.5 million for the three monthsended June 30, 2006, or a decrease of $0.3 million.  Other expense in the Company’s gift segmentfor the three months ended June 30, 2007 decreased to $45,000 from $115,000 inthe prior year.  Other expense in theCompany’s infant and juvenile segment decreased by $0.3 million to $1.1 millioncompared to $1.4 million in the prior year period.  The decrease in the infant and juvenilesegment was primarily due to lower borrowing costs.

The Company recorded a domestic income tax expense ofapproximately $1.2 million for the three months ended June 30, 2007, primarilyrelated to the deferred tax liability associated with the tax amortization ofintangible assets relating to the Kids Line, Sassy and Applauseacquisitions.  These deferred taxliabilities are indefinite in nature for accounting purposes, and thereforecannot be offset by the Company’s deferred tax assets.  The Company has recorded full valuationallowances against these deferred tax assets as management believes it is morelikely than not that those net deferred tax assets will not be realized.  Income tax expense for the three months endedJune 30, 2006 was $3.0 million. Effective with the quarter ended December 31, 2005, the Company recordedfull valuation allowances against substantially all of its net deferred taxassets, while continuing to record deferred tax expense related to theamortization of certain indefinite life intangibles resulting from acquisitionsmade in previous years.

As a result of the foregoing, consolidated net incomefor the three months ended June 30, 2007 was $365,000, or $0.02 per dilutedshare, compared to consolidated net loss of $6.0 million, or ($0.29) perdiluted share, for the three months ended June 30, 2006, representing animprovement of $6.3 million, or $0.31 per diluted share.

20

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**RESULTS OF OPERATIONS— SIX MONTHS ENDED JUNE 30, 2007 AND2006**

The Company’s consolidated net sales for the sixmonths ended June 30, 2007 increased 2.1% to $145.8 million compared to $142.8million for the six months ended June 30, 2006 as a result of sales growth inboth its infant and juvenile and gift business segments.

The Company’s gift segment net sales increased 1.5%for the six months ended June 30, 2007 to $70.2 million compared to $69.2million for the six months ended June 30, 2006, primarily as a result of therollout of the Shining Stars product line, improved content and productavailability as well as strong consumer demand for the Company’s YomikoTM brandof premium plush products.  Net sales inthe Company’s gift segment were favorably impacted by foreign exchange rates byapproximately $1.9 million for the six months ended June 30, 2007.  TheCompany’s infant and juvenile segment net sales for the six months ended June30, 2007 increased 2.6% to $75.6 million compared to $73.6 million for the sixmonths ended June 30, 2006. This increase is primarily attributable to salesgrowth in the Company’s Kids Line subsidiary.

Consolidated gross profit was 40.9% of consolidatednet sales for the six months ended June 30, 2007 as compared to 41.1% ofconsolidated net sales for the six months ended June 30, 2006.  Thedecline in the consolidated gross profit percentage is primarily due to competitivepricing pressure, increased raw material cost, sales channel mix and currencyexchange expenses associated with Sassy’s MAM Babyartikel GmbH contract in theinfant and juvenile segment, partially offset by increased gross profit marginsin the gift segment.  Gross profit forthe Company’s gift segment was 43.8% of net sales for such segment for the sixmonths ended June 30, 2007 as compared to 39.0% of net sales for the six monthsended June 30, 2006 as a result of new product introductions throughout the giftsegment product line that command higher margins.  Gross profit for theCompany’s infant and juvenile segment was 38.3% of net sales for such segmentfor the six months ended June 30, 2007 as compared to 43.0% of net sales forthe six months ended June 30, 2006.

Consolidated selling, general and administrativeexpense was $52.1 million, or 35.8% of consolidated net sales, for the sixmonths ended June 30, 2007 compared to $60.0 million, or 42.1% of consolidatednet sales, for the six months ended June 30, 2006.  Selling, general andadministrative expense in the Company’s gift segment decreased by $10.7 millionto $38.7 million in the first half of 2007 from $49.4 million in the prior yearperiod.  This decrease is a result ofcontinued expense reductions from implementation of the PIP and similar costreduction initiatives that were implemented in prior years, partially offset by$0.8 million of costs related to the exploration of potential strategicalternatives and other special charges regarding the gift segment.  Included in the gift segment selling, generaland administrative expense in the first half of 2006 was $3.7 million in costsassociated with the restructuring activities in the U.S. and European giftdivision and $2.5 million of consulting costs incurred in connection with thedevelopment of the PIP.    Selling,general and administrative expense in the Company’s infant and juvenile segmentincreased by $2.9 million from $10.6 million for the six months ended June 30,2006 to $13.5 million for the same period in 2007, primarily as a result of effortsto support anticipated growth in this segment.

Consolidated other expense was $2.3 million for thesix months ended June 30, 2007 compared to $6.8 million for the six monthsended June 30, 2006, a decrease of $4.5 million.  This decrease is a result of refinancingcosts incurred in the first half of 2006, and lower borrowing costs in 2007.  The 2006 refinancing resulted in lowerinterest expense as a result of lower borrowings and lower interest rates in2007, as well as a $2.9 million write-off and amortization of deferredfinancing costs in 2006.

Income tax expense decreased $0.3 million to $2.4million for the six months ended June 30, 2007 as compared to $2.7 million forthe six months ended June 30, 2006. Income tax expense is primarily related to the deferred tax liabilityassociated with the tax amortization of intangible assets relating to the KidsLine, Sassy, and Applause acquisitions. These deferred tax liabilities are indefinite in nature for accountingpurposes, and therefore cannot be offset by the Company’s deferred taxassets.  The Company has recorded fullvaluation allowances against these deferred tax assets as management believes itis more likely than not that those net deferred tax assets will not be realized.

As a result of the foregoing, consolidated net incomefor the six months ended June 30, 2007 was $2.9 million, or $0.14 per dilutedshare, compared to a consolidated net loss of $11.0 million, or ($0.53) perdiluted share, for the six months ended June 30, 2006, representing animprovement of $13.9 million, or $0.67 per share.

