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, 2009ORo
            
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934For
                the transition period from ________ to
                ________





Commission
                file number:
            0-22635RC2
                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 has submitted electronically and posted
      on
      its corporate Web site, if any, every Interactive Data File required to be
      submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
      12 months (or for such shorter period that the Registrant was required to submit
      and post such files).





Yes
            
            
            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
            [   ]
            
            Accelerated
                filer
            [X]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, 2009, there were outstanding 17,256,832 shares of the Registrant’s $0.01 par
      value common stock.





RC2
      CORPORATION





FORM
      10-Q





MARCH
      31, 2009





INDEX






PART
              I – FINANCIAL
              INFORMATION
            
            PageItem
              1.
            
            Condensed
                Consolidated Balance Sheets as of March 31, 2009
              and December 31, 2008
            
            3Condensed
                Consolidated Statements of Earnings for the Three
              Months
                Ended March 31, 2009 and 2008
            
            4Condensed
                Consolidated Statements of Cash Flows for the
                Three
              Months
                Ended March 31, 2009 and 2008
            
            5Notes
              to Condensed
              Consolidated Financial Statements
            
            6Item
              2.
            
            Management's
                Discussion and Analysis of Financial Condition
              and Results of Operations
            
            15Item
              3.
            
            Quantitative
              and
              Qualitative Disclosures about Market Risk
            
            22Item
              4.
            
            Controls
              and
              Procedures
            
            23PART
              II – OTHER
              INFORMATIONItem
              1.
            
            Legal
              Proceedings
            
            23Item
              1A.
            
            Risk
              Factors
            
            24Item
              2.
            
            Unregistered
              Sales
              of Equity Securities and Use of Proceeds
            
            24Item
              3.
            
            Defaults
              Upon Senior
              Securities
            
            24Item
              4.
            
            Submission
              of
              Matters to a Vote of Security Holders
            
            24Item
              5.
            
            Other
              Information
            
            24Item
              6.
            
            Exhibits
            
            24Signatures
            
            26







2


PART
      I – FINANCIAL INFORMATION





Item
      1.  Financial Statements





RC2
      Corporation and Subsidiaries


Condensed
      Consolidated Balance Sheets


(Unaudited
      and in thousands)





March
                31,
              2009
            
            
            December
                31,
              2008AssetsCash
            
            $
            27,843
            
            
            $
            32,095Accounts
                receivable, net
            
            
            69,014
            
            
            
            91,647Inventory
            
            
            67,017
            
            
            
            73,989Other
                current assets
            
            
            18,310
            
            
            
            19,562Total
                current assets
            
            
            182,184
            
            
            
            217,293Property
                and equipment, net
            
            
            29,992
            
            
            
            30,901Intangibles,
                net
            
            
            82,270
            
            
            
            82,504Other
                non-current assets
            
            
            6,178
            
            
            
            5,952Total
                assets
            
            $
            300,624
            
            
            $
            336,650Liabilities
                and stockholders’ equityAccounts
                payable and accrued expenses
            
            $
            54,465
            
            
            $
            73,986Current
                maturities of bank term loan
            
            
            15,000
            
            
            
            15,000Other
                current liabilities
            
            
            2,486
            
            
            
            2,508Total
                current liabilities
            
            
            71,951
            
            
            
            91,494Line
                of credit
            
            
            5,000
            
            
            
            20,120Bank
                term loan
            
            
            56,250
            
            
            
            60,000Other
                non-current liabilities
            
            
            17,300
            
            
            
            16,347Total
                liabilities
            
            
            150,501
            
            
            
            187,961Stockholders’
                equity
            
            
            150,123
            
            
            
            148,689Total
                liabilities and stockholders’ equity
            
            $
            300,624
            
            
            $
            336,650





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 31,2009
            
            
            2008Net
                sales
            
            $
            86,268
            
            
            $
            93,290Cost
                of sales
            
            
            51,589
            
            
            
            50,748Recall-related
                items
            
            
            ---
            
            
            
            20Gross
                profit
            
            
            34,679
            
            
            
            42,522Selling,
                general and administrative expenses
            
            
            29,400
            
            
            
            36,453Recall-related
                items
            
            
            303
            
            
            
            1,420Amortization
                of intangible assets
            
            
            196
            
            
            
            225Operating
                income
            
            
            4,780
            
            
            
            4,424Interest
                expense
            
            
            1,177
            
            
            
            1,464Interest
                income
            
            
            (85
            )
            
            
            (389
            )Other
                expense (income), net
            
            
            723
            
            
            
            (448
            )Income
                before income taxes
            
            
            2,965
            
            
            
            3,797Income
                tax expense
            
            
            1,177
            
            
            
