SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C.  20549





FORM
      10-Q





(Mark
                One)X
            
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934For
                the quarterly period ended March 31, 2008ORTRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For
                the transition period from _________ to
                _________





Commission
                file number:
            0-22635 RC2
                    Corporation(Exact
                    name of Registrant as specified in its charter)Delaware
                
                36-4088307(State
                    or other jurisdiction of incorporation or organization)
                
                (IRS
                    Employer Identification No.)1111
                    West 22nd
                    Street, Suite 320, Oak Brook, Illinois  60523(Address
                    of principal executive offices)Registrant’s
                    telephone number, including area
                    code:  630-573-7200


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


Yes
            X
            
            No





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting
      company.  See the definitions of "large accelerated filer,"
      "accelerated filer" and "smaller reporting company" in Exchange Act Rule
      12b-2.


Large
                accelerated filer
            [X]
            
            Accelerated
                filer
            [   ]Non-accelerated
                filer
            [   ]
            
            Smaller
                reporting company
            [   ](Do
                not check if a smaller reporting company)





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


Yes
            
            
            No
            X





On
      April
      23, 2008, there were outstanding 17,404,680 shares of the Registrant’s $0.01 par
      value common stock.









RC2
      CORPORATION


FORM
      10-Q


MARCH
      31, 2008





INDEX





PART
                I – FINANCIAL INFORMATION
            PageItem
                1.
            Condensed
                Consolidated Balance Sheets as of March
                31, 2008
              and
                December 31,
                2007
            
            3Condensed
                Consolidated Statements of Earnings
                for the Three Months
              Ended
                March 31, 2008 and
                2007
            
            4Condensed
                Consolidated Statements of Cash
                Flows for the Three Months
              Ended
                March 31, 2008 and
                2007
            
            5Notes
                to Condensed Consolidated Financial
                Statements
            
            6Item
                2.
            Management’s
                Discussion and Analysis of
                Financial Condition and
              Results
                of
                Operations
            
            17Item
                3.
            Quantitative
                and Qualitative Disclosures
                about Market Risk
            
            25Item
                4.
            Controls
                and Procedures
            
            25PART
                II – OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            
            26Item
                1A.
            Risk
                Factors
            
            26Item
                2.
            Unregistered
                Sales of Equity Securities and Use
                of Proceeds
            
            27Item
                3.
            Defaults
                Upon Senior Securities
            
            27Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            
            27Item
                5.
            Other
                Information
            
            27Item
                6.
            Exhibits
            
            28Signatures
            
            29






2


PART
      I – FINANCIAL INFORMATION




Item
      1.  Financial Statements





RC2
      Corporation and Subsidiaries


Condensed
      Consolidated Balance Sheets


(Unaudited
      and in thousands)




March
                31,
              2008
            
            
            December
                31, 2007AssetsCash
                and cash equivalents
            
            $
            59,802
            
            
            $
            57,809Accounts
                receivable, net
            
            
            79,542
            
            
            
            110,317Inventory
            
            
            78,890
            
            
            
            77,034Other
                current assets
            
            
            16,714
            
            
            
            19,207Total
                current assets
            
            
            234,948
            
            
            
            264,367Property
                and equipment, net
            
            
            36,515
            
            
            
            37,293Goodwill
            
            
            247,846
            
            
            
            247,814Intangibles,
                net
            
            
            96,444
            
            
            
            96,675Other
                non-current assets
            
            
            4,307
            
            
            
            4,096Total
                assets
            
            $
            620,060
            
            
            $
            650,245Liabilities
                and stockholders’ equityAccounts
                payable and accrued expenses
            
            $
            75,075
            
            
            $
            99,076Line
                of credit
            
            
            103,000
            
            
            
            95,000Other
                current liabilities
            
            
            2,733
            
            
            
            3,163Total
                current liabilities
            
            
            180,808
            
            
            
            197,239Other
                non-current liabilities
            
            
            56,169
            
            
            
            55,628Total
                liabilities
            
            
            236,977
            
            
            
            252,867Stockholders’
                equity
            
            
            383,083
            
            
            
            397,378Total
                liabilities and stockholders’ equity
            
            $
            620,060
            
            
            $
            650,245





See
      accompanying notes to condensed consolidated financial statements.






3


RC2
      Corporation


Condensed
      Consolidated Statements of
      Earnings


(Unaudited
      and in thousands, except per share data)





For
                the three months ended March 31,2008
            
            
            2007Net
                sales, including recall-related returns and allowances
              of
                $32 for the three months ended March 31, 2008
            
            $
            93,290
            
            
            $
            112,593Cost
                of sales
            
            
            50,748
            
            
            
            62,131Recall-related
                costs
            
            
            20
            
            
            
            ---Gross
                profit
            
            
            42,522
            
            
            
            50,462Selling,
                general and administrative expenses
            
            
            36,453
            
            
            
            37,768Amortization
                of intangible assets
            
            
            225
            
            
            
            213Recall-related
                costs
            
            
            1,420
            
            
            
            ---Operating
                income
            
            
            4,424
            
            
            
            12,481Interest
                expense, net
            
            
            1,075
            
            
            
            302Other
                income
            
            
            (448
            )
            
            
            (466
            )Income
                before income taxes
            
            
            3,797
            
            
            
            12,645Income
                tax expense
            
            
            1,796
            
            
            
            4,586Net
                income
            
            $
            2,001
            
            
            $
            8,059Earnings
                per common share:Basic
            
            $
            0.11
            
            
            $
            0.38Diluted
            
            $
            0.11
            
            
            $
            0.37Weighted
                average shares outstanding:Basic
            
            
            17,912
            
            
            
            21,116Diluted
            
            
            18,180
            
            
            
            21,519





See
      accompanying notes to condensed consolidated financial statements.






4


RC2
      Corporation


Condensed
      Consolidated Statements of Cash
      Flows


(Unaudited
      and in thousands)





For
                the three months ended March 31,2008
            
            
            2007Cash
                flows from operating activitiesNet
                income
            
            $
            2,001
            
            
            $
            8,059Depreciation
                and amortization
            
            
            3,329
            
            
            
            3,817Amortization
                and write-off of deferred financing costs
            
            
            118
            
            
            
            294Stock-based
                compensation
            
            
            1,358
            
            
            
            1,046Excess
                tax benefit on stock option exercises
            
            
            (59
            )
            
            
            (613
            )Loss
                on disposition of assets
            
            
            1
            
            
            
            2Changes
                in operating assets and liabilities
            
            
            7,934
            
            
            
            10,012Net
                cash provided by operating activities
            
            
            14,682
            
            
            
            22,617Cash
                flows from investing activitiesPurchase
                of property and equipment
            
            
            (2,311
            )
            
            
            (2,870
            )Proceeds
                from disposition of property and equipment
            
            
            ---
            
            
            
            1Purchase
                price of acquisitions, net of cash acquired
            
            
            13
            
            
            
            ---(Increase)
                decrease in other non-current assets
            
            
            (16
            )
            
            
            54Net
                cash used in investing activities
            
            
            (2,314
            )
            
            
            (2,815
            )Cash
                flows from financing activitiesBorrowings
                on line of credit
            
            
            8,000
            
            
            
            ---Payments
                on bank term loans
            
            
            ---
            
            
            
            (22,438
            )Issuance
                of stock upon option exercises
            
            
            229
            
            
            
            1,693Excess
                tax benefit on stock option exercises
            
            
            59
            
            
            
            613Issuance
                of stock under ESPP
            
            
            32
            
            
            
            40Purchase
                of treasury stock
            
            
            (19,870
            )
            
            
            ---Net
                cash used in financing activities
            
            
            (11,550
            )
            
            
            (20,092
            )Effect
                of exchange rate changes on cash
            
            
            1,175
            
            
            
            191Net
                increase (decrease) in cash and cash equivalents
            
            
            1,993
            
            
            
            (99
            )Cash
                and cash equivalents, beginning of year
            
            
            57,809
            
            
            
            25,365Cash
                and cash equivalents, end of period
            
            $
            59,802
            
            
            $
            25,266Supplemental
                information:Cash
                flows during the period for:Interest
                paid
            
            $
            1,356
            
            
            $
            197Income
                taxes paid
            
            
            1,789
            
            
            
            3,168Income
                tax refunds received
            
            $
            4,142
            
            
            $
            834





See
      accompanying notes to condensed consolidated financial statements.






5


RC2
      Corporation and Subsidiaries


Notes
      to Condensed Consolidated Financial Statements





Note
      1 – Basis of Presentation





The
      condensed consolidated financial statements include the accounts of RC2
      Corporation and its subsidiaries (the Company or RC2).  All
      intercompany transactions and balances have been eliminated.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared by management, and in the opinion of management, contain all
      adjustments, consisting of normal recurring adjustments, necessary to present
      fairly the financial position of the Company as of March 31, 2008, the results
      of operations for the three-month periods ended March 31, 2008 and 2007, and
      cash flows for the three-month periods ended March 31, 2008 and
      2007.





Certain
      information and note disclosures normally included in financial statements
      prepared in accordance with U.S. generally accepted accounting principles have
      been omitted.  It is suggested that these condensed consolidated
      financial statements be read in conjunction with the consolidated financial
      statements and related notes included in the Company’s Form 10-K for the year
      ended December 31, 2007.  The condensed consolidated balance sheet
      information as of December 31, 2007, appearing herein, is derived from the
      consolidated balance sheet in the Form 10-K.





Due
      to
      the seasonality of our business, the results of operations for interim periods
      are not necessarily indicative of the operating results for a full
      year.