**Liquidity and Capital Resources**

The Company’s principal sources of liquidity are cashand cash equivalents, funds from operations, and availability under its bankfacilities. The Company believes that cash flow from operations and futureborrowings will be sufficient to fund its operating needs and capitalrequirements, including the payment of the Earnout Consideration, for at leastthe next 12 months.  See discussion ofthe Earnout Consideration below.  TheFourth Amendment to the Giftline Credit Agreement, discussed below and in PartII, Item 5. “Other Information” of this Quarterly Report on Form 10-Q,increases the potential borrowing capacity of the Giftline Borrowers (definedbelow), in the event that

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additional working capital is required in connectionwith the favorable reception to the Company’s 2007 gift segment product line.

As of June 30, 2007, the Company had cash and cashequivalents of $14.3 million compared to $11.5 million at December 31,2006.  This increase of $2.8 million isprimarily related to the net income generated during the first six months of2007, reduced prepaid expenses and other assets, offset by increases ininventory of $11.5 million, and accounts receivable of $3.3 million.  As of June 30, 2007 andDecember 31, 2006, working capital was $58.0 and $45.9 million,respectively.  This increase of $12.1million was primarily the result of an increase in accounts receivable andinventory offset by a decrease in prepaid expenses and other current assets andan increase in short term borrowings.

Cash and cash equivalents increased by $2.8 millionduring the six months ending June 30, 2007 compared to a decrease of $18.3million during the six months ending June 30, 2006. The increase during the sixmonths ended June 30, 2007 was primarily a result of the factors described inthe preceding paragraph.  The decreaseduring the six months ended June 30, 2006 was primarily due to a net loss, thepayment of debt and reduced accounts payable, partially offset by decreases inaccounts receivable and inventory.  Netcash provided by operating activities was approximately $2.6 million during thesix months ended June 30, 2007 compared to net cash used in operatingactivities of approximately $6.6 million during the six months ended June 30,2006. The increase of $9.2 million was due primarily to net income of $2.9million in the first half of 2007 as compared to a net loss of $11.0 million inthe first half of 2006.  Net cash used ininvesting activities was approximately $1.1 million for the six months endedJune 30, 2007 compared to net cash used of approximately $0.2 million for thesix months ended June 30, 2006. The increased usage was primarily related toincreased capital expenditures.  Net cashprovided by financing activities was approximately $0.9 million for the sixmonths ended June 30, 2007 compared to a usage of $11.5 million for the sixmonths ended June 30, 2006.  The increaseof $12.4 million was due primarily to the repayment of debt under theInfantline Credit Agreement in 2006.

Kids Line andRelated Financing

*Background.*  The Company purchased all of the outstandingequity interests and warrants in Kids Line, LLC (the “Purchase”) in accordancewith the terms and provisions of a Membership Interest Purchase Agreement (the “PurchaseAgreement”) executed as of December 15, 2004. At closing, the Company paidapproximately $130.5 million, which represented the portion of the purchaseprice due at closing plus various transaction costs. The aggregate purchaseprice under the Purchase Agreement, however, also includes the potentialpayment of the Earnout Consideration, which is defined as 11.724% of the AgreedEnterprise Value of Kids Line as of the last day of the three year periodending November 30, 2007 (the “Measurement Period”). The Earnout Considerationshall be paid as described in Note 4 to the Notes to Unaudited ConsolidatedFinancial Statements herein (approximately the third anniversary of the ClosingDate). The “Agreed Enterprise Value” shall be the product of (i) Kids Line’sEBITDA during the twelve (12) months ending on the last day of the MeasurementPeriod and (ii) the applicable multiple (ranging from zero to eight) as setforth in the Purchase Agreement. The Company cannot currently determine theprecise amount of the Earnout Consideration that will be required to be paidpursuant to the Purchase Agreement.  However,based on current projections, the Company anticipates that the EarnoutConsideration will be approximately $30 million, although the amount could bemore or less depending on the actual performance of Kids Line for the remainingportion of the Measurement Period. The amount of the Earnout Consideration willbe charged to goodwill when it is earned. The Company currently anticipatesthat cash flow from operations and anticipated availability under theInfantline Credit Agreement (defined below) will be sufficient to fund thepayment of the Earnout Consideration (and that such payment will be permittedunder the Infantline Credit Agreement), however there can be no assurance thatunforeseen events or changes in our business would not have a material adverseimpact on our ability to pay the Earnout Consideration and therefore on theCompany’s liquidity.

The Kids Lineacquisition was financed with the proceeds of a term loan, which wassubsequently replaced by a $105 million credit facility with LaSalle Bank asagent (the “2005 Credit Agreement”) and the 2005 Canadian Credit Agreement(defined below), which are described in the Current Report on Form 8-K filed bythe Company with the SEC on July 5, 2005.

In order to reduceoverall interest expense and gain increased flexibility with respect to thefinancial covenant structure of the Company’s senior bank financing, on March14, 2006, the 2005 Credit Agreement was terminated and the obligationsthereunder were refinanced (the “LaSalle Refinancing”).  For a detailed description of the 2006 CreditAgreements, which are defined and summarized below, see Note 5 of the Notes toUnaudited Consolidated Financial Statements above.  On March 14, 2006, in connection with the LaSalleRefinancing, all outstanding obligations under the 2005 Credit Agreement(approximately $76.5 million) were repaid using proceeds from the InfantlineCredit Agreement.