            1,796Net
                income
            
            $
            1,788
            
            
            $
            2,001Earnings
                per common share:Basic
            
            $
            0.10
            
            
            $
            0.11Diluted
            
            $
            0.10
            
            
            $
            0.11Weighted
                average shares outstanding:Basic
            
            
            17,248
            
            
            
            17,912Diluted
            
            
            17,306
            
            
            
            18,180





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
                31,2009
            
            
            2008Cash
                flows from operating activitiesNet
                income
            
            $
            1,788
            
            
            $
            2,001Depreciation
                and amortization
            
            
            3,034
            
            
            
            3,329Amortization
                of deferred financing costs
            
            
            239
            
            
            
            118Stock-based
                compensation
            
            
            1,167
            
            
            
            1,358Excess
                tax benefit on stock option exercises
            
            
            ---
            
            
            
            (59
            )Loss
                on disposition of assets
            
            
            7
            
            
            
            1Changes
                in operating assets and liabilities
            
            
            10,744
            
            
            
            7,934Net
                cash provided by operating activities
            
            
            16,979
            
            
            
            14,682Cash
                flows from investing activitiesPurchase
                of property and equipment
            
            
            (1,954
            )
            
            
            (2,311
            )Proceeds
                from disposition of property and equipment
            
            
            3
            
            
            
            ---Purchase
                price of acquisitions, net of cash acquired
            
            
            ---
            
            
            
            13Increase
                in other non-current assets
            
            
            (5
            )
            
            
            (16
            )Net
                cash used in investing activities
            
            
            (1,956
            )
            
            
            (2,314
            )Cash
                flows from financing activitiesPayments
                on bank term loan
            
            
            (3,750
            )
            
            
            ---Net
                (payments) borrowings on line of credit
            
            
            (15,120
            )
            
            
            8,000Issuance
                of stock upon option exercises
            
            
            ---
            
            
            
            229Excess
                tax benefit on stock option exercises
            
            
            ---
            
            
            
            59Issuance
                of stock under ESPP
            
            
            32
            
            
            
            32Purchase
                of treasury stock
            
            
            ---
            
            
            
            (19,870
            )Financing
                fees paid
            
            
            (157
            )
            
            
            ---Net
                cash used in financing activities
            
            
            (18,995
            )
            
            
            (11,550
            )Effect
                of exchange rate changes on cash
            
            
            (280
            )
            
            
            1,175Net
                (decrease) increase in cash
            
            
            (4,252
            )
            
            
            1,993Cash,
                beginning of year
            
            
            32,095
            
            
            
            57,809Cash,
                end of period
            
            $
            27,843
            
            
            $
            59,802Supplemental
                information:Interest
                paid
            
            $
            1,041
            
            
            $
            1,356Income
                taxes paid
            
            
            353
            
            
            
            1,789Income
                tax refunds received
            
            $
            101
            
            
            $
            4,142





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, 2009, and the
      results of operations and cash flows for the three-month periods ended March
      31,
      2009 and 2008.





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, 2008.  The condensed consolidated balance sheet
      information as of December 31, 2008, 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 and toddler products.





The
      Company’s reportable segments under Statement of Financial Accounting Standards
      (SFAS) No. 131, “Disclosures 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, 2009
      and
      2008, are as follows:





Three
                Months Ended March 31,(in
                thousands)
            
            2009
            
            
            2008Net
                sales:North
                America
            
            $
            67,771
            
            
            $
            72,966International
            
            
            18,678
            
            
            
            20,586Sales
                and transfers between segments
            
            
            (181
            )
            
            
            (262
            )Combined
                total
            
            $
            86,268
            
            
            $
            93,290Operating
                income:North
                America
            
            $
            3,134
            
            
            $
            2,225International
            
            
            1,670
            
            
            
            2,188Sales
                and transfers between segments
            
            
            (24
            )
            
            
            11Combined
                total
            
            $
            4,780
            
            
            $
            4,424





(in
                thousands)
            
            March
                31,
              2009
            
            
            December
                31,
              2008Total
                assets:North
                America
            
            $
            210,982
            
            
            $
            235,499International
            
            
            89,642
            
            
            
            101,151Combined
                total
            
            $
            300,624
            
            
            $
            336,650





Under
      the
      enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
      net
      sales by product category and by distribution channel.  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, 2009 and 2008:





Three
                Months Ended March 31,(in
                thousands)
            
            2009
            
            
            2008Mother,
                infant and toddler products
            
            $
            47,343
            
            
            $
            46,221Preschool,
                youth and adult products
            
            
            38,925
            
            
            
            47,069Net
                sales
            
            $
            86,268
            
            
            $
            93,290Chain
                retailers
            
            $
            67,380
            
            
            $
            69,114Specialty
                retailers, wholesalers, OEM dealers andother
            
            
            18,888
            
            
            
