10-K

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)

New Jersey (State of or other jurisdiction of incorporation or organization)	22-1815337 (I.R.S. Employer Identification Number)
111 Bauer Drive, Oakland, New Jersey (Address of principal executive offices)	07436 (Zip Code)
Registrant's Telephone Number, Including Area Code: (201) 337-9000

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class	Name of each exchange on which registered
Common Stock, $0.10 stated value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 file" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer ý 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 Act). Yes o    No ý

         The aggregate market value of the voting stock held by non-affiliates of the Registrant computed by reference to the price of such stock at the close of business on June 30, 2007 was $229 million.

         The number of shares outstanding of each of the Registrant's classes of common stock, as of March 14, 2008, was as follows:

Class	Number of Shares
Common Stock, $0.10 stated value	21,299,643

Documents Incorporated by Reference

         Certain information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Company's 2008 Annual Meeting of Stockholders (the "2008 Proxy Statement"), which will be filed not later than 120 days after the end of the fiscal period covered by this report.

PART I

ITEM 1.    BUSINESS

General

        Russ Berrie and Company, Inc. is a leading designer, importer, marketer and distributor of infant and juvenile and gift consumer products with annual net sales of $331.2 million in 2007. The Company currently operates in two segments: (i) its infant and juvenile segment and (ii) its gift segment. The term "Company" refers to Russ Berrie and Company, Inc. and its consolidated subsidiaries, unless the context requires otherwise.

        The Company's infant and juvenile segment designs, manufactures through third parties and markets products in a number of categories including, among others, infant bedding and accessories, bath toys and accessories, developmental toys, feeding items and baby comforting products. The infant and juvenile segment currently consists of Kids Line LLC ("Kids Line") and Sassy, Inc. ("Sassy"). These products are sold to consumers throughout the United States and the world via national accounts and independent retailers, including toy, specialty, food, drug, apparel and other retailers, and military post exchanges.

        The Company's gift segment designs, manufactures through third parties and markets a wide variety of gift products to retail stores throughout the United States and the world via the Company's wholly-owned subsidiaries and independent distributors. The Company's gift products are designed to appeal to the emotions of consumers to reflect their feelings of happiness, friendship, fun, love and affection. The Company believes that its present position as one of the leaders in the gift industry is due primarily to its imaginative product design, multi-channel marketing of its products, high product quality, efficient distribution and commitment to customer service.

        The Company maintains a direct sales force and distribution network to serve its customers in the United States, Europe, Canada and Australia. In countries where the Company does not maintain a direct sales force and distribution network, the Company's products are sold through independent sales agents and distributors. See Note 20 of Notes to Consolidated Financial Statements for information regarding segment and geographic information.

        The principal elements of our global business strategy include:

•

focusing on design-led and branded product development in each of our segments, to enable us to continue to introduce compelling new products, with the intention of increasing our market share;



•

pursuing organic growth opportunities, including:



(i)

expanding our product offerings into related categories; and



(ii)

expanding and diversifying our distribution channels, with particular emphasis on further extending the infant and juvenile segment into international markets and further expanding our sales channels to include business-to-business and web-based offerings;



•

growing through licensing, distribution or other strategic alliances, including pursuing acquisition opportunities in businesses complementary to ours;



•

implementing strategies to further capture synergies within and between our segments, through cross-marketing opportunities and consolidation of back-office activities; and



•

continuing efforts to manage costs within each of our segments, with particular focus on further streamlining our gift segment by concentrating on more profitable product lines and creating additional operational efficiencies.

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        We believe that we made substantial progress in successfully implementing this strategy during 2007. Specifically, revenues in the infant and juvenile segment continued to grow throughout the year, primarily as a result of new product development and increased distribution with respect to each of our infant and juvenile businesses. In particular, during 2007, Kids Line successfully introduced its Carter's® branded bedding and established an office in the United Kingdom to serve the European market. In addition, Sassy expanded its product line during 2007, including through a license agreement with Leap Frog™ and Sassy's entry into the baby gear category with the introduction of a doorway jumper and a bouncer that incorporates Kids Line designed fabric. We anticipate that Sassy will introduce additional baby gear products in 2008.

        During the second half of 2007, we also renewed our focus on growth through the exploration of strategic acquisitions. As a result of these efforts, on April 1, 2008, we entered into agreements to acquire each of: (i) LaJobi Industries, Inc. ("LaJobi"), a privately-held company based in Cranbury, New Jersey that designs, imports and sells infant and juvenile furniture and related products; and (ii) CoCaLo, Inc. ("CoCaLo"), a privately-held company based in Costa Mesa, California that designs, markets and distributes infant bedding and related accessories. If consummated, these acquisitions will significantly expand our infant and juvenile segment, and will enable us to offer a more complete range of products for the baby nursery. The closing of each acquisition is subject to various closing conditions, and there can be no assurance that either acquisition will be consummated, although we anticipate that each such acquisition will be closed early in April 2008. The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement (defined in Item 7) to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the acquisitions of LaJobi and CoCaLo. The Company anticipates that such amendment will be consummated in early April 2008, although there can be no assurance that either acquisition or such amendment will be consummated. See "Liquidity and Capital Resources" under section captioned "Anticipated Acquisitions" and Item 9B—"Other Information" below for details with respect to such anticipated acquisitions.

        With respect to our gift business, during 2007, we continued our focus on product categories where we believe we can command an authoritative position. As a result, we substantially rejuvenated our gift product line, with approximately 70% of the 2007 product line consisting of new products. New products for 2007 included the Shining Stars® product range, which was the gift segment's most successful new product introduction in several years. We intend to continue our focus on creating compelling new products, and our 2008 product offerings include two new product ranges that will capitalize on the popularity of dimensional products that include a virtual play component.

        For a discussion of the implementation of various Company business initiatives during 2007, see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" under the captions "Overview" and "Results of Operations—Years Ended December 31, 2007 and 2006."

        The Company was founded in 1963 by the late Mr. Russell Berrie, and was incorporated in New Jersey in 1966. The Company's common stock has been traded on the New York Stock Exchange under the symbol "RUS" since its initial public offering on March 29, 1984.

        The Company maintains its principal executive offices at 111 Bauer Drive, Oakland, New Jersey, 07436, along with its flagship 18,000 square foot showroom, and also maintains satellite showrooms in Atlanta, Chicago, Dallas, Los Angeles and Seattle, and internationally in Australia, Canada, China, England and Hong Kong. The Company's wholly-owned subsidiaries are located worldwide with distribution centers situated in key locations in the United States, Canada, the United Kingdom and Australia. The Company's telephone number is (201) 337-9000.

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Products

        Infant and Juvenile Segment.    The Company's infant and juvenile product line currently consists of approximately 3,000 products that principally focus on children of the age group newborn to two years, primarily under the trade names Sassy® and Kids Line®. 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, pacifiers, bottles, bibs, soft toys, mobiles and feeders, and recently entered the baby gear category.

        Most of the Company's infant and juvenile business products have suggested retail prices between $1 and $150. Product sales are highly diverse, and no single infant and juvenile item represented more than 2% of the Company's infant and juvenile segment's net sales in 2007 or 1% of the Company's consolidated net sales in 2007.

        Gift Segment.    The Company's gift product line of approximately 5,900 products is marketed under the trade names and trademarks RUSS® and APPLAUSE®. The APPLAUSE® trade name serves as the Company's brand platform for the licensed character and feature-rich products. The gift line encompasses both seasonal and everyday products that focus on theme or concept groupings such as collectible heirloom bears, stuffed animals, wedding, anniversary and baby gifts, novelty greeting cards, tabletop accessories and contemporary lifestyle gifts and accessories. Extensive seasonal lines include products for most major holidays. The gift segment has also developed and marketed several product categories that incorporate dimensional products and web-based interactivity.

        Most of the Company's gift products have suggested retail prices between $1 and $30. Product sales are highly diverse, and no single gift item represented more than 4% of the Company's gift segment's net sales in 2007 or 2% of the Company's consolidated net sales in 2007.

Design and Production

        The Company has a continuing program of new product development. The Company designs most of its own products and then generally evaluates consumer response in selected unaffiliated retail stores and consumer focus groups. Items are added to the product line only if the Company believes that they can be obtained and marketed on a basis that meets the Company's profitability standards.

        During 2005 and 2006, in connection with its restructuring, the Company refocused its gift segment product development efforts on categories where it commands an authoritative position, and reduced the number of stock-keeping units (SKUs) from approximately 13,000 in 2005 to approximately 5,900 in 2007. This significantly smaller and more focused product development effort has generated significant product development efficiencies and resulted in the introduction of a 2007 product line that consisted of approximately 70% new products. In prior years, the Company generally expected to replace approximately 30% - 40% of its product line with new product introductions.

        As of December 31, 2007 the Company had approximately 91 employees, located in the United States and in Eastern Asia, responsible for its gift and infant and juvenile product development and design. Generally, a new design is brought to market in less than one year after a decision is made to produce the product. Sales of the Company's products are, in large part, dependent on the Company's ability to anticipate, identify and react quickly to changing consumer preferences and to effectively utilize its sales and distribution systems to bring new products to market.

        The Company engages in market research and test marketing to evaluate consumer reactions to its products. Research into consumer buying trends often suggests new products. The Company assembles information from retail stores, the Company's sales force, focus groups, industry experts and the Company's internal Product Development department. The Company continually analyzes its products

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to determine whether they should be adapted into new or different products using elements of the initial design or whether they should be removed from the product line.

        Substantially all of the Company's gift and infant and juvenile products are produced by independent manufacturers, generally in Eastern Asia, under the quality review of the Company's personnel. During 2007, approximately 85% of the Company's products were produced in Eastern Asia.

        During 2007, the Company utilized approximately 75 manufacturers in Eastern Asia, with facilities primarily in the People's Republic of China ("PRC"). During 2007, approximately 82% of the Company's dollar volume of purchases was attributable to manufacturing in the PRC. The PRC currently enjoys "permanent normal trade relations" ("PNTR") status under U.S. tariff laws, which provides a favorable category of U.S. import duties. The loss of such PNTR status would result in a substantial increase in the import duty for products manufactured for the Company in the PRC and imported into the United States and would result in increased costs for the Company.

        A significant portion of the Company's staff of approximately 172 employees in Hong Kong, Korea, and in the cities of Shenzhen and Qingdao in the PRC, monitor the production process with responsibility for the quality, safety and prompt delivery of the Company's products, as well as design, product development and compliance issues. Members of the Company's Eastern Asia and U.S. product development staff make frequent visits to such manufacturers. Certain of the Company's manufacturers sell exclusively to the Company. In 2007, the supplier accounting for the greatest dollar volume of the Company's purchases accounted for approximately 19% of such purchases and the five largest suppliers accounted for approximately 44% in the aggregate. The Company believes that there are many alternate manufacturers for the Company's products and sources of raw materials. See Item1A "Risk Factors—We rely on foreign suppliers, primarily in the PRC, to manufacture most of our products, which subjects us to numerous international business risks that could increase our costs or disrupt the supply of our products".

Marketing and Sales

        The Company's infant and juvenile segment's products are marketed through its own direct sales force of 24 full-time employees as of December 31, 2007 and through independent manufacturers' representatives and distributors to retail customers in the United States and certain foreign countries including, but not limited to, national accounts and independent retailers, including toy, specialty, food, drug, apparel and other retailers, and military post exchanges. During 2007, the Company sold infant and juvenile products to approximately 1,000 customers worldwide. Toys "R" Us, Inc. and Babies "R" Us, Inc. in the aggregate accounted for approximately 25% of the consolidated net sales of the Company and approximately 50% of the net sales of the infant and juvenile segment during 2007. The loss of this customer, or the loss of certain other large customers of the infant and juvenile segment, could have a material adverse affect on the infant and juvenile segment and the consolidated results of the Company.

