SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      DC 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, 2007ORo
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 22ndStreet, 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 sections 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, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Exchange Act Rule 12b-2.





Large
                accelerated filer
            
            X
            Accelerated
                filer
            
            
            Non-accelerated
                filer





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


Yes
              
              
              
              
              No
              
              X


On
      April
      23, 2007, there were outstanding 21,180,669 shares of the Registrant's $0.01
      par
      value common stock.





RC2
      CORPORATION





FORM
      10-Q





MARCH
      31,
      2007





INDEX ****





PART
      I -
      FINANCIAL INFORMATION





PageItem
                1.
            Condensed
                Consolidated Balance Sheetsas of March
                31,2007
                and December 31, 2006
            3Condensed
                Consolidated Statements of Earnings for the
                ThreeMonths
                Ended March 31, 2007 and 2006
            4Condensed
                Consolidated Statements of Cash Flowsfor
                theThree
                Months Ended March 31, 2007 and 2006
            5Notes
                to Condensed Consolidated Financial
                Statements
            6Item
                2.
            Management's
                Discussion and Analysisof Financial
                Conditionand
                Results of Operations
            14Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            20Item
                4.
            Controls
                and Procedures
            21





PART
      II -
      OTHER INFORMATION


Item
                  1.
              Legal
                  Proceedings
              21Item
                  1A.
              Risk
                  Factors
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              22Item
                  3.
              Defaults
                  Upon Senior Securities
              22Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              22Item
                  5.
              Other
                  Information
              22Item
                  6.
              Exhibits
              22Signatures
              24




2


PART
      I.
      FINANCIAL INFORMATION




**Item
      1. Financial Statements**





**RC2
      Corporation and Subsidiaries**


**Condensed
      Consolidated Balance Sheets**


**(Unaudited
      and in thousands)**





**March
                31,**
              **2007**
            
            **December
                31,**
              **2006****Assets**Cash
                and cash equivalents
            
            $
            25,266
            
            $
            25,365Accounts
                receivable, net
            
            
            85,004
            
            
            112,937Inventory
            
            
            86,467
            
            
            83,650Other
                current assets
            
            
            14,259
            
            
            15,016Total
                current assets
            
            
            210,996
            
            
            236,968Property
                and equipment, net
            
            
            38,264
            
            
            38,991Goodwill
            
            
            239,155
            
            
            239,067Intangible
                assets, net
            
            
            96,195
            
            
            96,400Other
                non-current assets
            
            
            3,393
            
            
            3,214Total
                assets
            
            $
            588,003
            
            $
            614,640**Liabilities
                and stockholders’ equity**Accounts
                payable and accrued expenses
            
            $
            66,532
            
            $
            84,159Current
                maturities of bank term loans
            
            
            ---
            
            
            22,438Other
                current liabilities
            
            
            3,428
            
            
            768Total
                current liabilities
            
            
            69,960
            
            
            107,365Other
                non-current liabilities
            
            
            54,631
            
            
            55,349Total
                liabilities
            
            
            124,591
            
            
            162,714Stockholders’
                equity
            
            
            463,412
            
            
            451,926Total
                liabilities and stockholders' equity
            
            $
            588,033
            
            $
            614,640





See
      accompanying notes to condensed consolidated financial statements.





3


**RC2
      Corporation and Subsidiaries**


**Condensed
      Consolidated Statements of
      Earnings**


**(Unaudited
      and in thousands, except per share data)**







**For
                the three months ended March 31,****2007**
            
            **2006**Net
                sales
            
            $
            112,593
            
            $
            101,672Cost
                of sales
            
            
            62,131
            
            
            54,395Gross
                profit
            
            
            50,462
            
            
            47,277Selling,
                general and administrative expenses
            
            
            37,768
            
            
            34,116Amortization
                of intangible assets
            
            
            213
            
            
            315Operating
                income
            
            
            12,481
            
            
            12,846Interest
                expense, net
            
            
            302
            
            
            1,015Other
                income
            
            
            (466
            )
            
            (155
            )Income
                from continuing operations before income taxes
            
