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
                SECURITIESEXCHANGE
                ACT OF 1934For
                the quarterly period ended June 30, 2008ORTRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIESEXCHANGE
                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 is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting
      company.  See the definitions of "large accelerated filer,"
      "accelerated filer" and "smaller reporting company" in Exchange Act Rule
      12b-2.


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





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


Yes
            
            
            No
            X





On
      August
      1, 2008, there were outstanding 17,188,045 shares of the Registrant’s $0.01 par
      value common stock.







RC2
      CORPORATION


FORM
      10-Q


JUNE
      30, 2008





INDEX








PART
                I – FINANCIAL INFORMATION
            
            PageItem
                1.
            Condensed
                Consolidated Balance Sheets as of June 30, 2008
              and
                December 31, 2007
            
            3Condensed
                Consolidated Statements of Operations for the Three Months
              and
                Six Months Ended June 30, 2008 and 2007
            
            4Condensed
                Consolidated Statements of Cash Flows for the Six Months
              Ended
                June 30, 2008 and 2007
            
            5Notes
                to Condensed Consolidated Financial Statements
            
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            
            19Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            31Item
                4.
            Controls
                and Procedures
            
            32PART
                II – OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            
            32Item
                1A.
            Risk
                Factors
            
            34Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            34Item
                3.
            Defaults
                Upon Senior Securities
            
            35Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            35Item
                5.
            Other
                Information
            
            35Item
                6.
            Exhibits
            
            36Signatures
            
            38





2


PART
      I – FINANCIAL INFORMATION





Item
      1.      Financial Statements





RC2
      Corporation and Subsidiaries


Condensed
      Consolidated Balance Sheets


(Unaudited
      and in thousands)





June
                30,
              2008
            
            
            December
                31, 2007AssetsCash
                and cash equivalents
            
            $
            58,038
            
            
            $
            57,809Accounts
                receivable, net
            
            
            75,992
            
            
            
            110,317Inventory
            
            
            97,161
            
            
            
            77,034Other
                current assets
            
            
            22,974
            
            
            
            19,207Total
                current assets
            
            
            254,165
            
            
            
            264,367Property
                and equipment, net
            
            
            36,045
            
            
            
            37,293Goodwill
            
            
            247,874
            
            
            
            247,814Intangibles,
                net
            
            
            96,220
            
            
            
            96,675Other
                non-current assets
            
            
            4,808
            
            
            
            4,096Total
                assets
            
            $
            639,112
            
            
            $
            650,245Liabilities
                and stockholders’ equityAccounts
                payable and accrued expenses
            
            $
            101,435
            
            
            $
            99,076Line
                of credit
            
            
            103,000
            
            
            
            95,000Other
                current liabilities
            
            
            2,924
            
            
            
            3,163Total
                current liabilities
            
            
            207,359
            
            
            
            197,239Other
                non-current liabilities
            
            
            56,845
            
            
            
            55,628Total
                liabilities
            
            
            264,204
            
            
            
            252,867Stockholders’
                equity
            
            
            374,908
            
            
            
            397,378Total
                liabilities and stockholders’ equity
            
            $
            639,112
            
            
            $
            650,245





See
      accompanying notes to condensed consolidated financial statements.




3


RC2
      Corporation and Subsidiaries


Condensed
      Consolidated Statements of Operations


(Unaudited
      and in thousands, except per share data)





For
                the three months ended
              June
                30,
            
            
            For
                the six months ended
              June
                30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
                sales, including recall-related returns and
              allowances
                of $33 and $2,427 for the three months
              ended
                June 30, 2008 and 2007, respectively, and
              $65
                and $2,427 for the six months ended June 30,
              2008
                and 2007, respectively
            
            $
            89,193
            
            
            $
            92,990
            
            
            $
            182,483
            
            
            $
            205,583Cost
                of sales
            
            
            48,300
            
            
            
            53,544
            
            
            
            99,048
            
            
            
            115,675Recall-related
                costs
            
            
            401
            
            
            
            1,703
            
            
            
            421
            
            
            
            1,703Gross
                profit
            
            
            40,492
            
            
            
            37,743
            
            
            
            83,014
            
            
            
            88,205Selling,
                general and administrative expenses
            
            
            34,909
            
            
            
            32,722
            
            
            
            71,362
            
            
            
            70,490Recall-related
                costs
            
            
            15,229
            
            
            
            2,233
            
            
            
            16,649
            
            
            
            2,233Amortization
                of intangible assets
            
            
            226
            
            
            
            213
            
            
            
            451
            
            
            
            426Operating
                (loss) income
            
            
            (9,872
            )
            
            
            2,575
            
            
            
            (5,448
            )
            
            
            15,056Interest
                expense (income), net
            
            
            740
            
            
            
            (150
            )
            
            
            1,815
            
            
            
            152Other
                expense (income)
            
            
            390
            
            
            
            (110
            )
            
            
            (58
            )
            
            
            (576
            )(Loss)
                income from continuing operations
              before
                income taxes
            
            
            (11,002
            )
            
            
            2,835
            
            
            
            (7,205
            )
            
            
            15,480Income
                tax (benefit) expense
            
            
            (4,589
            )
            
            
            485
            
            
            
            (2,793
            )
            
            
            5,071(Loss)
                income from continuing operations
            
            
            (6,413
            )
            
            
            2,350
            
            
            
            (4,412
            )
            
            
            10,409Income
                from discontinued operations, net of tax
            
            
            ---
            
            
            
            110
            
            
            
            ---
            
            
            
            110Net
                (loss) income
            
            $
            (6,413
            )
            
            $
            2,460
            
            
            $
            (4,412
            )
            
            $
            10,519Basic
                (loss) earnings per common share:(Loss)
                income from continuing operations
            
            $
            (0.37
            )
            
            $
            0.11
            
            
            $
            (0.25
            )
            
            $
            0.49Income
                from discontinued operations
            
            
            ---
            
            
            
            0.01
            
            
            
            ---
            
            
            
            0.01Net
                (loss) income
            
            $
            (0.37
            )
            
            $
            0.12
            
            
            $
            (0.25
            )
            
            $
            0.50Diluted
                (loss) earnings per common share:(Loss)
                income from continuing operations
            
            $
            (0.37
            )
            
            $
            0.11
            
            
            $
            (0.25
            )
            
            $
            0.48Income
                from discontinued operations
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            0.01Net
                (loss) income
            
            $
            (0.37
            )
            
            $
            0.11
            
            
            $
            (0.25
            )
            
            $
            0.49Weighted
                average shares outstanding:Basic
            
            
            17,260
            
            
            
            21,225
            
            
            
            17,586
            
            
            
            21,170Diluted
            
            
            17,260
            
            
            
            21,611
            
            
            
            17,586
            
            
            
            21,565





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 six months ended
              June
                30,2008
            
            
            2007Cash
                flows from operating activitiesNet
                (loss) income
            
            $
            (4,412
            )
            
            $
            10,519Income
                from discontinued operations, net of tax
            
            
            ---
            
            
            
            (110
            )Depreciation
                and amortization
            
            
            6,662
            
            
            
            7,665Amortization
                and write-off of deferred financing costs
            
            
            236
            
            
            
            382Stock-based
                compensation
            
            
            2,673
            
            
            
            2,349Excess
                tax benefit on stock option exercises
            
            
            (39
            )
            
            
            (953
            )Loss
                (gain) on disposition of assets
            
            
            12
            
            
            
            (85
            )Changes
                in operating assets and liabilities
            
            
            14,024
            
            
            
            18,324Net
                cash provided by continuing operations
            
            
            19,156
            
            
            
            38,091Net
                cash provided by discontinued operations
            
            
            ---
            
            
            
            110Net
                cash provided by operating activities
            
            
            19,156
            
            
            
            38,201Cash
                flows from investing activitiesPurchase
                of property and equipment
            
            
            (4,951
            )
            
            
            (5,883
            )Proceeds
                from disposition of property and equipment
            
            
            8
            
            
            
            12Purchase
                price of acquisitions, net of cash acquired
            
            
            13
            
            
            
            (6,761
            )Proceeds
                from sale of discontinued operations
            
            
            ---
            
            
            
            110(Increase)
                decrease in other non-current assets
            
            
            (69
            )
            
            
            63Net
                cash used in continuing operations
            
            
            (4,999
            )
            
            
            (12,459
            )Net
                cash used in discontinued operations
            
            
            ---
            
            
            
            ---Net
                cash used in investing activities
            
            
            (4,999
            )
            
            
            (12,459
            )Cash
                flows from financing activitiesBorrowings
                on line of credit
            
            
            8,000
            
            
            
            ---Payments
                on bank term loans
            
            
            ---
            
            
            
            (22,438
            )Issuance
                of stock upon option exercises
            
            
            245
            
            
            
            1,924Excess
                tax benefit on stock option exercises
            
            
            39
            
            
            
            953Issuance
                of stock under ESPP
            
            
            83
            
            
            
            95Purchase
                of treasury stock
            
            
            (24,660
            )
            
            
            (140
            )Net
                cash used in continuing operations
            
            
            (16,293
            )
            
            
            (19,606
            )Net
                cash used in discontinued operations
            
            
            ---
            
            
            
            ---Net
                cash used in financing activities
            
            
            (16,293
            )
            
            
            (19,606
            )Effect
                of exchange rate changes on cash
            
            
            2,365
            
            
            
            755Net
                increase in cash and cash equivalents
            
            
            229
            
            
            
            6,891Cash
                and cash equivalents, beginning of year
            
            
            57,809
            
            
            
            25,365Cash
                and cash equivalents, end of period
            
            $
            58,038
            
            
            $
            32,256Supplemental
                information:Cash
                flows during the period for:Interest
                paid
            
            $
            2,410
            
            
            $
            248Income
                taxes paid
            
            
            4,054
            
            
            
            8,131Income
                tax refunds received
            
            $
            4,142
            
            
            $
            838





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 June 30, 2008, the results
      of
      operations for the three-month and six-month periods ended June 30, 2008 and
      2007, and cash flows for the six-month periods ended June 30, 2008 and
      2007.