        The Company's gift business products are marketed primarily through its own direct sales force of approximately 225 full-time employees as of December 31, 2007. The Company's gift products are sold directly to retail customers in the United States and certain foreign countries, including but not limited to gift stores, pharmacies, card shops, home decor shops, apparel stores, craft stores, garden stores, book stores, stationery stores, hospitals, college and airport gift shops, resort and hotel shops, florists, chain stores, department stores, food stores, military post exchanges and internet companies. In recent years, the gift segment has also expanded its distribution to national accounts. During 2007, the Company sold gift products to approximately 29,000 customers worldwide.

        During 2006, the Company commenced a program to expand its telemarketing department and develop a business-to-business website in order to cultivate new business from, and more efficiently

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service, smaller customers. The business-to-business website was operational during 2007 and continues to expand its reach.

        The Company's products in 2007 were sold under the RUSS®, RUSS® Baby, Sassy®, APPLAUSE®, and Kids Line® brand names and under trademarks of licensed products.

        The Company reinforces the marketing efforts of its sales force through an active promotional program, including showrooms, participation in trade shows, trade and consumer advertising and a program of seasonal and theme based catalogs.

        Effective packaging and merchandising of its product lines are also important to the Company's marketing strategy. Certain products are shipped in colorful, corrugated cartons which can be used as freestanding displays and then recycled or discarded when all the products have been sold. The Company also makes available to certain of its customers semi-permanent freestanding Lucite, metal and wooden displays, thereby providing an efficient promotional vehicle for selling the Company's products at retail locations and assisting in maintaining dedicated retail space for the Company's products.

        Customer service is another essential component of the Company's marketing strategy. The Company maintains a Customer Service Department that responds to customer inquiries, investigates and resolves issues and generally assists customers.

        The Company's general terms of sale are competitive with others in its industries. The Company provides extended payment terms to its gift segment's customers, which typically do not exceed five months, on sales of seasonal merchandise, e.g., Christmas, Easter and other seasonal items. The Company has a general policy that all sales are final.

        During 2007, the Company also maintained a direct sales force and distribution network to serve (i) its infant and juvenile customers in the United States, the United Kingdom and Australia and (ii) its gift segment's customers in the United States, the United Kingdom, Spain, Canada and Australia. Where the Company does not maintain a direct sales force and distribution network, both segments sell their products in numerous other countries worldwide through independent distributors. The Company's consolidated foreign sales, including export sales from the United States, aggregated $93.0 million, $76.1 million, and $86.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.

        In connection with the implementation of the Company's Profit Improvement Program (the "PIP") during 2006, the Company evaluated and terminated the direct sales and distribution efforts in several European countries, including France, Germany, Belgium and Holland, and restructured certain of its sales operations in the U.K, Spain and Ireland. The Company believes it has established alternative means of reaching certain customers in the affected countries, including through the use of independent sales representatives or distributors. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Overview."

Distribution

        The Company's infant and juvenile customers are located in the United States and throughout the world and during 2007, were principally served by distribution centers in Kentwood, Michigan; Southgate, California; Eastleigh, Hampshire (U.K.); and Sydney, Australia.

        The Company's gift customers are located in the United States and throughout the world and are principally served through a U.S. distribution center in South Brunswick, New Jersey, and a European distribution center in Eastleigh, Hampshire (U.K.). The Company also maintains distribution facilities in the Toronto, Canada area and in the Sydney, Australia area, to serve its gift customers in Canada

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and Australia, respectively. The Company generally uses common carriers to distribute its products to its customers.

Seasonality

        In addition to its everyday products, the Company's gift segment produces specially designed products for holiday seasons, which include: Christmas/Chanukah, Valentine's Day, Spring (Easter), Gifts for Her (Mother's Day), Gifts for Him (Father's Day), Fall/Harvest (Thanksgiving) and Graduation.

        During 2007, gift items specially designed for individual seasons accounted for approximately 6% of the Company's consolidated net sales, although no individual season accounted for more than approximately 3% of the Company's consolidated net sales.

        The following table sets forth the Company's consolidated quarterly net sales as a percentage of the Company's consolidated annual sales during 2007, 2006 and 2005.

	Quarterly Sales
	2007			2006			2005
Quarter Ended
	Sales		%	Sales		%	Sales		%
	($ in Thousands)
March 31	$	75,073	22.7	$	77,146	26.2	$	70,740	24.4
June 30	$	70,714	21.3	$	65,653	22.3	$	62,019	21.4
September 30	$	100,928	30.5	$	78,081	26.5	$	83,208	28.7
December 31	$	84,458	25.5	$	73,889	25.0	$	74,064	25.5

        The pattern of the Company's gift segment sales is influenced by the shipment of seasonal merchandise. The Company ships the majority of orders each year for Christmas in the quarter ended September 30, for Valentine's Day in the quarter ended December 31 and for Easter in the quarters ended December 31 and March 31. The Company's infant and juvenile segment is not significantly influenced by shipments of seasonal merchandise.

Backlog

        It is characteristic of the Company's gift segment for seasonal merchandise orders to be taken in advance of shipment. The Company's gift segment represents 52% of the Company's backlog at December 31, 2007. The Company's consolidated backlog at December 31, 2007 and 2006 was approximately $23.6 million and $23.4 million, respectively. It is expected that substantially all of the Company's backlog at December 31, 2007 will be shipped during 2008. See Item 1A, "Risk Factors—Amounts included in our backlog may not result in actual revenue or translate into profits".

Competition

        The infant and juvenile segment industry is highly competitive and is characterized by the frequent introduction of new products and includes numerous domestic and foreign competitors, many of which are substantially larger and have greater financial and other resources than the Company. The Company competes with a number of different competitors, depending on the product category, and competes against no single company across all product categories. The Company's competition includes large, infant and juvenile product companies and specialty infant and juvenile product manufacturers. The Company competes principally on the basis of brand name recognition, product quality, innovation, proprietary product design, customer service and price/value relationship. In addition, the Company believes that it competes favorably with respect to breadth of product line.

        The Company's gift segment also operates in a highly competitive market. The Company believes that the principal competitive factors in the gift segment include product design, brand name

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recognition, price/value, marketing ability, reliable delivery and quality and customer service. The Company believes that its positive principal competitive factors are its marketing ability, reliable delivery, proprietary product design, quality, customer service and licensing agreements. Certain of the Company's existing or potential competitors, however, may have financial resources that are greater than those of the Company, greater customer acceptance of products and/or more profitable distribution outlets.

        In addition, certain of the potential customers of each of our segments, in particular mass merchandisers, have the financial and other resources necessary to buy products similar to those that we sell directly from manufacturers in Eastern Asia and elsewhere, thereby reducing the size of our potential market.

Copyrights, Trademarks, Patents and Licenses

        The Company prints notices of claim of copyright on substantially all of its products and has registered hundreds of its designs with the United States Copyright Office. The Company has registered, in various countries throughout the world, the trademark RUSS® with a distinctive design and APPLAUSE®, for use on most of its gift products, and Sassy® and Kids Line® for use on its infant and juvenile products. The Company believes its copyrights, trademarks and patents are valid, and has pursued a policy of aggressively protecting them from infringement. However, copyright and trademark protections are limited or even unavailable in some foreign countries and preventing unauthorized use of the Company's intellectual properties can be difficult even in countries with substantial legal protection. In addition, the portion of the Company's business that relies on the use of intellectual property is subject to the risk of challenges by third parties claiming infringement of their proprietary rights. However, even in light of the Company's increased use of licensing (discussed below), it does not consider its business materially dependent on copyright, trademark or patent protection due to the availability of substitutes, creation of other designs, and the variety of other products.

        The Company enters into license agreements relating to trademarks, copyrights, patents, designs and products which enable the Company to market items compatible with its product line. The Company's gift segment has increased its use of licensing in recent years to differentiate its products from its competitors. During 2004, the gift segment entered into various license agreements, some of which include: (i) Marvel Enterprises, Inc. relating to Spider-Man® and X-Men™ classic characters and certain other characters; and (ii) Hasbro International, Inc. and Simon & Schuster, Inc. relating to the Raggedy Ann and Andy™ property. In 2005, the gift segment entered into additional license agreements, including: (i) Universal Studios Licensing LLP relating to Curious George™ and The Little Engine That Could™; (ii) New England Confectionary Company relating to Necco Sweetheart™; and (iii) Twentieth Century Fox and Merchandising, a division of Fox Entertainment Group, Inc., relating to The Simpsons™. In 2007, the Company entered into additional licensing agreements, including an agreement with Abrams Gentile Entertainment, Inc. for Shining Stars®. With the exception of the Shining Stars license, which currently runs through March 2013, all gift segment license agreements mentioned above are for one to four year terms with extensions possible if agreed to by both parties. The Marvel license expired at the end of 2007, and the Company elected not to renew such agreement. During 2007, the agreements relating to Raggedy Ann and Andy™ were extended through December 31, 2008. The Company's infant and juvenile segment maintains license agreements with The William Carter Company (Carter's), Disney Enterprises, Inc. and LeapFrog Enterprises, Inc. Royalties are paid on licensed items and, in many cases, advance royalties and minimum guarantees are required by these license agreements. The Company does not believe its business is dependent on any single license, although during 2007, the Shining Stars license and the Carter's license contributed significant revenues to our gift and infant and juvenile segments, respectively.

        Sassy has operated under a distribution agreement with MAM Babyartikel GmbH of Vienna, Austria (the "MAM Agreement") prior to and after the acquisition of Sassy by the Company in 2002.

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Based on several factors, including the views of the Company's new chief executive officer (in consultation with senior management), the inability to obtain concessions from MAM during discussions in December 2007, the decreasing profitability of the products sold under the MAM Agreement and specified restrictions contained therein limiting the Company's ability to enter into competitive product categories, the Company recognized an impairment charge and exercised its right to terminate the MAM Agreement, effective as of March 26, 2008. As a result of such termination, the Company recorded an additional impairment charge of $6.4 million for the fiscal year ended December 31, 2007 (for a total impairment charge of $10.0 million during 2007 which has been recorded in cost of sales of the infant and juvenile segment), reflecting the write-off of the remaining intangible assets related to the MAM Agreement. See Item 9B for further detail with respect to the MAM Agreement. The Company expects to continue to distribute MAM products throughout 2008 pursuant to contractual transition procedures, but anticipates that it will experience a sales decline of approximately $20-25 million (although, as noted above, the agreement generates only limited profitability), until such time as the Company can generate replacement or alternate product sales. Pursuant to the MAM Agreement, the Company will be restricted from selling products competitive with the MAM products for a period of one year following the termination of the MAM Agreement. See Note 4 to Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources" under the sections captioned "Results of Operations" and "Other Events and Circumstances Pertaining to Liquidity" for additional details and information regarding certain financial charges recorded in connection with the MAM Agreement.

Employees

        As of December 31, 2007, the Company employed approximately 1,036 persons. The Company considers its employee relations to be good. Most of the Company's employees are not covered by a collective bargaining agreement, although approximately 48 employees of the Company's infant and juvenile segment, representing approximately 19% of such segment's employees or approximately 5% of the Company's total employees, were represented by a collective bargaining agreement during 2007.

        The Company's policy is to require that its management, sales, product development, and design personnel enter into confidentiality agreements and, in the case of sales management and sales personnel, non-competition agreements (subject to certain territorial limitations) which restrict their ability to compete with the Company for periods ranging between six months and one year after termination of their employment.