            
            12,645
            
            
            11,986Income
                tax expense
            
            
            4,586
            
            
            4,420Income
                from continuing operations
            
            
            8,059
            
            
            7,566Loss
                from discontinued operations, net of tax
            
            
            ---
            
            
            (76
            )Net
                income
            
            $
            8,059
            
            $
            7,490Basic
                earnings per common share:Income
                from continuing operations
            
            $
            0.38
            
            $
            0.36Loss
                from discontinued operations
            
            
            ---
            
            
            ---Net
                income
            
            $
            0.38
            
            $
            0.36Diluted
                earnings per common share:Income
                from continuing operations
            
            $
            0.37
            
            $
            0.35Loss
                from discontinued operations
            
            
            ---
            
            
            ---Net
                income
            
            $
            0.37
            
            $
            0.35Weighted
                average shares outstanding:Basic
            
            
            21,116
            
            
            20,750Diluted
            
            
            21,519
            
            
            21,262







See
      accompanying notes to condensed consolidated financial statements.





4


**RC2
      Corporation and Subsidiaries**


**Condensed
      Consolidated Statements of Cash
      Flows**


**(Unaudited
      and in thousands)**





**For
                the three months ended March 31,****2007**
            
            **2006****Cash
                flows from operating activities**Net
                income
            
            $
            8,059
            
            $
            7,490Loss
                from discontinued operations
            
            
            ---
            
            
            76Depreciation
                and amortization
            
            
            3,817
            
            
            3,850Amortization
                and write-off of deferred financing costs
            
            
            294
            
            
            121Stock-based
                compensation
            
            
            1,046
            
            
            1,005Excess
                tax benefit on stock option exercises
            
            
            (613
            )
            
            ---Loss
                on disposition of assets
            
            
            2
            
            
            7Changes
                in operating assets and liabilities
            
            
            10,012
            
            
            (1,324
            )Net
                cash provided by continuing operations
            
            
            22,617
            
            
            11,225Net
                cash used in discontinued operations
            
            
            ---
            
            
            (542
            )Net
                cash provided by operating activities
            
            
            22,617
            
            
            10,683**Cash
                flows from investing activities**Purchase
                of property and equipment
            
            
            (2,870
            )
            
            (3,561
            )Proceeds
                from disposition of property and equipment
            
            
            1
            
            
            5Decrease
                (increase) in other non-current assets
            
            
            7
            
            
            (66
            )Investments
            
            
            47
            
            
            ---Net
                cash used in continuing operations
            
            
            (2,815
            )
            
            (3,622
            )Net
                cash used in discontinued operations
            
            
            ---
            
            
            (5
            )Net
                cash used in investing activities
            
            
            (2,815
            )
            
            (3,627
            )**Cash
                flows from financing activities**Payments
                to bank on lines of credit
            
            
            ---
            
            
            (14,490
            )Payments
                to bank on bank term loan
            
            
            (22,438
            )
            
            (5,312
            )Issuance
                of common stock upon option exercises
            
            
            1,693
            
            
            893Excess
                tax benefit on stock option exercises
            
            
            613
            
            
            934Issuance
                of common stock under ESPP
            
            
            40
            
            
            39Net
                cash used in continuing operations
            
            
            (20,092
            )
            
            (17,936
            )Net
                cash provided by (used in) discontinued operations
            
            
            ---
            
            
            ---Net
                cash used in financing activities
            
            
            (20,092
            )
            
            (17,936
            )Effect
                of exchange rate changes on cash
            
            
            191
            
            
            (156
            )Net
                decrease in cash and cash equivalents
            
            
            (99
            )
            
            (11,036
            )Cash
                and cash equivalents, beginning of year
            
            
            25,365
            
            
            25,262Cash
                and cash equivalents, end of period
            
            $
            25,266
            
            $
            14,226Supplemental
                information:Cash
                flows during the period for:Interest
                paid
            
            $
            197
            
            $
            1,169Income
                taxes paid
            
            $
            3,168
            
            $
            10,614Income
                tax refunds received
            
            $
            834
            
            $
            279





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, 2007, the results
      of its operations for the three-month periods ended March 31, 2007 and 2006,
      and
      its cash flows for the three-month periods ended March 31, 2007 and
      2006.





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, 2006. The condensed consolidated balance sheet information as of December
      31, 2006 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 Segments**




The
      Company is a leading designer, producer and marketer of innovative, high-quality
      toys, collectibles and infant products that are targeted to consumers of all
      ages.





