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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2008

Or

For the transition period from             to            

Commission file number: 1-8681

RUSS BERRIE AND COMPANY, INC.

(Exact name of registrant as specified in its charter)

(201) 337-9000

(Registrant’s Telephone Number, including area code)

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 o

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 Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o     Accelerated filer x     Non-accelerated filer o     Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x

The number of shares outstanding of each of the registrant’s classes of common stock, as of November 3, 2008 was as follows:

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RUSS BERRIE AND COMPANY, INC.

INDEX

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PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)
(UNAUDITED)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Share and Per Share Data)

(UNAUDITED)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)
(UNAUDITED)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared by Russ Berrie and Company, Inc. and its subsidiaries (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations.  The information furnished reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the interim periods presented.  Results for interim periods are not necessarily an indication of results to be expected for the year.

The Company currently operates in two segments: (i) its infant and juvenile segment and (ii) its gift segment. This segmentation of the Company’s operations reflects how the chief operating decision makers currently view the results of operations.

The Company’s infant and juvenile segment is currently composed of: Kids Line, LLC; Sassy, Inc.; LaJobi Inc.; and CoCaLo, Inc., all wholly-owned subsidiaries, whose products focus principally on children of the age group newborn to two years and are generally sold to national accounts and independent retailers.  Kids Line products consist primarily of infant bedding and related nursery accessories, such as blankets, rugs, mobiles, nightlights, hampers, lamps and wall art. Sassy has concept groupings such as bath toys and accessories, developmental toys, feeding utensils and bowls, bottles, bibs, soft toys, mobiles and feeders, and recently entered the baby gear category.  LaJobi designs, imports and sells infant and juvenile furniture and related products (including cribs, changing tables, dressers, hutches, armoires, bookcases and end tables, mattresses and changing pads).  CoCaLo designs, outsources, markets and distributes infant bedding (including crib bumpers, blankets, crib sheets and dust ruffles) and related accessories (including wall hangings, musical mobiles, blankets, diaper stackers, valances, wall paper borders, lamps, shades, nightlights, switch plates, decorative pillows and rugs).

The Company’s gift segment designs, manufactures through third parties and markets a wide variety of gift products to mass market, toy, specialty, food, drug and independent retailers throughout the United States and throughout the world via the Company’s domestic and international wholly-owned subsidiaries and independent distributors.

Certain prior year amounts have been reclassified to conform to the 2008 presentation.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as amended (the “2007 10-K”).

NOTE 2 – Acquisitions

I. LaJobi

On April 1, 2008, LaJobi, Inc. (“LaJobi”), a newly-formed and indirect, wholly-owned Delaware subsidiary of the Company entered into an Asset Purchase Agreement (the “Asset Agreement”) with LaJobi Industries, Inc., a New Jersey corporation (“Seller”), and each of Lawrence Bivona and Joseph Bivona (collectively, the “Stockholders”), for the purchase of substantially all of the assets used in the business of Seller and specified obligations. The transactions contemplated by the Asset Agreement were consummated as of April 2, 2008.

The acquisition of LaJobi has enabled the Company to expand its infant and juvenile segment and offer a more complete range of products for the baby nursery.

The aggregate purchase price payable for the business of Seller was equal to: $47.0 million, reduced by the amount of assumed indebtedness (including capitalized lease obligations) as adjusted pursuant to a working capital adjustment, plus the earnout consideration described below. At Closing, LaJobi paid $44.5 million in cash to Seller, plus $3.2 million (the estimated amount of the working capital adjustment). As the final working capital adjustment was $3.0 million, the Seller subsequently refunded $0.2 million.  The remaining $2.5 million of the purchase price was deposited in escrow at Closing in respect of potential indemnification claims.  As additional consideration, if the following conditions have been satisfied, LaJobi will pay the earnout consideration described below:

(a)   Subject to paragraph (b) below, provided that the EBITDA of Seller’s business (the “Business”) (determined as provided in the Asset Agreement) has grown at a compound annual growth rate (“CAGR”) of not less than 4% during the period from January 1, 2008 through December 31, 2010 (the “Measurement Date”), as compared to the specified EBITDA of the Business for calendar year 2007, LaJobi will pay to Seller a percentage of the Agreed Enterprise Value of LaJobi as of the Measurement Date or Early Measurement Date (as defined in paragraph (b) below), as the case may be. The amount of such payment will range from zero to a maximum amount of $15.0 million (the “LaJobi Earnout Consideration”). The “Agreed

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Enterprise Value” will be the product of (i) the Business’s EBITDA during the twelve (12) months ending on the Measurement Date or Early Measurement Date (or, in the event an Early Measurement Date selected by Seller, as permitted by the Asset Agreement, is a date prior to January 1, 2009, the annualized EBITDA of the Business for such period), as the case may be, multiplied by (ii) an applicable multiple (ranging from 5 to 9) depending on the specified levels of CAGR achieved, subject to the $15.0 million cap described above.

(b)    In the event LaJobi, prior to the Measurement Date, relocates the principal location of the Business beyond an agreed distance, the calculation and payment of the LaJobi Earnout Consideration may be accelerated upon election of Seller. For purposes of determining the LaJobi Earnout Consideration, the CAGR shall be based on the period from January 1, 2008 through the last day of the month (the “Early Measurement Date”) immediately preceding the date of the relocation. In such event, any LaJobi Earnout Consideration payable will be discounted, at the Agreed Rate, from the scheduled payment date to, and including, the specified early payment date.

Any LaJobi Earnout Consideration will be recorded as additional goodwill when and if paid.

Under the Asset Agreement, LaJobi is entitled to indemnification from Seller and the Stockholders for various matters, including, but not limited to, breaches of representations, warranties or covenants, and specified excluded obligations, subject, in the case of specified matters, to certain minimum thresholds and a maximum aggregate indemnification limit of $10.0 million. The right to indemnification (other than with respect to certain specified exceptions) terminates 18 months after the Closing Date.

In accordance with the Asset Agreement, LaJobi entered into (i) a transitional services agreement with a Thailand affiliate of Seller, and (ii) a three year employment agreement with Lawrence Bivona as President of LaJobi. Mr. Bivona was formerly the President of Seller.

In connection with the Asset Agreement, the Company paid a finder’s fee to a financial institution in the amount of $1.5 million at the closing of the transaction, and has agreed to pay to such financial institution 1% of the Agreed Enterprise Value of LaJobi, payable in the same manner and at the same time as the LaJobi Earnout Consideration is paid to Seller.  Including the finder’s fee paid at closing, the Company incurred aggregate transaction expenses of approximately $2.0 million in connection with the LaJobi acquisition.