Government Regulation

        Certain of the Company's products are subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws empower the Consumer Product Safety Commission (the "Commission") to protect consumers from certain hazardous articles by regulating their use or excluding them from the market and requiring a manufacturer to repurchase articles that become banned. The Commission's determination is subject to judicial review. Similar laws exist in some states and cities in the United States and in certain foreign jurisdictions in which the Company's products are sold. The Company maintains a quality control program in order to comply with such laws, and the Company believes it is in substantial compliance with all the foregoing laws. Notwithstanding the foregoing, no assurance can be made that all products are or will be free from hazards or defects See Item 1A—"Risk Factors—Product liability, product recalls and other claims relating to the use of our products could increase our costs."

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Corporate Governance and Available Information

        The Company makes available a wide variety of information free of charge on its website at www.russberrie.com. The Company's filings with the United States Securities and Exchange Commission (the "SEC"), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to such reports, are available on the Company's website as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. The Company's website also contains news releases, financial information, Company profiles and certain corporate governance information, including current versions of the "Company's Complaint Procedures for Accounting and Auditing Matters", "Corporate Governance Guidelines", the Company's "Code of Business Conduct and Ethics", the Company's "Code of Ethics for Principal Executive Officer and Senior Financial Officers", the charters of the Audit Committee, the Compensation Committee and the Nominating/Governance Committee of the Board of Directors, and information regarding how interested parties may contact the Board. To access our SEC reports or amendments, log onto our website and click onto "Investor Relations" on the main menu and then onto the "SEC Filings" link provided under "Investor News." Mailed copies of such information can be obtained free of charge by writing to the Company at Russ Berrie and Company, Inc., 111 Bauer Drive, Oakland, NJ 07436, Attention: Corporate Secretary. The contents of the Company's websites are not incorporated into this filing.

ITEM 1A.    RISK FACTORS

        The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risk factors actually occurs, our business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of our common stock could decline.

Our net sales and profitability depend on our ability to continue to conceive, design and market products that appeal to consumers.

        The introduction of new products is critical in our industry and to our growth strategy. A significant percentage of our product line is replaced each year with new products. Our business depends on our ability to continue to conceive, design and market new products and upon continuing market acceptance of our product offerings. Rapidly changing consumer preferences and trends make it difficult to predict how long consumer demand for our existing products will continue or which new products will be successful. In this regard, the Company introduced during 2007 its Shining Stars® product range, which achieved a high level of sales (partially attributable to initial retail shelf placement during its introductory year) that the Company does not anticipate will be repeated during 2008. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Overview". Our current products may not continue to be popular or new products that we introduce may not achieve adequate consumer acceptance for us to recover development, manufacturing, marketing and other costs. A decline in consumer demand for our products, our failure to develop new products on a timely basis in anticipation of changing consumer preferences or the failure of our new products to achieve and sustain consumer acceptance could reduce our net sales and profitability.

Increased consolidation and a declining number of independent retail outlets may have a continued negative impact on gift segment sales.

        The Company's gift segment has incurred significant losses during the past several years primarily as a result of (i) retailer consolidation and a declining number of independent retail outlets; (ii) increased competition from other entities; and (iii) changing buying habits of consumers, marked by a shift from independent retailers to mass market retailers. Although the Company has increased its

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presence in, and focus on, the mass market, a significant portion of the Company's gift segment products continue to be marketed to independent retail outlets. If increased consolidation of such outlets continues, as well as a continued decline in the number of such outlets, the Company's sales therefrom will likely continue to decline.

Gross margin could be adversely affected by several factors.

        Gross margin may be adversely affected in the future by increases in vendor costs (including as a result of increases in the cost of raw materials), excess inventory, obsolescence charges, changes in shipment volume, price competition and changes in channels of distribution or in the mix of products sold. For example, increased costs in China, primarily for labor and raw materials, as well as the appreciation of the Chinese Yuan against the dollar, negatively impacted our gross margins in 2007, particularly in our infant and juvenile segment, and may continue to negatively impact our gross margins in 2008. Economic conditions, such as rising fuel prices, currency exchange fluctuations and decreased consumer confidence, may also adversely impact our margins. Gross margin may also be impacted by the geographic mix of products sold. Gross margin is often lower in the mass market distribution channel, which represents a growing percentage of our gift segment sales and a substantial majority of our infant and juvenile sales.

Changes in consumer preferences could adversely affect our net sales and profitability.

        The nature of the Company's products and the rapid changes in customer preferences leave the Company vulnerable to an increased risk of inventory obsolescence. Thus, the Company's ability to manage its inventories properly is an important factor in its operations. Inventory shortages can adversely affect the timing of shipments to customers and diminish sales and brand loyalty. Conversely, excess inventories can result in lower gross margins due to the excessive discounts and markdowns that might be necessary to reduce inventory levels. The inability of the Company to effectively manage its inventory could have a material adverse effect on the Company's business, financial condition and results of operations.

Competition in our markets could reduce our net sales and profitability.

        We operate in highly competitive markets. Certain of our competitors have greater brand recognition and greater financial, technical, marketing and other resources than we have. In addition, we may face competition from new participants in our markets because the gift and infant/juvenile product industries have limited barriers to entry. In addition, certain of our potential customers, in particular mass merchandisers, have the financial and other resources necessary to buy products, similar to those that we sell, directly from manufacturers in Eastern Asia and elsewhere, thereby reducing the size of our potential market. We also experience price competition for our products, competition for shelf space at retailers and competition for licenses, all of which may increase in the future. If we cannot compete successfully in the future, our net sales and profitability will likely decline.

Our debt covenants may affect our liquidity or limit our ability to complete acquisitions, incur debt, make investments, sell assets, merge or complete other significant transactions.

        Our 2006 Credit Agreements (defined below) include provisions that place limitations on a number of our activities, including our ability to:

•

incur additional debt;



•

create liens on our assets or make guarantees;



•

make certain investments or loans;



•

pay dividends;

11

•

dispose of or sell assets or enter into acquisitions, mergers or similar transactions; or



•

distribute cash from our domestic subsidiaries to the Company or to other subsidiaries, which could impact our liquidity and our ability to pay our corporate overhead expenses.

These covenants could restrict our ability to pursue opportunities to expand our business operations. The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement (defined below) to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the acquisitions of LaJobi and CoCaLo. There can be no assurance that either acquisition or such amendment will be consummated.

        The Giftline Credit Agreement (defined below) also provides that the lenders will sweep all cash of the Giftline Borrowers (defined below) on a daily basis, which will restrict such borrowers' ability to use such cash. In addition, during 2005 we funded losses in our gift division with cash flow from our infant and juvenile business. Pursuant to the Assignment, RB, (each as defined in Item 7) is dependent upon cash distributions from its domestic subsidiaries to satisfy its legal obligations and overhead expenses. The covenants in our 2006 Credit Agreements limit the ability of our domestic subsidiaries to distribute cash to RB, which could have a material adverse impact on the Company's liquidity. In addition, other covenants in the 2006 Credit Agreements limit our ability to utilize cash flow generated from our infant and juvenile segment to fund other aspects of our business, including the gift segment. If the gift segment continues to incur losses (a portion of which result in part from the disproportionate share of corporate overhead expenses that are charged to the gift segment as a result of the 2006 Credit Agreements), it may not have sufficient liquidity under the Giftline Revolver to fund such losses and its ongoing operations. In order to forestall any such liquidity issues, management intends to implement various cash management strategies. While management believes that these strategies will enable the gift segment to maintain sufficient liquidity for at least the next 12 months, there can be no assurance that such strategies will be successful. If such strategies are not successful, and the gift segment does not have sufficient availability under the Giftline Revolver, we may be forced to dispose of material assets or operations, seek to obtain equity capital, or restructure or refinance our gift segment indebtedness. Even if we are able to restructure or refinance such indebtedness, the economic terms may not be favorable to us. See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources" and Note 8 of Notes to Consolidated Financial Statements.

        The Infantline Borrowers are required to make prepayments of the Term Loan upon the occurrence of certain transactions, including most asset sales or debt or equity issuances. Additionally, commencing in early 2008 with respect to fiscal year 2007, annual mandatory prepayments of the Term Loan shall be required in an amount equal to 50% of Excess Cash Flow 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 the fiscal year ended December 31, 2007, no Excess Cash Flow payment was required.

Inability to maintain compliance with the bank covenants.

        The Company's ability to maintain compliance with the financial and other covenants in its credit facilities is dependent upon the Company's ability to continue to execute its business model and current operational plans. If an event of default in such covenants occurs and is continuing, among other things, the lenders may accelerate the loans, declare the commitments thereunder to be terminated, seize collateral or take other actions of secured creditors. If the loans are accelerated or commitments terminated, we could face substantial liquidity problems and may be forced to dispose of material assets or operations, seek to obtain equity capital, or restructure or refinance our indebtedness. Such alternative measures may not be available or successful. Also, our bank covenants may limit our ability to dispose of material assets or operations or to restructure or refinance our indebtedness. Even if we are able to restructure or refinance our indebtedness, the economic terms may not be favorable to us.

12

All of the foregoing could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.

Our cash flows and capital resources may be insufficient to make required payments on our indebtedness.

        Our ability to generate cash to meet scheduled payments with respect to our debt depends on our financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and the other factors discussed in this "Risk Factors" section. If our cash flow and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and may be forced to dispose of material assets or operations, seek to obtain equity capital, or restructure or refinance our indebtedness. As discussed in the two immediately preceding risk factors, such alternative measures may not be successful and may not permit us to meet our scheduled debt services obligations. The breach of any covenants or restrictions in the 2006 Credit Agreements could result in a default thereunder, which would permit the lenders to take the actions discussed in the immediately preceding risk factor. As discussed above, this could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.

If we lose key personnel we may not be able to achieve our objectives.

        We are dependent on the continued efforts of various members of senior management, as well as senior executives of several of our subsidiaries, including Bruce G. Crain, President and Chief Executive Officer, Michael Levin, President and Chief Executive Officer of Kids Line, LLC and Fritz Hirsch, President of Sassy, Inc. If for any reason, these or other senior executives or other key members of management do not continue to be active in management, our business, financial condition or results of operations could be adversely affected. We cannot assure you that we will be able to continue to retain our senior executives or other personnel necessary for the continued success of our business.

Our infant and juvenile business is dependent on several large customers.

        The continued success of our infant and juvenile segment depends on our ability to continue to sell our products to several large mass market retailers. We typically do not have long-term contracts with these customers and the loss of one or more of these customers could have a material adverse affect on the results of operations of our infant and juvenile segment and ultimately the Company. In addition, our access to shelf space at retailers for the products of both of our segments may be reduced by store closings, consolidation among these retailers and competition from other products. An adverse change in our relationship with, or the financial viability of, one or more of our customers could reduce our net sales and profitability. See "Business—Marketing and Sales" and Note 5 of Notes to Consolidated Financial Statements.

The results of our gift segment may depend on the continued success of our Profit Improvement Program.

        During 2006, the Company developed and substantially implemented a Profit Improvement Program (the "PIP") with respect to its global gift business. The PIP involved an analysis and, in some instances, reevaluation of key operational aspects of the Company's gift business and was designed to help enable the Company to return its gift business to a sustainable level of profitability. The PIP involved reengineering the manner in which the gift segment operates, and focused the gift business on its most profitable products, customers and territories as a means of providing a platform for potential profitable growth in the future. The scope of the PIP was broad and significant and may cause losses to our business that we cannot predict, including a loss of gift segment sales. Although the PIP is substantially complete, there are certain additional initiatives that were identified and which the

13

Company has elected not to implement at this time. In the event the Company elects to implement these initiatives, such action may result in the recognition of certain significant restructuring charges and the incurrence of certain severance obligations. The Company may also be required to make certain investments to generate certain of the efficiencies that the PIP was designed to achieve, although the nature and magnitude of these investments cannot be determined at this time. There can be no assurance that the PIP will ultimately be successful in stemming the losses generated by the gift segment and returning the segment to profitability, or that we will be able to successfully grow the gift segment in the future. If we fail to maintain the PIP initiatives, our results of operations and financial position will suffer. See "Business—Marketing and Sales" and "Management's Discussion and Analysis of Results of Operations and Financial Condition—Overview" and "—Liquidity and Capital Resources."