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.




6


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, 2007 and 2006 are as
      follows:





**Three
                Months Ended****March
                31,**(in
                thousands)
            
            **2007**
            
            **2006**Net
                sales:North
                America
            
            $
            90,590
            
            $
            87,937International
            
            
            22,168
            
            
            13,836Sales
                and transfers between segments
            
            
            (165
            )
            
            (101
            )Combined
                total
            
            $
            112,593
            
            $
            101,672Operating
                income:North
                America
            
            $
            9,212
            
            $
            10,870International
            
            
            3,263
            
            
            1,976Sales
                and transfers between segments
            
            
            6
            
            
            ---Combined
                total
            
            $
            12,481
            
            $
            12,846





(in
                thousands)
            
            **March
                31,**
              **2007**
            
            **December
                31,**
              **2006**Total
                assets:North
                America
            
            $
            496,093
            
            $
            517,158International
            
            
            91,910
            
            
            97,482Combined
                total
            
            $
            588,003
            
            $
            614,640




Under
      the
      enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
      net
      sales by product category and by distribution channel. During the fourth quarter
      of 2006, the Company reclassified its product categories and distribution
      channels to be more closely aligned with its strategic direction and
      organization structure. This presentation is consistent with how the Company
      views its business. The Company groups its products into three product
      categories: infant and toddler products, preschool products and 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, 2007
      and 2006:





**For
                the three months ended March 31,**(in
                thousands)
            
            **2007**
            
            **2006**Infant
                and toddler products
            
            $
            51,400
            
            $
            43,739Preschool
                products
            
            
            40,693
            
            
            37,831Youth
                and adult products
            
            
            20,500
            
            
            20,102Net
                sales
            
            $
            112,593
            
            $
            101,672Chain
                retailers
            
            $
            80,343
            
            $
            72,441Specialty
                retailers, wholesalers and OEM dealers
            
            
            30,038
            
            
            26,687Corporate
                promotional, direct to consumers and other
            
            
            2,212
            
            
            2,544Net
                sales
            
            $
            112,593
            
            $
            101,672


7




**Note
      3 - Goodwill and Intangible Assets**





The
      change in carrying value of goodwill by reporting unit for the three months
      ended March 31, 2007 is shown below:





(in
                thousands)
            
            **North
                America**
            
            **International**
            
            **Total**Balance
                at January 1, 2007
            
            $
            223,836
            
            $
            15,231
            
            $
            239,067Other
                adjustments
            
            
            45
            
            
            43
            
            
            88Balance
                at March 31, 2007
            
            $
            223,881
            
            $
            15,274
            
            $
            239,155





Other
      adjustments made during the three months ended March 31, 2007, primarily relate
      to the adoption of FASB Interpretation (FIN) 48 (see Note 4 - Income Taxes)
      and
      currency exchange rate changes.





The
      components of intangible assets, net are as follows:





(in
                thousands)
            
            **March
                31,**
              **2007**
            
            **December
                31,**
              **2006****Gross
                amount of amortizable intangible assets:**Customer
                relationships
            
            $
            8,363
            
            $
            8,363Other
            
            
            3,471
            
            
            3,47111,834
            
            
            11,834**Accumulated
                amortization of amortizable intangible assets:**Customer
                relationships
            
            
            536
            
            
            485Other
            
            
            2,305
            
            
            2,1432,841
            
            
            2,628**Intangible
                assets not subject to amortization:**Licenses
                and trademarks
            
            
            87,202
            
            
            87,194**Total
                intangible assets, net**
            
            $
            96,195
            
            $
            96,400





Other
      amortizable intangible assets consist primarily of patents, non-compete
      agreements and trademarks. Amortization expense related to amortizable
      intangible assets for the year 2007 is estimated to be $0.8
      million.