Note
      2 – Business Combinations





Mother’s
      Intuition Inc.





On
      November 30, 2007, the Company acquired substantially all of the assets of
      Mother’s Intuition Inc. (MI), a privately-held, start-up developer and marketer
      of women’s prenatal bodycare products based in Mission Viejo,
      California.  Closing consideration consisted of $2.2 million of cash,
      excluding transaction expenses.  An additional $1.5 million in
      purchase price has been deferred and will be paid in three equal installments
      of
      $0.5 million each on December 31, 2008, 2009 and 2010.  This deferred
      purchase price is included in other current liabilities and other non-current
      liabilities in the accompanying condensed consolidated balance sheets at March
      31, 2008 and December 31, 2007.  Additional cash consideration of
      $10.5 million may be earned in the transaction by MI based on achieving certain
      financial targets in each of the three years beginning in 2008 through
      2010.  This transaction has been accounted for under the purchase
      method of accounting, and accordingly, the operating results of MI have been
      included in the accompanying condensed consolidated statements of earnings
      since
      the effective date of the acquisition.  The excess of the aggregate
      purchase price over the fair market value of net assets acquired of $3.5
      million and $3.4 million at March 31, 2008 and December 31, 2007, respectively,
      has been recorded as goodwill in the accompanying condensed consolidated balance
      sheets.






6


The
      purchase price was allocated to the net assets of MI based on their estimated
      fair values on November 30, 2007, as follows:





(in
                thousands)Total
                purchase price, including expenses, net of cash acquired
            
            
            
            
            $
            3,748Less:Current
                assets
            
            $
            188Intangible
                assets
            
            
            180Liabilities
            
            
            (76
            )
            
            
            (292
            )Excess
                purchase price over net assets acquired
            
            
            
            
            
            $
            3,456





The
      unaudited pro forma condensed consolidated results of operations of MI are
      not
      presented due to the immateriality of its results of operations.





Angels
      Landing, Inc.





On
      May
      24, 2007, the Company acquired substantially all of the assets of Angels
      Landing, Inc. (Angels Landing), a privately-held, start-up developer and
      marketer of infant and toddler travel gear under the Compass brand name (the
      Compass Business) based in Kettering, Ohio.  Closing consideration
      consisted of $6.9 million of cash, excluding transaction expenses, and includes
      $0.3 million which may be earned in the transaction by Angels Landing if gross
      sales relating to the Compass Business in 2008 exceed a certain
      target.  This transaction has been accounted for under the purchase
      method of accounting, and accordingly, the operating results of the Compass
      Business have been included in the accompanying condensed consolidated
      statements of earnings since the effective date of the
      acquisition.  The excess of the aggregate purchase price over the fair
      market value of net assets acquired of $4.2 million has been recorded as
      goodwill in the accompanying condensed consolidated balance sheets at March
      31,
      2008 and December 31, 2007.





The
      purchase price was allocated to the net assets of the Compass Business based
      on
      their estimated fair values on May 24, 2007, as follows:





(in
                thousands)Total
                purchase price, including expenses, net of cash acquired
            
            
            
            
            $
            6,772Less:Current
                assets
            
            $
            1,324Property
                and equipment
            
            
            817Intangible
                assets
            
            
            890Liabilities
            
            
            (485
            )
            
            
            (2,546
            )Excess
                purchase price over net assets acquired
            
            
            
            
            
            $
            4,226





The
      unaudited pro forma condensed consolidated results of operations for the Compass
      Business are not presented due to the immateriality of its results of
      operations.






7


Note
      3 – Business Segments





The
      Company is a leading designer, producer and marketer of innovative, high-quality
      toys, collectibles, and infant and toddler products.





The
      Company’s reportable segments under Statement of Financial Accounting Standards
      (SFAS) No. 131, “Disclosure About Segments of an Enterprise and Related
      Information,” are North America and International.  The North America
      segment includes the United States, Canada and Mexico.  The
      International segment includes non-North America markets.





Segment
      performance is measured at the operating income level.  Segment assets
      are comprised of all assets, net of applicable reserves and
      allowances.  Certain assets and resources are jointly used between the
      North America and International segments.  Intercompany allocations of
      such uses are not made.





Results
      are not necessarily those that would be achieved if each segment were an
      unaffiliated business enterprise.  Information by segment and a
      reconciliation to reported amounts for the three months ended March 31, 2008
      and
      2007, are as follows:





Three
                Months Ended
              March
                31,(in
                thousands)
            
            2008
            
            
            2007Net
                sales:North
                America
            
            $
            72,966
            
            
            $
            90,590International
            
            
            20,586
            
            
            
            22,168Sales
                and transfers between segments
            
            
            (262
            )
            
            
            (165
            )Combined
                total
            
            $
            93,290
            
            
            $
            112,593Operating
                income:North
                America
            
            $
            2,225
            
            
            $
            9,286International
            
            
            2,188
            
            
            
            3,189Sales
                and transfers between segments
            
            
            11
            
            
            
            6Combined
                total
            
            $
            4,424
            
            
            $
            12,481




(in
                thousands)
            
            March
                31,
              2008
            
            
            December
                31, 2007Total
                assets:North
                America
            
            $
            483,686
            
            
            $
            513,289International
            
            
            136,374
            
            
            
            136,956Combined
                total
            
            $
            620,060
            
            
            $
            650,245





8


Under
      the
      enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
      net
      sales by product category and by distribution channel.  During the
      first quarter of 2008, the Company reclassified its product categories and
      distribution channels to be more closely aligned with its strategic direction
      and organization structure.  The presentation is consistent with how
      the Company views its business.  The Company groups its products into
      two product categories: mother, infant and toddler products, and preschool,
      youth and adult products.  The following table presents consolidated
      net sales by product category and by distribution channel for the three months
      ended March 31, 2008 and 2007:





Three
                Months Ended
              March
                31,(in
                thousands)
            
            2008
            
            
            2007Mother,
                infant and toddler products
            
            $
            46,221
            
            
            $
            51,400Preschool,
                youth and adult products
            
            
            47,069
            
            
            
            61,193Net
                sales
            
            $
            93,290
            
            
            $
            112,593Chain
                retailers
            
            $
            69,114
            
            
            $
            80,343Specialty
                retailers, wholesalers, OEM dealers and other
            
            
            24,176
            
            
            
            32,250Net
                sales
            
            $
            93,290
            
            
            $
            112,593





Note
      4 – Goodwill and Intangible Assets





The
      change in carrying value of goodwill by reporting unit for the three months
      ended March 31, 2008, is shown below:





(in
                thousands)
            
            North
                America
            
            
            International
            
            
            TotalBalance
                at January 1, 2008
            
            $
            232,194
            
            
            $
            15,620
            
            
            $
            247,814Compass
                Business fair value allocation
            
            
            (24
            )
            
            
            ---
            
            
            
            (24
            )MI
                fair value allocation
            
            
            7
            
            
            
            ---
            
            
            
            7Other
                adjustments
            
            
            ---
            
            
            
            49
            
            
            
            49Balance
                at March 31, 2008
            
            $
            232,177
            
            
            $
            15,669
            
            
            $
            247,846





Other
      adjustments made during the three months ended March 31, 2008, primarily relate
      to currency exchange rate changes.





9


The
      components of intangible assets, net are as follows:





(in
                thousands)
            
            March
                31,
              2008
            
            
            December
                31, 2007Gross
                amount of amortizable intangible assets:Customer
                relationships
            
            $
            8,582
            
            
            $
            8,582Other
            
            
            4,321
            
            
            
            4,32112,903
            
            
            
            12,903Accumulated
                amortization of amortizable intangible assets:Customer
                relationships
            
            
            764
            
            
            
            706Other
            
            
            2,982
            
            
            
            2,8153,746
            
            
            
            3,521Intangible
                assets not subject to amortization:Licenses
                and trademarks
            
            
            87,287
            
            
            
            87,293Total
                intangible assets, net
            
            $
            96,444
            
            
            $
            96,675





Other
      amortizable intangible assets consist primarily of patents, non-compete
      agreements, trademarks and licenses.  Amortization expense related to
      amortizable intangible assets for the year 2008 is estimated to be approximately
      $0.9 million.





Note
      5 – Income Taxes





Effective
      January 1, 2007, the Company adopted FASB Interpretation No. (FIN) 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
      Statement No. 109.”  This Interpretation clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with FASB Statement No. 109, “Accounting for Income
      Taxes.”  This Interpretation prescribes a recognition threshold and
      measurement approach for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return.  This
      Interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure and
      transition.





The
      uncertain tax positions as of March 31, 2008 and December 31, 2007, totaled
      $4.2
      million.  At March 31, 2008 and December 31, 2007, approximately $2.9
      million and $3.0 million, respectively, of the total gross unrecognized tax
      benefits represent the amount that, if recognized, would affect the effective
      income tax rate in future periods.  The Company and its subsidiaries
      are subject to U.S. federal income tax, as well as income tax of multiple state
      and foreign jurisdictions.  The Company has substantially concluded
      all U.S. federal income tax matters for years through
      2003.  Substantially all material state and local and foreign income
      tax matters have been concluded for years through 2003.  U.S. federal
      income tax returns for 2004 through 2006 are currently open for
      examination.  In the next twelve months, the Company expects to reduce
      the unrecognized tax position reserves by approximately $1.3 million, primarily
      due to the settlement of various state and international income tax audits
      and
      court cases and the closing of various statutes.  The Company’s
      continuing practice is to recognize interest and/or penalties related to income
      tax matters in income tax expense.  During the three months ended
      March 31, 2008, the Company recorded adjustments to interest of $0.1 million
      and
      an immaterial amount to potential penalties, related to these unrecognized
      tax benefits.  In total as of March 31, 2008 and December 31, 2007,
      the Company has recorded a liability for interest of $2.1 million and $2.0
      million, respectively, and $0.4 million for potential penalties.