We may not be able to collect outstanding accounts receivable from our major retail customers.

        Certain of our retail customers purchase large quantities of our products on credit, which may cause a concentration of accounts receivable among some of our largest customers. Our profitability may be harmed if one or more of our largest customers were unable or unwilling to pay these accounts receivable when due or demand credits or other concessions for products they are unable to sell or for other reasons.

Disruptions in our current information technology system or difficulties in implementing an alternative global information technology system could harm our business.

        Our global gift operations are currently managed and monitored with an Enterprise Resource Planning ("ERP") system. System failure or malfunctioning in the ERP system may result in disruption of operations and the inability to process transactions and could adversely affect our financial results. In addition, the Company has recently evaluated whether the implementation of an alternative global information technology system for the gift business would provide greater efficiencies, lower costs and greater reporting capabilities than those provided by the current ERP system. Implementation of a new system solution, if any, would likely proceed in stages across the geographic breadth of the Company, and could require several years for completion. In the event that we elect to implement a new system, we anticipate incurring significant financial and resource costs, and our business may be subject to transitional difficulties as we replace the current ERP system. These difficulties may include disruption of our operations, loss of data, and the diversion of our management and key employees' attention away from other business matters. The difficulties associated with any such implementation, and our failure to realize the anticipated benefits from the implementation, could harm our business, results of operations and cash flows.

We rely on foreign suppliers, primarily in the PRC, to manufacture most of our products, which subjects us to numerous international business risks that could increase our costs or disrupt the supply of our products.

        Approximately 82% of the Company's purchases are attributable to manufacturers in the PRC. The supplier accounting for the greatest dollar volume of purchases accounted for approximately 19% and the five largest suppliers accounted for approximately 44% in the aggregate during 2007. The Company uses approximately 75 manufacturers in Eastern Asia. While we believe that there are many other manufacturing sources available for our product lines, difficulties encountered by one or several of our larger suppliers such as a fire, accident, natural disaster or an outbreak of illness (e.g., SARS or avian flu) at one or more of their facilities, could halt or disrupt production at the affected facilities, delay the completion of orders, cause the cancellation of orders, delay the introduction of new products

14

or cause us to miss a selling season applicable to some of our products. In addition, our international operations subject us to certain other risks, including:

•

economic and political instability;



•

restrictive actions by foreign governments;



•

greater difficulty enforcing intellectual property rights and weaker laws protecting intellectual property rights;



•

changes in import duties or import or export restrictions;



•

delays in shipping of product and unloading of product through ports, as well as timely rail/truck delivery to the Company's warehouses and/or a customer's warehouse;



•

complications in complying with the laws and policies of the United States affecting the importation of goods, including duties, quotas and taxes;



•

complications in complying with trade and foreign tax laws; and



•

the effects of terrorist activity, armed conflict and epidemics.

        Any of these risks could disrupt the supply of our products or increase our expenses. The costs of compliance with trade and foreign tax laws increase our expenses and actual or alleged violations of such laws could result in enforcement actions or financial penalties that could result in substantial costs. In addition, the introduction of certain social programs in the PRC or otherwise will likely increase the cost of doing business for certain of our manufacturers, which could increase our manufacturing costs.

Currency exchange rate fluctuations could increase our expenses.

        Our net sales are primarily denominated in U.S. dollars, except for a small amount of net sales denominated in U.K. pounds, Australian dollars, Euros or Canadian dollars. Our purchases of finished goods from Eastern Asian manufacturers are denominated in U.S. dollars. Expenses for these manufacturers are denominated in Chinese Yuan. As a result, any material increase in the value of the Yuan relative to the U.S. dollar or the U.K. pound would increase the prices at which we purchase finished goods and therefore could adversely affect our profitability. We are also subject to exchange rate risk relating to transfers of funds denominated in U.K. pounds, Australian dollars, Canadian dollars or Euros from our foreign subsidiaries to the United States. See Note 5 of Notes to Consolidated Financial Statements for more information regarding foreign currency forward exchange contracts.

Product liability, product recalls and other claims relating to the use of our products could increase our costs.

        We face product liability risks relating to the use of our products. We also must comply with a variety of product safety and product testing regulations. In particular, our products are subject to the Federal Consumer Product Safety Act, which empowers the Consumer Product Safety Commission ("CPSC") to take action against hazards presented by consumer products, including the formulation and implementation of regulations and uniform safety standards. The CPSC has the authority to exclude from the market and recall certain consumer products that are found to be hazardous. Consumer product safety laws also exist in some states and cities within the United States and in Canada, Australia and Europe, as well as certain other countries. While we take the steps we believe are necessary to comply with these acts, there can be no assurance that we will be in compliance in the future. If we fail to comply with these regulations or if we face product liability claims, we may be subject to damage awards or settlement costs that exceed our insurance coverage and we may incur significant costs in complying with recall requirements. Furthermore, concerns about potential liability

15

may lead us to recall voluntarily selected products. Recalls or post-manufacture repairs of our products could harm our reputation, increase our costs or reduce our net sales. Governments and regulatory agencies in the markets where we manufacture and sell products may enact additional regulations relating to product safety and consumer protection in the future, and may also increase the penalties for failure to comply with product safety and consumer protection regulations. In addition, one or more of our customers might require changes in our products, such as the non-use of certain materials, in the future. Complying with any such additional regulations or requirements could impose increased costs on our business. Similarly, increased penalties for non-compliance could subject us to greater expense in the event any of our products were found to not comply with such regulations. Such increased costs or penalties could harm our business. Furthermore, substantially all of our licenses give the licensor the right to terminate the license agreement if any products marketed under the license are subject to a product liability claim, recall or similar violations of product safety regulations or if we breach covenants relating to the safety of the products or their compliance with product safety regulations. A termination of a license could adversely affect our net sales. Even if a product liability claim is without merit, the claim could harm our reputation and divert management's attention and resources from our business.

Competition for licenses could increase our licensing costs or limit our ability to market products.

        We market a portion of our products through licenses with other parties. These licenses are generally limited in scope and duration and generally authorize the sale of specific licensed products on a nonexclusive basis. Our license agreements often require us to make minimum guaranteed royalty payments that may exceed the amount we are able to generate from actual sales of the licensed products. Any termination of or failure to renew our significant licenses, or inability to develop and enter into new licenses, could limit our ability to market our licensed products or develop new products, and could reduce our net sales and profitability. Competition for licenses could require us to pay licensors higher royalties and higher minimum guaranteed payments in order to obtain or retain attractive licenses, which could increase our expenses. In addition, licenses granted to other parties, whether or not exclusive, could limit our ability to market products, including products we currently market, which could cause our net sales and profitability to decline.

Trademark infringement or other intellectual property claims relating to our products could increase our costs.

        Our industry is characterized by frequent litigation regarding trademark infringement and other intellectual property rights. We are and have been a defendant in trademark and other intellectual property infringement claims and claims of breach of license from time to time, and we may continue to be subject to such claims in the future. The defense of intellectual property litigation is both costly and disruptive of the time and resources of our management, even if the claim is without merit. We also may be required to pay substantial damages or settlement costs to resolve intellectual property litigation.

We may experience difficulties in integrating strategic acquisitions.

        As part of our growth strategy, we may pursue acquisitions that are consistent with our mission and enable us to leverage our competitive strengths. In connection therewith, on April 1, 2008, we entered into agreements to acquire each of LaJobi and CoCaLo.

        The integration of acquired companies and their operations into our operations involves a number of risks including:

•

possible failure to maintain customer, licensor and other relationships after the closing of the transaction of the acquired company;

16

•

the acquired business may experience losses which could adversely affect our profitability;



•

unanticipated costs relating to the integration of acquired businesses may increase our expenses;



•

difficulties in achieving planned cost-savings and synergies may increase our expenses or decrease our net sales;



•

diversion of management's attention could impair their ability to effectively manage our business operations, and unanticipated management or operational problems or liabilities may adversely affect our profitability and financial condition; or



•

possible failure to obtain any necessary consents to the transfer of licenses or other agreements of the acquired company.

        Additionally, we financed our acquisition of Kids Line and intend to finance our anticipated acquisitions of LaJobi and CoCaLo with senior debt financing. This debt leverage, or additional leverage that may be incurred with any other future acquisitions, could adversely affect our profit margins and limit our ability to capitalize on future business opportunities. See Note 8 of Notes to Consolidated Financial Statements. The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the acquisitions of LaJobi and CoCaLo. There can be no assurance that either acquisition or such amendment will be consummated.

Sales of our gift segment products are seasonal, which causes our operating results to vary from quarter to quarter.

        Sales of our gift segment products are seasonal. Historically, our net sales with respect to gift segment products have typically peaked in the third and fourth quarters due to holiday season buying patterns. See "Business—Seasonality."

The trading price of our common stock has been volatile and investors in our common stock may experience substantial losses.

        The trading price of our common stock has been volatile and may continue to be volatile in the future. The trading price of our common stock could decline or fluctuate in response to a variety of factors, including:

•

changes in financial estimates of our net sales and operating results or buy/sell recommendations by securities analysts;



•

the timing of announcements by us or our competitors concerning significant product developments, acquisitions or financial performance;



•

fluctuation in our quarterly operating results;



•

other economic or external factors;



•

continued losses in our gift segment;



•

our failure to meet the performance estimates of securities analysts or investors;



•

substantial sales of our common stock; or



•

general stock market conditions.

        You may be unable to sell your stock at or above your purchase price.

17

A limited number of our shareholders can exert significant influence over us.

        As reported in various Schedules 13D filed with the Securities and Exchange Commission ("SEC") (i) various investment funds and accounts managed by Prentice Capital Management, L.P. ("Prentice"), (ii) D. E. Shaw Laminar Portfolios, L.L.C. ("Laminar"), (iii) portfolios of investment funds advised by Third Avenue Management, LLC and (iv) Franklin Advisory Services, LLC and related entities beneficially owned approximately 21%, 21%, 12.2%, and 11.5% respectively, of the outstanding shares of our Common Stock. Prentice and Laminar each has the right to nominate two members of our Board of Directors. This share ownership would permit these and other large stockholders, if they chose to act together, to exert significant influence over the outcome of stockholder votes, including votes concerning the election of directors, by-law amendments, possible mergers, corporate control contests and other significant corporate transactions. See Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

Various restrictions in our charter documents, policies, New Jersey law and our 2006 Credit Agreements could prevent or delay a change in control of us which is not supported by our board of directors.

        We are subject to a number of provisions in our charter documents, policies, New Jersey law and our 2006 Credit Agreements that may discourage, delay or prevent a merger, acquisition or change of control that a stockholder may consider favorable. These anti-takeover provisions include:

•

advance notice procedures for nominations of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings;



•

covenants in our credit agreements restricting mergers, asset sales and similar transactions and a provision in our credit agreements that triggers an event of default upon certain acquisitions by a person or group of persons with beneficial ownership of 50.1% or more of our outstanding common stock; and



•

the New Jersey Shareholders Protection Act.