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As part of theLaSalle Refinancing, the Company formed a wholly-owned Delaware subsidiary,Russ Berrie U.S. Gift, Inc. (“U.S. Gift”), to which it assigned (the “Assignment”)substantially all of its assets and liabilities which pertain primarily to itsdomestic gift business, such that separate loan facilities could be madedirectly available to each of the Company’s domestic gift business and infantand juvenile business, respectively. Pursuant to the Assignment, our parent company, Russ Berrie and Company,Inc. (“RB”), is now organized as a holding company, with all of its operationsbeing conducted through its subsidiaries. RB, however, has continuing cashneeds for corporate overhead expenses, taxes and other purposes (collectively,the “Requirements”). The 2006 Credit Agreements (defined below) containsignificant limitations on the ability of RB’s domestic subsidiaries todistribute cash, including in the form of dividends, loans or other advances,to RB to pay for its Requirements (such limitations are described in moredetail below). Management believes that the amounts permitted to be distributedto RB by its domestic subsidiaries will be sufficient to fund the requirements,although there can be no assurance that such requirements will not exceedcurrent estimates. Although there are no restrictions in the 2006 CreditAgreements on the ability of RB’s foreign subsidiaries to distribute cash toRB, available cash there from may be insufficient to cover the Requirementswithout additional distributions from RB’s domestic subsidiaries. Because RB isdependent upon cash distributions from its domestic subsidiaries, if such domesticsubsidiaries are unable to distribute sufficient cash to RB to meet itsrequirements without triggering a default under the 2006 Credit Agreements,this could have a material adverse impact on the Company’s liquidity.

As a result of theLaSalle Refinancing, the obligation to pay the Earnout Consideration is nolonger the obligation of RB, but the joint and several obligation of theInfantline Borrowers (defined below). The Infantline Borrowers will be permitted to pay all or a portion ofthe Earnout Consideration to the extent that, before and after giving effect tosuch payment, (i) Excess Revolving Loan Availability under the InfantlineCredit Agreement will equal or exceed $3.0 million and (ii) no violation of thefinancial covenants in the Infantline Credit Agreement would then exist, orwould, on a pro forma basis, result there from.

*InfantlineCredit Agreement.*   OnMarch 14, 2006, as amended as of December 22, 2006 (discussed below), KidsLine, LLC and Sassy, Inc. (collectively, the “Infantline Borrowers”), enteredinto a credit agreement as borrowers, on a joint and several basis, withLaSalle Bank National Association as administrative agent and arranger (the “Agent”),the lenders from time to time party thereto, RB as loan party representative,Sovereign Bank as syndication agent, and Bank of America, N.A. as documentationagent (as amended, the “Infantline Credit Agreement”). Unless otherwisespecified herein, capitalized terms used but undefined in this section shallhave the meanings ascribed to them in the Infantline Credit Agreement.

The commitmentsunder the Infantline Credit Agreement consist of (a) a $35.0 million revolvingcredit facility (the “Revolving Loan”), with a sub facility for letters ofcredit in an amount not to exceed $5.0 million, and (b) a $60.0 million termloan facility (the “Term Loan”).  As ofJune 30, 2007, the outstanding balance on the Revolving Loan was $18.5 millionand the outstanding balance on the Term Loan was $28.0 million, and there was$730,000 utilized on the letter of credit sub-facility. At June 30, 2007, theavailability under the Revolving Loan was approximately $11.8 million.

The principal ofthe Term Loan will be repaid in installments as described in Note 5 to theNotes to Unaudited Consolidated Financial Statements, with a final installmentin the aggregate amount of the unpaid principal balance of the Term Loan (inaddition to all outstanding amounts under the Revolving Loan) is due andpayable on March 14, 2011, in each case subject to customary early terminationprovisions (without any prepayment penalty) in accordance with the terms of theInfantline Credit Agreement.

As of December 22,2006, the Infantline Credit Agreement was amended (the “First Amendment”) topermit the temporary repayment and subsequent reborrowing of certain amountsunder the Term Loan, which was intended to enable the Infantline Borrowers tocontinue to utilize cash flow expected to be generated from operations to repaydebt until the Earnout Consideration becomes due.  Pursuant to the First Amendment, theInfantline Borrowers borrowed $20 million under the Revolving Loan, theoutstanding balance of which had previously been reduced to zero, and utilizedthe proceeds of such draw to prepay $20 million under the Term Loan. Thelenders agreed to provide an additional Term Loan reborrowing commitment (the “TRCommitment”) of an aggregate maximum principal amount of $20 million, whichamounts may only be reborrowed during specified periods and only in connectionwith the payment of the Earnout Consideration. Pursuant to the First Amendment,the Infantline Borrowers will pay a non-use fee in respect of undrawn amountsof the TR Commitment at a per annum rate of 0.375% of the daily average of theundrawn amounts.

The Infantline Loans bear interest at a rate per annumequal to the Base Rate (for Base Rate Loans) or the LIBOR Rate (for LIBORLoans) at the option of the Infantline Borrowers, plus an applicable margin, inaccordance with a pricing grid based on the most recent quarter-end Total Debtto EBITDA Ratio, which applicable margin shall range

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from 1.75% - 2.50% for LIBOR Loans and from 0.25% -1.00% for Base Rate Loans. The applicable interest rate margins as of June 30,2007 were: 1.75% for LIBOR Loans and 0.25% for Base Rate Loans.  The weighted average interest rates for theoutstanding loans as of June 30, 2007 were as follows:  
|                | ** ** | **At June 30, 2007** | ** ** |
|----------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **LIBOR Loans**                | ** ** | **Base Rate Loans** | ** ** |
| Revolving Loan |       | 7.11                                | %          | 8.50 | % |
| Term Loan      |       | 7.11                                | %          | 8.50 | % |

 

The InfantlineBorrowers are required to make prepayments of the Term Loan as is described inNote 5 to the Notes to Unaudited Consolidated Financial Statements.

The principal of the Term Loan will be repaid ininstallments as follows: (a) $0.75 million on the last day of each calendarmonth for the period commencing March, 2006 through and including February,2008, ($9.0 million in 2007), (b) $1.0 million on the last day of each calendarmonth for the period commencing March 2008 through and including February 2009 and(c) $1.25 million on the last day of each calendar month for the periodcommencing March, 2009 through and including February 2011. A final installmentin the aggregate amount of the unpaid principal balance of the Term Loan (inaddition to all outstanding amounts under the Revolving Loan) is due andpayable on March 14, 2011, in each case subject to customary early terminationprovisions (without any prepayment penalty) in accordance with the terms of theInfantline Credit Agreement.