The purchase price has been allocated to the net assets acquired based on information currently available with regard to the value of such assets.  The estimated fair values contained herein are preliminary in nature, and may not be indicative of the final purchase price allocation.  Accordingly, the final determination of fair value could result in an increase or decrease in amortization expense in future periods from the amounts currently estimated.

The following table summarizes the preliminary allocation of the purchase price based upon the fair values of the assets acquired and liabilities assumed at the date of the acquisition of the Business. This initial purchase price allocation will be finalized during the fourth quarter ending December 31, 2008. The fair values are as follows:

Goodwill of $9,425,000 was assigned to the Company’s infant and juvenile segment for the Business. The aggregate amount of goodwill and intangible assets expected to be deductible for tax purposes is estimated to be $43,709,000.

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II.   CoCaLo

On April 1, 2008, a newly-formed, wholly-owned Delaware subsidiary of the Company, I&J Holdco, Inc. (the “CoCaLo Buyer”), entered into a Stock Purchase Agreement (the “Stock Agreement”) with each of Renee Pepys Lowe and Stanley Lowe (collectively, the “Sellers”), for the purchase of all of the issued and outstanding capital stock of CoCaLo, Inc., a California corporation (“CoCaLo”). The transactions contemplated by the Stock Agreement were consummated as of April 2, 2008.

The acquisition of CoCaLo has enabled the Company to expand its infant and juvenile segment and offer a more complete range of products for the baby nursery.

The aggregate base purchase price payable for CoCaLo was equal to: (i) $16.0 million, minus (ii) the aggregate Debt of CoCaLo outstanding at Closing (including accrued interest) of $4.0 million, minus (iii) specified transaction expenses ($0.3 million), plus (iv) a working capital adjustment of $1.5 million paid by the CoCaLo Buyer. A portion of the purchase price ($1.6 million which was discounted to $1.4 million for financial statement purposes) was evidenced by a non-interest bearing promissory note and will be paid as additional consideration in equal annual installments over a three year period from the Closing Date. The CoCaLo Buyer will also pay the Additional Earnout Payments, if payable as described below.

The Additional Earnout Payments provide for a potential payment ranging from zero to a maximum of $4.0 million, payable with respect to performance on three metrics – sales, gross profit and combined Kids Line and CoCaLo EBITDA – as follows:

(i)                                     $666,667 will be paid if CoCaLo’s aggregate net sales for the three years ending December 31, 2010 (the “Measurement Period”) exceeds a specified target, and up to an additional $666,667 will be paid, on a straight line sliding scale basis, to the extent that CoCaLo’s net sales for the Measurement Period are between the initial performance target and a specified maximum target.

(ii)                                  $666,667 will be paid if CoCaLo’s aggregate gross profit for the Measurement Period exceeds a specified target, and up to an additional $666,667 will be paid, on a straight-line sliding scale basis, to the extent that CoCaLo’s aggregate gross profit for the Measurement Period is between the initial performance target and a specified maximum target.

(iii)                               $666,666 will be paid if the aggregate EBITDA of Kids Line and CoCaLo for the Measurement Period exceeds a specified target, and up to an additional $666,666 will be paid, on a straight-line sliding scale basis, to the extent that the aggregate EBITDA of Kids Line and CoCaLo is between the initial performance target and a specified maximum target.

Any Additional Earnout Payments will be recorded as additional goodwill when and if paid.

Kids Line has guaranteed all of the obligations of the CoCaLo Buyer under the Stock Agreement.

Under the Stock Agreement, the CoCaLo Buyer is entitled to indemnification from the Sellers for various matters, including, but not limited to, breaches of representations, warranties or covenants, and liabilities with respect to specified proceedings and obligations, subject, in the case of specified matters, to certain minimum thresholds and a maximum aggregate indemnification limit of $3.0 million. The right to indemnification (other than with respect to certain specified exceptions) terminates on the third anniversary of the Closing Date.

In accordance with the Stock Agreement, CoCaLo entered into a three year employment agreement with Renee Pepys Lowe as President and Chief Executive Officer. Ms. Pepys Lowe was formerly the President and Chief Executive Officer of CoCaLo.

The purchase price has been allocated to the net assets acquired based on information currently available with regard to the value of such assets.  The estimated fair values contained herein are preliminary in nature, and may not be indicative of the final purchase price allocation.  Accordingly, the final determination of fair value could result in an increase or decrease in amortization expense in future periods from the amounts currently estimated.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the preliminary allocation of the purchase price based upon the fair values of the assets acquired and liabilities assumed at the date of the CoCaLo acquisition. This initial purchase price allocation will be finalized during the fourth quarter ending December 31, 2008. The fair values are as follows:

The excess value received of $628,000 above the purchase price was recorded in other long term liabilities and will be recognized in the consolidated financial statements upon the settlement of the contingent purchase consideration as a reduction of goodwill or an extraordinary gain.

The intangibles were assigned to the Company’s infant and juvenile segment for the purchase of CoCaLo. The aggregate amount of intangible assets expected to be deductible for tax purposes is estimated to be $10,800,000.

Pro Forma Information

The following unaudited pro forma consolidated results of operations of the Company for the three and nine months ended September 30, 2007 and nine months ended September 30, 2008 assumes the acquisition of CoCaLo and LaJobi occurred as of January 1 of each period (in thousands).

The above amounts are based upon certain assumptions and estimates, and do not reflect any benefits from combined operations. The pro forma results have not been audited and do not necessarily represent results which would have occurred if the acquisitions had taken place on the basis assumed above, and may not be indicative of the results of future combined operations.

NOTE 3 - SHAREHOLDERS’ EQUITY

The costs resulting from share-based payment transactions are recognized in the financial statements at their grant date fair value. The grant date fair value of options granted under stock option plans (or otherwise) is estimated on the date of grant using a Black-Scholes options pricing model using the assumptions below. Expected volatilities are calculated based on the historical volatility of the Company’s stock, management’s estimate of implied volatility of the Company’s stock and other factors.  The expected term of options granted is derived from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that options are expected to be outstanding. Management monitors stock option exercises and employee termination patterns to estimate forfeiture rates within the valuation model. Separate groups of employees, directors and officers that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free interest rate is based on the Treasury note interest rate in effect on the date of grant for the expected term of the stock option.

