SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      DC 20549





FORM
      10-Q





(Mark
                One)x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934For
                the quarterly period ended March 31, 2006ORo
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934For
                the transition period from _______ to
                _________





Commission
      file number: 0-22635




RC2
                  Corporation(Exact
                  Name of Registrantas
                  Specified in Its Charter)


Delaware
            
            36-4088307(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)




1111
                West 22ndStreet, Suite 320, Oak Brook, Illinois,
                60523(Address
                of principal executive
                offices)





Registrant's
      telephone number, including area code:  630-573-7200





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




Yes
            X
            
            No




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





Large
                accelerated filer
            X
            
            Accelerated
                filer
            
            Non-accelerated
                filer





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




Yes
              
              
              No
              X


On
      April
      25, 2006, there were outstanding 20,827,172 shares of the Registrant's $0.01
      par
      value common stock.





RC2
      CORPORATION





FORM
      10-Q





MARCH
      31,
      2006





INDEX ****





PART
      I -
      FINANCIAL INFORMATION




PageItem
                  1.
              Condensed
                  Consolidated Balance Sheets as of March 31,
                  2006
                    and December 31,
                    2005
              3Condensed
                  Consolidated Statements of Earnings
                  for the Three
                  Months
                    Ended March 31, 2006 and
                    2005
              4Condensed
                  Consolidated Statements of Cash
                  Flows for the
                  Three
                    Months Ended March 31, 2006 and
                    2005
              5Notes
                  to Condensed Consolidated Financial
                  Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial
                  Condition
                  and
                    Results of
                    Operations
              15Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              20Item
                  4.
              Controls
                  and Procedures
              21




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




PART
      I.  FINANCIAL
      INFORMATION






**Item
      1.   Financial Statements**





**RC2
      Corporation and Subsidiaries**


**Condensed
      Consolidated Balance
      Sheets**


**(in
      thousands)**


**March
                31,**
              **2006**
            
            **December
                31,**
              **2005****(Unaudited)****Assets**Cash
                and cash equivalents
            
            $
            14,226
            
            $
            25,262Accounts
                receivable, net
            
            
            84,822
            
            
            113,066Inventory
            
            
            77,342
            
            
            71,260Other
                current assets
            
            
            19,213
            
            
            17,597Total
                current assets
            
            
            195,603
            
            
            227,185Property
                and equipment, net
            
            
            47,181
            
            
            47,039Goodwill
            
            
            253,175
            
            
            253,571Intangible
                assets, net
            
            
            99,645
            
            
            99,611Other
                non-current assets
            
            
            2,275
            
            
            2,330Total
                assets
            
            $
            597,879
            
            $
            629,736**Liabilities
                and stockholders’ equity**Accounts
                payable and accrued expenses
            
            $
            64,939
            
            $
            87,322Line
                of credit
            
            
            ---
            
            
            3,979Current
                maturities of bank term loans
            
            
            21,250
            
            
            21,250Other
                current liabilities
            
            
            1,135
            
            
            1,348Total
                current liabilities
            
            
            87,324
            
            
            113,899Lines
                of credit
            
            
            3,592
            
            
            13,980Bank
                term loans, less current maturities
            
            
            38,125
            
            
            43,438Other
                non-current liabilities
            
            
            59,375
            
            
            59,468Total
                liabilities
            
            
            188,416
            
            
            230,785Stockholders’
                equity
            
            
            409,463
            
            
            398,951Total
                liabilities and stockholders' equity
            
            $
            597,879
            
            $
            629,736





See
      accompanying notes to condensed consolidated financial statements.





3


**RC2
      Corporation and Subsidiaries**


**Condensed
      Consolidated Statements of
      Earnings**


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







**For
                the three months ended March 31,****2006**
            
            **2005****(Unaudited)**
            
            **(Unaudited)**Net
                sales
            
            $
            103,509
            
            $
            96,489Cost
                of sales
            
            
            55,393
            
            
            47,367Gross
                profit
            
            
            48,116
            
            
            49,122Selling,
                general and administrative expenses
            
            
            35,076
            
            
            35,561Amortization
                of intangible assets
            
            
            315
            
            
            94Operating
                income
            
            
            12,725
            
            
            13,467Interest
                expense, net
            
            
            1,015
            
            
            1,321Other
                income
            
            
            (157
            )
            
            (85
            )Income
                before income taxes
            
            
            11,867
            
            
            12,231Income
                tax expense
            
            
            4,377
            
            
            4,403Net
                income
            
            $
            7,490
            
            $
            7,828Net
                income per share:Basic
            
            $
            0.36
            
            $
            0.38Diluted
            
            $
            0.35
            
            $
            0.37Weighted
                average shares outstanding:Basic
            
            
            20,750
            
            
            20,496Diluted
            
            
            21,262
            
            
            21,433







See
      accompanying notes to condensed consolidated financial statements.