The InfantlineCredit Agreement contains customary affirmative and negative covenants, as wellas the following financial covenants: (i) a minimum EBITDA test, (ii) a minimumFixed Charge Coverage Ration, (iii) a maximum total Debt to EBITDA Ratio and(iv) an annual capital expenditure limitation. As of June 30, 2007, theInfantline Borrowers were in compliance with the financial covenants containedin the Infantline Credit Agreement.

*GiftlineCredit Agreement*.  Also on March 14, 2006, as amended on April 11, 2006, August 8, 2006,December 28, 2006, and August 6, 2007, U.S. Gift and other specifiedwholly-owned domestic subsidiaries of RB (collectively, the “Giftline Borrowers”),entered into a credit agreement as borrowers, on a joint and several basis,with LaSalle Bank National Association, as issuing bank (the “Issuing Bank”),LaSalle Business Credit, LLC as administrative agent (the “Administrative Agent”),the lenders from time to time party thereto, and RB, as loan partyrepresentative (as amended, the “Giftline Credit Agreement” and, together withthe Infantline Credit Agreement, the “2006 Credit Agreements”). Unlessotherwise specified herein, capitalized terms used but undefined in thissection shall have the meanings ascribed to them in the Giftline CreditAgreement.

Prior to theAugust 6, 2007 amendment to the Giftline Credit Agreement (the “FourthAmendment”), the Giftline Credit Agreement consisted of a maximum revolvingcredit loan commitment (the “Giftline Revolver”) in an amount equal to thelesser of (i) $15.0 million (with a maximum availability of $13.5 million) and(ii) the then-current Borrowing Base, in each case minus amounts outstandingunder the Canadian Credit Agreement (as defined below), with a sub-facility forletters of credit to be issued by the Issuing Bank in an amount not to exceed$8.0 million.  The Fourth Amendmentincreased the aggregate total Commitment under the Giftline Credit Agreementfrom $15.0 million to $25.0 million, and amended the definition of RevolvingLoan Availability so that it now equals the difference between (a) the lesserof (x) the Maximum Revolving Commitment in effect at such time and (b) theBorrowing Base at such time, minus (b) the sum of the aggregate principalamount of all “Loans”, “Specified Hedging Obligations” and the “Stated Amount”of all “Letters of Credit” outstanding or requested but not yet funded underthe Canadian Loan Agreement.  TheBorrowing Base is primarily a function of a percentage of eligible accountsreceivable and eligible inventory.  As ofJune 30, 2007, the outstanding balance on the Giftline Revolver was $7.8million, there was no outstanding balance on the Canadian Revolving Loan(defined below), and there was $1.1 million utilized under the Canadiansub-facility for letters of credit.  At June30, 2007, based on available collateral, the unused amount available to beborrowed under the Giftline Revolver was $4.3 million.

All outstandingamounts under the Giftline Revolver are due and payable on March 14, 2011,subject to earlier termination in accordance with the terms of the GiftlineCredit Agreement.

On December 28,2006, pursuant to the third amendment to the Giftline Credit Agreement (the “ThirdAmendment”), the interest rates applicable to the Giftline Revolver werereduced such that the applicable margin is now determined in accordance with apricing grid based on the most recent quarter-end daily average ExcessRevolving Loan Availability, which applicable margins shall range from 2.00% -2.75% for LIBOR Loans and from 0% - 0.50% for Base Rate Loans.  Interest is due and payable in the samemanner as with respect to the Infantline Loans. The applicable interest ratemargins as of June 30, 2007 were 2.25% for LIBOR Loans and 0.25% for Base

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Rate Loans. As ofJune 30, 2007, the interest rate was 8.50% for the one outstanding Base Rateloan.  There are no LIBOR Loansoutstanding as of June 30, 2007.

Disbursement andreceivable bank accounts of the Giftline Borrowers are required to be with theAdministrative Agent or its affiliates, and cash in such accounts will be swepton a daily basis to pay down outstanding amounts under the Giftline Revolver.

The GiftlineCredit Agreement contains customary affirmative and negative covenantssubstantially similar to those applicable to the Infantline Credit Agreement.The Giftline Credit Agreement originally contained the following financialcovenants:  (i) a minimum EBITDA test,(ii) a minimum Excess Revolving Loan Availability requirement of $5.0 million,(iii) an annual capital expenditure limitation and (iv) a minimum Fixed ChargeCoverage Ratio (for quarters commencing with the quarter ended March 31, 2008).On August 8, 2006, the Giftline Credit Agreement was amended to lower thethreshold on the Minimum EBITDA covenant by $1.0 million per fiscal quarter foreach of four consecutive fiscal quarters commencing with the fiscal quarterending December 31, 2006. On December 28, 2006, the Third Amendment (i)eliminated in their entirety both the minimum EBITDA financial covenant and theFixed Charge Coverage Ratio financial covenant and (ii) reduced the minimumExcess Revolving Loan Availability requirement from $5,000,000 to $3,500,000.The Fourth Amendment eliminated the existing Excess Revolving Loan Availabilityrequirement, and re-instituted a Fixed Charge Coverage Ratio covenant based onthe last day of any fiscal month for the applicable Computation Period (asdefined in the Fourth Amendment) ending on such date.  The Fixed Charge Covenant Ratio now specifiesthat the Fixed Charge Coverage Ratio, as determined for the Computation Periodending on the last day of any fiscal month, may not be less than 1.1:1.0.  This covenant is only applicable, however, ifduring the three fiscal month period then ending on such date of determination RevolvingLoan Availability (defined above) was less than $3,500,000 for any three (3)consecutive business day period.  If,however, compliance is required, the Giftline Borrowers will be required todeliver a specified compliance certificate to the Administrative Agent. Inaddition, the Giftline Borrowers must comply with the Fixed Charge CoverageRatio covenant for a period of three consecutive fiscal months after they failto satisfy the test condition set forth above. As of June 30, 2007, the Company was in compliance with the remainingfinancial covenants contained in the Giftline Credit Agreement.