            24,176Net
                sales
            
            $
            86,268
            
            
            $
            93,290





7


Note
      3 – Intangible Assets





The
      components of intangible assets, net are as follows:





(in
                thousands)
            
            March
                31,
              2009
            
            
            December
                31,
              2008Gross
                amounts of amortizable intangible assets:Customer
                relationships
            
            $
            8,582
            
            
            $
            8,582Other
            
            
            4,351
            
            
            
            4,32112,933
            
            
            
            12,903Accumulated
                amortization of amortizable intangible assets:Customer
                relationships
            
            
            997
            
            
            
            939Other
            
            
            3,609
            
            
            
            3,4714,606
            
            
            
            4,410Intangible
                assets not subject to amortization:Licenses
                and trademarks
            
            
            73,943
            
            
            
            74,011Total
                intangible assets, net
            
            $
            82,270
            
            
            $
            82,504





Other
      amortizable intangible assets consist primarily of patents, non-compete
      agreements, trademarks and licenses, as well as an adjustment to the escrow
      amount related to the Angels Landing, Inc. acquisition.  Amortization
      expense related to amortizable intangible assets for 2009 is estimated to be
      approximately $0.6 million.





Note
      4 – Income Taxes





The
      uncertain tax positions were $3.6 million as of March 31, 2009 and December
      31,
      2008.  At March 31, 2009 and December 31, 2008, approximately $2.4
      million and $2.5 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
      2004.  Substantially all material state and local and foreign income
      tax matters have been concluded for years through 2004.  U.S. federal
      income tax returns for 2005 through 2007 are currently open for
      examination.  In the next twelve months, the Company expects to reduce
      the unrecognized tax position reserves by approximately $1.2 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, 2009, the Company recorded an adjustment to interest of $0.1 million
      and no adjustment to potential penalties, related to these unrecognized tax
      benefits.  In total, as of March 31, 2009 and December 31, 2008, the
      Company has recorded a liability for interest of $2.1 million and $2.0 million,
      respectively, and $0.3 million in each period for potential
      penalties.





8


Note
      5 – Debt





On
      November 3, 2008, the Company entered into a new credit facility to replace
      its
      previous credit facility.  The credit facility is comprised of a $75.0
      million term loan and a $70.0 million revolving line of credit.  The
      total borrowing capacity available under the credit facility is subject to
      a
      formula based on the Company’s leverage ratio, as defined in the credit
      agreement.  The term loan and the revolving line of credit both have a
      scheduled maturity date of November 1, 2011.  Under this credit
      facility, the term loan and the revolving line of credit bear interest, at
      the
      Company’s option, at a base rate or at LIBOR, plus applicable margins, which are
      based on the Company’s leverage ratio.  Applicable margins vary
      between 2.25% and 3.25% on LIBOR borrowings and 1.25% and 2.25% on base rate
      borrowings.  At March 31, 2009, the applicable margins in effect were
      2.75% for LIBOR borrowings and 1.75% for base rate
      borrowings.  Principal payments on the term loan commenced on March
      31, 2009, at a rate of $3.8 million per calendar quarter, with the remaining
      principal of $33.8 million due on November 1, 2011.  The Company is
      also required to pay a commitment fee which varies from 0.45% and 0.50% per
      annum on the average daily unused portion of the revolving line of
      credit.  At March 31, 2009, the commitment fee in effect was 0.50% per
      annum.





Under
      the
      terms of the new 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, buy back its stock,
      incur
      additional debt and make acquisitions above certain amounts.  The
      credit facility also includes a clean down provision that limits the maximum
      amount of borrowings under the revolving line of credit to $30.0 million for
      a
      period of 60 consecutive days during the first four calendar months of
      2009.  The clean down provision limits decrease to $27.5 million for a
      period of 60 consecutive days during the first four calendar months of 2010
      and
      $25.0 million for a period of 60 consecutive days during the first four calendar
      months of 2011.  The Company has met its clean down provision for the
      year 2009.  On March 31, 2009, the Company had $76.3 million
      outstanding on this credit facility and was in compliance with all
      covenants.




Note
        6 – 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 300 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, 2009 and
        2008.


9




Note
      7 – Legal Proceedings





See
      Note
      12 – Product Recalls for a description of certain legal proceedings with respect
      to the products subject to the 2007 recalls.


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.




Note
      8 – 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, 2009
            Shares
                Outstanding at December 31, 2008Voting
                common stock
            28,000
            $0.01
            17,248
            17,245





At
      December 31, 2008, the Company held 5.9 million shares of its common stock
      in
      treasury.  During the three months ended March 31, 2009 and 2008, the
      Company sold a total of 3,346 shares and 1,275 shares, respectively, out of
      treasury to Company employees under the Employee Stock Purchase Plan (ESPP)
      for
      $32 thousand in each period.