4


**RC2
      Corporation and Subsidiaries**


**Condensed
      Consolidated Statements of Cash
      Flows**


**(in
      thousands)**





**For
                the three months ended March 31,****2006**
            
            **2005****(Unaudited)**
            
            **(Unaudited)****Cash
                flows from operating activities**Net
                income
            
            $
            7,490
            
            $
            7,828Depreciation
                and amortization
            
            
            3,858
            
            
            3,536Stock-based
                compensation
            
            
            1,042
            
            
            ---Amortization
                of deferred financing costs
            
            
            121
            
            
            121Loss
                (gain) on disposition of assets
            
            
            7
            
            
            (12
            )Changes
                in operating assets and liabilities
            
            
            (1,835
            )
            
            8,197Net
                cash provided by operating activities
            
            
            10,683
            
            
            19,670**Cash
                flows from investing activities**Purchase
                of property and equipment
            
            
            (3,566
            )
            
            (3,300
            )Purchase
                of TFY, net of cash acquired
            
            
            ---
            
            
            33Proceeds
                from disposition of property and equipment
            
            
            5
            
            
            423Increase
                in other non-current assets
            
            
            (66
            )
            
            (109
            )Net
                cash used in investing activities
            
            
            (3,627
            )
            
            (2,953
            )**Cash
                flows from financing activities**Payments
                to bank on lines of credit
            
            
            (14,490
            )
            
            (18,000
            )Payments
                to bank on bank term loan
            
            
            (5,312
            )
            
            (3,750
            )Issuance
                of common stock upon option exercises
            
            
            893
            
            
            453Tax
                benefit on stock option exercises and expense
            
            
            934
            
            
            ---Issuance
                of common stock under ESPP
            
            
            39
            
            
            36Net
                cash used in financing activities
            
            
            (17,936
            )
            
            (21,261
            )Effect
                of exchange rate changes on cash
            
            
            (156
            )
            
            (213
            )Net
                decrease in cash and cash equivalents
            
            
            (11,036
            )
            
            (4,757
            )Cash
                and cash equivalents, beginning of year
            
            
            25,262
            
            
            20,123Cash
                and cash equivalents, end of period
            
            $
            14,226
            
            $
            15,366Supplemental
                information:Cash
                flows during the period for:Interest
            
            $
            1,169
            
            $
            1,345Income
                taxes
            
            $
            10,614
            
            $
            932Income
                tax refunds received
            
            $
            279
            
            $
            305





See
      accompanying notes to condensed consolidated financial statements.





5


**RC2
      Corporation and Subsidiaries**


**Notes
      to Condensed Consolidated Financial
      Statements**





**Note
      1 - Basis of Presentation**





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





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared by management and, in the opinion of management, contain all
      adjustments, consisting of normal recurring adjustments, necessary to present
      fairly the financial position of the Company as of March 31, 2006, the results
      of its operations for the three-month periods ended March 31, 2006 and 2005,
      and
      its cash flows for the three-month periods ended March 31, 2006 and
      2005.





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, 2005.  The condensed consolidated balance sheet information as of
      December 31, 2005 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 - Stock-Based Payment Arrangements**





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





At
      March
      31, 2006, the Company has four stock incentive plans, three of which are
      dormant, and an employee stock purchase plan (ESPP), which are described below.
      Amounts recognized in the financial statements with respect to these stock-based
      payment arrangements for the three months ended March 31, 2006, are as
      follows:





(in
      thousands)


Total
                cost of stock-based payment plans
            
            $
            1,042Amount
                of related income tax benefit recognized in net income
            
            $
            387





Stock-based
      compensation expense is included in selling, general and administrative expenses
      in the accompanying condensed consolidated statement of earnings for the three
      months ended March 31, 2006.


6


Prior
      to
      January 1, 2006, the Company accounted for stock-based compensation arrangements
      with employees in accordance with the provisions of APB Opinion No.
      25 and complied with the disclosure provisions of SFAS No.
      123.  If compensation costs for stock options issued, including
      options for shares issued under the ESPP, had been determined based on the
      fair
      value at their grant date consistent with SFAS No. 123, the Company’s net income
      and net income per share would have been reduced to the following pro forma
      amounts:





(in
                thousands, except per share data)
            
            **For
                the three**
              **months
                ended**
              **March
                31, 2005**Net
                income as reported
            
            $
            7,828Deduct:
                total stock-based employee compensation
              expense
                determined under fair value based method
              for
                all awards, net of related income tax benefit
            
            
            (441
            )Pro
                forma net income
            
            $
            7,387Basic
                net income per share:As
                reported
            
            $
            0.38Pro
                forma
            
            $
            0.36Diluted
                net income per share:As
                reported
            
            $
            0.37Pro
                forma
            
            $
            0.34





**Employee
      Stock Purchase Plan**





The
      Company has an ESPP to provide employees of the Company with an opportunity
      to
      purchase common stock of the Company through accumulated payroll deductions.
      The
      plan allows eligible employees to purchase shares of the Company’s common stock
      through quarterly offering periods commencing on each January 1, April 1, July
      1
      and October 1. The option price for each share of common stock purchased equals
      90% of the last quoted sales price of a share of the Company’s common stock as
      reported by the NASDAQ National Market on the first day of the quarterly
      offering period or the last day of the quarterly offering period, whichever
      is
      lower. The Company has reserved 500,000 shares of common stock held in treasury
      for issuance under the plan. The plan will terminate on July 1, 2007, unless
      sooner terminated by the Board of Directors.





The
      fair
      value of each option for shares issued under the ESPP during the three months
      ended March 31, 2006 and 2005 is estimated on the date of grant based on
      the Black-Scholes option pricing model with the following assumptions: risk-free
      rates of return of 4.2% and 2.3%, respectively, volatility factors of 21.0%
      to
      32.8%, respectively, and expected life of three months. The weighted
      average fair value of those purchase rights granted during the three months
      ended March 31, 2006 and 2005 was $4.45 and $6.69, respectively.