Stock Plans

As of September 30, 2008, the Company maintained the Russ Berrie and Company, Inc. Equity Incentive Plan (the “EI Plan”) and the Amended and Restated 2004 Employee Stock Purchase Plan (the “2004 ESPP”).  As of September 30, 2008 there were an aggregate of 1,477,769 shares of common stock reserved for issuance under the EI Plan and the 2004 ESPP.  The Company also continues to have options outstanding (although no further grants can be made) under certain equity plans that it previously maintained, including without limitation the 2004 Stock Option, Restricted and Non-Restricted Stock Plan (the “2004 Option

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Plan”)(collectively, the “Predecessor Plans” and together with the EI Plan, the “Plans”).  In addition, the Company may issue stock options outside of the plans discussed above. As of September 30, 2008, there were 370,000 stock options outstanding that were granted outside these plans.  The exercise price for equity awards issued under the Plans or otherwise is generally equal to the closing price of the Company’s common stock as of the date the award is granted. Generally, equity awards under the Plans (or otherwise) vest over a period ranging from one to five years from the grant date as provided in the specific grant. Options generally expire 10 years from the date of grant.

The Board of Directors (the “Board”) adopted the EI Plan on June 3, 2008, subject to approval by its shareholders, which was obtained at the 2008 Annual Meeting of Shareholders held on July 10, 2008 (the “2008 Meeting”).  The 2004 Option Plan was terminated as of the date of the 2008 Meeting, and no further awards under the 2004 Option Plan may be made thereafter.  The EI Plan provides for awards in any one or a combination of:  (a) Stock Options, (b) Stock Appreciation Rights, (c) Restricted Stock, (d) Stock Units, (e) Non-Restricted Stock, and/or (f) Dividend Equivalent Rights.  Any award under the EI Plan may, as determined by the committee administering the EI Plan (the “Plan Committee”) in its sole discretion, constitute a “Performance-Based Award” (an award that qualifies for the performance-based compensation exemption of Section 162(m) of the Internal Revenue Code of 1986, as amended).  All awards granted under the EI Plan will be evidenced by a written agreement between the Company and each participant (which need not be identical with respect to each grant or participant) that will provide the terms and conditions, not inconsistent with the requirements of the EI Plan, associated with such awards, as determined by the Plan Committee in its sole discretion.  Award agreements must be executed by the Company and a participant in order for the award covered by such agreement to be effective.  A total of 1,500,000 shares of Common Stock have been reserved for issuance under the EI Plan.  Options to purchase an aggregate of 105,000 shares of the Company’s Common Stock were granted to directors under the EI Plan as of July 10, 2008.

The Board adopted the Russ Berrie and Company, Inc. 2009 Employee Stock Purchase Plan (the “2009 ESPP”) on June 3, 2008, subject to approval by holders of a majority of the shares of Common Stock voting at the 2008 Meeting.  The 2009 ESPP, which is similar to the 2004 ESPP, will become effective on January 1, 2009, immediately after the 2004 ESPP terminates by its terms on December 31, 2008.  A total of 200,000 shares of Common Stock have been reserved for issuance under the 2009 ESPP.

Stock Options

The following table summarizes activity regarding outstanding options as of September 30, 2008, and changes during the nine months ended September 30, 2008:

During the three months ended March 31, 2008, 100,000 options were granted to our Chief Executive Officer pursuant to the terms of his employment agreement with the Company.  During the three months ended June 30, 2008, 51,000 additional stock options and 7,900 shares of restricted stock were granted to employees.  During the three months ended September 30, 2008, 105,000 stock options were granted to directors under the Company’s new EI Plan, each at an exercise price of $7.28. During the three months ended September 30, 2007 there were 17,500 stock options and 4,475 shares of restricted stock granted under the 2004 Option Plan. No options or shares of restricted stock were granted in either the first or second quarters of 2007.

Share-based compensation expense related to the Company’s stock options recorded in selling, general and administrative expense for the three and nine months ended September 30, 2008 was approximately $222,000 and $675,000, respectively. Share-based compensation expense related to the Company’s stock options, recorded in selling, general and administrative expense for the three and nine months ended September 30, 2007, was approximately $15,000 and $26,000, respectively. Share-based compensation expense related to the Company’s outstanding restricted stock, recorded in selling, general and administrative expense for the three and nine months ended September 30, 2008, was approximately $185,000 and $548,000, respectively. Share-based compensation expense related to restricted stock for the three and nine months ended September 30, 2007 was approximately $2,000.  No

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compensation cost related to equity grants was capitalized (in inventory or any other assets) as of September 30, 2008 and 2007. For the three and nine months ended September 30, 2008 and 2007, there were no excess tax benefits recognized as a result of share-based compensation exercises.

The assumptions used to estimate the fair value of the stock options granted during the nine months ended September 30, 2008 has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Non-vested Stock Options and Restricted Stock

As of September 30, 2008, there was approximately $3.4 million of total unrecognized compensation cost related to 836,100 non-vested stock options. This cost is expected to be recognized over a weighted-average period of 3.9 years.

A summary of the Company’s non-vested stock options at September 30, 2008 and changes during the nine months ended September 30, 2008 are presented below:

During the year ended December 31, 2007, there were 170,675 shares of restricted stock issued under the 2004 Option Plan, 169,800 of which remain non-vested These restricted stock grants have vesting periods ranging from three to five years, with fair values at date of grant ranging from $13.65 to $16.77 per share. Compensation expense is determined for the issuance of restricted stock by amortizing over the requisite service period, or the vesting period, the aggregate fair value of the restricted stock awarded based on the closing price of the Company’s Common Stock on the date the award is made. There were 7,900 shares of restricted stock granted during the second quarter of 2008.

A summary of the Company’s non-vested restricted stock grants at September 30, 2008 and changes during the nine months ended September 30, 2008 are presented below:

As of September 30, 2008, the total remaining unrecognized compensation cost related to outstanding shares of restricted stock was approximately $2.2 million, and is expected to be recognized over a weighted-average period of 3.1 years.

Employee Stock Purchase Plan

Under the 2004 ESPP, eligible employees are provided the opportunity to purchase the Company’s common stock at a discount.  Pursuant to this plan, options are granted to participants as of the first trading day of each plan year, which is the calendar year, and may be exercised as of the last trading day of each plan year, to purchase from the Company the number of shares of common stock that may be purchased at the relevant purchase price with the aggregate amount contributed by each participant.  In

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each plan year, an eligible employee may elect to participate in the plan by filing a payroll deduction authorization form for up to 10% (in whole percentages) of his or her compensation.  No employee shall have the right to purchase the Company’s common stock under the 2004 ESPP which has a fair value in excess of $25,000 in any plan year.  The purchase price is the lesser of 85% of the closing market price of the Company’s common stock on either the first trading day or the last trading day of the plan year.  If an employee does not elect to exercise his or her option, the total amount credited to his or her account during that plan year is returned to such employee, and his or her option expires.  As of September 30, 2008, the 2004 ESPP had approximately 80,269 shares reserved for future issuance.