8


**Note
        4 - Income Taxes**


Effective
          January 1, 2007, the Company adopted 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.  As a result of the Company’s adoption of FIN 48, the Company
          recognized a $0.7 million increase to reserves for uncertain tax positions.
          This
          increase was accounted for as a $685 thousand adjustment to the beginning
          balance of retained earnings which is included in stockholders' equity
          and a $45
          thousand increase to goodwill on the accompanying condensed consolidated
          balance
          sheet at March 31, 2007. As of the date of the adoption, the Company had
          approximately $5.0 million of total gross unrecognized tax benefits of
          which
          $1.0 million is included in other current liabilities and $4.0 million
          is
          included in other non-current liabilities on the accompanying condensed
          consolidated balance sheet at March 31, 2007.  Of the total
          unrecognized benefits, $4.1 million represents 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
          2002.  Substantially all material state and local and foreign income tax
          matters have been concluded for years through 2002. U.S. federal income
          tax
          returns for 2003 through 2006 are currently open for examination.  In the
          next twelve months, the Company expects to reduce the unrecognized tax
          benefits
          reserve by approximately $1.3 million primarily due to the settlement of
          various
          state and international income tax audits and court cases. The Company's
          continuing practice is to recognize interest and/or penalties related to
          income
          tax matters in income tax expense. The Company had $1.7 million accrued
          for
          interest and $0.9 million accrued for penalties as January 1, 2007. As
          of March
          31, 2007, there have been no material changes to the liability for uncertain
          tax
          positions including additional liabilities for interest and penalties.
 **Note
        5 - 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. This additional capacity is
      currently uncommitted by the lenders and must be approved by the lenders upon
      the Company’s request for borrowing. As of March 31, 2007, the term loan has
      been 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, 2007, the
      margin in effect was 0.75% 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, 2007, the commitment fee in effect
      was 0.20% 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, 2007, the Company had no outstanding borrowings
      on the revolving line of credit, and was in compliance with all
      covenants.


9


During
      the three months ended March 31, 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.





During
      2005, the Company’s United Kingdom subsidiary entered into a line of credit with
      a bank for $8.0 million that was to expire on September 14, 2008. The line
      of
      credit bore interest at 1.15% over the LIBOR rate, and the total amount was
      secured by a guarantee of the Company. During 2006, all borrowings under the
      line of credit were repaid and the Company cancelled the availability
      thereunder.





**Note
      6 - Commitments and Contingencies**





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





The
      Company markets a significant portion of its products with licenses from other
      parties. These licenses are generally limited in scope and duration and
      authorize the sale of specific licensed products on a nonexclusive basis. The
      Company has license agreements with, among others, 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 500 license agreements, approximately 400 of which are actively used in
      the
      Company’s current product lines, 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,
      2007
      and 2006.





Effective
      January 1, 2006, the Company entered into a five-year supply agreement with
      one
      of its third-party, dedicated suppliers (the Supplier). Under this agreement,
      the Supplier agrees to manufacture the Company’s products exclusively, and the
      Company agrees to purchase a minimum of $20.4 million of product from the
      Supplier each year. The annual minimum purchase guarantee is subject annual
      decreases based upon the Company’s overall annual purchases from all of its
      suppliers.





Subsequent
      to March 31, 2007, the Company entered into a multi-year digital media agreement
      which requires monthly payments beginning June 1, 2007 through May 31,
      2009.  The aggregate monthly commitment
      under this agreement is $2.8 million.





**Note
      7 - Legal Proceedings**





The
      Company 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
      financial position or the results of the Company's
      operations.


10


**Note
      8 - Common Stock**





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





**Authorized**
            **Par**
            **Shares
                Outstanding at**
            **Shares
                Outstanding at****Shares**
            **Value**
            **March
                31, 2007**
            **December
                31, 2006**Voting
                common stock
            28,000,000
            $0.01
            21,170,972
            21,052,038





At
      December 31, 2006, the Company held 1,824,221 shares of its common stock in
      treasury. In January of 2007 and 2006, the Company sold 1,334 shares and 1,298
      shares, respectively, out of treasury to Company employees under the employee
      stock purchase plan (ESPP) for $40,412 and $39,194, 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. 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 will be held
      as
      treasury shares. The program has initially been authorized for a period of
      one
      year, but may be extended beyond that period or may be suspended at any
      time. As of March 31, 2007, the Company had not yet repurchased any shares
      under this program.