The
      Company calculates the volatility factor for those options issued under the
      ESPP
      based on the volatility of the Company’s common stock during the most recent
      three-month period. **** The
      expected term of share options granted represents the period of time that
      share options granted are expected to be outstanding. The risk-free rate for
      the
      period within the contractual term of the share option is based on the U.S.
      Treasury yield curve in effect at the time of grant.





7


**Stock
      Incentive Plans**





The
      Company maintains an employee stock option plan for its key employees. The
      Company had reserved 415,041 shares of common stock for issuance under the
      plan.
      These options vested in equal installments over a five-year period. The options
      will expire on the earlier of the tenth anniversary of the date of grant or
      30
      days after the date of termination of the employee’s employment with the
      Company. This plan is dormant, and no future issuances are authorized from
      this
      plan.





The
      Company maintains a stock incentive plan, under which options could be granted
      to purchase up to 2,300,000 shares of common stock to executives or key
      employees of the Company. Some of the options that were granted vested
      immediately, and the rest vest over a five-year period. These options expire
      on
      the tenth anniversary of the date of grant or 90 days after the date of
      termination of the employee’s employment with the Company. Under this plan,
      cancelled options revert back into the plan. This plan became dormant in 2005
      upon the approval of the 2005 Stock Incentive Plan, as discussed below. No
      future issuances are authorized from this plan.





The
      Company also maintains an omnibus stock plan, under which the Company had
      400,000 shares of its common stock reserved for issuance. This plan is dormant,
      and no future issuances are authorized from this plan.





During
      2005, a stock incentive plan was approved by the Company’s stockholders. Under
      this plan, restricted stock awards or options to purchase stock may be granted
      for up to 1,200,000 shares of common stock to executives or key employees of
      the
      Company. Options granted may vest immediately or over a five-year period. These
      options expire on the tenth anniversary of the date of grant or 90 days after
      the date of termination of the employee’s employment with the Company. Under
      this plan, cancelled options revert back into the plan and are available for
      future issuance.





The
      fair
      value of stock options granted under the stock incentive plans during the
      three months ended March 31, 2006 and 2005 is estimated on the date of grant
      based on the Black-Scholes option pricing model that assumes, among other
      things, no dividend yield, weighted average risk-free rates of return of
      4.6% and 4.2%, respectively, weighted average volatility factors of 54.5% and
      54.6%, respectively, and expected life of seven years.





The
      Company calculates the expected volatility factor for those options issued
      under
      the stock incentive plans to correspond with the average volatility factor
      of
      those companies included in a peer group study conducted by a third-party on
      behalf of the Company. The historical stock price movements of the Company's
      common stock are not considered to be a good indicator of expected future
      volatility because the Company’s business has changed significantly as a result
      of acquisitions completed. However, the Company continues to monitor its actual
      volatility to assess whether the peer group volatility remains appropriate
      and
      updates the peer group study at least annually.





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





8


A
      summary
      of stock option activity for the Company’s stock incentive plans for the three
      months ended March 31, 2006 is as follows:





**Number
                of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Weighted
                Average Remaining Contractual Life**
            
            **Aggregate**
              **Intrinsic**
              **Value
                (000)**Outstanding
                at beginning of the year
            
            
            1,562,842
            
            $
            16.14Changes
                during the period:Granted
            
            
            248,556
            
            $
            35.71Exercised
            
            
            94,870
            
            $
            9.41Cancelled
            
            
            (510
            )
            $
            8.11Outstanding
                at end of period
            
            
            1,717,038
            
            $
            19.35
            
            
            6.9
            
            $
            22,530Exercisable
                at end of period
            
            
            883,930
            
            $
            11.83
            
            
            5.5
            
            $
            7,711





The
      weighted average fair value of options granted under the Company’s stock
      incentive plans for the three months ended March 31, 2006 and 2005 was $21.47
      and $18.64 per share, respectively. The total intrinsic value of options
      exercised during the three months ended March 31, 2006 and 2005 was $0.7 million
      and $0.4 million, respectively.





As
      of
      March 31, 2006, there was $13.4 million of total unrecognized compensation
      cost
      related to nonvested stock-based compensation arrangements granted under the
      Company’s stock incentive plans. That cost is expected to be recognized over a
      weighted average period of 2.8 years. The total fair value of options vested
      during the three months ended March 31, 2006 was $2.5 million.





**Note
      3 - Goodwill and Intangible Assets**





The
      change in carrying value of goodwill by reporting unit for the three months
      ended March 31, 2006 is shown below:





(in
      thousands)


**North
                America**
            
            **International**
            
            **Total**Balance
                at January 1, 2006
            
            $
            240,130
            
            $
            13,441
            
            $
            253,571Other
                adjustments
            
            
            (523
            )
            
            127
            
            
            (396
            )Balance
                at March 31, 2006
            
            $
            239,607
            
            $
            13,568
            
            $
            253,175





Adjustments made during the first quarter of 2006 primarily
      relate to currency exchange rate changes, release of certain purchase accounting
      liabilities and other adjustments.