The
      Company’s Board of Directors authorized the adoption of a program to repurchase
      up to $150.0 million of the Company’s common stock through December 31,
      2008.  Under this program, shares could 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.  These repurchases were funded with borrowings on the
      Company’s revolving line of credit and with cash flow from
      operations.





Note
      9 – Stock-Based Payment Arrangements





At
      March
      31, 2009, 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,
      2009
      and 2008, are as follows:




Three
                Months Ended March 31,(in
                thousands)
            
            2009
            
            
            2008Total
                expense recognized for stock-basedpayment
                plans
            
            $
            1,167
            
            
            $
            1,358Amount
                of related income tax benefit recognized indetermining
                net income
            
            $
            440
            
            
            $
            512





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, 2009 and 2008.





Restricted
      stock awards, options to purchase stock or stock-settled stock appreciation
      rights (SARs) may be granted under the current stock incentive
      plan.  A summary of stock option and SAR activity for the Company’s
      stock incentive plans for the three months ended March 31, 2009, is as
      follows:






10




Number
              of
                Shares
            
            
            Weighted
              Average
              Exercise
                Price
            
            
            Weighted
              Average
              Remaining
                Contractual
              Life
            
            
            Aggregate
              Intrinsic
              Value
              (000)Outstanding,
                beginning of year
            
            
            1,921,142
            
            
            $
            22.80Changes
                during the period:Granted
            
            
            993,300
            
            
            
            5.11Exercised
            
            
            ---
            
            
            
            ---Forfeited
            
            
            5,600
            
            
            
            28.07Expired
            
            
            70,552
            
            
            
            26.44Outstanding,
                end of period
            
            
            2,838,290
            
            
            $
            16.51
            
            
            
            7.6
            
            
            $
            496Exercisable
                and vested as ofMarch
                31, 2009
            
            
            1,181,033
            
            
            $
            21.25Expected
                to vest
            
            
            1,620,871
            
            
            
            13.13Total
                vested and expected to vest
            
            
            2,801,904
            
            
            $
            16.55
            
            
            
            7.6
            
            
            $
            493




The
      total
      fair value of options and SARs vested during the three months ended March 31,
      2009, was $3.7 million.  As of March 31, 2009, there was $10.6 million
      of total unrecognized compensation cost related to nonvested stock-based
      compensation arrangements granted under the Company’s stock incentive plans for
      stock options and SARs.  That cost is expected to be recognized over a
      weighted average period of 3.1 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, 2009, is as
      follows:





Number
              of
                Shares
            
            
            Weighted
              Average
              Fair
                Value
            
            Weighted
              Average
              Remaining
              Contractual
              LifeUnvested
                restricted stock awards, beginning of year
            
            
            57,851
            
            
            $
            21.90Changes
                during the period:Granted
            
            
            ---
            
            
            
            ---Vested
            
            
            ---
            
            
            
            ---Forfeited
            
            
            ---
            
            
            
            ---Unvested
                restricted stock awards, end of period
            
            
            57,851
            
            
            $
            20.97
            
            1.7





As
      of
      March 31, 2009, there was $0.6 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 1.7
      years.





11


Note
      10 – Related Party Transactions





The
      Company purchased some of its finished goods during the three months ended
      March
      31, 2008, from a company in which a relative of a Company stockholder and former
      director of the Company has an ownership interest.  The former
      director completed his board of directors tenure in May 2008.





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 benefits based on employees’ years of
      service.




The
      components of net periodic benefit cost for the three months ended March 31,
      2009 and 2008, are as follows:





Three
                Months Ended March 31,(in
                thousands)
            
            2009
            
            
            2008Service
                cost
            
            $
            31
            
            
            $
            25Interest
                cost
            
            
            223
            
            
            
            213Expected
                return on plan assets
            
            
            (243
            )
            
            
            (277
            )Amortization
                of prior service costs
            
            
            5
            
            
            
            5Amortization
                of net loss
            
            
            58
            
            
            
            47Net
                periodic benefit cost
            
            $
            74
            
            
            $
            13





The
      Company did not make any contributions to the Plan during the three months
      ended
      March 31, 2009, and currently does not expect to make any additional
      contributions during the remainder of the fiscal 2009 year.





Note
      12 – Product Recalls





During
      2008, the Company reached a settlement in the various class action lawsuits
      against the Company which arose from or relate to the Company’s recall of
      certain products in June 2007 and September 2007.  With the final
      approval of the settlement agreement and the end of the claim period, the class
      action lawsuits relating to the June 2007 and September 2007 recalls have been
      resolved.  The Company may be subject to individual claims for
      personal injuries or other claims or government inquiries (including the inquiry
      by the Consumer Product Safety Commission (CPSC) described in the next
      paragraph) relating to the 2007 recalls.  No assurances can be given
      as to the outcome of any such claims or government inquiries.