In addition to thechanges discussed above, the Fourth Amendment permits, subject to specifiedconditions, the mergers of specified inactive and holding company subsidiariesof RB with and into RB (including certain Giftline Borrowers), and increasesthe amount of In-Transit Inventory which may be deemed “Eligible Inventory”under specified circumstances from $3.0 million to $8.0 million.  Further details with respect to the FourthAmendment can be found in Part II, Item 5, “Other Information”, of thisQuarterly Report on Form 10-Q.

As contemplated bythe 2005 Credit Agreement, on June 28, 2005, as amended as of August 4, 2005,December 7, 2005 and March 14, 2006, RB’s Canadian subsidiary, Amram’sDistributing Ltd. (“Amrams”), executed a separate Credit Agreement(acknowledged by RB) with the financial institutions party thereto and LaSalleBusiness Credit, a division of ABN AMRO Bank, N.V., Canada Branch, a Canadianbranch of a Netherlands bank, as issuing bank and administrative agent (asamended, the “Canadian Credit Agreement”), and related loan documents withrespect to an original maximum U.S. $10.0 million revolving loan (the “CanadianRevolving Loan”). RB executed an unsecured Guarantee (the “Canadian Guarantee”)to guarantee the obligations of Amrams under the Canadian Credit Agreement. Inconnection with the LaSalle Refinancing, the March 14, 2006 amendment to theCanadian Credit Agreement: (i) replaced references to the 2005 Credit Agreementwith the Giftline Credit Agreement (such that, among other conforming changes,a default under the Giftline Credit Agreement will be a default under theCanadian Credit Agreement), (ii) released RB from the Canadian Guaranty and(iii) provided for a maximum U.S. $5.0 million revolving loan. In connectionwith the release of RB from the Canadian Guaranty, U.S. Gift executed anunsecured Guarantee to guarantee the obligations of Amrams under the CanadianCredit Agreement. A default under the Infantline Credit Agreement will notconstitute a default under the Canadian Credit Agreement. As of June 30, 2007,there were no borrowings under this facility.

The Companybelieves that the lower interest rates that were extended to the Company’ssubsidiaries in connection with the LaSalle Refinancing will enable the Companyto reduce its aggregate interest expense, on a comparable basis, byapproximately $2.0 million per year. However, because the 2006 Credit Agreements are extended directly to RB’sdomestic subsidiaries, RB is dependent upon its operating subsidiaries toprovide the cash necessary to enable the Company to fund its corporate overheadand other expenses.

The 2006 CreditAgreements restrict the ability of RB’s domestic subsidiaries to distributecash to RB for the purpose of paying dividends to RB’s shareholders or for thepurpose of satisfying RB’s corporate overhead expenses.  Among other limitations, the InfantlineCredit Agreement contains a cap (subject to certain exceptions) of $2.0 millionper year on the amount that can be provided to RB to pay corporate overheadexpenses, and the Giftline

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Credit Agreementcontains a similar cap (subject to certain exceptions) equal to $4.5 millionper year for each of fiscal years 2006 and 2007, and $5.0 million for eachfiscal year thereafter, of which approximately $3.9 million was paid in 2006and approximately $1.5 million was paid during the six months ended June 30,2007.  The Third Amendment permits theGiftline Borrowers to pay dividends or make distributions to RB if no defaultor event of default exists or would result there from, and immediately after givingeffect to such payments, there is at least $1.5 million available to be drawnunder the Giftline Revolver.  The amountof any such payments to RB cannot exceed the amount of capital contributionsmade by RB to the Giftline Borrowers after December 28, 2006, which are used bythe Giftline Borrowers to pay down the Giftline Revolver minus the total amountof dividends or other distributions made by the Giftline Borrowers to RB underthis provision of the Giftline Credit Agreement.  As of June 30, 2007, the amount of capitalcontributions made after December 28, 2006 by RB under this provision of theThird Amendment to the Giftline Borrowers was $3.0 million.  RB believes that the amounts permitted to bedistributed to it by its subsidiaries will be sufficient to fund its corporateoverhead expenses, although there can be no assurance that such expenses willnot exceed current estimates.

During the sixmonths ended June 30, 2007, the Company paid approximately $538,000 for incometaxes. The Company currently expects that its cash flows will exceed any incometax payments during 2007.

*Russ Berrie (UK) Limited Business OverdraftFacility* - On March 19, 2007, Russ Berrie UK Limited enteredinto a Business Overdraft Facility (the “Facility”) with National WestminsterBank PLC (the “Bank”) and The Royal Bank of Scotland plc (“RBS”), acting asagent for the Bank.  The Facility, asamended, consists of a maximum credit line of £1.5 million.  Interest will be charged on amountsoutstanding under the Facility at an annual rate of 1.5% over the Bank’s Base Rate,which interest rate spread will be increased to 3.5% for any amountsoutstanding in excess of the maximum limit. The Facility is secured by a lien on substantially all of the assets ofRuss Berrie UK Limited.  The Facilityreplaces the Framework Agreement with Barclays Bank Plc described in Item 7 ofthe 2006 10-K, which was terminated as of March 31, 2007.  The Facility, like the Framework Agreementfacility, was established to assist in meeting the working capital requirementsof Russ Berrie UK Limited.   As of June30, 2007 there was approximately $0.4 million of borrowings under thisfacility.

**Other Events and CircumstancesPertaining to Liquidity**

As previously disclosed, the Company believes it hassubstantially completed its gift segment restructuring activities.  In the event that additional initiativesrelated to the PIP are implemented, certain significant restructuring chargesmay be recognized.  As the determinationto implement any or all such initiatives has not yet been made, estimates of therange of any additional charges or other related expenditures cannot bedetermined at this time.  See “Overview”from the 2006 10-K for a description of the PIP and the restructuringactivities undertaken in 2005 and 2006.