9


The
      components of intangible assets, net are as follows:





(in
      thousands)


**March
                31,**
              **2006**
            
            **December
                31,**
              **2005****Gross
                amount of amortizable intangible assets:**Customer
                relationships
            
            $
            8,704
            
            $
            8,704Other
            
            
            3,262
            
            
            2,962$
            11,966
            
            $
            11,666**Accumulated
                amortization of amortizable intangible assets:**Customer
                relationships
            
            $
            327
            
            $
            275Other
            
            
            1,467
            
            
            1,204$
            1,794
            
            $
            1,479**Intangible
                assets not subject to amortization:**Licenses
                and trademarks
            
            $
            89,321
            
            $
            89,272Other
            
            
            152
            
            
            152$
            89,473
            
            $
            89,424**Total
                intangible assets, net**
            
            $
            99,645
            
            $
            99,611





Other
      amortizable intangible assets consist primarily of patents, non-compete
      agreements, licenses and trademarks. The future quarterly amortization expense
      of amortizable intangible assets is approximately $0.3 million.





**Note
      4 - Business Segments**




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





The
      Company’s reportable segments under SFAS No. 131, "Disclosure About Segments of
      an Enterprise and Related Information," are North America and International.
      The
      North America segment includes the United States, Canada and Mexico. The
      International segment includes non-North America markets.





Segment
      performance is measured at the operating income level. Segment assets are
      comprised of all assets, net of applicable reserves and allowances.





10


Results
      are not necessarily those that would be achieved if each segment were an
      unaffiliated business enterprise. Information by segment and a reconciliation
      to
      reported amounts for the three months ended March 31, 2006 and 2005 are as
      follows:





**Three
                Months Ended**
              **March
                31,**(in
                thousands)
            
            **2006**
            
            **2005**Net
                sales:North
                America
            
            $
            89,773
            
            $
            84,175International
            
            
            13,837
            
            
            12,698Sales
                and transfers between segments
            
            
            (101
            )
            
            (384
            )Combined
                total
            
            $
            103,509
            
            $
            96,489Operating
                income:North
                America
            
            $
            10,749
            
            $
            11,633International
            
            
            1,976
            
            
            1,834Combined
                total
            
            $
            12,725
            
            $
            13,467





(in
                thousands)
            
            **March
                31,**
              **2006**
            
            **December
                31,**
              **2005**Total
                assets:North
                America
            
            $
            530,566
            
            $
            558,452International
            
            
            67,313
            
            
            71,284Combined
                total
            
            $
            597,879
            
            $
            629,736





Certain
      assets and resources are jointly used between the North America and
      International segments. Intercompany allocations of such uses are not
      made.





Under
      the
      enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
      net
      sales by product category and by distribution channel. The Company groups its
      products into three product categories: infant products, children’s toys and
      collectible products. This presentation is consistent with how the Company
      views
      its business. The following table presents consolidated net sales by product
      category and by distribution channel for the three months ended March 31, 2006
      and 2005:





(in
                thousands)
            
            **2006**
            
            **2005**Infant
                products
            
            $
            43,790
            
            $
            37,797Children’s
                toys
            
            
            43,105
            
            
            33,980Collectible
                products
            
            
            16,614
            
            
            24,712Net
                sales
            
            $
            103,509
            
            $
            96,489Chain
                retailers
            
            $
            72,549
            
            $
            60,145Specialty
                and hobby wholesalers
              and
                retailers
            
            
            24,214
            
            
            26,719OEM
                dealers
            
            
            4,142
            
            
            6,372Corporate
                promotional
            
            
            2,286
            
            
            2,547Direct
                to consumers
            
            
            318
            
            
            706Net
                sales
            
            $
            103,509
            
            $
            96,489





11


**Note
      5 - Comprehensive Income**





The
      Company reports comprehensive income in accordance with SFAS No. 130, "Reporting
      Comprehensive Income." SFAS No. 130 requires companies to report all changes
      in
      equity during a period, except those resulting from investment by owners and
      distributions to owners, in a financial statement for the period in which they
      are recognized. Comprehensive income for the three months ended March 31,
      2006 and 2005 is calculated as follows:





(in
                thousands)
            
            **2006**
            
            **2005**Net
                income
            
            $
            7,490
            
            $
            7,828Other
                  comprehensive income (loss) - foreign currency
                translation
                  adjustments
            
            
            113
            
            
            (1,091
            )Comprehensive
                income
            
            $
            7,603
            
            $
            6,737





**Note
      6 - Common Stock**





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





**Authorized**
            **Par**
            **Shares
                Outstanding at**
            **Shares
                Outstanding at****Shares**
            **Value**
            **March
                31, 2006**
            **December
                31, 2005**Voting
                common stock
            28,000,000
            $0.01
            20,814,122
            20,717,954





At
      December 31, 2005, the Company held 1,830,830 shares of its common stock in
      treasury. In January of 2006 and 2005, the Company sold 1,298 shares and 1,227
      shares, respectively, out of treasury to Company employees under the ESPP for
      $39,194 and $36,000, respectively.





**Note
      7 - Debt**





Upon
      the
      closing of the acquisition of The First Years Inc. (TFY) on September 15, 2004,
      the Company entered into a new credit facility 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, both of which mature on September
      14,
      2008, with scheduled quarterly principal payments ranging from $3.8 million
      to
      $6.9 million commencing on December 31, 2004, and continuing thereafter with
      a
      final balloon payment upon maturity. A portion of the term loan has an interest
      rate of 3.45% plus applicable margin through the first three years of the
      facility. The remaining term loan and revolving line of credit bear 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 and
      amortization) and varies between 1.00% and 1.75%. At March 31, 2006, the margin
      in effect was 1.25% for LIBOR loans. The Company is also required to pay a
      commitment fee of 0.30% to 0.45% per annum on the average daily unused portion
      of the revolving line of credit. Under the terms of this credit facility, the
      Company is required to comply with certain financial and non-financial
      covenants. Among other restrictions, the Company is restricted in its ability
      to
      pay dividends, incur additional debt and make acquisitions above certain
      amounts. The key financial covenants include minimum EBITDA and interest
      coverage and leverage ratios. The credit facility is secured by working capital
      assets and certain intangible assets. On March 31, 2006, the Company had $59.4
      million outstanding on this credit facility and was in compliance with all
      covenants.