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





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





Note
      2  –  Business Combinations





Mother’s
      Intuition Inc.





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





6


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





(in
                thousands)Total
                purchase price, including expenses, net of cash acquired
            
            
            
            
            $
            3,748Less:Current
                assets
            
            $
            170Intangible
                assets
            
            
            180Liabilities
            
            
            (76
            )
            
            
            (274
            )Excess
                purchase price over net assets acquired
            
            
            
            
            
            $
            3,474





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





Angels
      Landing, Inc.





On
      May
      24, 2007, the Company acquired substantially all of the assets of Angels
      Landing, Inc. (Angels Landing), a privately-held, start-up developer and
      marketer of infant and toddler travel gear under the Compass brand name (the
      Compass Business) based in Kettering, Ohio.  Closing consideration
      consisted of $6.9 million of cash, excluding transaction expenses, and includes
      $0.3 million which may be earned in the transaction by Angels Landing if gross
      sales relating to the Compass Business in 2008 exceed a certain
      target.  This transaction has been accounted for under the purchase
      method of accounting, and accordingly, the operating results of the Compass
      Business have been included in the accompanying condensed consolidated
      statements of operations since the effective date of the
      acquisition.  The excess of the aggregate purchase price over the fair
      market value of net assets acquired of $4.2 million has been recorded as
      goodwill in the accompanying condensed consolidated balance sheets at June
      30,
      2008 and December 31, 2007.





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





(in
                thousands)Total
                purchase price, including expenses, net of cash acquired
            
            
            
            
            $
            6,772Less:Current
                assets
            
            $
            1,351Property
                and equipment
            
            
            817Intangible
                assets
            
            
            890Liabilities
            
            
            (485
            )
            
            
            (2,573
            )Excess
                purchase price over net assets acquired
            
            
            
            
            
            $
            4,199





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





7


Children’s
      Publishing Division of Publications International, Ltd.





On
      June
      23, 2008, the Company announced that it has signed a definitive purchase
      agreement to acquire the Children’s Publishing Division (CPD) of privately-held
      Publications International, Ltd.  CPD, based in Lincolnwood, Illinois,
      is one of the world’s top children’s book publishers, selling more than 10
      million books annually.  CPD’s products, which include electronic
      books, story books, Story Reader® and PoingoTM,
      are sold
      at toy, mass merchandising, warehouse clubs and book retailers throughout North
      America, Europe, Latin America and Asia.  This acquisition, which is
      structured as an asset purchase, is expected to close during the third quarter
      of 2008, and is subject to customary closing conditions.  The purchase
      agreement calls for a payment of $163.0 million of cash, which does not include
      the effect of post-closing working capital adjustments or transaction fees
      and
      expenses.





Note
      3  –  Business Segments





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





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





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





Results
      are not necessarily those that would be achieved if each segment were an
      unaffiliated business enterprise.  Information by segment and a
      reconciliation to reported amounts for the three months and six months ended
      June 30, 2008 and 2007, are as follows:





Three
                Months Ended
              June
                30,
            
            
            Six
                Months Ended
              June
                30,(in
                thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Net
                sales:North
                America
            
            $
            62,300
            
            
            $
            71,560
            
            
            $
            135,266
            
            
            $
            162,150International
            
            
            27,069
            
            
            
            21,601
            
            
            
            47,655
            
            
            
            43,769Sales
                and transfers between segments
            
            
            (176
            )
            
            
            (171
            )
            
            
            (438
            )
            
            
            (336
            )Combined
                total
            
            $
            89,193
            
            
            $
            92,990
            
            
            $
            182,483
            
            
            $
            205,583Operating
                (loss) income:North
                America
            
            $
            (9,885
            )
            
            $
            184
            
            
            $
            (7,660
            )
            
            $
            9,470International
            
            
            27
            
            
            
            2,386
            
            
            
            2,215
            
            
            
            5,575Sales
                and transfers between segments
            
            
            (14
            )
            
            
            5
            
            
            
            (3
            )
            
            
            11Combined
                total
            
            $
            (9,872
            )
            
            $
            2,575
            
            
            $
            (5,448
            )
            
            $
            15,056





8





(in
                thousands)
            
            June
                30,
              2008
            
            
            December
                31, 2007Total
                assets:North
                America
            
            $
            486,873
            
            
            $
            513,289International
            
            
            152,239
            
            
            
            136,956Combined
                total
            
            $
            639,112
            
            
            $
            650,245





Under
      the
      enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
      net
      sales by product category and by distribution channel.  During the
      first quarter of 2008, the Company reclassified its product categories and
      distribution channels to be more closely aligned with its strategic direction
      and organization structure.  The presentation is consistent with how
      the Company views its business.  The Company groups its products into
      two product categories: mother, infant and toddler products, and preschool,
      youth and adult products.  The following table presents consolidated
      net sales by product category and by distribution channel for the three months
      and six months ended June 30, 2008 and 2007:





Three
                Months Ended
              June
                30,
            
            
            Six
                Months Ended
              June
                30,(in
                thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Mother,
                infant and toddler products
            
            $
            41,545
            
            
            $
            44,080
            
            
            $
            87,766
            
            
            $
            95,480Preschool,
                youth and adult products
            
            
            47,648
            
            
            
            48,910
            
            
            
            94,717
            
            
            
            110,103Net
                sales
            
            $
            89,193
            
            
            $
            92,990
            
            
            $
            182,483
            
            
            $
            205,583Chain
                retailers
            
            $
            60,858
            
            
            $
            62,820
            
            
            $
            129,972
            
            
            $
            143,163Specialty
                retailers, wholesalers, OEM dealers
              and
                other
            
            
            28,335
            
            
            
            30,170
            
            
            
            52,511
            
            
            
            62,420Net
                sales
            
            $
            89,193
            
            
            $
            92,990
            
            
            $
            182,483
            
            
            $
            205,583





Note
      4  –  Goodwill and Intangible Assets





The
      change in carrying value of goodwill by reporting unit for the six months ended
      June 30, 2008, is shown below:





(in
                thousands)
            
            North
                America
            
            
            International
            
            
            TotalBalance
                at January 1, 2008
            
            $
            232,194
            
            
            $
            15,620
            
            
            $
            247,814Compass
                Business fair value allocation
            
            
            (51
            )
            
            
            ---
            
            
            
            (51
            )MI
                fair value allocation
            
            
            25
            
            
            
            ---
            
            
            
            25Other
                adjustments
            
            
            ---
            
            
            
            86
            
            
            
            86Balance
                at June 30, 2008
            
            $
            232,168
            
            
            $
            15,706
            
            
            $
            247,874





Other
      adjustments made during the six months ended June 30, 2008, primarily relate
      to
      currency exchange rate changes.





9


The
      components of intangible assets, net are as follows:





(in
                thousands)
            
            June
                30,
              2008
            
            
            December
                31, 2007Gross
                amount of amortizable intangible assets:Customer
                relationships
            
            $
            8,582
            
            
            $
            8,582Other
            
            
            4,321
            
            
            
            4,32112,903
            
            
            
            12,903Accumulated
                amortization of amortizable intangible assets:Customer
                relationships
            
            
            823
            
            
            
            706Other
            
            
            3,149
            
            
            
            2,8153,972
            
            
            
            3,521Intangible
                assets not subject to amortization:Licenses
                and trademarks
            
            
            87,289
            
            
            
            87,293Total
                intangible assets, net
            
            $
            96,220
            
            
            $
            96,675





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





Note
      5  –  Income Taxes





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





The
      uncertain tax positions as of June 30, 2008 and December 31, 2007, totaled
      $4.4
      million and $4.2 million, respectively.  At June 30, 2008 and December
      31, 2007, approximately $3.1 million and $3.0 million, respectively, of the
      total gross unrecognized tax benefits represent the amount that, if recognized,
      would affect the effective income tax rate in future periods.  The
      Company and its subsidiaries are subject to U.S. federal income tax, as well
      as
      income tax of multiple state and foreign jurisdictions.  The Company
      has substantially concluded all U.S. federal income tax matters for years
      through 2003.  Substantially all material state and local and foreign
      income tax matters have been concluded for years through 2003.  U.S.
      federal income tax returns for 2004 through 2006 are currently open for
      examination.  In the next twelve months, the Company expects to reduce
      the unrecognized tax position reserves by approximately $1.7 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 six months ended June
      30, 2008, the Company recorded adjustments to interest of $0.2 million and
      an
      immaterial amount to potential penalties, related to these unrecognized tax
      benefits.  In total as of June 30, 2008 and December 31, 2007, the
      Company has recorded a liability for interest of $2.2 million and $2.0 million,
      respectively, and $0.4 million for potential penalties.





10


Note
      6  –  Debt





Upon
      the
      closing of the acquisition of The First Years Inc. on September 15, 2004,
      the Company entered into a new credit facility, which has subsequently been
      amended, to replace its previous credit facility.  The credit facility
      is comprised of an $85.0 million term loan and a $100.0 million revolving line
      of credit.  The credit facility also provides an additional $75.0
      million of capacity under the revolving line of credit, which was approved
      by
      the lenders upon the Company’s request in October 2007.  During the
      first quarter of 2007, the term loan was repaid, and the term loan is no longer
      available for borrowing.  The revolving line of credit is available
      until its maturity on September 14, 2008.  A portion of the term loan
      had an interest rate of 3.45%, plus applicable margin, through the first three
      years of the facility.  The remaining term loan bore and revolving
      line of credit bears interest, at the Company’s option, at a base rate or at a
      LIBOR rate plus applicable margin.  The applicable margin is based on
      the Company’s ratio of consolidated debt to consolidated EBITDA (earnings before
      interest, taxes, depreciation, amortization and non-cash expense related to
      equity awards) and varies between 0.75% and 1.625%.  At June 30, 2008,
      the margin in effect was 1.625% 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 June 30,
      2008, the commitment fee in effect was 0.35% 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 June 30, 2008, the Company had $103.0 million outstanding
      on the revolving line of credit and was in compliance with all
      covenants.