        The New Jersey Shareholders Protection Act, as it pertains to the Company, prohibits a merger, consolidation, specified asset sale or other similar business combination or disposition between the Company and any stockholder of 10% or more of our voting stock for a period of five years after the stockholder acquires 10% or more of our voting stock, unless the transaction is approved by our board of directors before the stockholder acquires 10% or more of our voting stock. In addition, no such transaction shall occur at any time unless: (1) the transaction is approved by our board of directors before the stockholder acquires 10% or more of our voting stock, (2) the transaction is approved by the holders of two-thirds of our voting stock excluding shares of our voting stock owned by such "interested" stockholder or (3) (A) the aggregate consideration received per share by stockholders in such transaction is at least equal to the higher of (i) the highest per share price paid by the interested stockholder (x) within the 5-year period preceding the announcement date of such transaction or (y) within the 5-year period preceding, or in the transaction, in which the stockholder became an interested stockholder, whichever is higher, in each case plus specified interest, less the value of dividends paid up to the amount of such interest, and (ii) the market value per share of common stock on the announcement date of such transaction or on the date the interested stockholder became an interested stockholder, whichever is higher, plus specified interest, less the value of dividends paid up to the amount of such interest, (B) the consideration in the transaction received by stockholders is in cash or in the same form as the interested stockholder used to acquire the largest number of shares previously acquired by it, and (C) after the date the interested stockholder became an interested stockholder, and prior to the consummation of the transaction, such interested stockholder has not become the beneficial owner of additional shares of our stock, except (w) as part of the transaction which resulted in the interested stockholder becoming an interested stockholder, (x) by virtue of

18

proportionate stock splits, stock dividends or other distributions not constituting a transaction covered by the New Jersey Shareholders Protection Act, (y) through a transaction meeting the conditions of paragraph (B) above and this paragraph (C) or (z) through purchase by the interested stockholder at any price, which, if that price had been paid in an otherwise permissible transaction under the New Jersey Shareholders Protection Act, the announcement date and consummation date of which were the date of that purchase, would have satisfied the requirements of paragraphs (A) and (B) above.

Changes in our effective tax rate may have an adverse effect on our results of operations.

        Our future effective tax rate and the amount of our provision for income taxes may be adversely affected by a number of factors, including:

•

the jurisdictions in which profits are determined to be earned and taxed;



•

the repatriation of non-U.S. earnings on which we have previously provided for U.S. taxes;



•

adjustments to estimated taxes upon finalization of various tax returns;



•

increases in expenses not deductible for tax purposes;



•

changes in available tax credits;



•

changes in share-based compensation expense;



•

changes in the valuation of our deferred tax assets and liabilities;



•

changes in accounting standards or tax laws and regulations, or interpretations thereof;



•

the resolution of issues arising from uncertain positions and tax audits with various tax authorities; and



•

penalties and/or interest expense that we may be required to recognize on liabilities associated with uncertain tax positions.



•

any significant increase in our future effective tax rates could adversely impact our net income for future periods.

Actual results differing from estimates.

        If actual events, circumstances, outcomes and amounts differ from judgments, assumptions and estimates made or used in determining the amount of certain assets (including the amount of recoverability of property, plant and equipment, goodwill and other intangible assets, valuation allowances for receivables, inventories and deferred income tax assets, and accruals for income taxes and liabilities), liabilities and or other items reflected in our financial statements, it could adversely affect our results of operations and financial condition.

Increased costs associated with corporate governance compliance may affect our results of operations.

        The Sarbanes Oxley Act of 2002 has required changes in some of our corporate governance and securities disclosure and compliance practices, and requires ongoing review of our internal control procedures. These developments have increased our legal compliance and financial reporting costs, and to the extent that we identify areas of our disclosures controls and procedures and/or internal controls requiring improvement we may have to incur additional costs and diversion of management's time. Any such action could adversely affect our results of operations and financial condition.

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Amounts included in our backlog may not result in actual revenue or translate into profits.

        As of December 31, 2007, the Company had a consolidated backlog of unfilled orders of approximately $23.6 million. This backlog amount is based primarily on purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. In addition, purchase orders included in our backlog may not be profitable. We may experience variances in the realization of our backlog because of delays or cancellations resulting from external market factors and economic factors beyond our control. If our backlog fails to materialize, we could experience a reduction in revenue, profitability and liquidity.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        Not applicable.

ITEM 2.    PROPERTIES

        The principal facilities of the Company's gift segment consist of its corporate offices in Oakland, New Jersey (120,000 square feet), and a distribution center in South Brunswick, New Jersey (522,000 square feet), both of which the Company leases. Additionally, leased principal office and distribution facilities are located in Eastleigh, Hampshire England (84,000 square feet), the Sydney, Australia area (67,000 square feet) and the Toronto, Canada area (117,000 square feet). The Company also operates showroom facilities for its gift business segment in Oakland, New Jersey; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; Los Angeles, California; Seattle, Washington;Sydney, Australia; Montreal, Vancouver and Toronto, Canada; Eastleigh, Hampshire, England; Kowloon, Hong Kong; and Shenzhen, China. Certain showrooms are located within the leased facilities listed above; others are leased separately with remaining lease terms primarily ranging between six months and twelve years.

        The Company owns office and distribution facilities used by its infant and juvenile operations in Kentwood, Michigan. Another facility used by its infant and juvenile operations, located in Southgate, California, is leased.

        LaSalle Business Credit, LLC and certain of its affiliates ("LaSalle"), as administrative agent for the lenders under the 2006 Credit Agreements, has a lien on substantially all of the assets of the Company. Such lien includes a mortgage on the real property located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michigan (the "Facility Encumbrance"). See Note 8 of Notes to Consolidated Financial Statements.

        The Company believes that the facilities of the Company are maintained in good operating condition and are, in the aggregate, adequate for the Company's purposes. At December 31, 2007, the Company and its subsidiaries were obligated under operating lease agreements (principally for buildings and other leased facilities) for remaining lease terms ranging from two months to twelve years. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Contractual Obligations."

ITEM 3.    LEGAL PROCEEDINGS

        In the ordinary course of its business, the Company is party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to its business, as plaintiff or defendant. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially adversely affect the consolidated results of operations, financial condition or cash flows of the Company.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders during the fourth quarter of 2007.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table provides information with respect to the executive officers of the Company as of March 20, 2008. All officers are elected by the Board of Directors and may be removed with or without cause by the Board. As is discussed under the section captioned "Kids Line and Related Financing" in "Management's Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources", Russ Berrie and Company, Inc. is now organized as a holding company, with all of its operations being conducted through its subsidiaries. As a result of this structure, we have determined that it is appropriate to deem the leaders of each of our principal business units executive officers of the Company, even where such leaders are employed by our subsidiaries. As a result, as of March 20, 2008, Michael Levin, President and Chief Executive Officer of Kids Line, LLC, and Fritz Hirsch, President of Sassy, were deemed to be executive officers of the Company.

NAME	AGE	POSITION WITH THE COMPANY
Jeffrey A. Bialosky	48	Executive Vice President—Sales
Anthony Cappiello(2)(3)	54	Executive Vice President and Chief Administrative Officer (interim principal financial officer)
Teresa Chan	53	Vice President—Far East Operations
Bruce G. Crain(1)(3)	47	President and Chief Executive Officer
Marc S. Goldfarb(2)(3)	44	Senior Vice President, General Counsel and Corporate Secretary
Fritz Hirsch(3)	56	President of Sassy, Inc.
Y.B. Lee	62	Senior Vice President—Design and Development, Far East Operations and President—Korean Operations
Michael Levin(3)	46	President and Chief Executive Officer of Kids Line, LLC
Guy Paglinco	50	Vice President and Chief Accounting Officer
Chris Robinson(3)	53	President—International Division
Thomas J. Sancetta	44	Vice President—Sales Administration
Arline Wall	55	Senior Vice President—Product Development and Marketing

(1)

Member of the Company's Board of Directors

(2)

Member of the Company's Disclosure Committee

(3)

Member of the Company's Executive Management Committee

        Jeffrey A. Bialosky was appointed Executive Vice President—Sales in November 2006. Prior thereto, he held the position of Senior Vice President—National Accounts in February 2004 and joined the Company as Senior Vice President—Product Development (Plush) in April 2003. Prior to joining the Company, Mr. Bialosky was employed with Commonwealth Toy, a designer, developer, manufacturer and marketer of toys to the mass market, as Senior Vice President of Product Development and Marketing since February 1995.

        Anthony P. Cappiello has been employed as Executive Vice President and Chief Administrative Officer since August 2005. He was appointed interim principal financial officer in November 2007. Prior to joining the Company, Mr. Cappiello was Chief Operating Officer at Waterford & Wedgwood U.S.A, a marketer, manufacturer and distributor of fine crystal, china, linens, jewelry, cookware, heirlooms and flatware, since May 1991.

        Teresa Chan was appointed Vice President—Far East Operations in January 2004. Ms. Chan was elected as an officer of the Company in October 1999 and had been employed by the Company as Vice President—International Sales since January 1997.

21

        Bruce G. Crain joined the Company as President and Chief Executive Officer in December 2007. Since March 2007, he provided consulting services to the Company. Previously he served in various executive capacities with Blyth, Inc, a NYSE—listed multi-channel designer and marketer of home décor and gift products from 1997 to September 2006.

        Marc S. Goldfarb joined the Company as Vice President, General Counsel and Corporate Secretary in September 2005. In November 2006, he was promoted to the position of Senior Vice President. Prior to joining the Company, Mr. Goldfarb was Vice President, General Counsel and Corporate Secretary of Journal Register Company, a publicly traded newspaper publishing company, from January 2003 to September 2005. From July 1998 to January 2003, he served as Managing Director and General Counsel of The Vertical Group, an international private equity firm. Prior to that, Mr. Goldfarb was a Partner at Bachner, Tally, Polevoy & Misher LLP.

        Fritz Hirsch joined the Company as President of Sassy, Inc. upon its acquisition in 2002. Prior to such acquisition, he served as President of Sassy since 1986.

        Y.B. Lee was appointed Senior Vice President—Design and Development, Far East Operations and President—Korean Operations in 2004. Prior to that, Mr. Lee was Senior Vice President—Far East and President—Far East Operations since June 1996.

        Michael Levin joined the Company as President and Chief Executive Officer of Kids Line, LLC upon its acquisition in December 2004. Prior to such acquisition, he served as President and Chief Executive Officer of Kids Line, LLC since June 2001.

        Guy Paglinco joined the Company as Vice President—Corporate Controller in September 2006, and was promoted to Vice President and Chief Accounting Officer of the Company as of November 13, 2007. Immediately prior to joining the Company, Mr. Paglinco served in various roles at Emerson Radio Corp., an AMEX-listed international distributor of consumer electronic products, including Chief Financial Officer from 2004-2006, and Corporate Controller from 1998-2004.

        Chris Robinson was appointed President—International Division in February 2003. Prior to that Mr. Robinson served as Managing Director of Russ Berrie U.K. Ltd. since June 1988.

        Thomas J. Sancetta was appointed Vice President—Sales Administration in November 2006. Prior to that, he was Vice President-Inventory Management from July 2003. Mr. Sancetta was elected an officer of the Company in January 2003 and had been employed by the Company as Vice President—Sales Administration since January 2002 and Director of Internal Audit since September 1997.

        Arline Wall joined the Company as Senior Vice President—Product Development and Marketing in December 2005. Prior to joining the Company, from September 2004 to November 2005, Ms. Wall was employed by MAF Marketing, Inc., a premium incentive sales company, as Vice President—New Product Development. Prior to that, from August 1998 to September 2004, Ms. Wall was employed by Toys "R" Us, Inc., most recently holding the position of Global Brand Director.