12


During
      2005, the Company’s United Kingdom subsidiary entered into a line of credit with
      a bank for $8.0 million that expires on September 14, 2008. The line of credit
      bears interest at 1.15% over the LIBOR rate, and the total amount is secured
      by
      a guarantee of the Company. During the first quarter of 2006, a portion of
      the
      line of credit was repaid and the Company cancelled the availability thereunder.
      At March 31, 2006, $3.6 million was available and the Company had $3.6 million
      outstanding on this line of credit.





**Note
      8 - Net Income Per Share**





The
      Company computes net income per share in accordance with SFAS No. 128, "Earnings
      Per Share." Under the provisions of SFAS No. 128, basic net income per share
      is
      computed by dividing net income for the period by the weighted average number
      of
      common shares outstanding during the period. Diluted net income per share is
      computed by dividing net income for the period by the weighted average number
      of
      common and common equivalent shares outstanding during the period. Options
      to
      purchase 580,702 shares of common stock at prices between $29.02 and $36.54
      per
      share were outstanding during the three months ended March 31, 2006, but were
      not included in the computation of diluted earnings per share because the
      options’ exercise price was either greater than the average market price of
      common shares or the total assumed proceeds under the treasury stock method
      were
      anti-dilutive. Options to purchase 291,010 shares of common stock at prices
      between $31.27 and $34.65 per share were outstanding during the three months
      ended March 31, 2005, but were not included in the computation of diluted
      earnings per share because the options’ exercise price was greater than the
      average market price of common shares.





**Note
      9 - Legal Proceedings**





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





**Note
      10 - 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
      11 - Reclassifications**





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





**Note
      12 - Related Party Transactions**





The
      Company purchased some of its product during the first quarter of 2006 and
      2005
      from two companies in which a relative of a Company stockholder/director has
      ownership interests.





13


**Note
      13 - Commitments and Contingencies**





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





The
      Company markets a significant portion of its products with licenses from other
      parties. These licenses are limited in scope and duration and authorize the
      sale
      of specific licensed products generally on a nonexclusive basis. The Company
      has
      license agreements with entertainment publishing and media companies, automotive
      and truck manufacturers, agricultural, construction and outdoor sports vehicle
      and equipment manufacturers; major race sanctioning bodies, and race team
      owners, sponsors and drivers. The Company has more than 700 license agreements,
      with terms generally of two to three years. Many of the license agreements
      include minimum guaranteed royalty payments that the Company must pay whether
      or
      not it meets specified sales targets. The Company believes it either achieved
      its minimum guarantees or has accrued for the costs related to these guarantees
      for the three months ended March 31, 2006 and 2005.





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





In
      conjunction with the acquisition of TFY during the third quarter of 2004, the
      Company acquired purchase commitments with certain vendors relating to product
      and product components which are kept on hand to shorten lead times. In the
      event the Company chooses to discontinue the product, the Company would be
      required to reimburse the applicable vendor for the cost of the products and
      product components on hand. At March 31, 2006, the total commitment to these
      vendors was approximately $0.5 million.





**Note
      14 - Employee Benefit Plans**





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





The
      components of net periodic benefit cost for the three months ended March 31,
      2006 and 2005 are as follows:





(in
                thousands)
            
            **2006**
            
            **2005**Service
                cost
            
            $
            26
            
            $
            27Interest
                cost
            
            
            197
            
            
            192Expected
                return on plan assets
            
            
            (245
            )
            
            (245
            )Amortization
                of prior service costs
            
            
            5
            
            
            5Amortization
                of net loss
            
            
            110
            
            
            93Net
                periodic benefit cost
            
            $
            93
            
            $
            72





The
      Company did not make any contributions to the pension benefit plan during the
      three months ended March 31, 2006 and does not expect to make any contributions
      during the fiscal 2006 year.





14


**Note
      15 - Subsequent Event**





In
      July
      2005, the Company invested in Meteor The Monster Truck Company, LLC (Meteor).
      After recovery of its capital contributions and preferred returns, the Company
      will share in 7.5% of the profits and losses of Meteor. The Company contributed
      $0.8 million to Meteor. The Company determined that the investment in Meteor
      will be accounted for using the equity method of accounting based on the
      Company’s ability to exercise significant influence over the operating and
      financial policies of Meteor as a result of its representation on the board
      of
      directors. The investment in Meteor of $0.7 million is included in other
      non-current assets on the accompanying condensed consolidated balance sheets
      at
      March 31, 2006 and December 31, 2005.





In
      April
      2006, an event occurred under the Company's agreement with Meteor which
      triggered the Company's obligation to invest approximately an additional
      $1.4 million.  The Company anticipates funding this amount during the
      second quarter of 2006.