During
      2008, the Company received an inquiry from the CPSC for information regarding
      the recalls of certain products in June 2007 and September 2007 for the purpose
      of assessing whether the CPSC may impose a fine on the Company.  The
      Company is responding to this inquiry, and at this time, the CPSC has not yet
      imposed a fine upon the Company.





12


The
      Company recorded charges of $0.3 million and $1.5 million related to the 2007
      recalls for the three months ended March 31, 2009 and 2008.  The
      Company has $3.8 million and $6.0 million of accrued recall-related items
      included in accounts payable and accrued expenses in the accompanying condensed
      consolidated balance sheets at March 31, 2009 and December 31, 2008,
      respectively.  These items are based on the latest estimates of
      retailer inventory returns, consumer product replacement costs, shipping costs
      and fines and penalties as of the date of this filing, as well as additional
      replacement costs or refunds, claims administration and unpaid legal fees to
      defend recall-related matters incurred to date.  It is reasonably
      possible that actual costs associated with the recalls and related litigation
      could differ significantly from the estimates recorded.





Note
      13 – Reclassifications





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




Note
      14 – 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
      15 – 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 was 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 provided for 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 adopted the provisions of SFAS No. 157 with respect
      to its financial assets and liabilities that are measured at fair value within
      the financial statements, and as of January 1, 2009, the Company adopted the
      provisions of SFAS No. 157 with respect to its non-financial assets and
      non-financial liabilities.  The adoption of SFAS No. 157 did not have
      a material impact on the Company’s financial statements.





13


Note
      16 – 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, 2009 and 2008, is calculated as follows:





Three
                Months Ended March 31,(in
                thousands)
            2009
            
            2008Net
                income
            
            $
            1,788
            
            
            $
            2,001Other
                comprehensive (loss) income – foreign currencytranslation
                adjustments
            
            
            (1,129
            )
            
            
            1,838Comprehensive
                income
            
            $
            659
            
            
            $
            3,839





Note
      17 – 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.  The following table
      discloses the components of earnings per common share as required by SFAS No.
      128:





Three
                Months Ended March 31,2009
            
            
            2008Net
                income
            
            $
            1,788
            
            
            $
            2,001Weighted
                average common and commonequivalent
                shares outstanding:Weighted
                average common shares outstanding
            
            
            17,248
            
            
            
            17,912Add
                effect of diluted securities – assumed
              exercise
                of stock options and SARs and
              vesting
                of restricted stock awards
            
            
            58
            
            
            
            268Weighted
                average common and commonequivalent
                shares outstanding
            
            
            17,306
            
            
            
            18,180Earnings
                per common share:Basic
            
            $
            0.10
            
            
            $
            0.11Diluted
            
            $
            0.10
            
            
            $
            0.11





Options
      and SARs to purchase 2,722,041 shares and 1,126,829 shares of common stock
      were
      outstanding during the three months ended March 31, 2009 and 2008, respectively,
      but were not included in the computation of diluted earnings per common share
      because the options and SARs were anti-dilutive.





14


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, 2009, decreased 7.5% compared to net sales
      for the three months ended March 31, 2008.  Net sales for the three
      months ended March 31, 2009, were negatively impacted by conservative
      retailer ordering and unfavorable foreign currency exchange
      translation.  Gross profit decreased to 40.2% for the three months
      ended March 31, 2009, from 45.6% for the three months ended March 31,
      2008.  Selling, general and administrative expenses, as a percentage
      of net sales, decreased to 34.1% for the three months ended March 31, 2009,
      from
      39.1% for the three months ended March 31, 2008.  Operating income
      increased to $4.8 million for the three months ended March 31, 2009, from $4.4
      million for the three months ended March 31, 2008.  As a percentage of
      net sales, operating income increased to 5.6% for the three months ended March
      31, 2009, from 4.7% for the three months ended March 31, 2008.





Three
      Months Ended March 31, 2009, Compared to Three Months Ended March 31,
      2008





Net
      sales.  Net sales for the three months ended March 31, 2009,
      decreased $7.0 million, or 7.5%, to $86.3 million from $93.3 million for the
      three months ended March 31, 2008.  Net sales in our North America
      segment decreased 7.1% and net sales in our international segment decreased
      9.3%, which includes a 28.3% negative impact in changes from currency exchange
      rates.





Net
      sales
      in our mother, infant and toddler products category increased 2.4%, primarily
      driven by higher sales in our infant and toddler gear and feeding and care
      product lines marketed under The First Years® brand,
      which were
      partially offset by sales declines in our infant toy product
      lines.  Net sales in our preschool, youth and adult products category
      decreased 17.3%, primarily due to softness across almost all product
      lines.