Total share-based compensation expense related to the 2004 ESPP was approximately $45,000 and $134,000 for the three and nine months ended September 30, 2008, respectively. Total share-based compensation expense related to the 2004 ESPP was approximately $38,000 and $113,000 for the three months and nine months ended September 30, 2007, respectively.

The fair value of each option granted under the 2004 ESPP is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Expected volatilities are calculated based on the historical volatility of the Company’s stock; management’s estimate of implied volatility of the Company’s stock and other factors. The risk-free interest rate is based on the U.S. Treasury yield with a term that is consistent with the expected life of the options. The expected life of options under the 2004 ESPP is one year, or the equivalent of the annual plan year.

NOTE 4 - WEIGHTED AVERAGE COMMON SHARES

The weighted average common shares outstanding included in the computation of basic and diluted net income/loss per share is set forth below (in thousands):

The computation of diluted net income (loss) per common share for the three and nine months ended September 30, 2008 did not include options to purchase approximately 2.0 million shares of common stock because the exercise prices were greater than the average market price of the common stock during such period. The computation of diluted net income (loss) per common share for the nine months ended September 30, 2008 did not include options to purchase approximately 38,000 shares of common stock because there was a net loss for such period and inclusion of such shares would be anti-dilutive.

For the three and nine months ended September 30, 2007, approximately 0.8 million stock options were excluded from the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common stock during such period.

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NOTE 5 – DEBT

Consolidated long-term debt at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):

At September 30, 2008, there was approximately $23.1 million borrowed under the New Revolving Loan, and approximately $6.4 million borrowed under the Giftline Revolver (each as defined below), all of which is classified as short-term debt.  At December 31, 2007, there was approximately $15.5 million borrowed under the Original Revolving Loan (as defined below) and approximately $7.8 million borrowed under the Giftline Revolver, all of which is classified as short-term debt.

A. The Infantline Credit Agreement

On March 14, 2006 (the “Closing Date”), Kids Line, LLC (“KL”) and Sassy, Inc. (“Sassy”) entered into a credit agreement as borrowers, on a joint and several basis, with LaSalle Bank National Association as administrative agent and arranger (the “Agent”), the lenders from time to time party thereto, Russ Berrie and Company, Inc. (“RB”) as loan party representative, Sovereign Bank as syndication agent, and Bank of America, N.A. as documentation agent (as amended on December 22, 2006, the “Infantline Credit Agreement”). The original commitments under the Infantline Credit Agreement consisted of (a) a $35.0 million revolving credit facility (the “Original Revolving Loan”), with a subfacility for letters of credit in an amount not to exceed $5.0 million, and (b) a term loan facility in the original amount of $60 million (the “Original Term Loan”).

As of December 22, 2006, the Infantline Credit Agreement was amended (the “First Amendment”) to permit the repayment and subsequent reborrowing of up to $20 million under the Original Term Loan, which was intended to enable KL and Sassy to continue to utilize cash flows expected to be generated from operations to repay debt until the earnout consideration for the purchase of Kids Line, LLC (the “KL Earnout Consideration”) became due.  Pursuant to the First Amendment, KL and Sassy borrowed $20 million under the Original Revolving Loan, the outstanding balance of which had previously been reduced to zero, and utilized the proceeds of such draw to prepay $20 million of the Original Term Loan. The lenders then provided an additional term loan reborrowing commitment (the “TR Commitment”) of an aggregate maximum principal amount of $20 million, which amounts could only be reborrowed during specified periods and only to fund the payment of the KL Earnout Consideration.  Pursuant to the First Amendment, KL and Sassy paid a non-use fee in respect of undrawn amounts of the TR Commitment at a per annum rate of 0.375% of the daily average of the undrawn amounts.  In December 2007, KL and Sassy paid $28.5 million of the KL Earnout Consideration, which amount was financed by drawing the TR Commitment of $20 million and drawing an additional $8.5 million on the Original Revolving Loan. The remaining portion of the KL Earnout Consideration ($3.6 million) was paid by KL and Sassy in January of 2008, also through a draw on the Original Revolving Loan.

As of April 2, 2008, RB, KL, Sassy, the CoCaLo Buyer, LaJobi and CoCaLo (via a Joinder Agreement) entered into an Amended and Restated Credit Agreement (the “Amendment”) with certain financial institutions party to the Infantline Credit Agreement or their assignees (the “Lenders”), LaSalle Bank National Association, as Agent and Fronting Bank, Sovereign Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation Agent and Banc of America Securities LLC as Lead Arranger.  KL, Sassy, the CoCaLo Buyer, LaJobi and CoCaLo are referred to herein collectively as the “Infantline Borrowers”, and the CoCaLo Buyer, LaJobi and CoCaLo are referred to herein as the “New Borrowers”.  The Amendment amends and restates the Infantline Credit Agreement, and adds the New Borrowers as parties thereto.  The Pledge Agreement dated as of March 14, 2006 between RB and the Agent (as amended on December 22, 2006) was also amended and restated as of April 2, 2008, to provide, among other things, for a pledge of the capital stock of the CoCaLo Buyer by RB.  In connection with the Amendment, 100% of the equity of each Infantline Borrower, including each New Borrower, has been pledged as collateral to the Agent.  In addition, the Guaranty and Collateral Agreement (as defined in the Amendment) was also amended and restated as of April 2, 2008, to add the New Borrowers as parties and to include substantially all of the existing and future assets and properties of the New Borrowers as security for the satisfaction of the obligations of all Infantline Borrowers, including the New Borrowers, under the Amendment and the other related loan documents.

The commitments under the Amendment consist of (a) a $75.0 million revolving credit facility (the “New Revolving Loan”), with a subfacility for letters of credit in an amount not to exceed $5.0 million, and (b) a $100.0 million term loan facility (the “New Term Loan”). The Infantline Borrowers drew down $31.0 million under the New Revolving Loan and the entire $100 million available under the New Term Loan on the Closing Date, in order to finance the acquisitions of LaJobi and CoCaLo, and pay related

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transaction expenses of such acquisitions and the Amendment, and to reallocate the existing indebtedness among the bank syndicate.  The scheduled maturity date has been extended from March 14, 2011 to April 1, 2013 (subject to customary early termination provisions).  The principal of the Original Term Loan was to be repaid on a monthly basis as follows: $9.0 million for each of years 1-2; $12.0 million for year 3; and $15.0 million for each of years 4-5.  Pursuant to the Amendment, the principal of the New Term Loan will be repaid, on a quarterly basis, at an annual rate of $14.4 million per year, commencing June 30, 2008 thru June 30, 2012 with $31.6 million due on April 1, 2013.