**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 quarter ended March 31, 2006, increased 7.3% primarily due to our *Bob
      the Builder* product
      line and our new feeding products, including our Soothie infant bottle feeding
      system and our new licensed Take & Toss toddler self-feeding system. Gross
      margin decreased to 46.5% for the first quarter of 2006 from 50.9% for the
      first
      quarter of 2005 primarily due to a less favorable product sales and channel
      mix,
      higher input costs and increased sales promotions. Selling, general and
      administrative expenses as a percentage of net sales decreased to 33.9% for
      the
      first quarter of 2006 from 36.9% for the first quarter of 2005. Operating income
      decreased to $12.7 million for the first quarter of 2006 compared to $13.5
      million for the first quarter of 2005. As a percentage of net sales, operating
      income decreased to 12.3% for the first quarter of 2006 from 14.0% for the
      first
      quarter of 2005.





On
      January 1, 2006, the Company adopted SFAS No. 123R, "Share-Based Payment,"
      using
      the modified prospective method. This Statement is a revision of SFAS No. 123,
      "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
      "Accounting for Stock Issued to Employees." For periods ended prior to January
      1, 2006, pursuant to APB Opinion No. 25, no stock-based employee compensation
      expense was recognized by the Company and, under the modified prospective method
      pursuant to SFAS 123R, results for prior periods have not been restated.
      Selling, general and administrative expenses for the first quarter of 2006
      includes $1.0 million in compensation expense for stock options as a result
      of
      the Company’s adoption of SFAS 123R which negatively impacted diluted earnings
      per share by $0.03. There was no compensation expense for stock options recorded
      in the first quarter of 2005.





As
      of
      March 31, 2006, there was $13.4 million of total unrecognized compensation
      cost
      related to nonvested stock-based compensation arrangements granted under the
      Company’s stock incentive plans. That cost is expected to be recognized over a
      weighted average period of 2.8 years. The total fair value of options vested
      during the three months ended March 31, 2006 was $2.5
      million.


15


**Three
      Months Ended March 31, 2006 Compared to Three Months Ended March 31,
      2005**





*Net
      sales.* Net
      sales
      for the first quarter of 2006 increased $7.0 million, or 7.3%, to $103.5 million
      from $96.5 million for the first quarter of 2005. Net sales increases occurred
      in our children’s toys and our infant products categories, but these increases
      were partially offset by a decrease in our collectible products category.





Net
      sales
      in our children's toy category increased 26.9% primarily driven by the *Bob
      the Builder* , *Thomas
      &*  *Friends* and John
      Deere ride-on and toy vehicle product lines. Net sales in our infant products
      category increased 15.9% primarily due to our new feeding products, including
      our Soothie infant bottle feeding system and our new licensed Take & Toss
      toddler self-feeding system. Net sales in our collectible products category
      decreased 32.8% primarily due to continued softness in the collectibles
      market.





*Gross
      profit.* Gross
      profit decreased $1.0 million, or 2.0%, to $48.1 million for the three
      months ended March 31, 2006 from $49.1 million for the three months
      ended March 31, 2005. The gross profit margin, as a percentage of net sales,
      decreased to 46.5% in the first quarter of 2006 compared to 50.9% in the first
      quarter of 2005 primarily due to a less favorable product sales and channel
      mix,
      higher input costs and increased sales promotions. Our quarterly gross margins
      can be affected by the mix of product that is shipped during each quarter.
      Individual product lines within a category carry gross margins that vary
      significantly and cause quarterly fluctuations, based on the timing of these
      individual shipments throughout the year. Due to the 2004 acquisition of TFY,
      which has higher sales of non-licensed products that carry lower selling prices
      and gross margins than the Company had historically, our quarterly gross margins
      could not only significantly fluctuate, but could be lower than those
      historically reported prior to 2004. There were no major changes in the
      components of cost of sales.





*Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses decreased $0.5 million, or 1.4%, to
      $35.1 million for the three months ended March 31, 2006 from
      $35.6 million for the three months ended March 31, 2005. As a percentage of
      net sales, selling, general and administrative expenses decreased to 33.9%
      for
      the three months ended March 31, 2006 from 36.9% for the three months ended
      March 31, 2005. The decrease in selling, general and administrative
      expenses as a percentage of sales was primarily due to operating leverage gained
      from increased volume as well as the realization of integration cost savings
      quarter over quarter. Selling, general and administrative expenses for the
      first
      quarter of 2006 include $1.0 of compensation expense for stock options. There
      was no compensation expense for stock options recorded in the first quarter
      of
      2005.





*Operating
      income.* Operating
      income decreased to $12.7 million for the first quarter of 2006 from $13.5
      million for the first quarter of 2005. As a percentage of net sales, operating
      income also decreased to 12.3% of net sales in the first quarter of 2006 from
      14.0% in the prior year first quarter.





*Net
      interest expense* .
      Net
      interest expense of $1.0 million for the three months ended March 31, 2006
      and $1.3 million for the three months ended March 31, 2005 relates
      primarily to bank term loans and lines of credit.  The
      decrease in net interest expense was primarily due to the decrease in average
      outstanding debt balances.





*Income
      tax.* Income
      tax expense for the three months ended March 31, 2006 and 2005 includes
      provisions for federal, state and foreign income taxes at an effective rate
      of
      36.9% and 36.0%, respectively.