**Note
      9 - Stock-Based Payment Arrangements**





Effective
      January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment.” This
      Statement is a revision of SFAS No. 123, “Accounting for Stock-Based
      Compensation” and supersedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees.” This Statement establishes standards
      for the accounting for transactions in which an entity exchanges its equity
      instruments for goods or services, and also addresses transactions in which
      an
      entity incurs liabilities in exchange for goods and services that are based
      on
      the fair value of the entity’s equity instruments or that may be settled by the
      issuance of those instruments. The Company adopted this Statement on a modified
      prospective basis, and therefore, no compensation expense related to stock-based
      payment arrangements was recognized in the financial statements prior to
      adoption.





At
      March
      31, 2007, 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,
      2007
      and 2006, are as follows:





**For
                the three months ended March 31,**(in
                thousands)
            
            **2007**
            
            **2006**Total
                expense recognized for stock-based payment plans
            
            $
            1,046
            
            $
            1,005Amount
                of related income tax benefit recognized in determining net
                income
            
            $
            388
            
            $
            373





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, 2007 and
      2006.


11


A
      summary
      of stock option activity for the Company’s stock incentive plans for the three
      months ended March 31, 2007 is as follows:





**Number
                of Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life**
            
            **Aggregate
                Intrinsic Value (000)**Outstanding
                at beginning of the year
            
            
            1,412,201
            
            $
            20.15Changes
                during the period:Granted
            
            
            257,009
            
            
            39.12Exercised
            
            
            117,600
            
            
            14.40Cancelled
            
            
            800
            
            
            31.27Outstanding
                at end of period
            
            
            1,550,810
            
            $
            23.73
            
            
            6.9
            
            $
            25,847Exercisable
                at end of period
            
            
            822,829
            
            $
            14.97
            
            
            5.4
            
            $
            20,920





As
      of
      March 31, 2007, there was $13.7 million of total unrecognized compensation
      cost
      related to nonvested stock-based compensation arrangements granted under the
      Company’s stock incentive plans. That cost is expected to be recognized over a
      weighted average period of 3.8 years. The total fair value of options vested
      during the three months ended March 31, 2007, was $2.9 million.





**Note
      10 - Related Party Transactions**





The
      Company purchased some of its finished goods during the three months ended
      March
      31, 2007 and 2006 from two companies in which a relative of a Company
      stockholder/director has ownership interests.





**Note
      11 - 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 the employees’ years of
      service.





The
      components of net periodic benefit cost for the three months ended March 31,
      2007 and 2006 are as follows:





(in
                thousands)
            
            **2007**
            
            **2006**Service
                cost
            
            $
            27
            
            $
            26Interest
                cost
            
            
            205
            
            
            197Expected
                return on plan assets
            
            
            (253
            )
            
            (245
            )Amortization
                of prior service costs
            
            
            5
            
            
            5Amortization
                of net loss
            
            
            96
            
            
            110Net
                periodic benefit cost
            
            $
            80
            
            $
            93





The
      Company did not make any contributions to the pension benefit plan during the
      three months ended March 31, 2007 and currently does not expect to make any
      contributions during the fiscal 2007 year.


12


**Note
      12 - Discontinued Operations**





On
      November 3, 2006, the Company announced the completion of the sale of RC2 South,
      Inc., its collectible trading card business, and substantially all of the assets
      related to its die-cast sports collectibles product line. The sale of the
      Company’s trading card business and sports collectibles product line is
      consistent with the Company’s strategic focus to achieve sustainable organic
      growth and to concentrate its efforts on its higher growth infant and toddler
      products and preschool products categories. The transaction was effective
      November 1, 2006, and the results of this sold business are presented as
      discontinued operations in the accompanying consolidated condensed statements
      of
      earnings and consolidated condensed statements of cash flows. The sold business
      was primarily reported under the North America segment.





Net
      sales
      and loss before income taxes generated by the sold business for the three months
      ended March 31, 2006, were as follows:





**Three
                Months**
              **Ended
                March 31,**(in
                thousands)
            
            **2006**Net
                sales
            
            $
            1,837Loss
                before income taxes
            
            $
            (119
            )




**Note
      13 - 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.





**Note
      14 - Earnings Per Share**





The
      Company computes earnings per share in accordance with SFAS No. 128, "Earnings
      Per Share." Under the provisions of SFAS No. 128, basic earnings per share
      is
      computed by dividing net income for the period by the weighted average number
      of
      common shares outstanding during the period. Diluted net income per 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 403,195 shares and 580,702 shares of common stock were outstanding
      during the three months ended March 31, 2007 and 2006, respectively, but were
      not included in the computation of diluted earnings per share because the
      options were anti-dilutive.