Gross
      profit.  Gross profit decreased $7.8 million, or 18.4%, to
      $34.7 million for the three months ended March 31, 2009, from $42.5 million
      for
      the three months ended March 31, 2008.  As a percentage of net sales,
      gross profit decreased to 40.2% for the three months ended March 31, 2009,
      from
      45.6% for the three months ended March 31, 2008, primarily due to less favorable
      product mix, unfavorable foreign exchange rates, and higher product costs,
      which
      more than offset cost improvement initiatives and price
      increases.  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.






15





Selling,
      general
      and administrative expenses.  Selling, general and
      administrative expenses decreased $7.1 million, or 19.5%, to $29.4 million
      for
      the three months ended March 31, 2009, from $36.5 million for the three months
      ended March 31, 2008.  Selling, general and administrative expenses,
      as a percentage of net sales, decreased to 34.1% for the three months ended
      March 31, 2009, from 39.1% for the three months ended March 31,
      2008.  The decrease in selling, general and administrative expenses is
      primarily due to the impact of the Company’s operating cost reduction plan
      implemented in the fourth quarter of 2008 and lower costs that vary with sales
      and foreign currency.




Operating
      income.  Operating income increased to $4.8 million for the
      three months ended March 31, 2009, from $4.4 million for the three months ended
      March 31, 2008.  As a percentage of net sales, operating income
      increased to 5.6% for the three months ended March 31, 2009, from 4.7% for
      the
      three months ended March 31, 2008.





Interest
      expense.  Interest expense of $1.2 million and $1.5 million for
      the three months ended March 31, 2009 and 2008, respectively, relates primarily
      to borrowings under our credit facility.  The decrease in interest
      expense is due to lower average debt outstanding and borrowing
      rates.





Other
      expense
      (income), net.  Other expense, net decreased to $0.7 million
      for the three months ended March 31, 2009, from other (income), net of $(0.4)
      million for the three months ended March 31, 2008, primarily as a result of
      unfavorable currency transaction losses.





Income
      tax.  Income tax expense for the three months ended March 31,
      2009 and 2008, includes provisions for federal, state and foreign income taxes
      at an effective rate of 39.7% and 47.3%, respectively, including discrete
      items.  Discrete items include significant, infrequent, unusual or
      non-recurring items.  During the three months ended March 31, 2008,
      the Company recognized discrete items related to the completion of statutory
      audits in certain foreign jurisdictions.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company’s operations provided net cash of $17.0 million and $14.7 million for
      the three months ended March 31, 2009 and 2008,
      respectively.  Accounts receivable and inventory decreased $22.4
      million and $6.6 million, respectively, during the three months ended March
      31,
      2009, primarily due to the seasonality of the Company’s
      business.  These decreases were partially offset by a decrease in
      accounts payable and accrued expenses of $19.1 million, primarily due to
      seasonally lower sales volume and lower inventory purchases and freight
      expense.





Net
      cash
      used in investing activities was $2.0 million and $2.3 million for the three
      months ended March 31, 2009 and 2008, respectively.  The decrease in
      net cash used in investing activities is primarily due to lower capital
      expenditures.  Capital expenditures for the three months ended March
      31, 2009, were $2.0 million, of which $1.4 million were for molds and
      tooling.





Net
      cash
      used in financing activities was $19.0 million and $11.6 million for the three
      months ended March 31, 2009 and 2008, respectively.  The increase in
      net cash used in financing activities is primarily due to payments made on
      the
      Company’s term loan and revolving line of credit during the three months ended
      March 31, 2009.  The Company made payments on its term loan and
      revolving line of credit of $3.8 million and $15.1 million, respectively, during
      the three months ended March 31, 2009.






16




Cash
      decreased $4.3 million during the three months ended March 31,
      2009.




On November 3, 2008, the Company entered into a new credit
      facility to replace its previous credit facility.  The credit facility
      is comprised of a $75.0 million term loan and a $70.0 million revolving line
      of
      credit.  The total borrowing capacity available under the credit
      facility is subject to a formula based on the Company’s leverage ratio, as
      defined in the credit agreement.  The term loan and the revolving line
      of credit both have a scheduled maturity date of November 1,
      2011.  Under this credit facility, the term loan and the revolving
      line of credit bear interest, at the Company’s option, at a base rate or at
      LIBOR, plus applicable margins, which are based on the Company’s leverage
      ratio.  Applicable margins vary between 2.25% and 3.25% on LIBOR
      borrowings and 1.25% and 2.25% on base rate borrowings.  At March 31,
      2009, the applicable margins in effect were 2.75% for LIBOR borrowings and
      1.75%
      for base rate borrowings.  Principal payments on the term loan
      commenced on March 31, 2009, at a rate of $3.8 million per calendar quarter,
      with the remaining principal of $33.8 million due on November 1,
      2011.  The Company is also required to pay a commitment fee which
      varies from 0.45% and 0.50% per annum on the average daily unused portion of
      the
      revolving line of credit.  At March 31, 2009, the commitment fee in
      effect was 0.50% per annum.