The Company enters into foreign currency forwardexchange contracts, principally to manage the economic currency risksassociated with the purchase of inventory by its European, Canadian andAustralian subsidiaries in the gift segment and by Sassy Inc. in the infant andjuvenile segment.  As of June 30, 2007,the Company had outstanding forward contracts with a notional amount totalingapproximately $8.6 million.

The Company is dependent upon information technologysystems in many aspects of its business. In 2002, the Company commenced aglobal implementation of an Enterprise Resource Planning (“ERP”) system for itsgift businesses.  During 2003 andcontinuing into 2004, certain of the Company’s international gift subsidiariesbegan to phase in aspects of the new ERP system.  In late 2005, the Company began to explorealternative global information technology systems for its gift business thatcould provide greater efficiencies, lower costs and greater reportingcapabilities than those provided by the current ERP system.  As a result of this review, all remaininginternational implementations of the ERP system were placed on hold pending adecision on whether or not to replace the current ERP system.  The Company has not yet made a decision onwhether to replace its current ERP system and will continue to explore whethersuch replacement is advisable.

The Company is subject to legal proceedings and claimsarising in the ordinary course of its business that the Company believes willnot have a material adverse impact on the Company’s consolidated financialcondition, results of operations or cash flows.

Consistent with its past practices and in the normalcourse of its business, the Company regularly reviews acquisition opportunitiesof varying sizes. The Company may consider the use of debt or equity financingto fund potential acquisitions.  The 2006 Credit Agreements imposerestrictions on the Company that could limit its ability to respond to marketconditions or to take advantage of acquisitions or other businessopportunities.

As has been previously reported, the Company has begunto explore the possible sale of its gift division and has received indicationsof interest from several prospective acquirers. During this process, theperformance of the

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division has continued to improve. The Company hashired Sagent Advisors to explore all strategic alternatives, including: sellinga division, selling the Company in its entirety or identifying candidates forpotential acquisitions, although the Company is unable to determine at thistime whether any transaction will occur.

**Contractual Obligations**

The following table summaries the Company’ssignificant known contractual obligations as of June 30, 2007 and the futureperiods in which such obligations are expected to be settled in cash (in thousands):
| ** **                        | ** ** | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Operating Lease  Obligations      |       | $         | 48,013     |     | $          | 3,700    |       | $        | 7,215      |     | $          | 6,561    |       | $              | 5,906      |   | $ | 5,236 |   | $ | 19,395 |   |
| Purchase  Obligations(1)          |       | $         | 44,723     |     | $          | 44,723   |       | $        | —     |     | $          | —   |       | $              | —     |   | $ | — |   | $ | — |   |
| Debt Repayment  Obligations(2)(3) |       | $         | 28,000     |     | $          | 4,500    |       | $        | 11,500     |     | $          | 12,000   |       | $              | —     |   | $ | — |   | $ | — |   |
| Royalty  Obligations              |       | $         | 4,590      |     | $          | 1,175    |       | $        | 1,590      |     | $          | 1,750    |       | $              | 75         |   | $ | — |   | $ | — |   |
| Total Contractual  Obligations    |       | $         | 125,326    |     | $          | 54,098   |       | $        | 20,305     |     | $          | 20,311   |       | $              | 5,981      |   | $ | 5,236 |   | $ | 19,395 |   |

 

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(1)             TheCompany’s purchase obligations consist of purchase orders for inventory.

(2)             Reflects repaymentobligations under the Infantline Credit Agreement.  Mandatory repayment obligations under theInfantline Credit Agreements are as follows (in thousands) $4,500 in 2007; $11,500in 2008; and $12,000 in 2009.  See Note 5of Notes to Unaudited Consolidated Financial Statements for a description ofthe Infantline Credit Agreement, including provisions that create, increaseand/or accelerate obligations thereunder.

(3)             The Company hasrevolving loan facilities that expire on March 14, 2011.  At June 30, 2007, there was approximately$7.8 million borrowed under the Giftline Revolver and approximately $18.5million borrowed under the Infantline Revolving Loan, which have not been includedin the table above.

(4)             Of the total incometax payable of $14.8 million, the Company has classified $5.1 million ascurrent, as such amount is expected to be resolved within one year.  The remaining amount has been classified as along term liability.  These amounts arenot included in the above table as the timing of their potential settlement wasnot reasonably estimable.

**OffBalance Sheet Arrangements**

As of June 30, 2007, there have been no materialchanges in the information provided under the caption “Off Balance SheetArrangements” of Item 7 of the 2006 10-K.

**CRITICAL ACCOUNTING POLICIES**

The SEC has issued disclosure advice regarding “criticalaccounting policies”, defined as accounting policies that management believesare both most important to the portrayal of the Company’s financial conditionand results and require application of management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffects of matters that are inherently uncertain.

Management is required to make certain estimates andassumptions during the preparation of its consolidated financial statementsthat affect the reported amounts of assets, liabilities, revenue and expenses,and related disclosure of contingent assets and liabilities. Estimates andassumptions are reviewed periodically, and revisions made as determined to benecessary by management.  There have beenno material changes to the Company’s significant accounting estimates andassumptions or the judgments affecting the application of such estimates andassumptions during the period covered by this report from those described inthe Company’s 2006 10-K.

Also see Note 2 of Notes to Consolidated FinancialStatements of the 2006 10-K for a summary of the significant accountingpolicies used in the preparation of the Company’s consolidated financialstatements.  See Note 2 to Notes toUnaudited Consolidated Financial Statements herein for a discussion of SFAS No.123R, and the assumptions used in option valuations.

The Company adopted “Accounting for Uncertainty inIncome Taxes” (“FIN 48”) as of January 1, 2007. The impact of the adoption of FIN 48 was not material to the Company’sconsolidated financial position or results of operations.  See Note 11 to Notes to UnauditedConsolidated Financial Statements herein for a discussion of FIN 48.

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**Recently Issued Accounting Standards**

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurement*(“SFAS No. 157”).  SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdiscloses about fair value measurements. SFAS No. 157 is effective for the Company’s fiscal year beginningJanuary 1, 2009.  The Company iscurrently evaluating the impact of adopting SFAS No. 157 on its consolidatedfinancial position and results of operations.