10


Note
      6 – Debt





Upon
      the
      closing of the acquisition of The First Years Inc. (TFY) on September 15, 2004,
      the Company entered into a new credit facility, which has subsequently been
      amended, to replace its previous credit facility.  The credit facility
      is comprised of an $85.0 million term loan and a $100.0 million revolving line
      of credit.  The credit facility also provides an additional $75.0
      million of capacity under the revolving line of credit, which was approved
      by
      the lenders upon the Company’s request in October 2007.  During the
      first quarter of 2007, the term loan was repaid, and the term loan is no longer
      available for borrowing.  The revolving line of credit is available
      until its maturity on September 14, 2008.  A portion of the term loan
      had an interest rate of 3.45%, plus applicable margin, through the first three
      years of the facility.  The remaining term loan bore and revolving
      line of credit bears interest, at the Company’s option, at a base rate or at a
      LIBOR rate plus applicable margin.  The applicable margin is based on
      the Company’s ratio of consolidated debt to consolidated EBITDA (earnings before
      interest, taxes, depreciation, amortization and non-cash expense related to
      equity awards) and varies between 0.75% and 1.625%.  At March 31,
      2008, the margin in effect was 1.00% for LIBOR loans.  The Company is
      also required to pay a commitment fee of 0.20% to 0.35% per annum on the average
      daily unused portion of the revolving line of credit.  At March 31,
      2008, the commitment fee in effect was 0.25% per annum.  Under the
      terms of this credit facility, the Company is required to comply with certain
      financial and non-financial covenants.  Among other restrictions, the
      Company is restricted in its ability to pay dividends, incur additional debt
      and
      make acquisitions above certain amounts.  The key financial covenants
      include minimum EBITDA and interest coverage and leverage ratios.  The
      credit facility is secured by working capital assets and certain intangible
      assets.  On March 31, 2008, the Company had $103.0 million outstanding
      on the revolving line of credit and was in compliance with all
      covenants.





During
      the first quarter of 2007, the Company expensed $0.2 million of deferred
      financing fees in conjunction with the Company’s voluntary payment of the
      remaining balance of its term loan.  Write-offs of deferred financing
      fees are included in interest expense, net in the accompanying condensed
      consolidated statements of earnings.





Note
      7 – Commitments and Contingencies





The
      Company leases office and warehouse/distribution space under various
      non-cancelable operating lease arrangements which expire through November 30,
      2019.





The
      Company markets a significant portion of its products under licenses from other
      parties.  These licenses are limited in scope and duration and
      authorize the sale of specific licensed products generally on a nonexclusive
      basis.  The Company has license agreements with, among others, various
      entertainment, publishing and media companies, automotive and truck
      manufacturers, and agricultural and construction vehicle and equipment
      manufacturers.  The Company is a party to more than 400 license
      agreements with terms generally of two to three years.  Many of the
      license agreements include minimum guaranteed royalty payments that the Company
      must pay whether or not it meets specified sales targets.  The Company
      believes it either achieved its minimum guarantees or has accrued for the costs
      related to these guarantees for the three months ended March 31, 2008 and
      2007.





Note
      8 – Legal Proceedings




See
      Note
      13 – Product Recalls for a description of certain putative class action lawsuits
      against the Company with respect to the products subject to the 2007 recalls
      and
      a notice received from a licensor relating to the recalls.





11


The
      Company also has certain contingent liabilities resulting from litigation and
      claims incident to the ordinary course of business.  Management
      believes that the probable resolution of such contingencies will not materially
      affect the Company’s financial position or the results of
      operations.





Note
      9 – Common Stock





Authorized
      and outstanding shares and the par value of the Company’s voting common stock
      are as follows:





(in
                thousands, except par value)
            Authorized
              Shares
            Par
              Value
            Shares
                Outstanding
              at
                March 31, 2008
            Shares
                Outstanding
              at
                December 31, 2007Voting
                common stock
            28,000
            $0.01
            17,419
            18,320





At
      December 31, 2007, the Company held 4.8 million shares of its common stock
      in
      treasury.  During the three months ended March 31, 2008 and 2007, the
      Company sold a total of 1,275 shares and 1,334 shares, respectively, out of
      treasury to Company employees under the Employee Stock Purchase Plan (ESPP)
      for
      $32,210 and $40,412, respectively.





In
      February 2007, the Company’s Board of Directors authorized the adoption of a
      program to repurchase up to $75.0 million of the Company’s common
      stock.  The program was initially authorized for a period of one
      year.  In October 2007, the Board of Directors authorized a $75.0
      million increase to the stock repurchase program and extended the timing of
      this
      program through December 31, 2008.  This program may be extended
      beyond the currently authorized period or may be suspended at any
      time.  Under this program, shares may be repurchased from time to time
      in open market transactions or privately negotiated transactions at the
      Company’s discretion, subject to market conditions and other
      factors.  Shares repurchased by the Company are held as treasury
      shares.  During the three months ended March 31, 2008, the Company
      repurchased 0.9 million shares for $19.9 million under this
      program.  Through March 31, 2008, the Company had repurchased an
      aggregate of 3.9 million shares for $107.8 million under the $150.0 million
      stock repurchase authorization.  These repurchases were funded with
      borrowings on the Company’s revolving line of credit and with cash flow from
      operations.





Note
      10 – Stock-Based Payment Arrangements





At
      March
      31, 2008, the Company has three stock incentive plans, two of which are dormant,
      and an ESPP.  Amounts recognized in the financial statements with
      respect to these stock-based payment arrangements for the three months ended
      March 31, 2008 and 2007, are as follows:





Three
                Months Ended
              March
                31,(in
                thousands)
            
            2008
            
            
            2007Total
                expense recognized for stock-based payment plans
            
            $
            1,358
            
            
            $
            1,046Amount
                of related income tax benefit recognized in determining net
                income
            
            $
            512
            
            
            $
            388





Stock-based
      compensation expense is included in cost of sales and selling, general and
      administrative expenses in the accompanying condensed consolidated statements
      of
      earnings for the three months ended March 31, 2008 and 2007.





12


Restricted
      stock awards or options to purchase stock may be granted under the current
      stock
      incentive plan.  A summary of stock option activity for the Company’s
      stock incentive plans for the three months ended March 31, 2008, is as
      follows:





Number
                of Shares
            
            
            Weighted
                Average Exercise Price
            
            
            Weighted
                Average Remaining Contractual Life
            
            
            Aggregate
                Intrinsic Value (000)Outstanding,
                beginning of year
            
            
            1,491,390
            
            
            $
            24.27Changes
                during the period:Granted
            
            
            569,500
            
            
            
            20.23Exercised
            
            
            29,438
            
            
            
            7.75Cancelled
            
            
            300
            
            
            
            31.27Expired
            
            
            500
            
            
            
            35.72Outstanding,
                end of period
            
            
            2,030,652
            
            
            $
            23.37
            
            
            
            7.2
            
            
            $
            6,848Exercisable
                at end of period
            
            
            964,658
            
            
            $
            19.13
            
            
            
            5.2
            
            
            $
            6,426





The
      total
      fair value of options vested during the three months ended March 31, 2008,
      was
      $3.9 million.  As of March 31, 2008, there was $14.6 million of total
      unrecognized compensation cost related to nonvested stock-based compensation
      arrangements granted under the Company’s stock incentive plans for stock
      options.  That cost is expected to be recognized over a weighted
      average period of 3.7 years.





Restricted
      stock awards require no payment from the grantee.  The related
      compensation cost of each award is calculated using either the market price
      on
      the grant date or the market price on the last day of the reported period and
      is
      expensed equally over the vesting period which is generally over two to three
      years.  A summary of restricted stock awards for the Company’s stock
      incentive plans for the three months ended March 31, 2008, is as
      follows:





Number
                of Shares
            
            
            Weighted
                Average Fair Value
            
            Weighted
              Average
              Remaining
              Contractual
                LifeUnvested
                restricted stock awards at beginning of year
            
            
            35,642
            
            
            $
            38.05Changes
                during the period:Granted
            
            
            ---Vested
            
            
            ---Unvested
                restricted stock awards at end of period
            
            
            35,642
            
            
            $
            36.06
            
            1.8





As
      of
      March 31, 2008, there was $0.9 million of total unrecognized compensation cost
      related to nonvested stock-based compensation arrangements granted under the
      Company’s stock incentive plans for restricted stock awards.  That
      cost is expected to be recognized over a weighted average period of 1.8
      years.






13


Note
      11 – Related Party Transactions





The
      Company purchased some of its finished goods during the three months ended
      March
      31, 2008 and 2007, from a company in which a relative of a Company
      stockholder/director has ownership interests.  During the three months
      ended March 31, 2007, the Company also purchased some of its finished goods
      from
      another company in which relatives of a Company stockholder/director have
      ownership interests.





Note
      12 – Employee Benefit Plans





The
      Company maintains a funded, noncontributory defined benefit pension plan (the
      Plan) that covers a select group of the Company’s workforce covered by a
      collective bargaining agreement who were hired prior to January 1,
      2002.  The Plan provides defined retirement benefits based on
      employees’ years of service.