22

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        At March 14, 2008, the Company's Common Stock was held by approximately 395 shareholders of record. The Company's Common Stock has been traded on the New York Stock Exchange, under the symbol RUS, since its initial public offering on March 29, 1984. The following table sets forth the high and low sale prices on the New York Stock Exchange Composite Tape for the calendar periods indicated, as furnished by the New York Stock Exchange:

	2007				2006
	HIGH		LOW		HIGH		LOW
First Quarter	$	15.90	$	13.34	$	15.25	$	11.27
Second Quarter		19.90		13.60		15.33		11.33
Third Quarter		20.08		13.65		15.39		10.80
Fourth Quarter		18.48		14.80		16.58		14.06

        The Board of Directors declared its first dividend to holders of the Company's Common Stock in November 1986. Cash dividends were paid quarterly from November 1986 through the first quarter of 2005. In addition, the Board declared a special cash dividend of $7.00 per share that was paid in June 2004. The quarterly dividend rate was decreased from $0.30 in 2004 to $0.10 per common share for the first quarter of 2005. The Company has not paid a dividend since April 2005 and currently does not anticipate paying any dividends.

        In accordance with the terms of the 2006 Credit Agreements, the Company's domestic operating subsidiaries are subject to certain restrictions in distributing cash to the Company for, among other things, the purpose of enabling the Company to pay dividends to its shareholders. See Item 7, "Managements Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources" and Note 8 of Notes to Consolidated Financial Statements for a description of the material terms of the 2006 Credit Agreements.

        See Item 12 of this Annual Report on Form 10-K for Equity Compensation Plan Information.

CUMULATIVE TOTAL STOCKHOLDER RETURN

        The following line graph compares the performance of the Company's Common Stock during the five-year period ended December 31, 2007 with the S&P 500 Index and an index composed of other publicly traded companies that the Company considers its peers (the "New Peer Group"). The graph assumes an investment of $100 on December 31, 2002 in the Company's Common Stock, the S&P 500 Index and the New Peer Group index and the Old Peer Group index (defined below). The Peer Group returns are weighted by market capitalization at the beginning of each year. Cumulative total return assumes reinvestment of dividends. The performance shown is not necessarily indicative of future performance.

23

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Russ Berrie & Company, Inc., The S & P 500 Index,
A New Peer Group And An Old Peer Group

*

$100 invested on 12/31/02 in stock or index—including reinvestment of dividends.
Fiscal year ending December 31.

	12/02	12/03	12/04	12/05	12/06	12/07
Russ Berrie & Company, Inc.	100.00	103.86	99.81	50.22	67.95	71.95
S&P 500	100.00	128.68	142.69	149.70	173.34	182.87
Old Peer Group	100.00	123.98	119.58	90.15	88.85	90.53
New Peer Group	100.00	121.59	128.78	97.05	101.64	106.72

        The New Peer Group is comprised of the following publicly traded companies, and is weighted according to market capitalization as of the beginning of each year: (1) Blyth, Inc.; (2) Crown Crafts, Inc.; (3) CSS Industries, Inc.; (4) Lenox Group, Inc.; and (5) Dorel Industries, Inc.

        The peer group selected by the Company was revised this year to exclude Enesco Group, Inc., because it filed for bankruptcy, and to include Dorel Industries, Inc. The peer group previously used by the Company, which includes (1) Blyth, Inc.; (2) Crown Crafts, Inc.; (3) CSS Industries, Inc.; (4) Lenox Group, Inc.; and (5) Enesco Group, Inc. (the "Old Peer Group"), is shown in the chart above for comparative purposes.

24

ITEM 6.    SELECTED FINANCIAL DATA

		Years Ended December 31,*
		2007			2006			2005			2004			2003
		(Dollars in Thousands, Except Per Share Data)
Statement of Operations Data:
Net Sales		$	331,173		$	294,769		$	290,031		$	265,959		$	329,687
Cost of Sales			205,792			176,666			173,712			155,389			154,639
Operating Income (Loss)			15,229			6,142			(7,989	)		(27,545	)		42,301
Income (Loss) before Provision (Benefit) for Income Taxes			11,852			(3,638	)		(22,914	)		(25,363	)		48,432
Income Tax Provision (Benefit)			2,944			5,798			12,185			(5,363	)		13,703
Net Income (Loss)			8,908			(9,436	)		(35,099	)		(20,000	)		34,729
Net Income (Loss) Per Share:
	Basic		0.42			(0.45	)		(1.69	)		(0.96	)		1.69
	Diluted		0.42			(0.45	)		(1.69	)		(0.96	)		1.68
Dividends Per Share**			0.00			0.00			0.10			8.20			1.12
Balance Sheet Data:
Working Capital		$	63,133		$	45,872		$	71,511		$	119,293		$	333,952
Property, Plant and Equipment, net			13,093			13,993			17,856			28,690			46,108
Total Assets			341,975			303,767			328,961			411,098			462,748
Debt			66,844			54,332			76,517			125,000			—
Shareholders' Equity			204,639			190,664			193,854			234,516			415,418
Statistical Data:
Current Ratio			1.7			1.5			1.9			2.6			8.1
Return on Average Shareholders' Equity			4.5	%		(4.9	)%		(16.4	)%		(6.2	)%		8.6	%
Net Profit Margin			2.7	%		(3.2	)%		(12.1	)%		(7.5	)%		10.5	%
Number of Employees			1,036			1,034			1,216			1,340			1,591

*

The above results include Kids Line, LLC since its acquisition on December 15, 2004. The above results include Bright of America Inc. from 2003 until its sale as of July 30, 2004.

**

Dividends per share for the year ended December 31, 2004 includes a one-time special cash dividend in the amount of $7.00 per common share.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

        The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our consolidated financial condition, changes in financial condition and results of operations. This financial and business analysis should be read in conjunction with our consolidated financial statements and accompanying Notes to Consolidated Financial Statements set forth in Item 8 below.

Overview

        The Company is a leader in the infant and juvenile and gift industries. Our infant and juvenile segment designs, manufactures through third parties and markets products in a number of categories, including infant bedding and accessories, bath toys and accessories, developmental toys, feeding items and baby comforting products. These products are sold to consumers, primarily in the United States and certain foreign countries, through national accounts and independent retailers, including toy, specialty, food, drug, apparel and other retailers,, military post exchanges and other venues. Our gift segment designs, manufactures through third parties and markets a wide variety of gift products to retail stores throughout the world, including but not limited to gift stores, pharmacies, card shops, home decor shops, apparel stores, craft stores, garden stores, book stores, stationery stores, hospitals, college and airport gift shops, resort and hotel shops, florists, chain stores, department stores, food stores, military post exchanges and internet companies. In recent years, the gift segment has also expanded its distribution to national accounts.

        Our revenues are primarily derived from sales of our products. For the years ended December 31, 2007 and December 31, 2006, infant and juvenile segment sales accounted for 49.2% and 49.9%, respectively, and gift segment sales accounted for 50.8% and 50.1%, respectively, of our consolidated net sales.

        The principal elements of our global business strategy include:

•

focusing on design-led and branded product development in each of our segments, to enable us to continue to introduce compelling new products, with the intention of increasing our market share;



•

pursuing organic growth opportunities, including:



(i)

expanding our product offerings into related categories; and



(ii)

expanding and diversifying of our distribution channels, with particular emphasis on further extending the infant and juvenile segment into international markets and further expanding our sales channels to include business-to-business and web-based offerings;



•

growing through licensing, distribution or other strategic alliances, including pursuing acquisition opportunities in businesses complementary to ours;



•

implementing of strategies to further capture synergies within and between our segments, through cross-marketing opportunities and consolidation of back-office activities; and



•

continuing efforts to manage costs within each of our segments, with particular focus on further streamlining our gift segment by concentrating on more profitable product lines and creating additional operational efficiencies.

        We believe that we made substantial progress in successfully implementing this strategy during 2007. Specifically, revenues in the infant and juvenile segment continued to grow throughout the year, primarily as a result of new product development and increased distribution with respect to each of our infant and juvenile businesses. In particular, during 2007, Kids Line successfully introduced its Carter's®

26

branded bedding and established an office in the United Kingdom to serve the European market. In addition, Sassy expanded its product line during 2007, including through a license agreement with Leap Frog™ and Sassy's entry into the baby gear category with the introduction of a doorway jumper and a bouncer that incorporates Kids Line designed fabric. We anticipate that Sassy will introduce additional baby gear products in 2008.

        In addition, during the second half of 2007, we also renewed our focus on growth through the exploration of strategic acquisitions. As a result of these efforts, on April 1, 2008, we entered into separate agreements to acquire each of: (i) LaJobi Industries, Inc. ("LaJobi"), a privately-held company based in Cranbury, New Jersey that designs, imports and sells infant and juvenile furniture and related products; and (ii) CoCaLo, Inc. ("CoCaLo"), a privately-held company based in Costa Mesa, California that designs, markets and distributes infant bedding and related accessories. If consummated, these acquisitions will significantly expand our infant and juvenile segment, and will enable us to offer a more complete range of products for the baby nursery. The closing of each acquisition is subject to various closing conditions, and there can be no assurance that either acquisition will be consummated, although we anticipate that each such acquisition will be closed early in April 2008. The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the acquisitions of LaJobi and CoCaLo. There can be no assurance that either acquisition or such amendment will be consummated. See "Liquidity and Capital Resources" below under the section captioned "Anticipated Acquisitions".

        With respect to our gift business, during 2007, we continued our focus on product categories where we believe we can command an authoritative position. As a result, we substantially rejuvenated our gift product line, with approximately 70% of the 2007 product line consisting of new products. New products for 2007 included the Shining Stars® product range, which was the gift segment's most successful new product introduction in several years. We intend to continue our focus on creating compelling new products, and our 2008 product offerings include two new product ranges that will capitalize on the popularity of dimensional products that include a virtual play component. As a result of the popularity of products that incorporate web-based interactivity and the large amount of inventory currently in the market from competitive products, as well as the initial retail shelf placement for the introductory year of Shining Stars, the Company does not anticipate that its Shining Stars product range will achieve in 2008 the high level of sales that it achieved during its 2007. The Company continues to expect significant sales for Shining Stars in 2008, albeit at levels considerably below those achieved in 2007. The Company also anticipates that a portion of this shortfall, if any, will be mitigated by sales of its new web-based product ranges, as well as other new product launches. In addition, potential expanded distribution for all of the Company's web-interactive products, including in international markets, as well as the viral marketing nature of such products, may create additional opportunities, although there can be no assurance that this will be the case.

        In addition, we believe we have substantially completed our gift segment restructuring activities. During 2006, we developed and substantially implemented our Profit Improvement Program ("PIP"), and as a result thereof, we believe that the gift segment infrastructure is now more appropriately sized in light of the current gift retail environment. Since mid-2004, we have reduced our global gift segment operating expenses by approximately $40 million, with approximately $25 million of those reductions having been achieved since November 2005. The full year effect of these annualized expense reductions was realized in fiscal 2007. As part of the PIP, we terminated our direct sales and distribution operations in France, Germany, Belgium and Holland, and restructured certain of our sales and related operations in the U.K., Spain and Ireland. We believe we have established alternative means of reaching certain customers in such regions, including through the use of independent sales representatives or distributors. Although implementation of the PIP has been largely completed, there are certain additional initiatives that have been identified by management but which have not

27

commenced pending a final determination by management of whether their implementation would be appropriate or desirable. As a result, the estimated completion date of the PIP's implementation and estimates of the range of additional charges to be incurred or other expenditures required in connection therewith cannot be determined at this time. The Company may also be required to make certain investments to generate the efficiencies and focus on profitable operations that the PIP is designed to achieve, which amounts cannot be quantified at this time. See Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006 and subsequent Quarterly Reports on Form 10-Q for a detailed discussion of our restructuring activities in recent periods.