InFebruary 2007, FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities.”  SFASNo. 159 provides companies with an option to report selected financial assetsand liabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets andliabilities.  SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007.  The Company is currently evaluating theimpact, if any, on its consolidated financial statements of SFAS No. 159.

**Forward-Looking Statements**

This Quarterly Report on Form 10-Q containscertain forward-looking statements.  Additional written and oralforward-looking statements may be made by the Company from time to time inSecurities and Exchange Commission (SEC) filings and otherwise.  ThePrivate Securities Litigation Reform Act of 1995 provides a safe-harbor forforward-looking statements.  These statements may be identified by the useof forward-looking words or phrases including, but not limited to, “anticipate”,“project”, “believe”, “expect”, “intend”, “may”, “planned”, “potential”, “should”,“will” or “would”.  The Company cautions readers that results predicted byforward-looking statements, including, without limitation, those relating tothe Company’s future business prospects, backlog, revenues, working capital,liquidity, capital needs, interest costs and income are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom those indicated in the forward-looking statements.   Specific risks and uncertainties include, butare not limited to, those set forth under Item 1A, “Risk Factors”, of the 200610-K and this report.  The Company undertakesno obligation to publicly update any forward-looking statement, whether as aresult of new information, future events or otherwise.

**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES****ABOUT MARKET RISK**

As of June 30, 2007, there have been no materialchanges in the Company’s market risks associated with marketable securities andforeign currency exchange rates, as described in Item 7A of the 2006 10-K.  The interest applicable to the 2006 CreditAgreements is based upon (i) the LIBOR Rate and (ii) the Base Rate (each asdefined in the 2006 Credit Agreements), plus an applicable margin.  At June 30, 2007, a sensitivity analysis tomeasure potential changes in applicable interest rates indicates that a onepercentage point increase in interest rates would increase the Company’sinterest expense by approximately $550,000 annually, based upon the level ofdebt at June 30, 2007.  See Note 5 ofNotes to Unaudited Consolidated Financial Statements for a description of theinterest rates applicable to the loans under the 2006 Credit Agreements.

**ITEM4.  CONTROLS AND PROCEDURES**

***Evaluation ofDisclosure Controls and Procedures***

We maintain disclosurecontrols and procedures as defined in Rules 13a-15(e) or15d-15(e) of the Exchange Act that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s (the “SEC”) rules and forms and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer (together, the “CertifyingOfficers”), to allow for timely decisions regarding required disclosure.

In designing and evaluatingdisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance of achieving the desired objectives.

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Under the supervision andwith the participation of management, including the Certifying Officers, wecarried out an evaluation of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to paragraph (b) of ExchangeAct Rules 13a-15 or 15d-15 as of June 30, 2007.  Based upon thatevaluation, the Certifying Officers have concluded that our disclosure controlsand procedures are effective at the reasonable assurance level as of June30, 2007.

***Changes in InternalControl over Financial Reporting***

There was no change in ourinternal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 thatoccurred during the fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II- OTHER INFORMATION**

**ITEM 1A. RISK FACTORS**

Otherthan the addition of the following, there have been no material changes to therisk factors set forth in Part I, Item 1A, “Risk Factors”, of the Company’s2006 10-K.

***Amounts included inour backlog may not result in actual revenue or translate into profits.***

As of June 30, 2007, the Gift segment had a backlog ofunfilled orders of approximately $65 million, as a result of high demand forthe Gift segment’s 2007 product line, including Shining Stars. This backlogamount is based primarily on purchase orders and may not result in actualreceipt of revenue in the originally anticipated period or at all. In addition,purchase orders included in our backlog may not be profitable. We mayexperience variances in the realization of our backlog because of delays orcancellations resulting from external market factors and economic factorsbeyond our control. If our backlog fails to materialize, we could experience areduction in revenue, profitability and liquidity.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

On May 18, 2007, the Company held its annualmeeting of shareholders to elect nine members to its Board of Directors. Each of the nine nominated directors was elected without contest.  Noother matters were brought before the shareholders at the annual meeting. The votes for and the votes withheld for each of the nominees for director wereas follows:
| Nominee                 | ** ** | **For**    | ** ** | **%** | ** ** | **Withheld** | ** ** | **%** | ** ** |
|-------------------------|------------|------------|------------|-------|------------|--------------|------------|-------|------------|
| Raphael Benaroya        |       | 15,794,841 |       | 81.7  |       | 3,547,905    |       | 18.3  |       |
| Mario Ciampi            |       | 19,062,237 |       | 98.5  |       | 280,509      |       | 1.5   |       |
| Andrew R. Gatto         |       | 19,096,328 |       | 98.7  |       | 246,418      |       | 1.3   |       |
| Frederick J.  Horowitz  |       | 19,106,216 |       | 98.8  |       | 236,530      |       | 1.2   |       |
| Lauren Krueger          |       | 19,036,823 |       | 98.4  |       | 305,923      |       | 1.6   |       |
| William A.  Landman *   |       | 19,095,777 |       | 98.7  |       | 246,969      |       | 1.3   |       |
| Daniel Posner           |       | 19,100,433 |       | 98.7  |       | 242,313      |       | 1.3   |       |
| Salvatore M.  Salibello |       | 16,601,108 |       | 85.8  |       | 2,741,638    |       | 14.2  |       |
| Michael Zimmerman       |       | 18,997,811 |       | 98.2  |       | 344,935      |       | 1.8   |       |

 

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*Note – Mr. Landman resigned from the Board of Directors effective June 7, 2007.

**ITEM 5.OTHER INFORMATION**

(a)  Asof August 8, 2007, RB and the other parties to the Giftline Credit Agreemententered into a Fourth Amendment to Credit Agreement (the “Fourth Amendment”).  Capitalized terms used but undefined in thisItem 5 shall have the meanings assigned to them in the Giftline CreditAgreement.  The Fourth Amendment, amongother things:

(i) Increases the aggregatetotal Commitment under the Giftline Credit Agreement from $15.0 million to$25.0 million.