The
      components of net periodic benefit cost for the three months ended March 31,
      2008 and 2007, are as follows:





Three
                Months Ended
              March
                31,(in
                thousands)
            
            2008
            
            
            2007Service
                cost
            
            $
            25
            
            
            $
            27Interest
                cost
            
            
            213
            
            
            
            205Expected
                return on plan assets
            
            
            (277
            )
            
            
            (253
            )Amortization
                of prior service costs
            
            
            5
            
            
            
            5Amortization
                of net loss
            
            
            47
            
            
            
            96Net
                periodic benefit cost
            
            $
            13
            
            
            $
            80





The
      Company did not make any contributions to the Plan during the three months
      ended
      March 31, 2008, and currently does not expect to make any additional
      contributions during the remainder of the fiscal 2008 year.





Note
      13 – Product Recalls





On
      June
      13, 2007, the Company announced the voluntary recall of 26 individual wooden
      railway vehicles and set components from the Thomas & Friends Wooden
      Railway product line, after an internal investigation linked apparent excess
      levels of lead with a limited number of paint colors used at a single contract
      manufacturing facility which purchased paint from independent
      suppliers.  On September 26, 2007, the Company announced the voluntary
      recall of five Thomas &
Friends Wooden Railway items,
      in addition to those items recalled in June
      2007.  Additionally, on December 6, 2007, the Company announced the
      voluntary recalls of two styles of The First Years 3-in-1 Flush & Sounds
      Potty training seats due to the discovery of excess levels of lead in the
      surface paint on 5-inch rectangular plaques inserted into the backs of the
      training seats and three styles of The First Years Newborn-to-Toddler Reclining
      Feeding Seat due to malfunctioning restraining straps that may disengage and
      permit the child to slip out of the seat.




Following
      the announcement of the June 2007 recall, a number of putative class action
      lawsuits were filed against the Company in various federal and state courts
      with
      respect to the products subject to the June 2007 and September 2007
      recalls.  These lawsuits make various claims and seek (i) medical
      monitoring as a result of alleged exposure to lead in the products subject
      to
      the recalls, (ii) disgorgement of certain profits under common law unjust
      enrichment theories, and/or (iii) various remedies under claims of product
      liability, breach of warranty, negligence, unfair and deceptive trade practices
      under state law and violation of the federal Consumer Product Safety
      Act.  On December 19, 2007, the various federal class action lawsuits
      were consolidated in the U.S. District Court for the Northern District of
      Illinois.





14


On
      January 22, 2008, the Company announced that it had reached a settlement in
      Barrett v. RC2
      Corporation filed in the Circuit Court of Cook County, Illinois, with the
      plaintiffs in the various class action lawsuits against the Company in state
      courts which arise from or relate to the Company’s recall of certain Thomas & Friends Wooden
      Railway products.  The Circuit Court of Cook County, Illinois, has
      granted preliminary approval of the terms of the proposed
      settlement.  If the settlement receives final approval, it would
      resolve all class claims made by members of the class in Barrett.  The class
      is basically defined as all persons in the United States who do not opt out
      of
      the class and who purchased or owned other than for resale the Company’s Thomas & Friends Wooden
      Railway products which were recalled in June 2007 and September
      2007.  The settlement would not include a release of individual claims
      for personal injury against the Company.  On February 20, 2008, the
      U.S. District Court for the Northern District of Illinois denied a motion filed
      by plaintiffs in the federal cases for a preliminary injunction seeking to
      stop
      the settlement proceedings in the state court and granted the Company’s motion
      to stay the federal court actions pending the state court’s final decision of
      whether to approve the proposed settlement in the Barrett
      case.  Certain plaintiffs in the federal court action also filed a
      motion to intervene in the state court proceeding, but, on February 25, 2008,
      they withdrew this motion.  The state court had stayed the issuance of
      notice of the proposed settlement to the class in Barrett pending a decision
      on
      the federal plaintiffs’ motion to intervene.  Since this motion was
      withdrawn, the Company will now seek to implement the state court settlement
      in
      the Barrett
      case.





The
      licensor (the Licensor) who has granted the licenses under which the Company
      markets the property affected by the June 2007 and September 2007 recalls (the
      Licenses) has sent a letter demanding that the Company indemnify it for certain
      costs in connection with the recalls and alleging that the Company has not
      complied with several provisions in the Licenses.  The Company has
      responded to the Licensor’s letter and is attempting to resolve these
      matters.





The
      Company recorded charges of $1.0 million, net of tax, or $0.05 per diluted
      share, in the three months ended March 31, 2008, related to the 2007
      recalls.  The Company has $13.5 million and $14.6 million of accrued
      recall-related costs included in accounts payable and accrued expenses in the
      accompanying condensed consolidated balance sheets at March 31, 2008 and
      December 31, 2007, respectively. These costs are based on the latest estimates
      of retailer inventory returns, consumer product replacement costs and shipping
      costs as of the date of this filing, as well as the additional replacement
      costs
      or refunds, donations, notice charges, claims administration and legal fees
      related to the settlement of the class action lawsuits.  It is
      reasonably possible that actual costs associated with the recalls and related
      litigation could differ significantly from the estimates recorded.





Note
      14 – Reclassifications





Certain
      prior year amounts have been reclassified to conform to the current year
      presentation.





Note
      15 – Use of Estimates





The
      preparation of the financial statements in conformity with U.S. generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the amounts reported in the financial statements and
      accompanying notes.  Actual results could differ from those
      estimates.






15


Note
      16 – Fair Value





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.”  This Statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      and expands disclosures about fair value measurements.  This Statement
      applies under other accounting pronouncements that require or permit fair value
      measurement.  However, this Statement does not require any new fair
      value measurements.  This Statement is effective for the financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years.  In February 2008, the FASB
      issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB
      Statement No. 157,” which provides a one year deferral of the effective date of
      SFAS No. 157 for non-financial assets and non-financial liabilities, except
      those that are recognized or disclosed in the financial statements at fair
      value
      at least annually. In accordance with FSP No. FAS 157-2, as of January 1, 2008,
      the Company has only adopted the provisions for SFAS No. 157 with respect to
      its
      financial assets and liabilities that are measured at fair value within the
      financial statements.   Based upon this one year deferral in the
      effective date, the provisions of SFAS No. 157 have not been applied to
      non-financial assets and non-financial liabilities.  The major
      categories of assets and liabilities that are measured at fair value, for which
      the Company has not applied the provisions of SFAS No. 157, are goodwill and
      intangible assets.





Note
      17 – Comprehensive Income





The
      Company reports comprehensive income in accordance with SFAS No. 130, “Reporting
      Comprehensive Income.”  SFAS No. 130 requires companies to report all
      changes in equity during a period, except those resulting from investment by
      owners and distributions to owners, in a financial statement for the period
      in
      which they are recognized.  Comprehensive income for the three months
      ended March 31, 2008 and 2007, is calculated as follows:





(in
                thousands)
            
            2008
            
            
            2007Net
                income
            
            $
            2,001
            
            
            $
            8,059Other
                comprehensive income – foreign currency
              translation
                adjustments
            
            
            1,838
            
            
            
            418Comprehensive
                income
            
            $
            3,839
            
            
            $
            8,477





Note
      18 – Earnings Per Common Share





The
      Company computes earnings per common share in accordance with SFAS No. 128,
      “Earnings Per Share.”  Under the provisions of SFAS No. 128, basic
      earnings per common share is computed by dividing net income for the period
      by
      the weighted average number of common shares outstanding during the
      period.  Diluted earnings per common share is computed by dividing net
      income for the period by the weighted average number of common and common
      equivalent shares outstanding during the period.  Options to purchase
      1,126,829 shares and 403,195 shares of common stock were outstanding during
      the
      three months ended March 31, 2008 and 2007, respectively, but were not included
      in the computation of diluted earnings per common share because the options
      were
      anti-dilutive.





16


Item
      2.  Management’s Discussion and
      Analysis
      of Financial Condition and Results of Operations





The
      following is a discussion and analysis of the Company’s financial condition,
      results of operations, liquidity and capital resources.  The
      discussion and analysis should be read in conjunction with the Company’s
      unaudited condensed consolidated financial statements and notes thereto included
      elsewhere herein.





RESULTS
      OF OPERATIONS





Operating
      Highlights





Net
      sales
      for the three months ended March 31, 2008, decreased 17.1% compared to net
      sales
      for the three months ended March 31, 2007.  Although net sales for the
      three months ended March 31, 2007, were strong, which make comparisons
      difficult, the net sales for the three months ended March 31, 2008, were
      negatively impacted by continued softness at the retail level.  Gross
      margins increased to 45.6% for the three months ended March 31, 2008, from
      44.8%
      for the three months ended March 31, 2007.  Selling, general and
      administrative expenses, as a percentage of net sales, increased to 39.1% for
      the three months ended March 31, 2008, from 33.6% for the three months ended
      March 31, 2007.  Operating income decreased to $4.4 million for the
      three months ended March 31, 2008, compared to $12.5 million for the three
      months ended March 31, 2007.  As a percentage of net sales, operating
      income decreased to 4.7% for the three months ended March 31, 2008, from 11.1%
      for the three months ended March 31, 2007.  The Company closely
      monitors its product line profitability and cost controls.  During
      2008, the Company will implement prices increases, primarily during the second
      and third quarters.  Additionally during 2008, the Company is planning
      to eliminate individual products with unacceptable levels of
      profit.  Although the Company incurred certain higher costs for its
      Multi-Check Safety System and consumer/digital marketing commitments during
      the
      first quarter of 2008, the Company believes that these programs will
      prove cost-effective over time.