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





Note
      7  –  Commitments and Contingencies





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





The
      Company markets a significant portion of its products under licenses from other
      parties.  These licenses are limited in scope and duration and
      authorize the sale of specific licensed products generally on a nonexclusive
      basis.  The Company has license agreements with, among others, various
      entertainment, publishing and media companies, automotive and truck
      manufacturers, and agricultural and construction vehicle and equipment
      manufacturers.  The Company is a party to more than 400 license
      agreements with terms generally of two to three years.  Many of the
      license agreements include minimum guaranteed royalty payments that the Company
      must pay whether or not it meets specified sales targets.  The Company
      believes it either achieved its minimum guarantees or has accrued for the costs
      related to these guarantees for the six months ended June 30, 2008 and
      2007.




11





Note
      8  –  Legal Proceedings





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





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





Note
      9  –  Common Stock





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





(in
                thousands, except par value)
            Authorized
              Shares
            Par
              Value
            Shares
                Outstanding
              at
                June 30, 2008
            Shares
                Outstanding
              at
                December 31, 2007Voting
                common stock
            28,000
            $0.01
            17,188
            18,320





At
      December 31, 2007, the Company held 4.8 million shares of its common stock
      in
      treasury.  During the six months ended June 30, 2008 and 2007, the
      Company sold a total of 3,965 shares and 2,831 shares, respectively, out of
      treasury to Company employees under the Employee Stock Purchase Plan (ESPP)
      for
      $0.1 million and $0.1 million, respectively.





In
      February 2007, the Company’s Board of Directors authorized the adoption of a
      program to repurchase up to $75.0 million of the Company’s common
      stock.  The program was initially authorized for a period of one
      year.  In October 2007, the Board of Directors authorized a $75.0
      million increase to the stock repurchase program and extended the timing of
      this
      program through December 31, 2008.  This program may be extended
      beyond the currently authorized period or may be suspended at any
      time.  Under this program, shares may be repurchased from time to time
      in open market transactions or privately negotiated transactions at the
      Company’s discretion, subject to market conditions and other
      factors.  Shares repurchased by the Company are held as treasury
      shares.  During the six months ended June 30, 2008, the Company
      repurchased 1.2 million shares for $24.7 million under this
      program.  Through June 30, 2008, the Company had repurchased an
      aggregate of 4.1 million shares for $112.6 million under the $150.0 million
      stock repurchase authorization.  These repurchases were funded with
      borrowings on the Company’s revolving line of credit and with cash flow from
      operations.





Note
      10 – Stock-Based Payment Arrangements





At
      June
      30, 2008, the Company has three stock incentive plans, two of which are dormant,
      and an ESPP.  Amounts recognized in the financial statements with
      respect to these stock-based payment arrangements for the three months and
      six
      months ended June 30, 2008 and 2007, are as follows:





Three
                Months Ended
              June
                30,
            
            
            Six
                Months Ended
              June
                30,(in
                thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Total
                expense recognized for stock-based
              payment
                plans
            
            $
            1,315
            
            
            $
            1,303
            
            
            $
            2,673
            
            
            $
            2,349Amount
                of related income tax benefit recognized
              in
                determining net income
            
            $
            496
            
            
            $
            484
            
            
            $
            1,008
            
            
            $
            872





Stock-based
      compensation expense is included in cost of sales and selling, general and
      administrative expenses in the accompanying condensed consolidated statements
      of
      operations for the three months and six months ended June 30, 2008 and
      2007.




12





Restricted
      stock awards or options to purchase stock may be granted under the current
      stock
      incentive plan.  A summary of stock option activity for the Company’s
      stock incentive plans for the six months ended June 30, 2008, is as
      follows:





Number
              of
                Shares
            Weighted
                Average Exercise Price
            Weighted
                Average
              Remaining
                Contractual Life
            Aggregate
                Intrinsic
              Value
                (000)Outstanding,
                beginning of year
            1,491,390
            $24.27Changes
                during the period:Granted
            569,500
            20.23Exercised
            29,438
            7.75Forfeited
            18,800
            31.53Expired
            700
            34.45Outstanding,
                end of period
            2,011,952
            $23.30
            6.9
            $5,195Exercisable
                at end of period
            975,058
            $19.25
            4.9
            $5,195





The
      total
      fair value of options vested during the six months ended June 30, 2008, was
      $4.2
      million.  As of June 30, 2008, there was $13.2 million of total
      unrecognized compensation cost related to nonvested stock-based compensation
      arrangements granted under the Company’s stock incentive plans for stock
      options.  That cost is expected to be recognized over a weighted
      average period of 3.5 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 six months ended June 30, 2008, is as
      follows:





Number
              of
                Shares
            Weighted
                Average
              Fair
                Value
            Weighted
                Average
              Remaining
                Contractual LifeUnvested
                restricted stock awards, beginning of year
            35,642
            $38.05Changes
                during the period:Granted
            34,496
            17.39Vested
            9,939
            41.75Forfeited
            2,348
            42.61Unvested
                restricted stock awards, end of period
            57,851
            $23.27
            2.2





As
      of
      June 30, 2008, there was $1.2 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 2.2
      years.





13


Note
      11 – Related Party Transactions





The
      Company purchased some of its finished goods during the three months and six
      months ended June 30, 2008 and 2007, from a company in which a relative of
      a
      stockholder and former director of the Company has an ownership
      interest.  During the three months and six months ended June 30, 2007,
      the Company also purchased some of its finished goods from another company
      in
      which relatives of a stockholder and former director of the Company have
      ownership interests.





Note
      12 – Employee Benefit Plans





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





The
      components of net periodic benefit cost for the three months and six months
      ended June 30, 2008 and 2007, are as follows:





Three
                Months Ended
              June
                30,
            
            
            Six
                Months Ended
              June
                30,(in
                thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Service
                cost
            
            $
            25
            
            
            $
            27
            
            
            $
            50
            
            
            $
            54Interest
                cost
            
            
            214
            
            
            
            205
            
            
            
            427
            
            
            
            410Expected
                return on plan assets
            
            
            (278
            )
            
            
            (253
            )
            
            
            (555
            )
            
            
            (506
            )Amortization
                of prior service costs
            
            
            5
            
            
            
            5
            
            
            
            10
            
            
            
            10Amortization
                of net loss
            
            
            48
            
            
            
            96
            
            
            
            95
            
            
            
            192Net
                periodic benefit cost
            
            $
            14
            
            
            $
            80
            
            
            $
            27
            
            
            $
            160




The
      Company did not make any contributions to the Plan during the six months ended
      June 30, 2008, and currently does not expect to make any additional
      contributions during the remainder of the fiscal 2008 year.





Note
      13 – 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, toddler
      and
      preschool products.  The transaction was effective November 1,
      2006.  The sold business was primarily reported under the North
      America segment.  A gain on the sale of $0.1 million, net of income
      tax benefit, was recognized on this transaction during the second quarter of
      2007.  The gain is presented in income from discontinued operations,
      net of tax, on the accompanying condensed consolidated statements of operations
      for the three months and six months ended June 30, 2007.  This gain
      represents the final escrow payout which was received during the second quarter
      of 2007.





14


Note
      14 – Product Recalls





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





Following
      the announcement of the June 2007 recall, a total of 23 putative class action
      lawsuits were filed against the Company in various federal and state courts
      with
      respect to the products subject to the June 2007 and September 2007
      recalls.  These lawsuits make various claims and seek (i) medical
      monitoring as a result of alleged exposure to lead in the products subject
      to
      the recalls, (ii) disgorgement of certain profits under common law unjust
      enrichment theories, and/or (iii) various remedies under claims of product
      liability, breach of warranty, negligence, unfair and deceptive trade practices
      under state law and violation of the federal Consumer Product Safety
      Act.  On December 19, 2007, the various federal class action lawsuits
      were consolidated in the U.S. District Court for the Northern District of
      Illinois.





On
      January 22, 2008, the Company announced that it had reached a settlement in
      Barrett v. RC2
      Corporation filed in the Circuit Court of Cook County, Illinois, with the
      plaintiffs in the various class action lawsuits against the Company in state
      courts which arise from or relate to the Company’s recall of certain Thomas & Friends Wooden
      Railway products.  The Circuit Court of Cook County, Illinois, granted
      preliminary approval of the terms of the proposed settlement.  The
      class in the Barrett
      case is basically defined as all persons in the United States who do not opt
      out
      of the class and who purchased or owned other than for resale the Company’s
Thomas & Friends
      Wooden Railway products which were recalled in June 2007 and September
      2007.  The settlement agreement provides class members with several
      relief options, including cash refunds, replacement products and
      coupons.  Under the settlement agreement, the Company also agreed to
      pay attorneys’ fees and costs to plaintiffs’ counsel totaling $2.9 million,
      subject to court approval.  The settlement agreement also provides
      that the Company will take certain quality control measures.