        In December 2004, the Company purchased all of the outstanding equity interests and warrants in Kids Line, LLC (the "Purchase"), in accordance with the terms and provisions of a Membership Interest Purchase Agreement (the "Purchase Agreement"). The Company paid approximately $130.6 million, which represented the portion of the purchase price due at closing plus various transaction costs. The aggregate purchase price under the Purchase Agreement also included the payment of contingent consideration (the "Earnout Consideration"). Pursuant to the Purchase Agreement, in December 2007, the Infantline Borrowers paid approximately $28.5 million of the Earnout Consideration and the balance of approximately $3.6 million was paid in January 2008. The total amount of the Earnout Consideration of $32.1 million was charged to goodwill as of December 31, 2007. The Company financed the Earnout Consideration by drawing down upon the Term Loan reborrowing commitment and short term borrowings which were available pursuant to the Infantline Credit Agreement (described in Note 8 of Notes to Consolidated Financial Statements).

Segments

        The Company currently operates in two segments: (i) its infant and juvenile segment and (ii) its gift segment.

Results of Operations

Fiscal year ended December 31, 2007 compared to fiscal year ended December 31, 2006

        The Company's consolidated net sales for the year ended December 31, 2007 increased by 12.4% to $331.2 million, compared to $294.8 million for the year ended December 31, 2006. The net sales increase was attributable to growth in both the Company's infant and juvenile and gift segments.

        The Company's gift segment net sales for the year ended December 31, 2007 increased 13.8% to $168.1 million compared to $147.7 million for the year ended December 31, 2006, primarily as a result of the rollout of its Shining Stars® product line, improved content and product availability, as well as strong consumer demand for the Yokimo™ brand of premium plush products. Net sales in the Company's gift segment benefited from foreign exchange rates by approximately $5.4 million for the year ended December 31, 2007. The Company's infant and juvenile segment net sales for the year ended December 31, 2007 increased 10.9% to $163.1 million, as compared to $147.1 million for the year ended December 31, 2006. The increase was primarily due to new and varied product introductions, including a successful introduction of Carters® branded infant bedding at Kids Line.

        Consolidated gross profit was 37.9% of consolidated net sales for the year ended December 31, 2007, as compared to gross profit of 40.1% for the year ended December 31, 2006. Consolidated gross profit for the year ended December 31, 2007 includes an impairment charge of an aggregate of $10.0 million, or approximately 3% of net sales, recorded in the infant and juvenile segment with respect to the MAM Agreement during the third and fourth quarters of 2007, representing the write-off of the remaining intangible asset associated with the termination of such agreement. This includes $3.6 million that was recorded in the third quarter of 2007 in selling, general and administrative expense and which was reclassified into gross profit as of December 31, 2007. Gross profit for the Company's gift segment was 43.8% of net sales for the year ended December 31, 2007

28

compared to 37.6% of net sales for the year ended December 31, 2006, primarily as a result of the introduction in 2007 of new, higher margin products throughout the gift segment product line, including Shining Stars and Yomiko. Gross profit for the Company's infant and juvenile segment was 31.7% of net sales for the year ended December 31, 2007, as compared to 42.7% of net sales for the year ended December 31, 2006, primarily as a result of the impairment of the MAM Agreement ($10.0 million, or 6.1% of net sales for the infant and juvenile segment), pricing pressure, increased raw material costs, product mix and unfavorable currency exchange expenses associated with the MAM Agreement. As described in more detail in "Liquidity and Capital Resources—Other Events and Circumstances Pertaining to Liquidity" below, during the third quarter of 2007, the Company recorded a $3.6 million impairment charge in connection with the MAM Agreement. In addition, the Company determined that the MAM Agreement was further impaired and subsequently terminated such agreement and, in connection therewith, recorded an additional $6.4 million charge to cost of goods sold at December 31, 2007, representing the write-off of the remaining intangible asset associated with the MAM Agreement.

        Consolidated selling, general and administrative expense was $110.2 million, or 33.3% of consolidated net sales, for the year ended December 31, 2007, compared to $112.0 million, or 38.0% of consolidated net sales, for the year ended December 31, 2006. Selling, general and administrative expense in the Company's gift segment decreased $3.8 million to $83.1 million for the year ended 2007 from $86.9 million in the year ended 2006. This decrease is a result of expense reduction initiatives that were implemented in prior years, partially offset by $2.9 million in current and future severance obligations, $1.5 million of costs related to the exploration of strategic alternatives and other charges, approximately $0.9 million related to the write-down of a note receivable in connection with a 2005 divestiture as well as higher selling expenses resulting from increased sales volume and advertising costs of approximately $2.7 million in connection with the introduction of the Shining Stars product line. Selling, general and administrative expense in the Company's infant and juvenile segment increased by $2.1 million from $25.0 million for the year ended December 31, 2006 to $27.1 million for the year ended December 31, 2007, primarily as a result of increased costs associated with growth at Kids Line, including the establishment of a U.K. subsidiary of Kids Line.

        Consolidated operating income was $15.2 million for the year ended December 31, 2007 compared to consolidated operating income of $6.1 million for the year ended December 31, 2006. This improvement of $9.1 million was primarily the result of a $22.2 million improvement in the operating loss of the Company's gift segment for the year ended December 31, 2007 compared to the year ended December 31, 2006, partially offset by a $13.1 million decrease (from $37.7 million to $24.6 million) in the infant and juvenile segment operating income during the same period, in each case due to the factors discussed above.

        Consolidated other expense was $3.4 million for the year ended December 31, 2007 compared to $9.8 million for the year ended December 31, 2006, an improvement of $6.4 million. This improvement is the result of refinancing costs that were incurred in 2006 but not in 2007 and lower borrowing costs in 2007.

        The income tax provision for the year ended December 31, 2007 was $2.9 million as compared to $5.8 million in 2006. The Company recorded a current tax benefit of approximately $2.5 million primarily related to a decrease in tax reserves associated with the expiration of the statute of limitations in various jurisdictions during 2007, partially offset by foreign tax expense of approximately $1.1 million on profitable foreign operations. The Company recorded a federal deferred tax expense of approximately $2.5 million related to the deferred tax liability associated with tax amortization of intangible assets relating to the Kids Line, Sassy and Applause acquisitions. These deferred tax liabilities are indefinite in nature for accounting purposes, and therefore cannot be offset by the Company's deferred tax assets. The Company has recorded valuation allowances against that deferred portion of its deferred tax assets where management believes it is more likely than not that the Company will not be able to realize such deferred tax assets. The Company recorded an additional

29

deferred tax expense of approximately $1.8 million to reflect an increase in the valuation allowance related to its foreign tax credit carryforwards, and to record a valuation allowance against its deferred tax assets in Australia, as the Company believes it is more likely than not that the Company will not be able to realize such deferred tax assets.

        As a result of the foregoing, consolidated net income for the year ended December 31, 2007 was $8.9 million, or $0.42 per basic share, compared to consolidated net loss of $9.4 million, or $(0.45) per basic share, for the year ended December 31, 2006, which represents an improvement of approximately $18.3 million, or $0.87 per basic share. As noted above, results for fiscal 2007 include an aggregate of $14.9 million of charges primarily related to the impairment of the MAM Agreement, certain severance charges, certain restructuring charges related to the gift segment, and a write-down of a note receivable related to a divestiture from 2005.

Fiscal year ended December 31, 2006 compared to fiscal year ended December 31, 2005

        The Company's consolidated net sales for the year ended December 31, 2006 increased by 1.6% to $294.8 million, compared to $290.0 million for the year ended December 31, 2005. The net sales increase was primarily attributable to growth in the Company's infant and juvenile segment, partially offset by a sales decrease in the Company's gift segment.

        The Company's gift segment net sales for the year ended December 31, 2006 decreased 6.8% to $147.7 million compared to $158.5 million for the year ended December 31, 2005, primarily as a result of the factors discussed in the "Overview" above, particularly the closure of several European direct sales operations and a reduction in the size of the Company's worldwide gift sales force of approximately 30%. Net sales in the Company's gift segment benefited by foreign exchange rates of approximately $1.5 million for the year ended December 31, 2006. The Company's infant and juvenile segment net sales for the year ended December 31, 2006 increased 11.9% to $147.1 million compared to $131.5 million for the year ended December 31, 2005. The increase was primarily due to new and varied product introductions.

        Consolidated gross profit was 40.1% of consolidated net sales for the year ended December 31, 2006, which is consistent with gross profit for the year ended December 31, 2005. Gross profit for the Company's gift segment was 37.6% of net sales for the year ended December 31, 2006 compared to 38.5% of net sales for the year ended December 31, 2005, primarily as a result of continued competitive pricing pressures in the gift segment as well as increased sales during 2006 of close-out merchandise related to the Company's substantial reduction of the number of products it sells. Gross profit for the Company's infant and juvenile segment was 42.7% of net sales for the year ended December 31, 2006 as compared to 42.0% of net sales for the year ended December 31, 2005, due primarily to new products with improved gross margins.

        Consolidated selling, general and administrative expense was $112.0 million, or 38.0% of consolidated net sales, for the year ended December 31, 2006 compared to $124.3 million, or 42.9% of consolidated net sales, for the year ended December 31, 2005. The decrease is due primarily to lower expenses in the gift segment, consisting of lower payroll and associated costs of approximately $8.1 million, reduced showroom costs of approximately $1.7 million, lower rent and related occupancy costs of approximately $2.1 million as a result of the restructuring initiatives as discussed in the "Overview" above, partially offset by higher selling, general and administrative expenses in the infant and juvenile segment to support the growth in that segment.

        Consolidated operating income was $6.1 million for the year ended December 31, 2006 compared to an operating loss of $8.0 million for the year ended December 31, 2005. This improvement of $14.1 million was primarily the result of a decrease in the operating loss of the Company's gift segment of $11.0 million for the year ended December 31, 2006 compared to the year ended December 31,

30

2005, and a $3.1 million improvement in the infant and juvenile segment during the same period, in each case due to the factors discussed above.

        Consolidated other income (expense) was an expense of $9.8 million for the year ended December 31, 2006 compared to an expense of $14.9 million for the year ended December 31, 2005, a decrease of $5.1 million. This decrease in expense was primarily due to a decrease in interest expense as a result of the LaSalle Refinancing (described below in "Liquidity and Capital Resources") in March of 2006 and lower levels of outstanding debt.

        The income tax provision in 2006 was $5.8 million as compared to $12.2 million in 2005. The tax provision includes domestic tax expense of approximately $4.5 million related to the deferred tax liability associated with tax amortization of intangible assets relating to the Kids Line, Sassy and Applause acquisitions. These deferred tax liabilities are indefinite in nature for accounting purposes, and therefore cannot be offset against the Company's deferred tax assets. The Company has recorded valuation allowances against that portion of its deferred tax assets where management believes it is more likely than not that the Company will not be able to realize such deferred tax assets. Additionally, the Company recorded tax expense of approximately $1.3 million primarily due to foreign taxes related to its profitable operations in Australia, Canada and Hong Kong and state income taxes.

        As a result of the foregoing, consolidated net loss for the year ended December 31, 2006 was $9.4 million, or $0.45 per share, compared to consolidated net loss of $35.1 million, or $1.69 per share, for the year ended December 31, 2005, which represents an improvement in the consolidated net loss of approximately $25.7 million, or $1.24 per share.

Liquidity and Capital Resources

        The Company's principal sources of liquidity are cash and cash equivalents, funds from operations, and availability under its bank facilities. The Company believes that cash flows from operations and future borrowings will be sufficient to fund its operating needs and capital requirements for at least the next 12 months, subject to the discussion below with respect to potential acquisitions.

        As of December 31, 2007, the Company had cash and cash equivalents of $21.9 million compared to $11.5 million at December 31, 2006. This increase of $10.4 million was primarily the result of an increase in net income and an increase in accounts payable and accrued expenses, partially offset by an increase in inventory and accounts receivable. As of December 31, 2007 and December 31, 2006, working capital was $61.0 million and $45.9 million, respectively, representing an increase of $15.1 million. This increase was primarily the result of a net increase in cash and cash equivalents for the aforementioned reasons and the reclass of uncertain tax positions from current liabilities to long-term liabilities.