(ii) Eliminates theexisting covenant pertaining to Excess Revolving Loan Availability (previouslyExcess Revolving Loan Availability could not be less than $3.5 million).

(iii) Re-institutes a “FixedCharge Coverage Ratio” financial covenant specifying that the Fixed ChargeCoverage Ratio, as determined for the Computation Period ending on the last dayof any fiscal month, may not be less than 1.1:1.0.  This covenant is only applicable, however, ifduring the three fiscal month period then ending on such date of determinationRevolving Loan Availability (defined below) was less than $3,500,000 for any three(3) consecutive business day period.  If,however, compliance is required the Giftline Borrowers will be required todeliver a specified compliance certificate to the Administrative Agent.  In addition, the Giftline

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Borrowers must comply withthe Fixed Charge Coverage Ratio covenant for a period of three consecutivefiscal months after they fail to satisfy the test condition set forth above.

(iv) Amends the definitionof Revolving Loan Availability to mean the difference between (a) the lesser of(x) the Maximum Revolving Commitment in effect at such time and (b) theBorrowing Base at such time, minus (b) the sum of the aggregate principalamount of all “Loans”, “Specified Hedging Obligations” and the “Stated Amount”of all “Letters of Credit” outstanding or requested but not yet funded underthe Canadian Loan Agreement.

(v) Amends the definitionof “Computation Period” generally to mean, as of the last day of any fiscalmonth, the preceding 12-fiscal month period ending as of such date; prior toDecember 31, 2007, such period is the number of months elapsed commencing afterDecember 31, 2006 (previously, “Computation Period” was defined as each periodof four consecutive fiscal quarters ending on the last day of a fiscalquarter);

(v) Re-institutes adefinition of “Fixed Charge Coverage Ratio” which is based on the last day ofany fiscal month for the Computation Period ending on such date.  Prior to the deletion of this covenant in theDecember 28, 2006 amendment to the Giftline Credit Agreement, the applicableperiod was quarterly.

(vi) Permits, subject tospecified conditions, the mergers of specified inactive and holding Company subsidiariesof RB with and into RB (including certain Giftline Borrowers).

(vii) Increases the amountof In-Transit Inventory which may be deemed “Eligible Inventory” underspecified circumstances from $3.0 million to $8.0 million.

In connection with the execution of the FourthAmendment, the Gift Borrowers paid an amendment fee in the amount of $37,500 tothe Administrative Agent.

The foregoingdescription of the Fourth Amendment is qualified in its entirety by referenceto the full text thereof, which is attached hereto as Exhibit 4.23.

**ITEM 6.  EXHIBITS** 
|        | Exhibits to this Quarterly Report on Form 10-Q. |
|--------|-------------------------------------------------|
|   |                                            |   |
|   | 4.23                                            | Fourth Amendment to Credit Agreement, dated as of  August 8, 2007, among RB, Russ Berrie U.S. Gift, Inc., Russ Berrie & Co.  (West), Inc., Russ Berrie and Company Properties, Inc., Russplus, Inc., Russ  Berrie and Company Investments, Inc., the financial institutions signatory  thereto (the “Lenders”), LaSalle Business Credit, LLC, as administrative  agent for the Lenders and LaSalle Bank National Association as Issuing Bank. |
|   |                                            |   |
|   | 10.108                                          | Amended and Restated Severance Policy for Domestic  Vice Presidents (and Above) of Russ Berrie and Company, Inc., incorporated  herein by reference to the Company’s Current Report on Form 8-K, filed on  July 17, 2007. |
|   |                                            |   |
|   | 10.109                                          | Russ Berrie and Company, Inc., Transaction Bonus  Plan, incorporated herein by reference to the Company’s Current Report on  Form 8-K, filed on July 17, 2007. |
|   |                                            |   |
|   | 31.1                                            | Certification of CEO required by Section 302 of  the Sarbanes Oxley Act of 2002. |
|   |                                            |   |
|   | 31.2                                            | Certification of CFO required by Section 302 of  the Sarbanes Oxley Act of 2002. |
|   |                                            |   |
|   | 32.1                                            | Certification of CEO required by Section 906 of  the Sarbanes Oxley Act of 2002. |
|   |                                            |   |
|   | 32.2                                            | Certification of CFO required by Section 906 of  the Sarbanes Oxley Act of 2002. |

 

**Items 1, 2 and 3 are not applicable and have been omitted.**

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized. 
|        |           |   | RUSS BERRIE AND COMPANY, INC. |                                       |   |
|--------|----------------|--------|-------------------------------|--------------------------------------------|--------|
|   |           |   | (Registrant)                  |                                       |   |   |
|   |           |   |                          |                                       |   |   |   |   |   |
|   |           |   |                          |                                       |   |   |   |   |   |
|   |           |   | By                            | /s/ James J. O’Reardon, Jr.           |   |   |   |   |   |   |
| Date:  | August 9, 2007 |   |                          | James J. O’Reardon, Jr.               |   |   |   |   |   |
|   |           |   |                          | Vice President and Chief Financial Officer |   |
|        |                |        |                               |                                            |        |  |  |  |  |  |  |

 

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**EXHIBIT INDEX**
| 4.23   | Fourth Amendment  to Credit Agreement, dated as of August 8, 2007, among RB, Russ Berrie U.S.  Gift, Inc., Russ Berrie & Co. (West), Inc., Russ Berrie and Company  Properties, Inc., Russplus, Inc., Russ Berrie and Company Investments, Inc.,  the financial institutions signatory thereto (the “Lenders”), LaSalle  Business Credit, LLC, as administrative agent for the Lenders and LaSalle  Bank National Association as Issuing Bank. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| 31.1   | Certification of  CEO required by Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        |
|   |
| 31.2   | Certification of  CFO required by Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        |
|   |
| 32.1   | Certification of  CEO required by Section 906 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        |
|   |
| 32.2   | Certification of  CFO required by Section 906 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        |

 

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