After
      the
      settlement agreement in the Barrett case was announced,
      plaintiffs’ counsel in the pending federal court class actions attempted to stop
      the Company from proceeding with the settlement in Barrett, and on January 28,
      2008, filed a motion for a preliminary injunction in the U.S. District Court
      for
      the Northern District of Illinois seeking to enjoin the Company from proceeding
      with the settlement in the Barrett case.  On
      February 20, 2008, the U.S. District Court for the Northern District of Illinois
      denied the motion for a preliminary injunction filed by plaintiffs in the
      federal cases and granted the Company’s motion to stay the federal court actions
      pending the state court’s final decision in the Barrett case of whether
      to
      approve the proposed settlement in that case.  Certain plaintiffs in
      the federal court action also filed a motion to intervene in the state court
      proceeding, but, on February 25, 2008, they withdrew this motion.  The
      state court had stayed the issuance of notice of the proposed settlement to
      the
      class in Barrett
      pending a decision on the federal plaintiffs’ motion to intervene.





15


After
      the
      federal court plaintiffs’ motion for a preliminary injunction to stop the Barrett settlement was
      denied, the Company then entered into further settlement negotiations with
      the
      plaintiffs in the 18 class actions filed in federal court and the plaintiffs
      in
      the 5 class actions filed in state courts to reach a global settlement in the
      Barrett
      case.  The Company, plaintiffs in the 5 state court class actions and
      plaintiffs in the 18 federal court class actions entered into an amended
      settlement agreement in the Barrett case which included
      the plaintiffs in all 23 class actions filed against the Company.  The
      amended settlement agreement incorporated the relief provided to the class
      in
      the original settlement agreement.  In addition, the Company agreed to
      (i) pay an additional $0.1 million in attorneys’ fees (for a total of $3.0
      million) to plaintiffs’ counsel, (ii) provide the class with additional relief
      in the form of limited reimbursement for blood testing for lead during specified
      limited time periods with caps on the amount of individual claims and a total
      cap of $0.5 million on all claims, and (iii) specify and further define actions
      it would take to increase quality control measures it had agreed to in the
      initial settlement agreement.





The
      amended settlement agreement was preliminarily approved by the Circuit Court
      of
      Cook County on May 5, 2008.  Notice was then issued to the
      class.  The amended settlement agreement received final approval from
      the Circuit Court of Cook County on August 6, 2008.  Less than 50
      persons opted out of the class.  The amended settlement agreement
      resolves all claims of the class, other than for individual claims for personal
      injuries or for persons opting out of the class, with respect to the June 2007
      and September 2007 recalls of certain Thomas &Friends
      Wooden Railway
      toys.  The claim period runs until October 6, 2008.





During
      the second quarter of 2008, the Company received an inquiry from the Consumer
      Product Safety Commission (CPSC) for information regarding the recalls of
      certain Thomas &
Friends Wooden Railway toys
      in June 2007 and September 2007 for the
      purpose of assessing whether the CPSC may impose a fine on the
      Company.  The Company is in the process of responding to this inquiry,
      and at this time, the Company is unable to predict the amount of any fine that
      may be imposed by the CPSC.





HIT
      Entertainment (the Licensor), the licensor who has granted the licenses under
      which the Company markets the property affected by the June 2007 and September
      2007 recalls (the Licenses), sent a letter demanding that the Company indemnify
      it for certain costs in connection with the recalls and alleging that the
      Company had not complied with several provisions in the Licenses.  On
      July 7, 2008, the Company announced it reached an agreement with the Licensor
      which modifies existing license agreements and provides a release to the Company
      in connection with past indemnification claims related to the recall of certain
      products and other legal matters.





The
      agreement provides an extension to the license term on the Thomas & Friends Wooden
      Railway product line, along with an immediate reduction in licensing payments
      on
      this product line, and a shortening of the license term on the Take Along Thomas & Friends die-cast
      product line.  In addition, the Company made, in July
      2008,  a one-time cash payment to the Licensor of $15.0 million in
      exchange for a release from indemnification claims.  This payment has
      been accrued at June 30, 2008, and is included in recall-related costs on the
      accompanying condensed consolidated statements of operations for the three
      months and six months ended June 30, 2008.





16


The
      Company recorded charges of $10.2 million, net of tax, or $0.58 per diluted
      share, and $4.0 million, net of tax, or $0.19 per diluted share, in the three
      months ended June 30, 2008 and 2007, respectively, related to the 2007
      recalls.  The Company recorded charges of $11.1 million, net of tax,
      or $0.63 per diluted share, and $4.0 million, net of tax, or $0.19 per diluted
      share, in the six months ended June 30, 2008 and 2007, respectively, related
      to
      the 2007 recalls.  The Company has $27.7 million and $14.6 million of
      accrued recall-related costs included in accounts payable and accrued expenses
      in the accompanying condensed consolidated balance sheets at June 30, 2008
      and
      December 31, 2007, respectively. These costs are based on the latest estimates
      of retailer inventory returns, consumer product replacement costs and shipping
      costs as of the date of this filing, as well as the additional replacement
      costs
      or refunds, donations, notice charges, claims administration, licensor
      indemnification claims and legal fees related to the settlement of the class
      action lawsuits.  It is reasonably possible that actual costs
      associated with the recalls and related litigation could differ significantly
      from the estimates recorded.





Note
      15 – Reclassifications





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





Note
      16 – 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
      17 – Fair Value





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





17


Note
      18 – Comprehensive (Loss) Income





The
      Company reports comprehensive (loss) 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 (loss) income
      for the six months ended June 30, 2008 and 2007, is calculated as
      follows:





(in
                thousands)
            
            2008
            
            
            2007Net
                (loss) income
            
            $
            (4,412
            )
            
            $
            10,519Other
                comprehensive income – foreign currency
              translation
                adjustments
            
            
            3,574
            
            
            
            2,314Comprehensive
                (loss) income
            
            $
            (838
            )
            
            $
            12,833





Note
      19 – (Loss) Earnings Per Common Share





The
      Company computes (loss) 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 (loss) earnings per common share from continuing
      operations as required by SFAS No. 128:





Three
                Months Ended
              June
                30,
            
            
            Six
                Months Ended
              June
                30,(in
                thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007(Loss)
                income from continuing operations
            
            $
            (6,413
            )
            
            $
            2,350
            
            
            $
            (4,412
            )
            
            $
            10,409Weighted
                average common and common
              equivalent
                shares outstanding:Weighted
                average common shares outstanding
            
            
            17,260
            
            
            
            21,225
            
            
            
            17,586
            
            
            
            21,170Add
                effect of diluted securities – assumed
              exercise
                of stock options and vesting of
              restricted
                stock awards
            
            
            ---
            
            
            
            386
            
            
            
            ---
            
            
            
            395Weighted
                average common and common
              equivalent
                shares outstanding
            
            
            17,260
            
            
            
            21,611
            
            
            
            17,586
            
            
            
            21,565Basic
                (loss) earnings per common share from
              continuing
                operations
            
            $
            (0.37
            )
            
            $
            0.11
            
            
            $
            (0.25
            )
            
            $
            0.49Diluted
                (loss) earnings per common share from
              continuing
                operations
            
            $
            (0.37
            )
            
            $
            0.11
            
            
            $
            (0.25
            )
            
            $
            0.48





18


Options
      to purchase 2,011,952 shares and 513,609 shares of common stock were outstanding
      during the three months ended June 30, 2008 and 2007, respectively, but were
      not
      included in the computation of diluted (loss) earnings per common share because
      the options were anti-dilutive.  Options to purchase 2,011,952 shares
      and 476,544 shares of common stock were outstanding during the six months ended
      June 30, 2008 and 2007, respectively, but were not included in the computation
      of diluted (loss) earnings per common share because the options were
      anti-dilutive.  Additionally, unvested restricted stock awards of
      57,851 were not included in the computation of diluted (loss) earnings per
      common share for the three months and six months ended June 30,
      2008.  Because actual results generated a loss from continuing
      operations, any potential common shares would be antidilutive, and accordingly,
      were excluded from the diluted (loss) earnings per common share
      calculation.  Since adjusting for recall-related costs results in
      income from continuing operations exclusive of these costs, the potential common
      shares discussed above would be dilutive, and accordingly, affected the diluted
      per share impact of the recall-related costs disclosed in Note 14 – Product
      Recalls.





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 June 30, 2008, decreased 4.1% compared to net sales
      for the three months ended June 30, 2007.  Overall sales declines
      slowed as compared with the declines of the first quarter. Gross profit
      increased to 45.4% for the three months ended June 30, 2008, from 40.5% for
      the
      three months ended June 30, 2007.  Selling, general and administrative
      expenses, as a percentage of net sales, increased to 39.1% for the three months
      ended June 30, 2008, from 35.2% for the three months ended June 30,
      2007.  The Company reported an operating loss of $9.9 million for the
      three months ended June 30, 2008, compared to operating income of $2.6 million
      for the three months ended June 30, 2007.  As a percentage of net
      sales, operating loss was 11.1% for the three months ended June 30, 2008,
      compared to operating income of 2.8% for the three months ended June 30,
      2007.





Net
      sales
      for the six months ended June 30, 2008, decreased 11.2% compared to net sales
      for the six months ended June 30, 2007.  Gross profit increased to
      45.5% for the six months ended June 30, 2008, from 42.9% for the six months
      ended June 30, 2007.  Selling, general and administrative expenses, as
      a percentage of net sales, increased to 39.1% for the six months ended June
      30,
      2008, from 34.3% for the six months ended June 30, 2007.  The Company
      reported an operating loss of $5.4 million for the six months ended June 30,
      2008, compared to operating income of $15.1 million for the six months ended
      June 30, 2007.  As a percentage of net sales, operating loss was 3.0%
      for the six months ended June 30, 2008, compared to operating income of 7.3%
      for
      the six months ended June 30, 2007.





The
      Company closely monitors its product line profitability and cost
      controls.  During the second quarter of 2008, the Company implemented
      some of its expected price increases, with the remaining price increases going
      into effect during the third quarter of 2008.  Additionally during
      2008, the Company is planning to continue to eliminate individual products
      with
      unacceptable levels of profit.  The Company expects product cost
      pressures to continue throughout the second half of 2008 and into
      2009.