The Infantline Loans bear interest at a rate per annum equal to the Base Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) at the option of the Infantline Borrowers, plus an applicable margin, in accordance with a pricing grid based on the most recent quarter-end Total Debt to EBITDA Ratio, which applicable margin, prior to the execution of the Amendment, ranged from 1.75% - 2.50% for LIBOR Loans and from 0.25% - 1.00% for Base Rate Loans.  Pursuant to the Amendment, the margins now range from 2.0% - 3.0% for LIBOR Loans and from 0.50% - 1.50% for Base Rate Loans.

The applicable interest rate margins as of September 30, 2008 were: 2.75% for LIBOR Loans and 1.25% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of September 30, 2008 were as follows:

In connection with the Amendment, the Infantline Borrowers paid the Agent and Lenders a closing fee of approximately $1.5 million, and the Company incurred $0.7 million of other third party costs.  Of the aggregate fees and costs, $0.4 million was expensed to interest expense in the three months ended June 30, 2008 and the remainder was treated as deferred financing costs and will be recognized over the term of the respective types of indebtedness using the effective interest method.   In connection with the Amendment, the Company also wrote-off during the second quarter of 2008 $0.3 million of unamortized deferred financing costs.

In addition, pursuant to the Amendment, the following fees are now applicable:  an agency fee of $35,000 per annum, an annual non-use fee (payable monthly, in arrears, and upon termination of the relevant obligations) of 0.40% to 0.60% of the unused amounts under the Revolving Loan, an annual letter of credit fee (payable monthly, in arrears, and upon termination of the relevant obligations) for undrawn amounts with respect to each letter of credit based on the most recent quarter-end Total Debt to EBITDA Ratio ranging from 2.75% - 3.25% and other customary letter of credit administration fees.  On August 13, 2008, the Amendment was further amended (the “August Modification”) to clarify the definition of EBITDA as applied to, among other things, the Total Debt to EBITDA Ratio for the last three quarters of 2008.

The Infantline Borrowers are required to make prepayments of the New Term Loan upon the occurrence of certain transactions, including most asset sales or debt or equity issuances, and pursuant to the Amendment, extraordinary receipts. Commencing in early 2008 with respect to fiscal year 2007, annual mandatory prepayments of the Original Term Loan would have been required in an amount equal to 50% of Excess Cash Flow for each fiscal year unless the Total Debt to EBITDA Ratio for such fiscal year was equal to or less than 2.00:1.00. For fiscal year 2007, no Excess Cash Flow payment was required, and pursuant to the Amendment, this requirement has been eliminated in its entirety.

The Amendment contains customary affirmative and negative covenants.  as well as the following financial covenants: (i) a minimum Fixed Charge Coverage Ratio, (ii) a maximum Total Debt to EBITDA Ratio and (iii) an annual capital expenditure limitation.  Upon the occurrence of an event of default under the Amendment, including a failure to remain in compliance with all applicable financial covenants, the lenders could elect to declare all amounts outstanding under the Amendment to be immediately due and payable.  The Infantline Borrowers were in compliance with all applicable financial covenants in the Amendment as of September 30, 2008.

The Amendment contains significant limitations on the ability of the Infantline Borrowers to distribute cash to RB, which became a corporate holding company by virtue of the Assignment, for the purpose of paying dividends to the shareholders of the Company or for the purpose of paying their allocable portion of RB’s corporate overhead expenses.  Prior to the effectiveness of the Amendment, KL and Sassy were not permitted (except in specified situations) to distribute cash to RB to pay RB’s overhead expenses unless: (i) before and after giving effect to such distribution, no event of default would exist and (ii) before and after giving effect to such distribution, Excess Revolving Loan Availability will equal or exceed $4.0 million; provided that the aggregate amount of such distributions could not exceed $2.0 million per year.  Pursuant to the Amendment, the $4.0 million availability threshold was increased to $5.0 million, and the aggregate maximum amount of such distributions was increased to $3.5 million, and apply in each case to all Infantline Borrowers.  Other restrictions on dividends and distributions to RB remain unchanged by the Amendment.

The Amendment also effected the following additional changes, among others, to the Infantline Credit Agreement:

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(i)            The definition of Borrowing Base was amended from 85% of eligible receivables plus 55% of eligible inventory to 85% of eligible receivables plus the lesser of (x) $25.0 million and (y) 55% of eligible inventory;

(ii)           Payment of the amounts outstanding under the promissory note under the Stock Agreement is prohibited if before and after giving effect to any such repayment, a default or event of default would exist;

(iii)          Payment of the LaJobi Earnout Consideration or the CoCaLo Additional Earnout Payments is prohibited if before and after giving effect to any such repayment, (a) a default or event of default would exist, (b) Excess Revolving Loan Availability will not equal or exceed $9.0 million, or (c) before and after giving effect to any such repayment, the Infantline Financial Covenants will not be satisfied (the “Earnout Conditions”);

(iv)          Specified defaults with respect to the LaJobi Earnout Consideration and/or the CoCaLo Additional Earnout Payments have been added as events of default (including failure to deliver to the Agent specified certifications and calculations within a specified time period, the reasonable determination by the Agent that any Earnout Conditions will not be satisfied as of the applicable payment date, if any material information provided to the Agent with respect to the Earnout Conditions shall be incorrect in any material respect and remain unremedied prior to the relevant payment date, or any LaJobi Earnout Consideration or Additional Earnout Payments are paid at any time that the Earnout Conditions are not satisfied); and

(v)           The Infantline Borrowers are required to maintain in effect Hedge Agreements that protect against potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount of the New Term Loan.

The Revolving Loan availability at September 30, 2008 was $27.2 million.

Pursuant to the requirement to maintain Hedge Agreements discussed above, on May 2, 2008, the Infantline Borrowers entered into an interest rate swap agreement with a notional amount of $70 million as a risk management tool to lock the interest cash outflows on the floating rate debt.  However, because the Company did not meet the criteria for hedge accounting under SFAS No. 133 for this instrument, changes in the fair value of the interest rate swap will be remeasured through operations each period.  Changes between its cost and its fair value as of September 30, 2008 resulted in an expense of approximately $125,000 for the three months ended September 30, 2008, resulting in a net $33,000 of income for the nine months ended September 30, 2008, and such amounts are included in interest expense in the respective consolidated statements of operations.