On
      June
      13, 2007, the Company announced the voluntary recall of 26 individual wooden
      railway vehicles and set components from the Thomas & Friends Wooden
      Railway product line, after an internal investigation linked apparent excess
      levels of lead with a limited number of paint colors used at a single contract
      manufacturing facility which purchased paint from independent
      suppliers.  On September 26, 2007, the Company announced the voluntary
      recall of five Thomas &
Friends Wooden Railway items,
      in addition to those items recalled in June
      2007.  Additionally, on December 6, 2007, the Company announced the
      voluntary recalls of two styles of The First Years 3-in-1 Flush & Sounds
      Potty training seats due to the discovery of excess levels of lead in the
      surface paint on 5-inch rectangular plaques inserted into the backs of the
      training seats and three styles of The First Years Newborn-to-Toddler Reclining
      Feeding Seat due to malfunctioning restraining straps that may disengage and
      permit the child to slip out of the seat.  The Company recorded
      charges, primarily in the North America segment, of $1.0 million, net of tax,
      or
      $0.05 per diluted share, in the three months ended March 31, 2008, related
      to
      the 2007 recalls.  The Company has $13.5 million and $14.6 million of
      accrued recall-related costs included in accounts payable and accrued expenses
      in the accompanying condensed consolidated balance sheets at March 31, 2008
      and
      December 31, 2007, respectively. These costs are based on the latest estimates
      of retailer inventory returns, consumer product replacement costs and shipping
      costs as of the date of this filing, as well as additional replacement costs
      or
      refunds, donations, notice charges, claims administration and legal fees related
      to the settlement of the class action lawsuits.





17


Three
      Months Ended March 31, 2008, Compared to Three Months Ended March 31,
      2007





Net
      sales.  Net sales for the three months ended March 31, 2008,
      decreased $19.3 million, or 17.1%, to $93.3 million from $112.6 million for
      the
      three months ended March 31, 2007.  Net sales in our North America
      segment decreased 19.5%, and net sales in our international segment decreased
      7.1%, which includes a 5.2% benefit in changes from currency exchange
      rates.





Net
      sales
      for the three months ended March 31, 2008, excluding $1.2 million in net sales
      of discontinued product lines, were $92.1 million, a decrease of 13.6% when
      compared with net sales for the three months ended March 31, 2007, excluding
      $6.0 million in net sales of discontinued product lines, of $106.6
      million.  The information in this paragraph constitutes non-GAAP
      financial information.  Internally, the Company uses this non-GAAP
      financial information for the following purposes: financial and operational
      decision making, evaluating period-to-period operating results and making
      comparisons of the Company’s operating results with those of its
      competitors.  Management believes that the presentation of these
      non-GAAP financial measures provides useful information to investors because
      this information may allow investors to better evaluate ongoing business
      performance and certain components of the Company’s operating results. Because
      the sales related to discontinued product lines have decreased significantly
      as
      the Company sells off the remaining inventory, the Company believes that the
      presentation of this non-GAAP financial information enhances an investor’s
      ability to make period-to-period comparisons of the Company’s operating
      results.  This information should be considered in addition to the
      results presented in accordance with GAAP, and should not be considered a
      substitute for the GAAP results. A reconciliation to the nearest GAAP financial
      measure follows:





(in
                millions)
            
            Net
                Sales2008
                actual
            
            $
            93.3Deduct:
                discontinued product lines
            
            
            1.2As
                adjusted
            
            $
            92.12007
                actual
            
            $
            112.6Deduct:
                discontinued product lines
            
            
            6.0As
                adjusted
            
            $
            106.6





Net
      sales
      decreases occurred in both our mother, infant and toddler products category
      and
      our preschool, youth and adult products category.  Net sales in our
      mother, infant and toddler products category decreased 10.1% primarily driven
      by
      declines in our licensed Take & Toss® toddler
      self-feeding system, our The First Years® by Learning
      Curve® infant
      toys and our Lamaze infant development products.  Excluding net sales
      related to discontinued product lines, net sales in our mother, infant and
      toddler products decreased 9.9%.  Net sales in our preschool, youth
      and adult products category decreased 23.0% primarily driven by declines in
      our
      licensed toy product lines and lower sales of discontinued
      products.  Excluding net sales related to discontinued product lines,
      net sales in our preschool, youth and adult products category decreased
      17.0%.  Information in this paragraph regarding net sales in our
      mother, infant and toddler products category excluding net sales related to
      discontinued product lines and net sales in our preschool, youth and adult
      products category excluding net sales related to discontinued product lines
      constitutes non-GAAP financial information.  Internally, the Company
      uses this non-GAAP financial information for the following purposes: financial
      and operational decision making, evaluating period-to-period operating results
      and making comparisons of the Company’s operating results with those of its
      competitors.






18


Management
      believes that the presentation of these non-GAAP financial measures provides
      useful information to investors because this information may allow
      investors to better evaluate ongoing business performance and certain components
      of the Company’s operating results.  Because the sales related to
      discontinued product lines have decreased significantly as the Company sells
      off
      the remaining inventory, the Company believes that the presentation of this
      non-GAAP financial information enhances an investor’s ability to make
      period-to-period comparisons of the Company’s operating results.  This
      information should be considered in addition to the results presented in
      accordance with GAAP, and should not be considered a substitute for the GAAP
      results.  A reconciliation to the nearest GAAP financial measure
      follows:





Net
                Sales(in
                millions)
            
            2008
            
            
            2007
            
            
            Difference
            
            
            %
                ChangeMother,
                infant and toddler products actual
            
            $
            46.2
            
            
            $
            51.4
            
            
            $
            (5.2
            )
            
            
            (10.1
            )%Deduct:
                discontinued product lines
            
            
            ---
            
            
            
            0.1
            
            
            
            (0.1
            )
            
            
            ---As
                adjusted
            
            $
            46.2
            
            
            $
            51.3
            
            
            $
            (5.1
            )
            
            
            (9.9
            )%Preschool,
                youth and adult products actual
            
            $
            47.1
            
            
            $
            61.2
            
            
            $
            (14.1
            )
            
            
            (23.0
            )%Deduct:
                discontinued product lines
            
            
            1.2
            
            
            
            5.9
            
            
            
            (4.7
            )
            
            
            (79.7
            )As
                adjusted
            
            $
            45.9
            
            
            $
            55.3
            
            
            $
            (9.4
            )
            
            
            (17.0
            )%





Gross
      profit.  Gross profit decreased $8.0 million, or 15.8%, to
      $42.5 million for the three months ended March 31, 2008, from $50.5 million
      for
      the three months ended March 31, 2007.  However, as a percentage of
      net sales, gross profit increased to 45.6% for the three months ended March
      31,
      2008, from 44.8% for the three months ended March 31, 2007.  This
      increase was primarily due to a more favorable product mix than that experienced
      in the prior year, as well as a deferral of higher product costs due to some
      of
      those costs being absorbed in inventory.  These costs will flow
      through in future periods when the inventory is sold.  Our quarterly
      gross margins can be affected by the mix of product that is shipped during
      each
      quarter.  Our mother, infant and toddler products category has higher
      sales of non-licensed products that carry lower selling prices and gross margins
      that vary significantly and cause quarterly fluctuations, based on the timing
      of
      these individual shipments throughout the year.  There were no major
      changes in the components of cost of sales.





Selling,
      general
      and administrative expenses.  Selling, general and
      administrative expenses decreased $1.3 million, or 3.4%, to $36.5 million for
      the three months ended March 31, 2008, from $37.8 million for the three months
      ended March 31, 2007.  The decrease in selling, general and
      administrative expenses for the three months ended March 31, 2008, was primarily
      due to the impact of lower sales volume on the Company’s variable
      costs.  However, as a percentage of net sales, selling, general and
      administrative expenses increased to 39.1% for the three months ended March
      31,
      2008, from 33.6% for the three months ended March 31, 2007.






19


Operating
      income.  Operating income decreased to $4.4 million for the
      three months ended March 31, 2008, from $12.5 million for the three months
      ended
      March 31, 2007.  As a percentage of net sales, operating income
      decreased to 4.7% for the three months ended March 31, 2008, from 11.1% for
      the
      three months ended March 31, 2007.  Operating income for the three
      months ended March 31, 2008, includes $1.5 million of recall-related
      costs.





Net
      interest
      expense.  Net interest expense of $1.1 million and $0.3 million
      for the three months ended March 31, 2008 and 2007, respectively, relates
      primarily to bank term loans and lines of credit.  The increase in net
      interest expense is primarily due to higher average debt
      outstanding.





Income
      tax.  Income tax expense for the three months ended March 31,
      2008 and 2007, includes provisions for federal, state and foreign income taxes
      at an effective rate of 35.7% and 36.3%, respectively.  However, the
      tax rate, including discrete items, for the three months ended March 31, 2008
      and 2007, is 47.3% and 36.3%, respectively.  Discrete items include
      significant, infrequent, unusual or non-recurring items.  During the
      three months ended March 31, 2008, the Company recorded adjustments relating
      to
      the completion of statutory audits of certain foreign
      jurisdictions.





Related
      Party Transactions





The
      Company purchased some of its finished goods during the three months ended
      March
      31, 2008 and 2007, from a company in which a relative of a Company
      stockholder/director has ownership interest.  Additionally, during the
      three months ended March 31, 2007, the Company purchased some of its finished
      goods from another company in which relatives of a Company stockholder/director
      have ownership interest.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company’s operations provided net cash of $14.7 million and $22.6 million during
      the three months ended March 31, 2008 and 2007,
      respectively.  Accounts receivable decreased $31.7 million during the
      three months ended March 31, 2008, primarily due to lower sales volume, as
      well
      as the seasonality of the Company’s business.  This decrease in
      accounts receivable was somewhat offset by a decrease in accounts payable and
      accrued expenses of $25.3 million during the three months ended March 31, 2008,
      primarily due to lower inventory purchases and lower royalty and customer
      allowance accruals, as a result of the lower sales volume during the quarter
      and
      the seasonality of the Company’s business.