Under
      the
      terms of the new 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, buy back its stock,
      incur
      additional debt and make acquisitions above certain amounts.  The
      credit facility also includes a clean down provision that limits the maximum
      amount of borrowings under the revolving line of credit to $30.0 million of
      a
      period of 60 consecutive days during the first four calendar months of
      2009.  The clean down provision limits decrease to $27.5 million for a
      period of 60 consecutive days during the first four calendar months of 2010
      and
      $25.0 million for a period of 60 consecutive days during the first four calendar
      months of 2011.  The Company has met its clean down provision
      requirement for the year 2009.  On March 31, 2009, the Company had
      $76.3 million outstanding on this credit facility and was in compliance with
      all
      covenants.  At March 31, 2009, the Company had $65.0 million available
      on its revolving line of credit.





The
      Company has met its working capital needs through funds generated from
      operations and available borrowings under its line 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 2009, principally for molds and tooling, will
      be in the range of $10.0 million to $11.0 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 2009.  However, if the Company’s
      capital requirements vary materially from those currently planned, the Company
      may require additional debt or equity financing beyond the available borrowings
      under its senior credit facility.  There can be no assurance that
      financing, if needed, would be available on terms acceptable to the Company,
      if
      at all.





17


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 primarily of finished goods, has been written down for excess
      quantities and obsolescence, and is stated at the lower of cost or
      market.  Cost reasonably approximates 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, sales
      projections 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.  In the
      fourth quarter of 2008, the Company recorded an impairment charge, writing-off
      its entire balance of goodwill.  The next test for impairment on its other
      indefinite lived intangibles will be as of October 1, 2009, and will be
      completed in the fourth quarter of 2009.  The Company’s management
      reviews for indicators that might suggest an impairment on its other indefinite
      lived intangibles 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, continued adverse
      conditions in the capital markets 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.





18


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.





In
      accordance with 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.




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 estimable.  Facts underlying the
      recall, including, among others, estimates of retailer inventory returns,
      consumer replacement costs, shipping costs and fines and penalties are
      considered when establishing a product recall reserve.  The Company
      also considers additional replacement costs or refunds, donations, notice
      charges, claims administration, licensor indemnification claims and plaintiffs’
legal fees related to settlement of the class action lawsuits.  The
      Company’s legal costs to defend recall-related matters are expensed as
      incurred.  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 primarily 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.  The Company accounts for stock-based
      compensation in accordance with 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.






19




The
      fair
      value of stock options and SARs 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 and SAR exercise and employee departure
      behavior in the Black-Scholes option pricing model.  The expected term
      of stock options and SARs granted represents the period of time that stock
      options and SARs granted are expected to be outstanding.  The
      risk-free rate for the period within the contractual term of the stock option
      or
      SAR 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.


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
      of 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 adopted
      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 the 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 provided 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 157-2, the Company
      adopted the provisions of SFAS No. 157 with respect to its financial assets
      and
      liabilities that are measured at fair value within the financial statements
      as
      of January 1, 2008, and with respect to its non-financial assets and
      non-financial liabilities as of January 1, 2009.





20


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,'' "estimate,'' "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 is dependent
      upon continuing licensing arrangements with owners of popular and classic licensed
      properties
      such asThomas
&
      Friends,Bob
      the
      Builder,Winnie
      the
      Pooh, John Deere andSesame
      Street,vehicle
      manufacturers, agricultural equipment manufacturers and other licensors;
 the effect on the Company’s business of the expected termination of the
      license of the Take Along Thomas & Friends die-cast
      product line at the end of 2009; risks related to product recalls or product
      liability claims, compliance with product safety standards and the effect of
      recalls on the Company’s relationship with licensors, including the effect on
      renewal and retention of licenses; uncertainty and potential adverse changes
      in
      the general economic conditions in the Company's markets, including fluctuating
      oil prices, declining consumer confidence, unemployment, fluctuations in stock
      markets, contraction of credit availability, bankruptcy or liquidity problems
      with our customers or other factors affecting economic conditions generally;
      currency exchange rate fluctuations, including in the Chinese Renminbi, the
      Hong
      Kong dollar, the British pound sterling, the Australian dollar, the Euro or
      the
      Canadian dollar, could increase the Company’s expenses or reduce the U.S. dollar
      value of the Company’s assets denominated in foreign currencies, including funds
      the Company needs to transfer to the U.S.; the effect of the reduced borrowing
      capacity in the Company’s new credit facility on the Company’s ability to access
      sufficient working capital, the risk that the Company may not have sufficient
      cash flows to comply with the payment terms of the new credit facility and
      the
      Company’s ability to comply with more restrictive covenants in the new credit
      facility; increases in the cost of raw materials, labor and other costs to
      manufacture the Company’s products could increase the Company’s cost of sales
      and reduce the Company’s gross margins; competition in the markets for the
      Company's products may increase significantly;  the Company is dependent
      upon the continuing willingness of leading retailers to purchase and provide
      shelf space for the Company's products; the Company may not be able to collect
      outstanding accounts receivable from its major retail customers; the Company
      relies upon a limited number of independently owned factories located in China
      to manufacture a significant portion of its products; 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; 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; the risk of
      future write-downs of intangible assets; and the Company may experience
      unanticipated negative results of litigation.  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, 2008.  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.