19





On
      July
      7, 2008, the Company announced it reached an agreement with HIT Entertainment
      (the Licensor) which modifies existing license agreements and provides a release
      to the Company in connection with past indemnification claims related to the
      recall of certain products and other legal matters.  The agreement
      provides an extension to the license term on the Thomas & Friends Wooden
      Railway product line, along with an immediate reduction in licensing payments
      on
      this product line, and a shortening of the license term on the Take Along Thomas & Friends die-cast
      product line.  In addition, the Company made, in July 2008, a one-time
      cash payment to the Licensor of $15.0 million in exchange for a release from
      indemnification claims.  This payment has been accrued at June 30,
      2008, and is included in recall-related costs on the accompanying condensed
      consolidated statements of operations for the three months and six months ended
      June 30, 2008.  The Company expects the one-time payment and reduced
      future profits from the shortening of license term on the Take Along Thomas & Friends product
      line will over time be offset by the reduction in licensing payments and
      licensing term extension on the Thomas & Friends Wooden
      Railway product line.





On
      June
      23, 2008, the Company announced that it has signed a definitive purchase
      agreement to acquire the Children’s Publishing Division (CPD) of privately-held
      Publications International, Ltd.  CPD, based in Lincolnwood, Illinois,
      is one of the world’s top children’s book publishers, selling more than 10
      million books annually.  CPD’s products, which include electronic
      books, story books, Story Reader® and PoingoTM,
      are sold at toy,
      mass merchandising, warehouse clubs and book retailers throughout North America,
      Europe, Latin America and Asia.  The acquisition, which is structured
      as an asset purchase, is expected to close during the third quarter of 2008,
      and
      is subject to customary closing conditions.  The purchase agreement
      calls for payment of $163.0 million of cash, which does not include the effect
      of post-closing working capital adjustments or transaction fees and
      expenses.





On
      June
      13, 2007, the Company announced the voluntary recall of 26 individual wooden
      railway vehicles and set components from the Thomas & Friends Wooden
      Railway product line, after an internal investigation linked apparent excess
      levels of lead with a limited number of paint colors used at a single contract
      manufacturing facility which purchased paint from independent
      suppliers.  On September 26, 2007, the Company announced the voluntary
      recall of five Thomas &
Friends Wooden Railway items,
      in addition to those items recalled in June
      2007.  Additionally, on December 6, 2007, the Company announced the
      voluntary recalls of two styles of The First Years 3-in-1 Flush & Sounds
      Potty training seats due to the discovery of excess levels of lead in the
      surface paint on 5-inch rectangular plaques inserted into the backs of the
      training seats and three styles of The First Years Newborn-to-Toddler Reclining
      Feeding Seat due to malfunctioning restraining straps that may disengage and
      permit the child to slip out of the seat.  The Company recorded
      charges of $10.2 million, net of tax, or $0.58 per diluted share, and $4.0
      million, net of tax, or $0.19 per diluted share, in the three months ended
      June
      30, 2008 and 2007, respectively.  The Company recorded charges of
      $11.1 million, net of tax, or $0.63 per diluted share, and $4.0 million, net
      of
      tax, or $0.19 per diluted share, in the six months ended June 30, 2008 and
      2007,
      respectively.  The portion of these charges included in the North
      America and International segments for the three months and six months ended
      June 30, 2008 and 2007, is outlined in the table below.





For
                the three months ended
              June
                30,
            
            
            For
                the six months ended
              June
                30,(in
                millions)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007North
                America
            
            $
            6.0
            
            
            $
            3.1
            
            
            $
            6.9
            
            
            $
            3.1International
            
            
            4.2
            
            
            
            0.9
            
            
            
            4.2
            
            
            
            0.9Total
                recall-related costs, net of tax
            
            $
            10.2
            
            
            $
            4.0
            
            
            $
            11.1
            
            
            $
            4.0





20


The
      Company has $27.7 million and $14.6 million of accrued recall-related costs
      included in accounts payable and accrued expenses in the accompanying condensed
      consolidated balance sheets at June 30, 2008 and December 31, 2007,
      respectively. These costs are based on the latest estimates of retailer
      inventory returns, consumer product replacement costs and shipping costs as
      of
      the date of this filing, as well as additional replacement costs or refunds,
      donations, notice charges, claims administration, licensor indemnification
      claims and legal fees related to the settlement of the class action
      lawsuits.





Three
      Months Ended June 30, 2008, Compared to Three Months Ended June 30,
      2007





Net
      sales.  Net sales for the three months ended June 30, 2008,
      decreased $3.8 million, or 4.1%, to $89.2 million from $93.0 million for the
      three months ended June 30, 2007.  Net sales in our North America
      segment decreased 12.9%, and net sales in our international segment increased
      25.3%, which includes a 7.9% benefit in changes from currency exchange
      rates.





Net
      sales
      for the three months ended June 30, 2008, excluding $0.2 million in net sales
      of
      discontinued product lines, were $89.0 million, a decrease of 2.1% when compared
      with net sales for the three months ended June 30, 2007, excluding $4.5 million
      in net sales of discontinued product lines and $2.4 million of recall-related
      returns and allowances, of $90.9 million.  The information in this
      paragraph constitutes non-GAAP financial information.  Internally, the
      Company uses this non-GAAP financial information for the following purposes:
      financial and operational decision making, evaluating period-to-period results
      and making comparisons of the Company’s results with those of its
      competitors.  Management believes that the presentation of these
      non-GAAP financial measures provides useful information to investors because
      this information may allow investors to better evaluate ongoing business
      performance and certain components of the Company’s operating results. Because
      the sales related to discontinued product lines have decreased significantly
      as
      the Company sells off the remaining inventory and recall-related returns and
      allowances have decreased significantly, the Company believes that the
      presentation of this non-GAAP financial information enhances an investor’s
      ability to make period-to-period comparisons of the Company’s operating
      results.  This information should be considered in addition to the
      results presented in accordance with GAAP, and should not be considered a
      substitute for the GAAP results. A reconciliation to the nearest GAAP financial
      measure follows:





(in
                millions)
            
            Net
                Sales2008
                actual
            
            $
            89.2Deduct:
                discontinued product lines
            
            
            0.2As
                adjusted
            
            $
            89.02007
                actual
            
            $
            93.0Add:
                recall-related returns and allowances
            
            
            2.4Deduct:
                discontinued product lines
            
            
            4.5As
                adjusted
            
            $
            90.9





21


Net
      sales
      decreases occurred in both our mother, infant and toddler products category
      and
      our preschool, youth and adult products category.  Net sales in our
      mother, infant and toddler products category decreased 5.8%, primarily driven
      by
      eliminating low margin products in our care and toy product lines offset
      slightly by increases in our The First Years® travel
      gear and
      feeding product lines.  Net sales in our preschool, youth and adult
      products category decreased 2.7%, primarily driven by declines in our Bob the Builder, Johnny
      Lightning®
      and ride-on product lines, as well as lower sales of discontinued
      products.  Excluding net sales related to discontinued product lines
      and recall-related returns and allowances, net sales in our preschool, youth
      and
      adult products category increased 1.3%.  Information in this paragraph
      regarding net sales in our preschool, youth and adult products category,
      excluding net sales related to discontinued product lines and recall-related
      returns and allowances, constitutes non-GAAP financial
      information.  Internally, the Company uses this non-GAAP financial
      information for the following purposes: financial and operational decision
      making, evaluating period-to-period results and making comparisons of the
      Company’s results with those of its competitors.  Management believes
      that the presentation of these non-GAAP financial measures provides useful
      information to investors because this information may allow investors to better
      evaluate ongoing business performance and certain components of the Company’s
      operating results.  Because the sales related to discontinued product
      lines have decreased significantly as the Company sells off the remaining
      inventory and recall-related returns and allowances have decreased
      significantly, the Company believes that the presentation of this non-GAAP
      financial information enhances an investor’s ability to make period-to-period
      comparisons of the Company’s operating results.  This information
      should be considered in addition to the results presented in accordance with
      GAAP, and should not be considered a substitute for the GAAP
      results.  A reconciliation to the nearest GAAP financial measure
      follows:





Net
                Sales(in
                millions)
            
            2008
            
            
            2007
            
            
            Difference
            
            
            %
                ChangePreschool,
                youth and adult products actual
            
            $
            47.6
            
            
            $
            48.9
            
            
            $
            (1.3
            )
            
            
            (2.7
            )%Add:  recall-related
                returns and allowances
            
            
            ---
            
            
            
            2.4
            
            
            
            (2.4
            )
            
            
            ---Deduct:
                discontinued product lines
            
            
            0.2
            
            
            
            4.5
            
            
            
            (4.3
            )
            
            
            ---As
                adjusted
            
            $
            47.4
            
            
            $
            46.8
            
            
            $
            0.6
            
            
            
            1.3
            %





Gross
      profit.  Gross profit increased $2.8 million, or 7.4%, to $40.5
      million for the three months ended June 30, 2008, from $37.7 million for the
      three months ended June 30, 2007.  As a percentage of net sales, gross
      profit increased to 45.4% for the three months ended June 30, 2008, from 40.5%
      for the three months ended June 30, 2007.  Aside from the impact of
      recall-related costs, this increase was primarily due to a more favorable
      product mix than that experienced in the prior year, as well as a positive
      impact from a portion of our current year price increases, which helped offset
      increases in our product costs.  Our quarterly gross margins can be
      affected by the mix of product that is shipped during each
      quarter.  Our mother, infant and toddler products category has higher
      sales of non-licensed products that carry lower selling prices and gross margins
      that vary significantly and cause quarterly fluctuations, based on the timing
      of
      these individual shipments throughout the year.  There were no major
      changes in the components of cost of sales.