Net
      cash
      used in investing activities was $2.3 million and $2.8 million for the three
      months ended March 31, 2008 and 2007, respectively. The decrease in
      investing activities was primarily due to lower capital
      expenditures.  Capital expenditures for the three months ended March
      31, 2008, were $2.3 million, of which $1.7 million was for molds and
      tooling.





Net
      cash
      used in financing activities was $11.6 million and $20.1 million for the three
      months ended March 31, 2008 and 2007, respectively. Borrowings on the
      Company’s revolving line of credit were $8.0 million during the three months
      ended March 31, 2008.  During the three months ended March 31, 2008,
      the Company purchased $19.9 million of its common stock which was funded
      primarily with cash flow from operations.





Cash
      and
      cash equivalents increased $2.0 million during the three months ended March
      31,
      2008.






20


Upon
      the
      closing of the acquisition of The First Years Inc. (TFY) on September 15, 2004,
      the Company entered into a new credit facility, which has subsequently been
      amended, to replace its previous credit facility.  The credit facility
      is comprised of an $85.0 million term loan and a $100.0 million revolving line
      of credit.  The credit facility also provides an additional $75.0
      million of capacity under the revolving line of credit, which was approved
      by
      the lenders upon the Company’s request in October 2007.  During the
      first quarter of 2007, the term loan was repaid, and the term loan is no longer
      available for borrowing.  The revolving line of credit is available
      until its maturity on September 14, 2008.  A portion of the term loan
      had an interest rate of 3.45%, plus applicable margin, through the first three
      years of the facility.  The remaining term loan bore and revolving
      line of credit bears interest, at the Company’s option, at a base rate or at a
      LIBOR rate plus applicable margin. The
      applicable margin is based on the Company’s ratio of consolidated debt to
      consolidated EBITDA (earnings before interest, taxes, depreciation, amortization
      and non-cash expense related to equity awards) and varies between 0.75% and
      1.625%.  At March 31, 2008, the margin in effect was 1.00% for LIBOR
      loans.  The Company is also required to pay a commitment fee of 0.20%
      to 0.35% per annum on the average daily unused portion of the revolving line
      of
      credit.  At March 31, 2008, the commitment fee in effect was 0.25% per
      annum.  Under the terms of this credit facility, the Company is
      required to comply with certain financial and non-financial
      covenants.  Among other restrictions, the Company is restricted in its
      ability to pay dividends, incur additional debt and make acquisitions above
      certain amounts.  The key financial covenants include minimum EBITDA
      and interest coverage and leverage ratios.  The credit facility is
      secured by working capital assets and certain intangible assets.  On
      March 31, 2008, the Company had $103.0 million outstanding on the revolving
      line
      of credit and was in compliance with all covenants. At March 31, 2008, the
      Company had $71.8 million available on its revolving line of
      credit.





During
      the first quarter of 2007, the Company expensed $0.2 million of deferred
      financing fees in conjunction with the Company’s voluntary payment of the
      remaining balance of its term loan.  Write-offs of deferred financing
      fees are included in interest expense, net in the accompanying condensed
      consolidated statements of earnings.





In
      February 2007, the Company’s Board of Directors authorized the adoption of a
      program to repurchase up to $75.0 million of the Company’s common
      stock.  The program was initially authorized for a period of one
      year.  In October 2007, the Board of Directors authorized a $75.0
      million increase to the stock repurchase program and extended the timing of
      this
      program through December 31, 2008.  This program may be extended
      beyond the currently authorized period or may be suspended at any
      time.  Under this program, shares may be repurchased from time to time
      in open market transactions or privately negotiated transactions at the
      Company’s discretion, subject to market conditions and other
      factors.  Shares repurchased by the Company are held as treasury
      shares.  During the three months ended March 31, 2008, the Company
      repurchased 0.9 million shares for $19.9 million under this
      program.  Through March 31, 2008, the Company had repurchased an
      aggregate of 3.9 million shares for $107.8 million under the $150.0 million
      stock repurchase authorization.  These repurchases were funded with
      borrowings on the Company’s revolving line of credit and with cash flow from
      operations.





The
      Company has met its working capital needs through funds generated from
      operations and available borrowings under its lines of credit.  The
      Company’s working capital requirements fluctuate during the year based on the
      seasonality related to sales.  Due to seasonal increases in demand for
      the Company’s products, working capital financing requirements are usually
      highest during the third and fourth quarters.  The Company expects
      that capital expenditures during 2008, principally for molds and tooling, will
      be approximately $13.0 million.





The
      Company believes that its cash flows from operations, cash on hand and available
      borrowings will be sufficient to meet its working capital and capital
      expenditure requirements and provide the Company with adequate liquidity to
      meet
      anticipated operating needs for 2008.  However, if the Company’s
      capital requirements vary materially from those currently planned, the Company
      may require additional debt or equity financing.  There can be no
      assurance that financing, if needed, would be available on terms acceptable
      to
      the Company, if at all.  The Company’s existing credit facility
      matures September 14, 2008, and the Company currently anticipates that it will
      refinance during the second quarter of 2008.






21


CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES





The
      Company makes certain estimates and assumptions that affect the reported amounts
      of assets and liabilities and the reported amounts of revenues and
      expenses.  The accounting policies described below are those the
      Company considers critical in preparing its consolidated financial
      statements.  These policies include significant estimates made by
      management using information available at the time the estimates are
      made.  However, as described below, these estimates could change
      materially if different information or assumptions were used.





Allowance
      for
      doubtful accounts.  The allowance for doubtful accounts
      represents adjustments to customer trade accounts receivable for amounts deemed
      uncollectible.  The allowance for doubtful accounts reduces gross
      trade receivables to their estimated net realizable value.  The
      Company’s allowance is based on management’s assessment of the business
      environment, customers’ financial condition, historical trends, customer payment
      practices, receivable aging and customer disputes.  The Company has
      purchased credit insurance that covers a portion of its receivables from major
      customers.  The Company will continue to proactively review its credit
      risks and adjust its customer terms to reflect the current
      environment.





Inventory.  Inventory,
      which consists of finished goods, has been written down for excess quantities
      and obsolescence, and is stated at the lower of cost or market.  Cost
      is determined by the first-in, first-out method and includes all costs necessary
      to bring inventory to its existing condition and location.  Market
      represents the lower of replacement cost or estimated net realizable
      value.  Inventory write-downs are recorded for damaged, obsolete,
      excess and slow-moving inventory.  The Company’s management uses
      estimates to record these write-downs based on its review of inventory by
      product category, length of time on hand and order bookings.  Changes
      in public and consumer preferences and demand for product or changes in customer
      buying patterns and inventory management, as well as discontinuance of products
      or product lines, could impact the inventory valuation.





Impairment
      of
      long-lived assets, goodwill and other intangible
      assets.  Long-lived assets have been reviewed for impairment
      based on Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets.”  This Statement
      requires that an impairment loss be recognized whenever the carrying value
      of an
      asset exceeds the sum of the undiscounted cash flows expected to result from
      the
      use and eventual disposition of that asset, excluding future interest costs
      the
      entity would recognize as an expense when incurred.  Goodwill and
      other intangible assets have been reviewed for impairment based on SFAS No.
      142,
“Goodwill and Other Intangible Assets.”  Under this Statement,
      goodwill and other intangible assets that have indefinite useful lives are
      not
      amortized, but rather tested at least annually for impairment.  The
      Company’s management reviews for indicators that might suggest an impairment
      loss could exist.  Testing for impairment requires estimates of
      expected cash flows to be generated from the use of the
      assets.  Various uncertainties, including changes in consumer
      preferences, deterioration in the political environment or changes in general
      economic conditions, could impact the expected cash flows to be generated by
      an
      asset or group of assets.  Intangible assets that have finite useful
      lives are amortized over their useful lives.





Income
      taxes.  The Company records current and deferred income tax
      assets and liabilities.  Management considers all available evidence
      in evaluating the realizability of the deferred tax assets and records valuation
      allowances against its deferred tax assets as needed.  Management
      believes it is more likely than not that the Company will generate sufficient
      taxable income in the appropriate carry-forward periods to realize the benefit
      of its deferred tax assets, except for those deferred tax assets for which
      an
      allowance has been provided.





Effective
      January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes – an interpretation of FASB Statement No.
      109.”  Management considers certain tax exposures and all available
      evidence when evaluating and estimating tax positions and tax benefits, which
      may require periodic adjustments and which may not accurately anticipate actual
      outcomes.  If the available evidence were to change in the future, an
      adjustment to the tax-related balances may be required.  Estimates for
      such tax contingencies are classified in other current liabilities and other
      non-current liabilities in the accompanying condensed consolidated balances
      sheets.





22


Product
      recalls.  The Company establishes a reserve for product recalls
      on a product-specific basis during the period in which the circumstances giving
      rise to the recall become known and estimatable.  Facts underlying the
      recall, including, among others, estimates of retailer inventory returns,
      consumer replacement costs and shipping costs are considered when establishing
      a
      product recall reserve.  The Company also considered additional
      replacement costs or refunds, donations, notice charges, claims administration
      and legal fees related to the settlement of the class action
      lawsuits.  When facts or circumstances become known that would
      indicate that the recall reserve is either not sufficient to cover or exceeds
      the estimated product recall expenses, the reserve is adjusted, as
      appropriate.