13


**Note
      15 - 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,
      2007 and 2006 is calculated as follows:





**For
                the three months ended March 31,**(in
                thousands)
            
            **2007**
            
            **2006**Net
                income
            
            $
            8,059
            
            $
            7,490Other
                comprehensive income - foreign currencytranslation
                adjustments
            
            
            418
            
            
            113Comprehensive
                income
            
            $
            8,477
            
            $
            7,603





**Note
      16 - Reclassifications**





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





**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, 2007, increased 10.7% primarily due
        to our
        infant and toddler products category and our preschool products category.
        Gross
        margin decreased to 44.8% for the three months ended March 31, 2007, from
        46.5%
        for the three months ended March 31, 2006, primarily due to a less
        favorable product sales and channel mix, higher input costs, especially on
        our
        die-cast products, and increased sales promotions. Selling, general and
        administrative expenses as a percentage of net sales remained relatively
        flat at
        33.6% for the three months ended March 31, 2007, compared to 33.5% for the
        three
        months ended March 31, 2006. Operating income decreased to $12.5 million
        for the
        three months ended March 31, 2007, compared to $12.8 million for the three
        months ended March 31, 2006. As a percentage of net sales, operating income
        decreased to 11.1% for the three months ended March 31, 2007, from 12.6%
        for the
        three months ended March 31, 2006.





**Three
      Months Ended March 31, 2007, Compared to Three Months Ended March 31,
      2006**





*Net
      sales.* Net
      sales
      for the three months ended March 31, 2007, increased $10.9 million, or 10.7%,
      to
      $112.6 million from $101.7 million for the three months ended March 31, 2006.
      Net sales increases occurred in all three of our products categories.


14


Net
      sales
      in our infant and toddler products category increased 17.5% primarily driven
      by
      the SoothieTMinfant
      bottle feeding system, the Take & Toss® toddler self-feeding
      system, the American Red Cross health and wellness products and the newly
      re-launched Lamaze infant development products. Net sales in our preschool
      products category increased 7.6% primarily driven by the *Thomas
      & Friends* and *Bob
      the Builder* product
      lines. We do, however, expect a slower growth rate in our preschool products
      category year over year for the rest of 2007 due primarily to negative trends
      in
      ride-ons. Net sales in our youth and adult products category increased 2.0%
      primarily driven by our John Deere toy replicas.





Net
      sales
      for the three months ended March 31, 2007, excluding $6.0 million in net sales
      of discontinued product lines, were $106.6 million, an increase of 13.0% when
      compared with net sales for the three months ended March 31, 2006, excluding
      $7.4 million in net sales of discontinued product lines, of $94.3 million.
      Management has provided this non-GAAP financial information so that investors
      can more easily compare financial performance of our current business operations
      from period to period. A reconciliation to the nearest GAAP financial measure
      follows:





(in
                millions)
            
            **Net
                Sales**2007
                actual
            
            $
            112.6Deduct:
                discontinued product lines
            
            
            6.0$
            106.62006
                actual
            
            $
            101.7Deduct:
                discontinued product lines
            
            
            7.4$
            94.3





*Gross
      profit.* Gross
      profit increased $3.2 million, or 6.8%, to $50.5 million for the three
      months ended March 31, 2007, from $47.3 million for the three months
      ended March 31, 2006. The gross profit margin, as a percentage of net sales,
      decreased to 44.8% for the three months ended March 31, 2007, compared to 46.5%
      for the three months ended March 31, 2006, primarily due to a less favorable
      product sales and channel mix, higher input costs, especially the effect of
      increased China and raw material costs, particularly zinc, on our die-cast
      products, and increased sales promotions. The cost increases in zinc negatively
      impacted gross margin by over 150 basis points during the three months ended
      March 31, 2007, and we expect these cost pressures will continue to impact
      margins, especially in the second quarter. Our quarterly gross margins can
      be
      affected by the mix of product that is shipped during each quarter. Our 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 increased $3.7 million, or 10.9%, to
      $37.8 million for the three months ended March 31, 2007 from
      $34.1 million for the three months ended March 31, 2006. The increase is
      primarily due to increased distribution, royalties and advertising and marketing
      expenses. As a percentage of net sales, selling, general and administrative
      expenses were almost flat at 33.6% for the three months ended March 31, 2007
      from 33.5% for the three months ended March 31, 2006.