Selling,
      general
      and administrative expenses.  Selling, general and
      administrative expenses increased $2.2 million, or 6.7%, to $34.9 million for
      the three months ended June 30, 2008, from $32.7 million for the three months
      ended June 30, 2007.  The increase in selling, general and
      administrative expenses for the three months ended June 30, 2008, was primarily
      due to higher fixed sales and marketing costs slightly offset by lower variable
      sales costs.  As a percentage of net sales, selling, general and
      administrative expenses increased to 39.1% for the three months ended June
      30,
      2008, from 35.2% for the three months ended June 30, 2007.




22





Operating
      (loss)
      income.  Operating loss for the three months ended June 30,
      2008, was $9.9 million, as compared to operating income of $2.6 million for
      the
      three months ended June 30, 2007.  As a percentage of net sales,
      operating loss was 11.1% for the three months ended June 30, 2008, compared
      to
      operating income of  2.8% for the three months ended June 30,
      2007.  Operating (loss) income for the three months ended June 30,
      2008 and 2007, includes $15.7 million and $6.4 million, respectively, of
      recall-related costs.





Net
      interest
      expense (income).  Net interest expense of $0.7 million for the
      three months ended June 30, 2008, relates primarily to bank term loans and
      lines
      of credit.  Net interest income of $0.2 million for the three months
      ended June 30, 2007, relates primarily to earnings on cash
      balances.  The increase in net interest expense (income) is primarily
      due to higher average debt outstanding.





Income
      tax.  Income tax benefit for the three months ended June 30,
      2008, includes benefits for federal, state and foreign income taxes at an
      effective rate of 35.9%.  Income tax expense for the three months
      ended June 30, 2007, includes provisions for federal, state and foreign income
      taxes at an effective rate of 36.5%.  However, the tax rate, including
      discrete items, for the three months ended June 30, 2008 and 2007, is 41.7%
      and
      17.1%, respectively.  Discrete items include significant, infrequent,
      unusual or non-recurring items.





Six
      Months Ended June 30, 2008, Compared to Six Months Ended June 30,
      2007





Net
      sales.  Net sales for the six months ended June 30, 2008,
      decreased $23.1 million, or 11.2%, to $182.5 million from $205.6 million for
      the
      six months ended June 30, 2007.  Net sales in our North America
      segment decreased 16.6%, and net sales in our international segment increased
      8.9%, which includes a 6.6% benefit in changes from currency exchange
      rates.





Net
      sales
      for the six months ended June 30, 2008, excluding $1.3 million in net sales
      of
      discontinued product lines and $0.1 of recall-related returns and allowances,
      were $181.3 million, a decrease of 8.2% when compared with net sales for the
      six
      months ended June 30, 2007, excluding $10.4 million in net sales of discontinued
      product lines and $2.4 million of recall-related returns and allowances, of
      $197.6 million.  The information in this paragraph constitutes
      non-GAAP financial information.  Internally, the Company uses this
      non-GAAP financial information for the following purposes: financial and
      operational decision making, evaluating period-to-period results and making
      comparisons of the Company’s results with those of its
      competitors.


23


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





(in
                millions)
            
            Net
                Sales2008
                actual
            
            $
            182.5Add:
                recall-related returns and allowances
            
            
            0.1Deduct:
                discontinued product lines
            
            
            1.3As
                adjusted
            
            $
            181.32007
                actual
            
            $
            205.6Add:
                recall-related returns and allowances
            
            
            2.4Deduct:
                discontinued product lines
            
            
            10.4As
                adjusted
            
            $
            197.6





Net
      sales
      decreases occurred in both our mother, infant and toddler products category
      and
      our preschool, youth and adult products category.  Net sales in our
      mother, infant and toddler products category decreased 8.1% primarily driven
      by
      declines in our toddler and infant toy products.  Net sales in our
      preschool, youth and adult products category decreased 14.0% primarily driven
      by
      declines in our licensed toy product lines and lower sales of discontinued
      products.  Excluding net sales related to discontinued product lines
      and recall-related returns and allowances, net sales in our preschool, youth
      and
      adult products category decreased 8.4%.  Information in this paragraph
      regarding net sales in our preschool, youth and adult products category,
      excluding net sales related to discontinued product lines and recall-related
      returns and allowances, constitutes non-GAAP financial
      information.  Internally, the Company uses this non-GAAP financial
      information for the following purposes: financial and operational decision
      making, evaluating period-to-period results and making comparisons of the
      Company’s results with those of its competitors.





24


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





Net
                Sales(in
                millions)
            
            2008
            
            
            2007
            
            
            Difference
            
            
            %
                ChangePreschool,
                youth and adult products actual
            
            $
            94.7
            
            
            $
            110.1
            
            
            $
            (15.4
            )
            
            
            (14.0
            )%Add:  recall-related
                returns and allowances
            
            
            0.1
            
            
            
            2.4
            
            
            
            (2.3
            )
            
            
            ---Deduct:
                discontinued product lines
            
            
            1.3
            
            
            
            10.4
            
            
            
            (9.1
            )
            
            
            ---As
                adjusted
            
            $
            93.5
            
            
            $
            102.1
            
            
            $
            (8.6
            )
            
            
            (8.4
            )%





Gross
      profit.  Gross profit decreased $5.2 million, or 5.9%, to $83.0
      million for the six months ended June 30, 2008, from $88.2 million for the
      six
      months ended June 30, 2007.  However, as a percentage of net sales,
      gross profit increased to 45.5% for the six months ended June 30, 2008, from
      42.9% for the six months ended June 30, 2007.  Aside from the impact
      of recall-related costs, this increase was primarily due to a more favorable
      product mix than that experienced in the prior year and the positive impact
      from
      a portion of our price increases.  There were no major changes in the
      components of cost of sales.





Selling,
      general
      and administrative expenses.  Selling, general and
      administrative expenses increased $0.9 million, or 1.3%, to $71.4 million for
      the six months ended June 30, 2008, from $70.5 million for the six months ended
      June 30, 2007.  The increase in selling, general and administrative
      expenses for the six months ended June 30, 2008, was primarily due to the higher
      fixed sales and marketing costs partially offset by lower variable sales
      costs.  As a percentage of net sales, selling, general and
      administrative expenses increased to 39.1% for the six months ended June 30,
      2008, from 34.3% for the six months ended June 30, 2007.





Operating
      (loss)
      income.  Operating loss for the six months ended June 30, 2008,
      was $5.4 million, as compared to operating income for the six months ended
      June
      30, 2007, of $15.1 million.  As a percentage of net sales, operating
      loss was 3.0% for the six months ended June 30, 2008, as compared to operating
      income of 7.3% for the six months ended June 30, 2007.  Operating
      (loss) income for the six months ended June 30, 2008 and 2007, includes $17.1
      million and $6.4 million, respectively, of recall-related costs.





Net
      interest
      expense.  Net interest expense of $1.8 million and $0.2 million
      for the six months ended June 30, 2008 and 2007, respectively, relates primarily
      to bank term loans and lines of credit.  The increase in net interest
      expense is primarily due to higher average debt outstanding.





Income
      tax.  Income tax benefit for the six months ended June 30,
      2008, includes benefits for federal, state and foreign income taxes at an
      effective rate of 35.9%.  Income tax expense for the six months
      ended June 30, 2007, includes provisions for federal, state and foreign income
      taxes at an effective rate of 36.5%.  However, the tax rate, including
      discrete items, for the six months ended June 30, 2008 and 2007, is 38.8% and
      32.8%, respectively.  Discrete items include significant, infrequent,
      unusual or non-recurring items.  During the six months ended June 30,
      2008, the Company recorded adjustments relating to the completion of 2007
      statutory audits of certain foreign jurisdictions.




25


Related
      Party Transactions





The
      Company purchased some of its finished goods during the three months and six
      months ended June 30, 2008 and 2007, from one company in which a relative of
      a
      stockholder and former director of the Company has an ownership
      interest.  Additionally, during the three months and six months ended
      June 30, 2007, the Company purchased some of its finished goods from another
      company in which relatives of a stockholder and former director of the Company
      have ownership interests.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company’s operations provided net cash of $19.2 million and $38.2 million during
      the six months ended June 30, 2008 and 2007, respectively.  Accounts
      receivable decreased $35.4 million during the six months ended June 30, 2008,
      primarily due to lower sales volume, as well as the seasonality of the Company’s
      business.  This decrease in accounts receivable was somewhat offset by
      an increase in inventory of $19.4 million during the six months ended June
      30,
      2008, primarily due to the seasonality of the Company’s business.





Net
      cash
      used in investing activities was $5.0 million and $12.5 million for the six
      months ended June 30, 2008 and 2007, respectively. The decrease in investing
      activities was primarily due to lower capital expenditures, as well as the
      second quarter 2007 purchase of the Compass Business.  Capital
      expenditures for the six months ended June 30, 2008, were $5.0 million, of
      which
      $3.2 million was for molds and tooling.





Net
      cash
      used in financing activities was $16.3 million and $19.6 million for the six
      months ended June 30, 2008 and 2007, respectively.  Borrowings on the
      Company’s revolving line of credit were $8.0 million during the six months ended
      June 30, 2008.  During the six months ended June 30, 2008, the Company
      purchased $24.7 million of its common stock, which was funded primarily with
      cash flows from operations.





Cash
      and
      cash equivalents increased $0.2 million during the six months ended June 30,
      2008.