16


**Related
      Party Transactions**





The
      Company purchased some of its product during the first quarter of 2006 and
      2005
      from two companies in which a relative of a Company stockholder/director has
      ownership interests.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company's operations provided net cash of $10.7 million during the three months
      ended March 31, 2006. Accounts receivable decreased $30.0 million during
      the three months ended March 31, 2006 and was the primary source of cash from
      operations.  Inventory increased $6.0 million and accounts payable and
      accrued expenses decreased $16.8 million and were the primary uses of cash
      from
      operations.  Capital expenditures for the three months ended March 31, 2006
      were $3.6 million, of which $2.7 million was for molds and tooling. Payments
      of
      outstanding debt under the Company’s credit facilities were $19.8 million during
      the three months ended March 31, 2006. Cash and cash equivalents decreased
      by
      $11.0 million during the three months ended March 31, 2006.





Upon
      the
      closing of the acquisition of TFY on September 15, 2004, the Company entered
      into a new credit facility 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, both of which mature on September 14, 2008, with
      scheduled quarterly principal payments ranging from $3.8 million to $6.9 million
      commencing on December 31, 2004, and continuing thereafter with a final balloon
      payment upon maturity. A portion of the term loan has an interest rate of 3.45%
      plus applicable margin through the first three years of the facility. The
      remaining term loan and revolving line of credit bear 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 and amortization) and
      varies between 1.00% and 1.75%. At March 31, 2006, the margin in effect was
      1.25% for LIBOR loans. The Company is also required to pay a commitment fee
      of
      0.30% to 0.45% per annum on the average daily unused portion of the revolving
      line of credit. Under the terms of this credit facility, the Company is required
      to comply with certain financial and non-financial covenants. Among other
      restrictions, the Company is restricted in its ability to pay dividends, incur
      additional debt and make acquisitions above certain amounts. The key financial
      covenants include minimum EBITDA and interest coverage and leverage ratios.
      The
      credit facility is secured by working capital assets and certain intangible
      assets. On March 31, 2006, the Company had $59.4 million outstanding on this
      credit facility and was in compliance with all covenants.





During
      2005, the Company’s United Kingdom subsidiary entered into a line of credit with
      a bank for $8.0 million that expires on September 14, 2008. The line of credit
      bears interest at 1.15% over the LIBOR rate, and the total amount is secured
      by
      a guarantee of the Company. During the first quarter of 2006, a portion of
      the
      line of credit was repaid and the Company cancelled the availability thereunder.
      At March 31, 2006, $3.6 million was available and the Company had $3.6 million
      outstanding on this line of credit.





During
      the three months ended March 31, 2006, the Company made total payments of $14.5
      million on its lines of credit and $5.3 million on its term loan. At March
      31,
      2006, the Company had $99.5 million available on its lines of
      credit.





17


The
      Company has met its working capital needs through funds generated from
      operations and available borrowings under our lines of credit. The Company's
      working capital requirements fluctuate during the year based on the seasonality
      related to sales. Due to seasonal increases in demand for the Company's
      products, working capital financing requirements are usually highest during
      the
      third and fourth quarters. The Company expects that capital expenditures during
      2006, principally for molds and tooling, will be approximately
      $16.0 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 2006. However, if the Company's capital
      requirements vary materially from those currently planned, the Company may
      require additional debt or equity financing. There can be no assurance that
      financing, if needed, would be available on terms acceptable to the Company,
      if
      at all.





CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES





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





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





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





18


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





*Income
      Taxes.* The
      Company records current and deferred income tax assets and liabilities.
      Management considers all available evidence in evaluating the realizability
      of
      the deferred tax assets and records valuation allowances against its deferred
      tax assets as needed. Management believes it is more likely than not that the
      Company will generate sufficient taxable income in the appropriate carry-forward
      periods to realize the benefit of its deferred tax assets. In determining the
      required liability, management considers certain tax exposures and all available
      evidence. However, 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 non-current liabilities on the
      accompanying condensed consolidated balance sheets.





*Accrued
      Allowances.* The
      Company ordinarily accepts returns only for defective merchandise. In certain
      instances, where retailers are unable to resell the quantity of products that
      they have purchased from the Company, the Company may, in accordance with
      industry practice, assist retailers in selling excess inventory by offering
      credits and other price concessions, which are typically evaluated and issued
      annually. Other allowances can also be issued for defective merchandise, volume
      programs and co-op advertising. All allowances are accrued for throughout the
      year, as sales are recorded. The allowances are based on the terms of the
      various programs in effect; however, management also takes into consideration
      historical trends and specific customer and product information when making
      its
      estimates. For the volume programs, the Company generally sets a volume target
      for the year with each participating customer and issues the discount if the
      target is achieved. The allowance for the volume program is accrued throughout
      the year, and if it becomes clear to management that the target for the
      participating customer will not be reached, the Company will change the estimate
      for that customer as required. The Company’s products currently carry a limited
      warranty which guarantees the product to be free from defects in material and
      workmanship under normal and intended use for a period of 90 days from the
      date
      of consumer purchase. Historical results of product warranty claims have shown
      that they have had an immaterial impact on the Company. Based upon the
      historical results, appropriate allowances for product warranty claims are
      accrued throughout the year.