Accrued
      allowances.  The Company ordinarily accepts returns only for
      defective merchandise.  In certain instances, where retailers are
      unable to resell the quantity of products that they have purchased from the
      Company, the Company may, in accordance with industry practice, assist retailers
      in selling excess inventory by offering credits and other price concessions,
      which are typically evaluated and issued annually.  Other allowances
      can also be issued for defective merchandise, volume programs and co-op
      advertising.  All allowances are accrued throughout the year, as sales
      are recorded.  The allowances are based on the terms of the various
      programs in effect; however, management also takes into consideration historical
      trends and specific customer and product information when making its
      estimates.  For the volume programs, the Company generally sets a
      volume target for the year with each participating customer and issues the
      discount if the target is achieved.  The allowance for the volume
      program is accrued throughout the year, and if it becomes clear to management
      that the target for the participating customer will not be reached, the Company
      will change the estimate for that customer as required.





Accrued
      royalties.  Royalties are accrued based on the provisions in
      licensing agreements for amounts due on net sales during the period, as well
      as
      management estimates for additional royalty exposures.  Royalties vary
      by product category and are generally paid on a quarterly
      basis.  Multiple royalties may be paid to various licensors on a
      single product.  Royalty expense is included in selling, general and
      administrative expenses in the accompanying condensed consolidated statements
      of
      earnings.





Stock-based
      compensation.  Effective January 1, 2006, the Company adopted
      SFAS No. 123R, “Share-Based Payment.”  The Company elected to use the
      modified prospective application of SFAS No. 123R for awards issued prior to
      January 1, 2006.  Income before income taxes for the three months
      ended March 31, 2008 and 2007, includes total expense recognized for all of
      the
      Company’s stock-based payment plans.





The
      fair
      value of stock options granted under the stock incentive plans is estimated
      on
      the date of grant based on the Black-Scholes option pricing
      model.  The Company calculates the expected volatility factor using
      Company-specific volatility as the Company believes that its actual volatility
      is a good indicator of expected future results.  The Company uses
      historical data to estimate stock option exercise and employee departure
      behavior in the Black-Scholes option pricing model.  The expected term
      of stock options granted represents the period of time that stock options
      granted are expected to be outstanding.  The risk-free rate for the
      period within the contractual term of the stock option is based on the U.S.
      Treasury yield curve in effect at the time of grant.





The
      fair
      value of restricted stock awards granted under the stock incentive plan is
      calculated either using the market price on the grant date or the market price
      on the last day of the reported period.







23


Recently
      Issued Accounting Pronouncements





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations.”  This Statement replaces SFAS No. 141, “Business
      Combinations.”  This Statement establishes principles and requirements
      for how the acquirer recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed and any non-controlling
      interest in the acquiree; recognizes and measures the goodwill acquired in
      the
      business combination or a gain from a bargain purchase; and determines what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of the business combination.  This
      Statement applies prospectively to business combinations for which the
      acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008.  The Company plans to
      adopt this Statement on January 1, 2009.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.”  This Statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      and expands disclosures about fair value measurements.  This Statement
      applies under other accounting pronouncements that require or permit fair value
      measurement.  However, this Statement does not require any new fair
      value measurements.  This Statement is effective for the financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years.  In February 2008, the FASB
      issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No.
      157,” which provides a one year deferral of the effective date of SFAS No. 157
      for non-financial assets and non-financial liabilities, except those that are
      recognized or disclosed in the financial statements at fair value at least
      annually.  In accordance with FSP FAS No. 157-2, as of January 1,
      2008, the Company has only adopted the provisions for SFAS No. 157 with respect
      to its financial assets and liabilities that are measured at fair value within
      the financial statements.  Based upon this one year deferral, the
      provisions of SFAS No. 157 have not been applied to non-financial assets and
      non-financial liabilities. The major categories of assets and liabilities that
      are measured at fair value, for which the Company has not applied the provisions
      of SFAS No. 157, are goodwill and intangible assets.





FORWARD
      LOOKING STATEMENTS





Certain
      statements contained in this report are considered “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of
      1995.  These statements may be identified by the use of
      forward-looking words or phrases such as “anticipate,” “believe,” “could,”
“expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” “would” or
      the negative of those terms or other words of similar meaning.  Such
      forward-looking statements are inherently subject to known and unknown risks
      and
      uncertainties.  The Company’s actual results and future developments
      could differ materially from the results or developments expressed in, or
      implied by, these forward-looking statements.  Factors that may cause
      actual results to differ materially from those contemplated by such
      forward-looking statements include, but are not limited to, the following:
      the
      risk that the charges and expenses the Company expects relating to its recalls
      may increase based on the amount of inventory of affected products at retailers,
      the amount of affected products that may be returned by consumers and the cost
      of providing replacement products to consumers and retailers; the
      effect of the recalls on the Company’s relationship with the licensors and the
      resolution of any claims or determinations made by such licensors including
      renewal and retention of licenses; the outcome of the class action lawsuits
      that
      have been filed against the Company related to the recalls and the possibility
      of potential new claims or litigation; the Company may not be able to
      manufacture, source and ship new and continuing products on a timely basis;
      the
      Company is dependent upon timely shipping of product and unloading of product
      through West Coast ports as well as timely rail/truck delivery to the Company’s
      warehouse and/or customers’ warehouses; increases in the cost of raw materials
      used to manufacture the Company’s products and increases in freight costs could
      increase the Company’s cost of sales and reduce the Company’s gross margins; currency
      exchange rate fluctuations, particularly in the Chinese Renminbi or the Hong
      Kong dollar, could increase the Company’s expenses; customers and consumers may
      not accept the Company’s products at prices sufficient for the Company to
      profitably recover development, manufacturing, marketing, royalty and other
      costs; the inventory policies of retailers, together with increased reliance
      by
      retailers on quick response inventory management techniques, may increase the
      risk of underproduction of popular items, overproduction of less popular items
      and failure to achieve tight shipping schedules; competition in the markets
      for
      the Company’s products may increase significantly; the Company is dependent upon
      continuing licensing arrangements with owners of popular and classic licensed
      properties such as Thomas
& Friends, Bob
      theBuilder,
Winnie
      the Pooh, John
      Deere, Nickelodeon and Sesame
      Street, vehicle manufacturers, agricultural equipment manufacturers and
      other licensors; the Company may experience unanticipated negative results
      of
      litigation; the Company relies upon a limited number of independently owned
      factories located in China to manufacture a significant portion of its products;
      the Company is dependent upon the continuing willingness of leading retailers
      to
      purchase and provide shelf space for the Company’s products; and general
      economic conditions in the Company’s markets.  Such uncertainties and
      other risks that may affect the Company’s performance are discussed further in
      Part I, Item 1A, “Risk Factors,” in the Company’s Form 10-K for the year ended
      December 31, 2007.  The Company undertakes no obligation to make any
      revisions to the forward-looking statements contained in this report or to
      update them to reflect events or circumstances occurring after the date of
      this
      report.





24


Item
      3.  Quantitative
      and Qualitative
      Disclosures about Market Risk





The
      Company’s exposure to market risk is limited to interest rate risk associated
      with the Company’s credit facilities and foreign currency exchange rate risk
      associated with the Company’s foreign operations.





Based
      on
      the Company’s interest rate exposure on variable rate borrowings at March 31,
      2008, a one percentage point increase in average interest rates on the Company’s
      borrowings would increase future interest expense by $0.1 million per month
      and
      a five percentage point increase would increase future interest expense by
      $0.4
      million per month.  The Company determined these amounts based on
      $103.0 million of variable rate borrowings at March 31, 2008, multiplied by
      1.0%
      and 5.0%, respectively, and divided by twelve.  The Company is
      currently not using any interest rate collars, hedges or other derivative
      financial instruments to manage or reduce interest rate risk.  As a
      result, any increase in interest rates on the Company’s variable rate borrowings
      would increase interest expense and reduce net income.





The
      Company’s net sales are primarily denominated in U.S. dollars, with 23.6% of net
      sales for the three months ended March 31, 2008, denominated in British pounds
      sterling, Australian dollars, Euros and Canadian dollars.  The
      Company’s purchases of finished goods from Chinese manufacturers are primarily
      denominated in Hong Kong dollars.  Expenses for these manufacturers
      are primarily denominated in Chinese Renminbi.  The Hong Kong dollar
      is currently pegged to the U.S. dollar.  If the Hong Kong dollar
      ceased to be pegged to the U.S. dollar, a material increase in the value of
      the
      Hong Kong dollar relative to the U.S. dollar would increase our expenses, and
      therefore, could adversely affect our profitability.  A 10.0% change
      in the exchange rate of the U.S. dollar with respect to the Hong Kong dollar
      for
      the three months ended March 31, 2008, would have changed the total dollar
      amount of our gross profit by 10.0%.  As expenses for the Company’s
      Chinese manufacturers are primarily denominated in Chinese Renminbi, a material
      increase in the value of the Chinese Renminbi relative to the U.S. dollar would
      increase the Company’s expenses, and therefore, could adversely affect the
      Company’s profitability.  A 10.0% change in the exchange rate of the
      U.S. dollar with respect to the British pound sterling, the Australian dollar,
      the Euro or the Canadian dollar for the three months ended March 31, 2008,
      individually would not have had a significant impact on the Company’s
      earnings.  The Company is also subject to exchange rate risk relating
      to transfers of funds denominated in British pounds sterling, Australian
      dollars, Canadian dollars or Euros from its foreign subsidiaries to the United
      States.  Historically, the Company has not used hedges or other
      derivative financial instruments to manage or reduce exchange rate
      risk.