21





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.





Based
      on
      the Company’s interest rate exposure on variable rate borrowings at March 31,
      2009, 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
      approximately $0.3 million per month.  The Company determined these
      amounts based on $76.3 million of variable rate borrowings at March 31, 2009,
      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 20.8% of net
      sales for the three months ended March 31, 2009, 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.  During July 2005,
      China revalued the Chinese Renminbi, abandoning the former model of pegging
      the
      Chinese Renminbi to the U.S. dollar.  As a result, any 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.  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, 2009, would have changed the total dollar amount of our gross profit
      by 10.5%.  A 10.0% change in the exchange rate of the U.S. dollar with
      respect to the translation of financial reporting denominated in British pounds
      sterling, the Australian dollar or the Euro for the three months ended March
      31,
      2009, individually would have not had a significant impact on the Company’s
      earnings.  The Company is also subject to exchange rate risk relating
      to transfers of funds or other transactions denominated in British pounds
      sterling, Australian dollars, Canadian dollars or Euros from its foreign
      subsidiaries to the United States, such as for purchases of inventory by certain
      of our foreign subsidiaries, effectively in U.S. dollars.  A 10.0%
      change in the exchange rate of the U.S. dollar with respect to the British
      pound
      sterling and the Australian dollar for the three months ended March 31, 2009,
      would have changed the total dollar amount of our gross profit by 1.4% and
      0.6%,
      respectively.  The Company is not currently using and has not
      historically used hedges or other derivative financial instruments to manage
      or
      reduce exchange rate risk.





22


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 recorded,
      processed, summarized and reported within the time periods specified in the
      SEC’s rules and forms, and that the information required to be disclosed by the
      Company in 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, 2009, 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, 2009, at reaching a level of reasonable assurance.  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.





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





During
      2008, the Company reached a settlement in the various class action lawsuits
      against the Company which arose from or relate to the Company’s recall of
      certain products in June 2007 and September 2007.  With the final
      approval of the settlement agreement and the end of the claim period, the class
      action lawsuits relating to the June 2007 and September 2007 recalls have been
      resolved.  The Company may be subject to individual claims for
      personal injuries or other claims or government inquiries (including the inquiry
      by the Consumer Product Safety Commission (CPSC) described in the next
      paragraph) relating to the 2007 recalls.  No assurances can be given
      as to the outcome of any such claims or government inquiries.





During
      2008, the Company received an inquiry from the CPSC for information regarding
      the recalls of certain products in June 2007 and September 2007 for the purpose
      of assessing whether the CPSC may impose a fine on the Company.  The
      Company is responding to this inquiry, and at this time, the CPSC has not yet
      imposed a fine upon the Company.





23


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,
      2008.  Please refer to that section for disclosures regarding the
      risks and uncertainties relating to our business.





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





Not
      applicable.





Item
      6.  Exhibits







3.1
            
            Amended
                and Restated Certificate of Incorporation of the Company (incorporated
                byreference
                to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the
                quarterended
                March 31, 2002 (File No. 0-22635) filed by the Company with the Securities
                andExchange
                Commission on May 14, 2002).3.2
            
            First
                Amendment to the Amended and Restated Certificate of Incorporation
                of theCompany
                (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly
                Reporton
                Form 10-Q for the quarter ended March 31, 2002 (File No. 0-22635)
                filed by
                theCompany
                with the Securities and Exchange Commission on May 14,
                2002).3.3
            
            Certificate
                of
                Ownership and Merger changing the Company’s name to RacingChampions
                Ertl Corporation (incorporated by reference to Exhibit 3.3 of the
                Company’sQuarterly
                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).








24







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 Form10-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).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.





25


SIGNATURES





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





Dated
      this 30th
      day of
      April, 2009.




RC2
      CORPORATION




By 
/s/
      Curtis W.
      Stoelting


Curtis
      W. Stoelting,
      Chief Executive Officer




By 
/s/
      Peter A.
      Nicholson


Peter
      A. Nicholson,
      Chief Financial Officer and Secretary




26