B. The Giftline Credit Agreement

On March 14, 2006, as amended on April 11, 2006, August 8, 2006, December 28, 2006 and August 7, 2007, Russ Berrie U.S. Gift Inc. (“U.S. Gift”) and other specified wholly-owned domestic subsidiaries of RB (collectively, the “Giftline Borrowers”), entered into a credit agreement as borrowers, on a joint and several basis, with LaSalle Bank National Association, as issuing bank (the “Issuing Bank”), LaSalle Business Credit, LLC as administrative agent (the “Administrative Agent”), the lenders from time to time party thereto, and the Company, as loan party representative (as amended, the “Giftline Credit Agreement”). Unless otherwise specified herein, capitalized terms used but undefined in this Note 5, Section B shall have the meanings ascribed to them in the Giftline Credit Agreement.

Prior to the August 8, 2007 amendment to the Giftline Credit Agreement (the “Fourth Amendment”), the Giftline Credit Agreement consisted of a maximum revolving credit loan commitment (the “Giftline Revolver”) in an amount equal to the lesser of (i) $15.0 million (with a maximum availability of $13.5 million) and (ii) the then-current Borrowing Base, in each case minus amounts outstanding under the Canadian Credit Agreement (as defined below), with a sub-facility for letters of credit to be issued by the Issuing Bank in an amount not to exceed $8.0 million. The Fourth Amendment increased the aggregate total Commitment under the Giftline Credit Agreement from $15.0 million to $25.0 million, and amended the definition of Revolving Loan Availability so that it now equals the difference between (a) the lesser of (x) the Maximum Revolving Commitment in effect at such time and (y) the Borrowing Base at such time, minus (b) the sum of the aggregate principal amount of all “Loans”, “Specified Hedging Obligations” and the “Stated Amount” of all “Letters of Credit” outstanding or requested but not yet funded under the Canadian Loan Agreement. The Borrowing Base is primarily a function of a percentage of eligible accounts receivable and eligible inventory. As of September 30, 2008, the outstanding balance on the Giftline Revolver was $6.4 million, there was no outstanding balance on the Canadian Revolving Loan (see Section C below), and there was $1.1 million utilized under the Canadian sub-facility for letters of credit. At September 30, 2008, based on available collateral, the unused amount available to be borrowed under the Giftline Revolver was $2.7 million.

All outstanding amounts under the Giftline Revolver are due and payable on March 14, 2011, subject to earlier termination in accordance with the terms of the Giftline Credit Agreement.

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The Giftline Revolver bears interest at a rate per annum equal to the sum of the Base Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans), at the Company’s option plus an applicable margin, which margin was originally 2.75% for LIBOR Loans and 1.25% for Base Rate Loans. However, pursuant to the December 28, 2006 amendment to the Giftline Credit Agreement (the “Third Amendment”), the interest rates applicable to the Giftline Revolver were reduced such that the applicable margin is now determined in accordance with a pricing grid based on the most recent quarter-end Daily Average Excess Revolving Loan Availability, which applicable margins range from 2.00% - 2.75% for LIBOR Loans and from 0% - 0.50% for Base Rate Loans. Interest is due and payable in the same manner as with respect to the Infantline Loans. The applicable interest rate margins as of September 30, 2008 were 2.25% for LIBOR Loans and 0.25% for Base Rate Loans. As of September 30, 2008, the interest rate was 5.25% for the one outstanding Base Rate loan ($0.4 million) and 5.44% for one outstanding LIBOR loan ($6.0 million).

In connection with the execution of the Giftline Credit Agreement, the Infantline Borrowers paid (on behalf of the Giftline Borrowers) aggregate closing fees of $0.15 million and an aggregate agency fee of $20,000. Aggregate agency fees of $20,000 will be payable by the Giftline Borrowers on each anniversary of the Closing Date. Pursuant to the Third Amendment, the Giftline Revolver is subject to an annual non-use fee (payable monthly, in arrears, and upon termination of the relevant obligations), ranging from 0.375% to 0.50% for unused amounts under the Giftline Revolver, and an annual letter of credit fee ranging from 2.00% to 2.75%. Other fees are as described in the Giftline Credit Agreement.

Receivable and disbursement bank accounts of the Giftline Borrowers are required to be with the Administrative Agent or its affiliates, and cash in such accounts is swept on a daily basis to pay down outstanding amounts under the Giftline Revolver.

The Giftline Credit Agreement contains customary affirmative and negative covenants substantially similar to those applicable to the Amendment. The Giftline Credit Agreement originally contained the following financial covenants: (i) a minimum EBITDA test, (ii) a minimum Excess Revolving Loan Availability requirement of $5.0 million, (iii) an annual capital expenditure limitation and (iv) a minimum Fixed Charge Coverage Ratio (for quarters commencing with the quarter ended June 30, 2008). On August 8, 2006, the Giftline Credit Agreement was amended to lower the threshold on the Minimum EBITDA covenant by $1.0 million per quarter for each of four consecutive quarters commencing with the quarter ending September 30, 2006. The Third Amendment (i) eliminated in their entirety both the minimum EBITDA financial covenant and the Fixed Charge Coverage Ratio financial covenant and (ii) reduced the minimum Excess Revolving Loan Availability requirement from $5.0 million to $3.5 million. The Fourth Amendment eliminated the existing Excess Revolving Loan Availability requirement, and re-instituted a Fixed Charge Coverage Ratio covenant based on the last day of any month for the applicable Computation Period (as defined in the Fourth Amendment) ending on such date. The Fixed Charge Coverage Ratio now specifies that the Fixed Charge Coverage Ratio, as determined for the Computation Period ending on the last day of any month, may not be less than 1.1:1.0. This covenant is only applicable, however, if during the three month period then ending on such date of determination (the “Test Period”) Revolving Loan Availability (defined above) was less than $3.5 million for any three (3) consecutive business day period (the “Test Condition”). If compliance is required because the Test Condition was not met, the Giftline Borrowers will be required to deliver a specified compliance certificate to the Administrative Agent. In addition, the Giftline Borrowers must comply with the Fixed Charge Coverage Ratio covenant for a period of three consecutive months after they fail to satisfy the Test Condition. The Company’s availability was not less than $3.5 million during the quarter ended September 30, 2008 and the Fixed Charge Coverage Ratio was not applicable during the quarter. As of September 30, 2008, the Company was in compliance with the applicable financial covenants contained in the Giftline Credit Agreement.

In addition to the changes discussed above, the Fourth Amendment permits, subject to specified conditions, the mergers of specified inactive subsidiaries of RB with and into RB (including certain Giftline Borrowers), and increases the amount of in-transit inventory which may be deemed “Eligible Inventory” under specified circumstances from $3.0 million to $8.0 million.