*Operating
      income.* Operating
      income decreased to $12.5 million for the three months ended March 31, 2007,
      from $12.8 million for the three months ended March 31, 2006. As a percentage
      of
      net sales, operating income also decreased to 11.1% for the three months ended
      March 31, 2007, from 12.6% for the three months ended March 31,
      2006.


15


*Net
      interest expense* .
      Net
      interest expense of $0.3 million for the three months ended March 31, 2007
      and $1.0 million for the three months ended March 31, 2006 relates
      primarily to bank term loans and lines of credit.  The
      decrease in net interest expense was primarily due to the decrease in average
      outstanding debt balances partially offset by the write-off of $0.2 million
      of
      deferred financing fees related to the Company’s voluntary payment of the
      remaining balance of its term loan.





*Income
      tax.* Income
      tax expense for the three months ended March 31, 2007 and 2006 includes
      provisions for federal, state and foreign income taxes at an effective rate
      of
      36.3% and 36.9%, respectively.





**Related
      Party Transactions**





The
      Company purchased some of its product during the three months ended March 31,
      2007 and 2006 from two companies in which a relative of a Company
      stockholder/director has ownership interests.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company's operations provided net cash of $22.6 million during the three months
      ended March 31, 2007. Accounts receivable decreased $30.0 million during
      the three months ended March 31, 2007 and was the primary source of cash from
      operations. Capital expenditures for the three months ended March 31, 2007
      were
      $2.9 million, of which $1.9 million was for molds and tooling. Payments of
      outstanding debt under the Company’s credit facilities were $22.4 million during
      the three months ended March 31, 2007, all of which were made on the Company’s
      term loan and resulted in the Company paying off its outstanding debt during
      the
      quarter. Cash and cash equivalents decreased by $0.1 million during the three
      months ended March 31, 2007.





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. This additional capacity is
      currently uncommitted by the lenders and must be approved by the lenders upon
      the Company’s request for borrowing. As of March 31, 2007, the term loan has
      been 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, 2007, the
      margin in effect was 0.75% 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, 2007, the commitment fee in effect
      was 0.20% 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, 2007, the Company had no outstanding borrowings
      on the revolving line of credit, and was in compliance with all covenants.
      At
      March 31, 2007, the Company had $99.6 million available on its revolving line
      of
      credit due to letters of credit outstanding.


16


During
      the three months ended March 31, 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.





During
      2005, the Company’s United Kingdom subsidiary entered into a line of credit with
      a bank for $8.0 million that was to expire on September 14, 2008. The line
      of
      credit bore interest at 1.15% over the LIBOR rate, and the total amount was
      secured by a guarantee of the Company. During 2006, all borrowings under the
      line of credit were repaid and the Company cancelled the availability
      thereunder.





On
      February 22, 2007, the Company announced that its Board of Directors authorized
      a stock repurchase program to repurchase up to $75.0 million of the Company’s
      common stock. The program has initially been authorized for a period of one
      year, but may be extended beyond that period or may be suspended at any time.
      Repurchases may occur from time to time and are expected to be funded by cash
      flow from operations. As of the date of this report, the Company has not yet
      repurchased any shares under this program.





In
      order
      to support its new product launches and to build consumer awareness of its
      owned
      brands, the Company is planning new investment spending of approximately $9.0
      million in 2007. The Company estimates that $5.0 million to $7.0 million of
      this
      amount will be expensed in 2007. During the quarter ended March 31, 2007, the
      Company spent $0.6 million. This spending will be focused on key strategic
      plan
      initiatives including on-line, digital and traditional consumer marketing and
      building and launching owned brands.





The
      Company has met its working capital needs through funds generated from
      operations and available borrowings under our 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
      2007, principally for molds and tooling, will be approximately
      $15.0 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 2007. 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.





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.