Upon
      the
      closing of the acquisition of The First Years Inc. on September 15, 2004,
      the Company entered into a new credit facility, which has subsequently been
      amended, to replace its previous credit facility.  The credit facility
      is comprised of an $85.0 million term loan and a $100.0 million revolving line
      of credit.  The credit facility also provides an additional $75.0
      million of capacity under the revolving line of credit, which was approved
      by
      the lenders upon the Company’s request in October 2007.  During the
      first quarter of 2007, the term loan was repaid, and the term loan is no longer
      available for borrowing.  The revolving line of credit is available
      until its maturity on September 14, 2008.  A portion of the term loan
      had an interest rate of 3.45%, plus applicable margin, through the first three
      years of the facility.  The remaining term loan bore and revolving
      line of credit bears interest, at the Company’s option, at a base rate or at a
      LIBOR rate plus applicable margin. The
      applicable margin is based on the Company’s ratio of consolidated debt to
      consolidated EBITDA (earnings before interest, taxes, depreciation, amortization
      and non-cash expense related to equity awards) and varies between 0.75% and
      1.625%.  At June 30, 2008, the margin in effect was 1.625% 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 June 30, 2008, the commitment fee in effect was 0.35% per
      annum.





26


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 June 30, 2008, the Company had $103.0 million outstanding
      on the revolving line of credit and was in compliance with all covenants. At
      June 30, 2008, the Company had $71.9 million available on its revolving line
      of
      credit.





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





In
      February 2007, the Company’s Board of Directors authorized the adoption of a
      program to repurchase up to $75.0 million of the Company’s common
      stock.  The program was initially authorized for a period of one
      year.  In October 2007, the Board of Directors authorized a $75.0
      million increase to the stock repurchase program and extended the timing of
      this
      program through December 31, 2008.  This program may be extended
      beyond the currently authorized period or may be suspended at any
      time.  Under this program, shares may be repurchased from time to time
      in open market transactions or privately negotiated transactions at the
      Company’s discretion, subject to market conditions and other
      factors.  Shares repurchased by the Company are held as treasury
      shares.  During the six months ended June 30, 2008, the Company
      repurchased 1.2 million shares for $24.7 million under this
      program.  Through June 30, 2008, the Company had repurchased an
      aggregate of 4.1 million shares for $112.6 million under the $150.0 million
      stock repurchase authorization.  These repurchases were funded with
      borrowings on the Company’s revolving line of credit and with cash flow from
      operations.





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





The
      Company believes that its cash flows from operations, cash on hand and available
      borrowings will be sufficient to meet its working capital and capital
      expenditure requirements and provide the Company with adequate liquidity to
      meet
      anticipated operating needs for 2008.  The Company’s existing credit
      facility matures September 14, 2008, and the Company currently anticipates
      that
      it will refinance its credit facility during the third quarter of 2008 to fund
      the pending CPD acquisition and future working capital needs.  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.




27





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





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





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





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





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




28





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





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





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





Stock-based
      compensation.  Effective January 1, 2006, the Company adopted
      SFAS No. 123R, “Share-Based Payment.”  The Company elected to use the
      modified prospective application of SFAS No. 123R for awards issued prior to
      January 1, 2006.  (Loss) income from continuing operations before
      income taxes for the three months and six months ended June 30, 2008 and 2007,
      includes total expense recognized for all of the Company’s stock-based payment
      plans.





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





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





29


Recently
      Issued Accounting Pronouncements





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





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




FORWARD
      LOOKING STATEMENTS





Certain
      statements contained in this report are considered “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of
      1995.  These statements may be identified by the use of
      forward-looking words or phrases such as “anticipate,” “believe,” “could,”
“expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” “would” or
      the negative of those terms or other words of similar meaning.  Such
      forward-looking statements are inherently subject to known and unknown risks
      and
      uncertainties.  The Company’s actual results and future developments
      could differ materially from the results or developments expressed in, or
      implied by, these forward-looking statements.  Factors that may cause
      actual results to differ materially from those contemplated by such
      forward-looking statements include, but are not limited to, the following:
      the
      risk that the charges and expenses the Company expects relating to its recalls
      may increase based on the amount of inventory of affected products at retailers,
      the amount of affected products that may be returned by consumers and the cost
      of providing replacement products to consumers and retailers; the
      effect of the recalls on the Company’s relationship with the licensors and the
      resolution of any claims or determinations made by such licensors including
      renewal and retention of licenses; the outcome of the class action lawsuits
      that
      have been filed against the Company related to the recalls and the possibility
      of potential new claims or litigation; risks relating to the completion, timing
      and terms of a new credit facility to finance the CPD acquisition and the
      Company’s future capital needs to replace the Company’s existing credit facility
      which matures on September 14, 2008;  the effect of the modified
      license terms with the Licensor, including whether the reduction in licensing
      payments and the licensing term extension on the Thomas & Friends Wooden
      Railway product line will be sufficient to offset the one-time $15.0 million
      payment to the Licensor and the reduced future profits from shortening the
      license term on the Take Along Thomas & Friends die-cast
      product line;  the Company may not be able to manufacture, source and
      ship new and continuing products on a timely basis; the Company is dependent
      upon timely shipping of product and unloading of product through West Coast
      ports as well as timely rail/truck delivery to the Company’s warehouse and/or
      customers’ warehouses; increases in the cost of raw materials used to
      manufacture the Company’s products and increases in freight costs could increase
      the Company’s cost of sales and reduce the Company’s gross margins; currency
      exchange rate fluctuations, particularly in the Chinese Renminbi or the Hong
      Kong dollar, could increase the Company’s expenses; customers and consumers may
      not accept the Company’s products at prices sufficient for the Company to
      profitably recover development, manufacturing, marketing, royalty and other
      costs; the inventory policies of retailers, together with increased reliance
      by
      retailers on quick response inventory management techniques, may increase the
      risk of underproduction of popular items, overproduction of less popular items
      and failure to achieve tight shipping schedules; competition in the markets
      for
      the Company’s products may increase significantly; the Company is dependent upon
      continuing licensing arrangements with owners of popular and classic licensed
      properties such as Thomas
& Friends, Bob
      theBuilder,
Winnie
      the Pooh, John
      Deere, Nickelodeon and Sesame
      Street, vehicle manufacturers, agricultural equipment manufacturers and
      other licensors; the Company may experience unanticipated negative results
      of
      litigation; the Company relies upon a limited number of independently owned
      factories located in China to manufacture a significant portion of its products;
      the Company is dependent upon the continuing willingness of leading retailers
      to
      purchase and provide shelf space for the Company’s products; and general
      economic conditions in the Company’s markets.  Such uncertainties and
      other risks that may affect the Company’s performance are discussed further in
      Part I, Item 1A, “Risk Factors,” in the Company’s Form 10-K for the year ended
      December 31, 2007.  The Company undertakes no obligation to make any
      revisions to the forward-looking statements contained in this report or to
      update them to reflect events or circumstances occurring after the date of
      this
      report.





30


Item
      3.     Quantitative and Qualitative Disclosures about Market
      Risk





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





Based
      on
      the Company’s interest rate exposure on variable rate borrowings at June 30,
      2008, a one percentage point increase in average interest rates on the Company’s
      borrowings would increase future interest expense by $0.1 million per month
      and
      a five percentage point increase would increase future interest expense by
      $0.4
      million per month.  The Company determined these amounts based on
      $103.0 million of variable rate borrowings at June 30, 2008, multiplied by
      1.0%
      and 5.0%, respectively, and divided by twelve.  The Company is
      currently not using any interest rate collars, hedges or other derivative
      financial instruments to manage or reduce interest rate risk.  As a
      result, any increase in interest rates on the Company’s variable rate borrowings
      would increase interest expense and reduce net income.





The
      Company’s net sales are primarily denominated in U.S. dollars, with 24.8% of net
      sales for the six months ended June 30, 2008, denominated in British pounds
      sterling, Australian dollars, Euros and Canadian dollars.  The
      Company’s purchases of finished goods from Chinese manufacturers are primarily
      denominated in Hong Kong dollars.  Expenses for these manufacturers
      are primarily denominated in Chinese Renminbi.  The Hong Kong dollar
      is currently pegged to the U.S. dollar.  If the Hong Kong dollar
      ceased to be pegged to the U.S. dollar, a material increase in the value of
      the
      Hong Kong dollar relative to the U.S. dollar would increase our expenses, and
      therefore, could adversely affect our profitability.  A 10.0% change
      in the exchange rate of the U.S. dollar with respect to the Hong Kong dollar
      for
      the six months ended June 30, 2008, would have changed the total dollar amount
      of our gross profit by 11.9%.  As expenses for the Company’s Chinese
      manufacturers are primarily denominated in Chinese Renminbi, a material increase
      in the value of the Chinese Renminbi relative to the U.S. dollar would increase
      the Company’s expenses, and therefore, could adversely affect the Company’s
      profitability.  A 10.0% change in the exchange rate of the U.S. dollar
      with respect to the British pound sterling, the Australian dollar, the Euro
      or
      the Canadian dollar for the six months ended June 30, 2008, individually would
      not have had a significant impact on the Company’s earnings.  The
      Company is also subject to exchange rate risk relating to transfers of funds
      denominated in British pounds sterling, Australian dollars, Canadian dollars
      or
      Euros from its foreign subsidiaries to the United
      States.  Historically, the Company has not used hedges or other
      derivative financial instruments to manage or reduce exchange rate
      risk.





31


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 (who currently functions as both the Principal Executive
      Officer and the Principal Financial Officer of the Company), as appropriate
      to
      allow timely decisions regarding required disclosure.  The Company
      carried out an evaluation as of June 30, 2008, under the supervision and with
      the participation of the Company’s management, including its Chief Executive
      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 concluded that the Company’s disclosure
      controls and procedures were effective as of June 30, 2008 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





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





Following
      the announcement of the June 2007 recall, a total of 23 putative class action
      lawsuits were filed against the Company in various federal and state courts
      with
      respect to the products subject to the June 2007 and September 2007
      recalls.  These lawsuits make various claims and seek (i) medical
      monitoring as a result of alleged exposure to lead in the products subject
      to
      the recalls, (ii) disgorgement of certain profits under common law unjust
      enrichment theories, and/or (iii) various remedies under claims of product
      liability, breach of warranty, negligence, unfair and deceptive trade practices
      under state law and violation of the federal Consumer Product Safety
      Act.  On December 19, 2007, the various federal class action lawsuits
      were consolidated in the U.S. District Court for the Northern District of
      Illinois.