The Giftline Credit Agreement contains significant limitations on the ability of the Giftline Borrowers to distribute cash to RB for the purpose of paying dividends to the shareholders of the Company or for the purpose of paying RB’s corporate overhead expenses, including a cap (subject to certain exceptions) on the amount that can be provided to RB to reimburse for its allocable portion of corporate overhead expenses equal to $5.0 million for each fiscal year commencing in 2008. The Third Amendment permits the Giftline Borrowers to pay dividends or make distributions to RB if no default or event of default exists or would result therefrom and immediately after giving effect to such payments, there is at least $1.5 million available to be drawn under the Giftline Revolver. The amount of any such payments to RB cannot exceed the amount of capital contributions made by RB to the Giftline Borrowers after December 28, 2006, which are used by the Giftline Borrowers to pay down the Giftline Revolver minus the total amount of dividends or other distributions made by the Giftline Borrowers to RB under this provision of the Giftline Credit Agreement.

In order to secure the obligations of the Giftline Borrowers, the Giftline Borrowers pledged and have granted security interests to the Administrative Agent in substantially all of their existing and future personal property, and each Giftline Borrower guaranteed the performance of the other Giftline Borrowers under the Giftline Credit Agreement. In addition, RB provided a limited recourse guaranty of the obligations of the Giftline Borrowers under the Giftline Credit Agreement. This guarantee is secured by a lien

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on the assets intended to be assigned to U.S. Gift pursuant to the Assignment. RB also pledged 100% of the equity interests of each of the Giftline Borrowers and 65% of its equity interests in certain of its First Tier Foreign Subsidiaries to the Administrative Agent (the “Giftline Pledge Agreement”). The Giftline Pledge Agreement contains substantially similar limitations on the activities of RB as is set forth in the Infantline Pledge Agreement.

C. Canadian Credit Agreement

As contemplated by the 2005 Credit Agreement, on June 28, 2005, the Company’s Canadian subsidiary, Amram’s Distributing Ltd. (“Amrams”), executed a separate Credit Agreement (acknowledged by RB) with the financial institutions party thereto and LaSalle Business Credit, a division of ABN AMRO Bank, N.V., Canada Branch, a Canadian branch of a Netherlands bank, as issuing bank and administrative agent (the “Canadian Credit Agreement”), and related loan documents with respect to a maximum U.S. $10.0 million revolving loan (the “Canadian Revolving Loan”). RB executed an unsecured Guarantee (the “Canadian Guarantee”) to guarantee the obligations of Amrams under the Canadian Credit Agreement. In connection with the LaSalle Refinancing, on March 14, 2006, the Canadian Credit Agreement was amended to (i) replace references to the 2005 Credit Agreement with the Giftline Credit Agreement (such that, among other conforming changes, a default under the Giftline Credit Agreement will be a default under the Canadian Credit Agreement), (ii) release RB from the Canadian Guaranty and (iii) provide for a maximum U.S. $5.0 million revolving loan. In connection with the release of the Company from the Canadian Guaranty, U.S. Gift executed an unsecured Guarantee to guarantee the obligations of Amrams under the Canadian Credit Agreement. A default under the Amendment will not constitute a default under the Canadian Credit Agreement. There were no borrowings under the Canadian Revolving Loan as of September 30, 2008 and December 31, 2007.

The Commitments under the Canadian Credit Agreement bear interest at a rate per annum equal to the sum of the Base Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) plus an applicable margin. As of September 30, 2008 and December 31, 2007, there was no Base Rate or Libor Loans outstanding under the Canadian Credit Agreement.

D. Russ Berrie (UK) Limited Business Overdraft Facility

On March 19, 2007, Russ Berrie UK Limited entered into a Business Overdraft Facility (the “Facility”) with National Westminster Bank PLC (the “Bank”) and The Royal Bank of Scotland plc (“RBS”), acting as agent for the Bank. The Facility, as amended, consists of a maximum credit line of £1.5 million. Interest is charged on amounts outstanding under the Facility at an annual rate of 1.5% over the Bank’s Base Rate, which interest rate spread will be increased to 3.5% for any amounts outstanding in excess of the maximum limit. The Facility is secured by a lien on substantially all of the assets of Russ Berrie UK Limited. The Facility was established to assist in meeting the working capital requirements of Russ Berrie UK Limited. As of September 30, 2008 and December 31, 2007, there were no borrowings outstanding under the Facility.

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

As of September 30, 2008, all of the Company’s goodwill (approximately $130.2 million) was recorded in the infant and juvenile segment and results from the acquisitions of: LaJobi Inc. in April 2008; Kids Line, LLC in 2004; and Sassy in 2002. As a result of the acquisition of LaJobi, the carrying amount of goodwill increased by $9.4 million during the nine months ended September 30, 2008.

The significant components of intangible assets consist of the following (in thousands):

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Other intangible assets as of September 30, 2008 and December 31, 2007 include Kids Line non-compete agreements, which are being amortized over four years, a patent and, for the three and nine months ended September 30, 2008, backlog for LaJobi and CoCaLo which are being amortized over nine months.  Amortization expense of $159,000 and $318,000 was recorded in the three and nine months ended September 30, 2008, respectively, for the customer relationships of LaJobi, based upon a preliminary valuation. Amortization expense of $34,000 and $68,000 was recorded in the three and nine months ended September 30, 2008, respectively, for the customer relationships of CoCaLo, based upon a preliminary valuation. Upon finalization of such valuation, any adjustment to the amortization expense will be adjusted in subsequent periods. Aggregate amortization expense, which includes LaJobi and CoCaLo for the second and third quarters of 2008, was approximately $644,000 and $1,287,000 for the three and nine months ended September 30, 2008, respectively. Amortization expense was approximately $406,000 and $424,000 for the three and nine months ended September 30, 2007, respectively.

Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other indefinite-lived intangible assets are no longer amortized but are reviewed for impairment at least annually, and more frequently if a triggering event occurs indicating that an impairment may exist.  The Company’s annual impairment testing is performed as of December 31 of each year.

NOTE 7 – IMPAIRMENTS

During the third quarter of fiscal 2007, due to the adverse impact of foreign exchange rates on the MAM Babyartikel GmbH distribution agreement, the Company performed an analysis of the value of certain of its intangible assets.  In connection with this analysis and the preparation of the Company’s financial statements for the three and nine months ended September 30, 2007, the Company concluded that an impairment charge was required under generally accepted accounting principles relating to the value of a distribution agreement between Sassy and MAM Babyartikel GmbH. Based upon the fair values derived using a discounted cash flows analysis, an impairment charge of $3.6 million was reflected in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2007, which was recorded in cost of goods sold in the Company’s infant and juvenile segment.  Based upon a valuation analysis prepared during the third quarter of 2007, the Company had determined that the MAM Agreement is a finite-lived asset and, as such, was to be amortized over an 8.5 year life.