Item
      4.  Controls and
      Procedures





The
      Company maintains disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed
      to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the Securities Exchange Act of 1934 is
      accumulated and communicated to its management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosure.  The Company carried out an evaluation
      as of March 31, 2008, under the supervision and with the participation of the
      Company’s management, including its Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures.  Based on such evaluation, the
      Company’s Chief Executive Officer and Chief Financial Officer concluded that the
      Company’s disclosure controls and procedures were effective as of March 31,
      2008.  It should be noted that in designing and evaluating the
      disclosure controls and procedures, management recognized that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures.  The Company has
      designed its disclosure controls and procedures to reach a level of reasonable
      assurance of achieving the desired control objectives and based on the
      evaluation described above, the Company’s Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective at reaching that level of reasonable assurance as
      of
      March 31, 2008.





There
      was
      no change in the Company’s internal control over financial reporting (as defined
      in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
      as
      amended) during the Company’s most recently completed fiscal quarter that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.






25


PART
      II.  OTHER INFORMATION





Item
      1.  Legal Proceedings





On
      June
      13, 2007, the Company announced the voluntary recall of 26 individual wooden
      railway vehicles and set components from the Thomas & Friends Wooden
      Railway product line, after an internal investigation linked apparent excess
      levels of lead with a limited number of paint colors used at a single contract
      manufacturing facility which purchased paint from independent
      suppliers.  On September 26, 2007, the Company announced the voluntary
      recall of five Thomas &
Friends Wooden Railway items,
      in addition to those items recalled in June
      2007.





Following
      the announcement of the June 2007 recall, a number of putative class action
      lawsuits were filed against the Company in various federal and state courts
      with
      respect to the products subject to the June 2007 and September 2007
      recalls.  These lawsuits make various claims and seek (i) medical
      monitoring as a result of alleged exposure to lead in the products subject
      to
      the recalls, (ii) disgorgement of certain profits under common law unjust
      enrichment theories, and/or (iii) various remedies under claims of product
      liability, breach of warranty, negligence, unfair and deceptive trade practices
      under state law and violation of the federal Consumer Product Safety
      Act.  On December 19, 2007, the various federal class action lawsuits
      were consolidated in the U.S. District Court for the Northern District of
      Illinois.





On
      January 22, 2008, the Company announced that it had reached a settlement in
      Barrett v. RC2
      Corporation filed in the Circuit Court of Cook County, Illinois, with the
      plaintiffs in the various class action lawsuits against the Company in state
      courts which arise from or relate to the Company’s recall of certain Thomas & Friends Wooden
      Railway products.  The Circuit Court of Cook County, Illinois, has
      granted preliminary approval of the terms of the proposed
      settlement.  If the settlement receives final approval, it would
      resolve all class claims made by members of the class in Barrett.  The class
      is basically defined as all persons in the United States who do not opt out
      of
      the class and who purchased or owned other than for resale the Company’s Thomas & Friends Wooden
      Railway products which were recalled in June 2007 and September
      2007.  The settlement would not include a release of individual claims
      for personal injury against the Company.  On February 20, 2008, the
      U.S. District Court for the Northern District of Illinois denied a motion filed
      by plaintiffs in the federal cases for a preliminary injunction seeking to
      stop
      the settlement proceedings in the state court and granted the Company’s motion
      to stay the federal court actions pending the state court’s final decision of
      whether to approve the proposed settlement in the Barrett
      case.  Certain plaintiffs in the federal court action also filed a
      motion to intervene in the state court proceeding, but, on February 25, 2008,
      they withdrew this motion.  The state court had stayed the issuance of
      notice of the proposed settlement to the class in Barrett pending a decision
      on
      the federal plaintiffs’ motion to intervene.  Since this motion was
      withdrawn, the Company will now seek to implement the state court settlement
      in
      the Barrett
      case.





The
      Company also has certain contingent liabilities resulting from litigation and
      claims incident to the ordinary course of business.  Management believes
      that the probable resolution of such contingencies will not materially
      affect the Company’s financial position or results of operations.





Item
      1A.  Risk Factors





There
      have been no material changes from the risk factors previously disclosed in
      Part
      I, Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31,
      2007.  Please refer to that section for disclosures regarding the
      risks and uncertainties relating to our business.






26


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





(a)
            Not
                applicable.





(b)
            Not
                applicable.





(c)
            Issuer
                Purchases of Equity Securities





Period
            
            Total
                Number of Shares Purchased
            
            
            Average
                Price Paid Per Share
            
            
            Total
                Number of Shares Purchased As Part of Publicly Announced
                Program
            
            
            Maximum
                Dollar Value of Shares That May Yet Be Purchased Under the Program
                (000s)January
                1, 2007 – December 31, 2007
            
            
            2,934,034
            
            
            $
            29.97
            
            
            
            2,934,034
            
            
            $
            62,064January
                1, 2008 – January 31, 2008
            
            
            373,500
            
            
            
            23.10
            
            
            
            373,500
            
            
            
            53,438February
                1, 2008 – February 29, 2008
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            53,438March
                1, 2008 – March 31, 2008
            
            
            558,042
            
            
            
            20.15
            
            
            
            558,042
            
            
            
            42,194Total
                quarter ended March 31, 2008
            
            
            931,542
            
            
            
            21.33
            
            
            
            931,542
            
            
            
            42,194Total
            
            
            3,865,576
            
            
            $
            27.89
            
            
            
            3,865,576
            
            
            $
            42,194





In
      February 2007, the Company’s Board of Directors authorized the adoption of a
      program to repurchase up to $75.0 million of the Company’s common
      stock.  The program was initially authorized for a period of one
      year.  In October 2007, the Board of Directors authorized a $75.0
      million increase to the stock repurchase program and extended the timing of
      this
      program through December 31, 2008.  This program may be extended
      beyond the currently authorized period or may be suspended at any
      time.  Under this program, shares may be repurchased from time to time
      in open market transactions or privately negotiated transactions at the
      Company’s discretion, subject to market conditions and other
      factors.  During the three months ended March 31, 2008, the Company
      repurchased 0.9 million shares for $19.9 million under this
      program.  Through March 31, 2008, the Company had repurchased an
      aggregate of 3.9 million shares for $107.8 million under the $150.0 million
      stock repurchase authorization.





Item
      3.  Defaults Upon Senior Securities





Not
      applicable.





Item
      4.  Submission of Matters
      to a Vote of
      Security Holders





Not
      applicable.





Item
      5.  Other Information





Not
      applicable.






27


Item
      6.  Exhibits





3.1
            Amended
                and Restated Certificate of Incorporation of the Company (incorporated
                by
                reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q
                for the quarter ended March 31, 2002 (File No. 0-22635) filed by
                the
                Company with the Securities and Exchange Commission on May 14,
                2002).




3.2
            First
                Amendment to the Amended and Restated Certificate of Incorporation
                of the
                Company (incorporated
                by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q
                for the quarter ended March 31, 2002 (File No. 0-22635) filed by
                the
                Company with the Securities and Exchange Commission on May 14,
                2002).





3.3
            Certificate
                of Ownership and Merger changing the Company’s name to Racing Champions
                Ertl Corporation
                (incorporated by reference to Exhibit 3.3 of the Company’s Quarterly
                Report on Form 10-Q for the quarter ended March 31, 2002 (File No.
                0-22635) filed by the Company with the Securities and Exchange Commission
                on May 14, 2002).





3.4
            Certificate
                of Ownership and Merger changing the Company’s name to RC2 Corporation
                (incorporated by reference to Exhibit 3.4 of the Company’s Quarterly
                Report on Form 10-Q for the quarter ended March 31, 2003 (File No.
                0-22635) filed by the Company with the Securities and Exchange Commission
                on May 14, 2003).




3.5
            Amended
                and Restated By-Laws of the Company (incorporated by reference to
                Exhibit
                3.5 of the Company’s
                Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
                (File
                No. 0-22635) filed by the Company with the Securities and Exchange
                Commission on May 10, 2004).





10.1
            Employment
                Agreement, dated as of
                April 1, 2008, between the Company and Curtis W. Stoelting.





10.2
            Employment
                Agreement, dated as of
                April 1, 2008, between the Company and Peter J. Henseler.





10.3
            Employment
                Agreement, dated as of
                April 1, 2008, between the Company and Jody L. Taylor.





10.4
            Employment
                Agreement, dated as of
                April 1, 2008, between the Company and Helena
                Lo.





10.5
            Employment
                Agreement, dated as of
                April 1, 2008, between the Company and Gregory J. Kilrea.





31.1
            Certification
                of Chief Executive
                Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Chief Financial
                Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.




32.1*
            Certification
                of Chief Executive
                Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350
                (Section 906 of the Sarbanes-Oxley Act of
                2002).


____________________




*
      This
      certification is not “filed” for purposes of Section 18 of the Securities
      Exchange Act of 1934, as
      amended, or incorporated by reference into any filing under the Securities
      Act
      of 1933, as amended, or the
      Securities Exchange Act of 1934, as amended.






28




SIGNATURES





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




Dated
      this 30th
      day of
      April 2008.


RC2
                CORPORATIONBy
                /s/ Curtis W.
                StoeltingCurtis W. Stoelting, Chief Executive OfficerBy
                /s/ Jody L.
                TaylorJody
                L. Taylor, Chief Financial Officer and
                Secretary







29