32


On
      January 22, 2008, the Company announced that it had reached a settlement in
      Barrett v. RC2
      Corporation filed in the Circuit Court of Cook County, Illinois, with the
      plaintiffs in the various class action lawsuits against the Company in state
      courts which arise from or relate to the Company’s recall of certain Thomas & Friends Wooden
      Railway products.  The Circuit Court of Cook County, Illinois, granted
      preliminary approval of the terms of the proposed settlement.  The
      class in the Barrett
      case is basically defined as all persons in the United States who do not opt
      out
      of the class and who purchased or owned other than for resale the Company’s
Thomas & Friends
      Wooden Railway products which were recalled in June 2007 and September
      2007.  The settlement agreement provides class members with several
      relief options, including cash refunds, replacement products and
      coupons.  Under the settlement agreement, the Company also agreed to
      pay attorneys’ fees and costs to plaintiffs’ counsel totaling $2.9 million,
      subject to court approval.  The settlement agreement also provides
      that the Company will take certain quality control measures.





After
      the
      settlement agreement in the Barrett case was announced,
      plaintiffs’ counsel in the pending federal court class actions attempted to stop
      the Company from proceeding with the settlement in Barrett, and on January 28,
      2008, filed a motion for a preliminary injunction in the U.S. District Court
      for
      the Northern District of Illinois seeking to enjoin the Company from proceeding
      with the settlement in the Barrett case.  On
      February 20, 2008, the U.S. District Court for the Northern District of Illinois
      denied the motion for a preliminary injunction filed by plaintiffs in the
      federal cases and granted the Company’s motion to stay the federal court actions
      pending the state court’s final decision in the Barrett case of whether
      to
      approve the proposed settlement in that case.  Certain plaintiffs in
      the federal court action also filed a motion to intervene in the state court
      proceeding, but, on February 25, 2008, they withdrew this motion.  The
      state court had stayed the issuance of notice of the proposed settlement to
      the
      class in Barrett
      pending a decision on the federal plaintiffs’ motion to intervene.





After
      the
      federal court plaintiffs’ motion for a preliminary injunction to stop the Barrett settlement was
      denied, the Company then entered into further settlement negotiations with
      the
      plaintiffs in the 18 class actions filed in federal court and the plaintiffs
      in
      the 5 class actions filed in state courts to reach a global settlement in the
      Barrett
      case.  The Company, plaintiffs in the 5 state court class actions and
      plaintiffs in the 18 federal court class actions entered into an amended
      settlement agreement in the Barrett case which included
      the plaintiffs in all 23 class actions filed against the Company.  The
      amended settlement agreement incorporated the relief provided to the class
      in
      the original settlement agreement.  In addition, the Company agreed to
      (i) pay an additional $0.1 million in attorney’s fees (for a total of $3.0
      million) to plaintiffs’ counsel, (ii) provide the class with additional relief
      in the form of limited reimbursement for blood testing for lead during specified
      limited time periods with caps on the amount of individual claims and a total
      cap of $0.5 million on all claims, and (iii) specify and further define actions
      it would take to increase quality control measures it had agreed to in the
      initial settlement agreement.





The
      amended settlement agreement was preliminarily approved by the Circuit Court
      of
      Cook County, on May 5, 2008.  Notice was then issued to the
      class.  The amended settlement agreement received final approval from
      the Circuit Court of Cook County on August 6, 2008.  Less than 50
      persons opted out of the class.  The amended settlement agreement
      resolves all claims of the class, other than for individual claims for personal
      injuries or for persons opting out of the class, with respect to the June 2007
      and September 2007 recalls of certain Thomas &Friends
      Wooden Railway
      toys.  The claim period runs until October 6, 2008.





33


During
      the second quarter of 2008, the Company received an inquiry from the Consumer
      Product Safety Commission (CPSC) for information regarding the recalls of
      certain Thomas &
Friends Wooden Railway toys
      in June 2007 and September 2007 for the
      purpose of assessing whether the CPSC may impose a fine on the
      Company.  The Company is in the process of responding to this inquiry,
      and at this time, the Company is unable to predict the amount of any fine that
      may be imposed by the CPSC.





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





Item
      1A.   Risk Factors





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





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





(a)
            Not
                applicable.





(b)
            Not
                applicable.





(c)
            Issuer
                Purchases of Equity Securities





Period
            
            Total
                Number of Shares Purchased
            
            
            Average
                Price Paid Per Share
            
            
            Total
                Number of Shares Purchased As Part of Publicly Announced
                Program
            
            
            Maximum
                Dollar Value of Shares That May Yet Be Purchased Under the Program
                (000s)January
                1, 2007 – March 31, 2008
            
            
            3,865,576
            
            
            $
            27.89
            
            
            
            3,865,576
            
            
            $
            42,194April
                1, 2008 – April 30, 2008
            
            
            266,675
            
            
            
            17.96
            
            
            
            266,675
            
            
            
            37,403May
                1, 2008 – May 31, 2008
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            37,403June
                1, 2008 – June 30, 2008
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            37,403Total
                quarter ended June 30, 2008
            
            
            266,675
            
            
            
            17.96
            
            
            
            266,675
            
            
            
            37,403Total
            
            
            4,132,251
            
            
            $
            27.25
            
            
            
            4,132,251
            
            
            $
            37,403





34


In
      February 2007, the Company’s Board of Directors authorized the adoption of a
      program to repurchase up to $75.0 million of the Company’s common
      stock.  The program was initially authorized for a period of one
      year.  In October 2007, the Board of Directors authorized a $75.0
      million increase to the stock repurchase program and extended the timing of
      this
      program through December 31, 2008.  This program may be extended
      beyond the currently authorized period or may be suspended at any
      time.  Under this program, shares may be repurchased from time to time
      in open market transactions or privately negotiated transactions at the
      Company’s discretion, subject to market conditions and other
      factors.  During the six months ended June 30, 2008, the Company
      repurchased 1.2 million shares for $24.7 million under this
      program.  Through June 30, 2008, the Company had repurchased an
      aggregate of 4.1 million shares for $112.6 million under the $150.0 million
      stock repurchase authorization.





Item
      3.    Defaults Upon Senior Securities





Not
      applicable.





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





The
      annual meeting of stockholders of
      the Company was held on May 8, 2008.  The matters voted upon,
      including the number of votes cast for, against or withheld, as well as the
      number of abstentions and broker non-votes, as to each such matter, were as
      follows:





Proposal
      I (Election of
      Directors)





FOR
            WITHHELDRobert
                E. Dods
            15,935,742
            923,664John
                S. Bakalar
            16,738,284
            121,122John
                J. Vosicky
            16,712,525
            146,881Curtis
                W. Stoelting
            16,737,869
            121,537Paul
                E. Purcell
            16,754,659
            104,747Daniel
                M. Wright
            16,076,974
            782,432Thomas
                M. Collinger
            16,761,403
            98,003Michael
                J. Merriman, Jr.
            16,712,433
            146,973Linda
                A. Huett
            16,712,067
            147,339Peter
                J. Henseler
            16,738,594
            120,812





Proposal
      II (Approval of
      Amendment to the RC2 Corporation 2005 Stock Incentive Plan)





FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES10,008,795
            5,728,439
            13,436
            1,108,736





Proposal
      III (Approval of
      the RC2 Corporation 2008 Incentive Bonus Plan)





FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES15,451,314
            284,915
            14,441
            1,108,736





Item
      5.    Other Information





Not
      applicable.




35





Item
      6.    Exhibits




2.1
            Asset
                Purchase Agreement dated as of June 20, 2008 among Learning Curve
                Brands,
                Inc., RC2 Australia Pty. Ltd., Racing Champions International Limited,
                Learning Curve Mexico S. de R.L. de C.V., RC2 Limited, RC2 (Asia)
                Limited,
                Publications International, Ltd., PIL, L.L.C., JRS Distribution Co.,
                Publications International Limited Partnership, Publications
                International, Ltd. L.P. and Publications International, Ltd. S de
                R.L. de
                C.V. (incorporated by reference to Exhibit 2.1 of the Company’s Current
                Report on Form 8-K (File No. 0-22635) filed by the Company with the
                Securities and Exchange Commission on June 26, 2008).





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





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





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





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





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





10.1
            RC2
                Corporation 2005 Stock Incentive Plan, as amended (incorporated by
                reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K
                (File No. 0-22635) filed by the Company with the Securities and Exchange
                Commission on May 12, 2008).





10.2
            RC2
                Corporation 2008 Incentive Bonus Plan (incorporated by reference
                to
                Exhibit 99.2 of the Company’s Current Report on Form 8-K (File No.
                0-22635) filed by the Company with the Securities and Exchange Commission
                on May 12, 2008).





10.3
            Ninth
                Amendment to Amended and Restated Credit Agreement, dated as of August
                8,
                2008, effective as of June 30, 2008, among the Company, certain of
                its
                subsidiaries, Harris, N.A., as lender and agent, and the other lenders
                named therein.






36




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




32.1*
            Certification
                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.






37


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 8th
      day of
      August 2008.





RC2
                CORPORATIONBy/s/
                Curtis W.
                StoeltingCurtis
                W. Stoelting, Chief Executive Officer
              (Principal
                Executive Officer and Principal
              Financial
                Officer)






38