In connection with the preparation of the Company’s financial statements for the second quarter of 2008, stemming from deteriorating macro-economic factors and declining revenues in the gift segment during the first half of 2008, as well as current and projected shortfalls of cash flows from the gift segment, the Company conducted an impairment test of the gift segment, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  As a result of this review, the Company determined that the fixed assets in the gift segment were impaired and, accordingly, the Company recorded an aggregate impairment charge of approximately $7.0 million in the second quarter of 2008.   Also during the second quarter of 2008, the Company recorded a non-cash charge of $1.0 million related to the write-off of Shining Stars website development expenses, resulting from the Company’s agreement with the licensor to return to the licensor the operational responsibility of the website in exchange for reduced future royalties and the elimination of future web-site responsibility.

NOTE 8 – SEGMENTS OF THE COMPANY AND RELATED INFORMATION

The Company operates in two segments: (i) the infant and juvenile segment, which as of September 30, 2008 is comprised of Kids Line, Sassy, LaJobi and CoCaLo and (ii) the Company’s gift segment.  This segmentation of the Company’s operations reflects how the Company’s chief operating decision makers currently view the results of operations.  There are no inter-segment revenues to eliminate.  Corporate assets and overhead expenses are included in the gift segment. See Note 2 for a description of the recent acquisitions of LaJobi and CoCaLo in the infant and juvenile segment.

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(A)  LaJobi and CoCaLo were acquired on April 2, 2008 and, accordingly, only six months of activity are included in this summary.

(B)  The nine months ended September 30, 2008, includes an impairment charge of  $7.0 million for the write-down of fixed assets in the gift segment. Of this amount, $6.7 million was recorded in selling, general and administrative expense and $0.3 million was recorded in cost of sales.

(C)  The nine months ended September 30, 2008 includes a $1.0 million charge, recorded in cost of goods sold, related to the write-off of Shining Stars website development expenses.

(D)  The nine months ended September 30, 2008 includes a $1.6 million inventory charge in connection with the unfavorable results of a voluntary quality test on a certain gift segment product.

(E)   For the three and nine months ended September 30, 2007, operating income (loss) for the gift segment is impacted by charges of $0.8 million for additional inventory reserves, as well as personnel costs associated with its foreign operations.

(F)   For the three and nine months ended September 30, 2007, cost of goods sold for the infant and juvenile segment includes an impairment charge of $3.6 million related to the MAM distribution agreement.

Total assets of each segment were as follows:

Concentration of Risk

As disclosed in the notes to the consolidated financial statements included in the 2007 Form 10-K, approximately 82% of the Company’s  2007 purchases are attributable to manufacturers in the People’s Republic of China.  The supplier accounting for the greatest dollar volume of purchases in 2007 accounted for approximately 19% and the five largest suppliers accounted for approximately 44% in the aggregate.  The Company utilizes approximately 75 manufacturers in Eastern Asia and believes that there are many alternative manufacturers for the Company’s products and sources of raw materials.  As a result, the Company does not believe there is a concentration of risk associated with any significant manufacturing relationship.

With respect to customers, Toys “R” Us, Inc. and Babies “R” Us, Inc., in the aggregate, accounted for 31.8% and 33.7% of the Company’s consolidated net sales during the three and nine month periods ended September 30, 2008, respectively, and 26.4% and 25.3% for the three and nine month periods ended September 30, 2007, respectively.

NOTE 9 - FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS

Certain of the Company’s subsidiaries periodically enter into foreign currency forward exchange contracts to hedge inventory purchases, both anticipated and firm commitments, denominated in the United States dollar. These contracts reduce foreign currency risk caused by changes in exchange rates and are used to offset the currency impact of these inventory purchases, generally for periods up to 13 months. At September 30, 2008, the Company’s forward contracts had expiration dates which ranged from one to six months.

The Company accounts for its forward exchange contracts as an economic hedge, with subsequent changes in fair value recorded in the Consolidated Statements of Operations.  Unrealized gains of $0.3 million relating to forward contracts are included in

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other current assets on the balance sheet at September 30, 2008 and December 31, 2007. Unrealized losses of $0.1 million are included in other current liabilities at December 31, 2007.

The Company has forward contracts to exchange British pounds, Canadian dollars and Australian dollars for United States dollars with notional amounts of $3.1 million and $9.7 million as of September 30, 2008 and December 31, 2007, respectively. The Company has forward contracts to exchange United States dollars to Euros with notional amounts of $0.6 million and $2.8 million as of September 30, 2008 and December 31, 2007, respectively. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts.  See Note 10 below for information with respect to the fair value of financial instruments, including the Company’s forward exchange contracts.

NOTE 10 – FINANCIAL INSTRUMENTS

The Company adopted SFAS No. 157 on January 1, 2008, the first day of its 2008 fiscal year, for its financial assets and liabilities that are remeasured and reported at fair value at each reporting period.  SFAS No. 157 defines fair value of assets and liabilities as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under generally accepted accounting principles, certain assets and liabilities must be measured at fair value, and SFAS No. 157 details the disclosures that are required for items measured at fair value.

Financial assets and liabilities are measured using inputs from the three levels of the SFAS No. 157 fair value hierarchy. The three levels are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Most of the Company’s assets and liabilities fall within Level 2 and include foreign exchange contracts and interest rate swap agreements. The fair value of foreign currency and interest rate swap contracts are based on third-party market maker valuation models that discount cash flows resulting from the differential between the contract rate and the market-based forward rate or curve capturing volatility and establishing intrinsic and carrying values.

Level 3—Unobservable inputs that reflect our assessment about the assumptions that market participants would use in pricing the asset or liability. The Company currently has no Level 3 assets or liabilities that are measured at a fair value on a recurring basis.

This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.  Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement.  In accordance with SFAS No. 157, the Company is not permitted to adjust quoted market prices in an active market.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s foreign exchange contracts and interest rate swap agreement as of September 30, 2008 (in thousands):

Cash and cash equivalents, trade accounts receivable, inventory, income tax receivable, trade accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

The carrying value of the Company’s term loan borrowings approximates fair value because interest rates under the term loan borrowings are variable, based on prevailing market rates.

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There have been no material changes to the Company’s valuation techniques during the nine months ended September 30, 2008.

NOTE 11 - COMPREHENSIVE INCOME (LOSS)

Comprehensive Income (Loss), representing all changes in Shareholders’ Equity during the period other than changes resulting from the issuance or repurchase of the Company’s common stock and payment of dividends, is reconciled to net income (loss) for the three and nine months ended September 30, 2008 and 2007 as follows (in thousands):