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





19


FORWARD-LOOKING
      STATEMENTS





Certain
      statements contained in this report are considered "forward-looking statements"
      within the meaning of the Private Securities Litigation Reform Act of 1995.
      These statements may be identified by the use of forward-looking words or
      phrases such as "anticipate," "believe," "could," "expect," "intend," "may,"
      "planned," "potential," "should," "will," "would" or the negative of those
      terms
      or other words of similar meaning. Such forward-looking statements are
      inherently subject to known and unknown risks and uncertainties. The Company's
      actual results and future developments could differ materially from the results
      or developments expressed in, or implied by, these forward-looking
      statements *.* Factors
      that may cause actual results to differ materially from those contemplated
      by
      such forward-looking statements include, but are not limited to, the following:
      the Company may not be able to manufacture, source and ship new and continuing
      products on a timely basis; the Company is dependent upon timely shipping of
      product and unloading of product through West Coast ports as well as timely
      rail/truck delivery to the Company's warehouse and/or customers' warehouses;
      increases in the cost of raw materials used to manufacture the Company’s
      products and increases in freight costs could increase the Company’s cost of
      sales and reduce the Company’s gross margins; currency exchange rate
      fluctuations, particularly in the Chinese Renminbi or the Hong Kong dollar,
      could increase the Company’s expenses; customers and consumers may not accept
      the Company’s products at prices sufficient for the Company to profitably
      recover development, manufacturing, marketing, royalty and other costs; the
      inventory policies of retailers, together with increased reliance by retailers
      on quick response inventory management techniques, may increase the risk of
      underproduction of popular items, overproduction of less popular items and
      failure to achieve tight shipping schedules; competition in the markets for
      the
      Company's products may increase significantly; the Company is dependent upon
      continuing licensing arrangements with owners of popular and classic licensed
      properties such as *Thomas
      & Friends* , *Bob
      the Builder* , *Winnie
      the Pooh* ,
      John
      Deere and *Sesame
      Street* ,
      vehicle
      manufacturers, agricultural equipment manufacturers, major race sanctioning
      bodies, race team owners, drivers, sponsors, agents and other licensors; the
      Company may experience unanticipated negative results of litigation; the Company
      relies upon a limited number of independently owned factories located in China
      to manufacture a significant portion of its vehicle replicas and certain other
      products; the Company is dependent upon the continuing willingness of leading
      retailers to purchase and provide shelf space for the Company's products; and
      general economic conditions in the Company's markets *.* Such
      uncertainties and other risks that may affect the Company’s performance are
      discussed further in Part I, Item 1A, "Risk Factors," in the Company’s Form 10-K
      for the year ended December 31, 2005. The Company undertakes no obligation
      to
      make any revisions to the forward-looking statements contained in this report
      or
      to update them to reflect events or circumstances occurring after the date
      of
      this report.





**Item
      3.** **Quantitative
      and Qualitative Disclosures about Market
      Risk**





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





Based
      on
      the Company's interest rate exposure on variable rate borrowings at
      March 31, 2006, a one percentage point increase in average interest rates
      on the Company's borrowings would increase future interest expense by $29,188
      per month and a five percentage point increase would increase future interest
      expense by $0.1 million per month. The Company determined these amounts based
      on
      approximately $35.0 million of variable rate borrowings at March 31, 2006,
      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.





20


During
      July 2005, China revalued the Chinese Renminbi, abandoning the former method
      of
      pegging the Chinese Renminbi to the U.S. dollar. As expenses for the Company’s
      Chinese manufacturers are primarily denominated in Chinese Renminbi, a material
      increase in the value of the Chinese Renminbi relative to the U.S. dollar would
      increase the Company’s expenses and therefore could adversely affect the
      Company’s profitability.





**Item
      4.  Controls and
      Procedures**





As
      of the
      end of the period covered by this report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company's management,
      including the Company's Chief Executive Officer and Chief Financial Officer,
      of
      the Company's disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended). Based on this evaluation, the Company's Chief Executive Officer and
      Chief Financial Officer concluded that, as of the end of such period, the
      Company's disclosure controls and procedures were effective in recording,
      processing, summarizing and reporting, on a timely basis, information required
      to be disclosed by the Company in reports that the Company files with or submits
      to the Securities and Exchange Commission. It should be noted that in designing
      and evaluating the disclosure controls and procedures, management recognized
      that any controls and procedures, no matter how well designed and operated,
      can
      provide only reasonable assurance of achieving the desired control objectives,
      and management necessarily was required to apply its judgment in evaluating
      the
      cost-benefit relationship of possible controls and procedures. The Company
      has
      designed its disclosure controls and procedures to reach a level of reasonable
      assurance of achieving the desired control objectives and based on the
      evaluation described above, the Company's Chief Executive Officer and Chief
      Financial Officer concluded that the Company's disclosure controls and
      procedures were effective at reaching that level of reasonable
      assurance.





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





PART II.  OTHER
      INFORMATION





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





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





**Item 1A.** **Risk
      Factors.**





There
      have been no material changes from the risk factors previously disclosed in
      Part
      I, Item 1A, "Risk Factors," of our Form 10-K for the year ended December 31,
      2005. Please refer to that section for disclosures regarding the risks and
      uncertainties relating to our business.





21


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




(a)  
      Not applicable.




(b)  
        Not applicable.  (c)  
          Not applicable.





**Item
      3.****Defaults
      Upon Senior Securities.**





Not
      applicable.





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





Not
      applicable.





**Item
      5.   Other Information.**





Not
      applicable.





**Item
      6.   Exhibits.**




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




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


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





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





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





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


22





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





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





_______________________





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








23


SIGNATURES





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





Dated
      this 2nd day of May 2006.





RC2
      CORPORATION





By /s/
      Curtis W.
      Stoelting


Curtis
      W.
      Stoelting, Chief Executive Officer






By /s/
      Jody L.
      Taylor


Jody
      L.
      Taylor, Chief Financial Officer


and
      Secretary






24