17
  *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 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 is recognized at the time title is transferred to the Company. Title
      is transferred to the Company FOB shipping point. Inventory, which consists
      of
      finished goods, has been written down for excess quantities and obsolescence,
      and is stated at 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 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
      of
      Long-Lived Assets and for Long-Lived Assets to be Disposed Of." 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 (FIN) 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 our 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 on the accompanying condensed consolidated balance
      sheets.


18


*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 for 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. The Company’s products currently carry a limited
      warranty which guarantees the product to be free from defects in material and
      workmanship under normal and intended use for a period of 90 days from the
      date
      of consumer purchase. Historical results of product warranty claims have shown
      that they have had an immaterial impact on the Company. Based upon the
      historical results, appropriate allowances for product warranty claims are
      accrued throughout the year.





*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 on the accompanying condensed consolidated statements
      of
      earnings.





*Stock-based
      compensation.* On
      January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments.” The
      Company elected to use the modified prospective application of SFAS No. 123R
      for
      awards issued prior to January 1, 2006. Income from continuing operations before
      income taxes for the three months ended March 31, 2007 and 2006, 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. Prior to
      2007, the Company calculated the expected volatility factor for those options
      issued under the stock incentive plan to correspond with the average volatility
      factor of those companies included in a peer group study. The historical stock
      price movements of the Company’s common stock had not been considered a good
      indicator of expected future volatility because the Company’s business had
      changed significantly as a result of acquisitions completed. However, the
      Company continued to monitor its actual volatility to assess whether its
      historical stock price movements over the expected option term were a good
      indicator of expected future results and began using Company specific volatility
      in 2007.





The
      Company uses historical data to estimate share option exercise and employee
      departure behavior used in the Black-Scholes option pricing model. The expected
      term of the share options granted represents the period in time that share
      options granted are expected to be outstanding. The risk-free rate for the
      period within the contractual term of the share option is based on the U.S.
      Treasury yield curve in effect at the time of grant.


19


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 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
      the Builder* , *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 vehicle replicas and certain other
      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, 2006. 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.





**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 facility and foreign currency exchange rate risk
      associated with the Company’s foreign operations.





The
      Company repaid the term loan under its credit facility during the quarter ended
      March 31, 2007, and had no borrowings outstanding under its revolving line
      of
      credit as of March 31, 2007. To the extent that the Company has future
      borrowings under its revolving line of credit, the Company will be subject
      to
      interest rate risk with respect to such borrowings.





20


During
      July 2005, China revalued the Chinese Renminbi, abandoning the former method
      of
      pegging the Chinese Renminbi to the U.S. dollar. 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.





**Item
      4.   Controls and
      Procedures**





As
      of the
      end of the period covered by this report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company's management,
      including the Company's Chief Executive Officer and Chief Financial Officer,
      of
      the Company's disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended). Based on this evaluation, the Company's Chief Executive Officer and
      Chief Financial Officer concluded that, as of the end of such period, the
      Company's disclosure controls and procedures were effective in recording,
      processing, summarizing and reporting, on a timely basis, information required
      to be disclosed by the Company in reports that the Company files with or submits
      to the Securities and Exchange Commission. 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.





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.





PART II.  OTHER
      INFORMATION





**Item 1.**  ****  **Legal
      Proceedings.**





The
      Company 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
      financial position or the results of the Company's 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,
      2006. Please refer to that section for disclosures regarding the risks and
      uncertainties relating to our business.





21


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




(a)  
Not
      applicable.




(b)  
Not
      applicable.




(c)   Not
      applicable.





**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.**





On
      February 21, 2007, the Company’s Board of Directors, based upon the
      recommendation of the Compensation Committee, approved amendments to the
      Company’s Outside Director Compensation Plan to take effect as of January 1,
      2007. These amendments are described on Exhibit 10.1 of this report, which
      is
      incorporated herein by reference.





**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).





22


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
            Amendment
                to Outside Director
                Compensation Plan effective January 1,
                2007.





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.








23


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 2007.





RC2
      CORPORATION





By /s/
      Curtis W.
      Stoelting


Curtis
      W. Stoelting,


Chief
      Executive Officer








By /s/
      Jody L.
      Taylor


Jody
      L.
      Taylor,


Chief Financial Officer and Secretary








24