        Net cash provided by operating activities was approximately $27.3 million for the year ended December 31, 2007, compared to net cash provided by operating activities of approximately $6.4 million for the year ended December 31, 2006. This increase of $21.0 million was due primarily to net income of $8.9 million in 2007 compared to a net loss of $9.4 million in 2006. Additionally, non-cash expenses for impairment of an intangible asset and deferred tax expense were offset by an increase of $21.1 million in inventory due to an increase in product categories. Net cash used in investing activities was approximately $32.7 million for the year ended December 31, 2007, compared to net cash used in investing activities of approximately $1.8 million for the year ended December 31, 2006. For 2007, the net cash used in investing activities was primarily the result of the payment of the Kids Line Earnout Consideration, as well as capital expenditures for property, plant and equipment. Net cash provided by financing activities was approximately $15.4 million for the year ended December 31, 2007, compared to net cash used by financing activities of $22.3 million for the year ended December 31, 2006. The increase in net cash provided by financing activities of approximately $37.7 million was due primarily to an increase in long-term debt and net borrowings on the Company's credit facilities in 2007, primarily

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reflecting the financing of the Earnout Consideration and an increase in the outstanding debt under the Giftline Revolver.

Anticipated Acquisitions

LaJobi

        On April 1, 2008, a newly-formed and indirect, wholly-owned Delaware subsidiary of the Company, LaJobi, Inc. (the "LaJobi Buyer"), entered into an Asset Purchase Agreement (the "Asset Agreement") with LaJobi Industries, Inc., a New Jersey corporation ("LaJobi"), 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 LaJobi and specified obligations. 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) to specialty stores and boutiques, baby superstores and mass merchandisers. All capitalized terms used in this section but undefined herein shall have the meanings ascribed to them in the Asset Agreement, unless otherwise indicated, and the descriptions herein are qualified in their entirety by reference to the Asset Agreement, filed as Exhibit 2.3 hereto.

        The aggregate purchase price payable for LaJobi is equal to: $47.0 million, reduced by the amount of assumed indebtedness (including capitalized lease obligations), as further increased or decreased by the amount that Final Working Capital is greater or less than $7.0 million. From the aggregate purchase price, $2.5 million will be deposited in escrow at Closing in respect of potential indemnification claims. As additional consideration, if the following conditions have been satisfied, the LaJobi Buyer will pay the amounts described below:

        (a)   Subject to paragraph (b) below, provided that the EBITDA of LaJobi'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, the LaJobi Buyer will pay to LaJobi a percentage of the Agreed Enterprise Value of the LaJobi Buyer 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 $15,000,000 (the "Earnout Consideration"). The "Agreed Enterprise Value" shall 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 LaJobi 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.

        (b)   In the event the LaJobi Buyer, prior to the Measurement Date, relocates the principal location of the LaJobi business beyond an agreed distance, the calculation of the Earnout Consideration may be accelerated upon election of LaJobi. For purposes of determining the 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 Earnout Consideration payable will be discounted, at the Agreed Rate, from the scheduled payment date to, and including, such early payment date.

        The Asset Agreement contains various representations, warranties, covenants and conditions to closing (including, without limitation, the receipt of specified consents, the extension of specified license agreements, and the execution of (i) a transitional services agreement with a Thailand affiliate of LaJobi and (ii) an employment agreement with Lawrence Bivona). Under the Asset Agreement, the LaJobi Buyer is entitled to indemnification from LaJobi and the Stockholders for various matters, including, but not limited to, breaches of representations, warranties or covenants, and specified

32

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, the LaJobi Buyer will at the Closing enter into a three year employment agreement with Lawrence Bivona as President of the LaJobi Buyer. Mr. Bivona is currently the President of LaJobi.

        The Asset Agreement may be terminated for specified reasons, including if the Closing shall not have taken place by April 30, 2008. In the event of specified terminations, LaJobi or the LaJobi Buyer, as applicable, shall reimburse the other for all reasonable costs and expenses incurred in connection with the contemplated transactions.

        In connection with the Asset Agreement, the Company has agreed to pay a finder's fee to a financial institution in the amount of $1.5 million, payable at the closing of the transaction, plus 1% of the Agreed Enterprise Value of the LaJobi Buyer, payable in the same manner and at the same time as the Earnout Consideration.

        The transactions contemplated by the Asset Agreement are expected to close early in April 2008, but there can be no assurance that such acquisition will be consummated.

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"). 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). All capitalized terms used in this section but undefined herein shall have the meanings ascribed to them in the Stock Agreement, unless otherwise indicated, and the descriptions herein are qualified in their entirety by reference to the Stock Agreement, filed as Exhibit 2.4 hereto.

        The aggregate base purchase price payable for CoCaLo will be equal to: (i) $16.0 million, minus (ii) the aggregate Debt of CoCaLo outstanding at Closing (including accrued interest), minus (iii) specified transaction expenses, and further increased or decreased by the amount that Closing Date Net Working Capital is greater or less than $5.8 million. An estimate of the aggregate base purchase price (including an estimate of the working capital adjustment) shall be calculated prior to Closing. Such estimate, less $1.6 million (the "Closing Amount"), will be paid in cash at Closing, in addition to amounts necessary to discharge the Debt to be repaid at Closing (to the extent included in the calculation of the Closing Amount). If the actual aggregate base purchase price (determined after the Closing) less $1.6 million is greater than the Closing Amount (after giving effect to any difference between the estimated and actual working capital adjustment), the CoCaLo Buyer shall pay the difference to the Sellers. If the Closing Amount is greater than the actual aggregate base purchase price (determined after the Closing) less $1.6 million (after giving effect to any difference between the estimated and actual working capital adjustment), the Sellers shall pay the difference to the CoCaLo Buyer. The $1.6 million shall be evidenced by a non-interest bearing promissory note and shall be paid as additional consideration in equal annual installments over a three year period from the Closing Date. The CoCaLo Buyer shall also pay the Additional Earnout Payments, if payable as described below.

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        The Additional Earnout Payments provide for a potential payment ranging from zero to a maximum of $4 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.

        Kids Line has agreed to guaranty all of the obligations of the CoCaLo Buyer under the Stock Agreement.

        The Stock Agreement contains various representations, warranties, covenants and conditions to closing (including obtaining specified consents and amendments). 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 will at the Closing enter into a three year employment agreement with Renee Pepys Lowe as President and Chief Executive Officer. Ms. Pepys Lowe is currently the President and Chief Executive Officer of CoCaLo.

        The transactions contemplated by the Stock Agreement are expected to close early in April 2008, but there can be no assurance that such acquisition will be consummated.

        The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the acquisitions of LaJobi and CoCaLo. The Company anticipates that such amendment will be consummated in early April 2008, although there can be no assurance that either acquisition or such amendment will be consummated.

Kids Line and Related Financing

        Background.    In December 2004, the Company purchased all of the outstanding equity interests and warrants in Kids Line (the "Purchase") in accordance with the terms and provisions of a Membership Interest Purchase Agreement (the "Purchase Agreement"). At closing, the Company paid approximately $130.6 million, which represented the portion of the purchase price due at closing plus various transaction costs. The aggregate purchase price under the Purchase Agreement, however, also included the payment of contingent consideration (the "Earnout Consideration"). Pursuant to the Purchase Agreement, 90% of the estimated Earnout Consideration was due in December 2007, and in connection therewith, the Infantline Borrowers (defined below), who were responsible for such

34

payment, paid $28.5 million in respect thereof in December of 2007. The remaining portion of the Earnout Consideration ($3.6 million) was paid in January of 2008, following the determination of the final Agreed Enterprise Value. The Earnout Consideration was charged to goodwill. The Infantline Borrowers made the payments using the availability under the Infantline Term Loan ($20.0 million) and the Infantline Revolving Loan ($8.5 million), each as defined below. To secure the obligations of the Infantline Borrowers to pay the Earnout Consideration, the Infantline Borrowers had previously granted a subordinated lien on substantially all of their assets, on a joint and several basis, and RB granted a subordinated lien on the equity interests of each of the Infantline Borrowers to the Earnout Sellers Agent (as defined in the Infantline Credit Agreement). All such security interests and liens were subordinated to the senior indebtedness of the Infantline Borrowers arising under the Infantline Credit Agreement. As a result of the payment in full of the Earnout Consideration, all such subordinated security interests and liens were released as of February 29, 2008.

        The Kids Line acquisition was originally financed with the proceeds of a term loan, which was subsequently replaced by a $105.0 million credit facility with LaSalle Bank as agent (the "2005 Credit Agreement") and the 2005 Canadian Credit Agreement (as defined below). In order to reduce overall interest expense and gain increased flexibility with respect to the financial covenant structure of the Company's senior financing, on March 14, 2006, the 2005 Credit Agreement was terminated and the obligations thereunder were refinanced (the "LaSalle Refinancing") with the execution of the 2006 Credit Agreement (defined below). For a detailed description of the 2006 Credit Agreements, which are summarized below, see Note 8 of Notes to Consolidated Financial Statements herein. In connection with the LaSalle Refinancing, all outstanding obligations under the 2005 Credit Agreement (approximately $76.3 million) were repaid using proceeds from the Infantline Credit Agreement (defined below).

        Long-term debt at December 31, 2007 and 2006 consists of the following (in thousands):

		December 31,
		2007		2006
Term Loan (Infantline Credit Agreement)		$	43,500	$	32,500
Less current portion			11,500		9,000
	Long-term debt	$	32,000	$	23,500

        The aggregate maturities of long-term debt at December 31, 2007 are as follows (in thousands):

2008		$	11,500
2009			14,500
2010			15,000
2011			2,500
	Total	$	43,500

        At December 31, 2007, there was approximately $15.5 million borrowed under the Infantline Revolving Loan and approximately $7.8 million borrowed under the Giftline Revolver, all of which is classified as short-term debt.

        As part of the LaSalle Refinancing, the Company formed a wholly-owned Delaware subsidiary, Russ Berrie U.S. Gift Inc. ("U.S. Gift") to which it assigned (the "Assignment") substantially all of its assets and liabilities which pertain primarily to its domestic gift business, such that separate loan facilities could be made directly available to each of the Company's domestic gift business and its infant and juvenile business. The Assignment transaction reinforced the operation of the Company as two separate segments, and the credit facilities that have been extended to each segment are separate and

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distinct. There are no cross-default provisions between the Infantline Credit Agreement and Giftline Credit Agreement (which are described below).

        Pursuant to the Assignment, our parent company, Russ Berrie and Company, Inc. ("RB"), is now organized as a holding company, with all of its operations being conducted through its subsidiaries. RB, however, has continuing cash needs for corporate overhead expenses, taxes and other purposes (collectively, the "Requirements"). The 2006 Credit Agreements (defined below) contain significant limitations on the ability of RB's domestic subsidiaries, to distribute cash, including in the form of dividends, loans or other advances, to RB to pay for its Requirements (such limitations are described in more detail below). Management believes that the amounts permitted to be distributed to RB by its domestic subsidiaries will be sufficient to fund the Requirements, although there can be no assurance that such Requirements will not exceed current estimates. Although there are no restrictions in the 2006 Credit Agreements on the ability of RB's foreign subsidiaries to distribute cash to RB, available cash therefrom may be insufficient to cover the Requirements without additional distributions from RB's domestic subsidiaries. Because RB is dependent upon cash distributions from its domestic subsidiaries, if such domestic subsidiaries are unable to distribute sufficient cash to RB to meet its Requirements without triggering a default under the 2006 Credit Agreements, this could have a material adverse impact on the Company's liquidity.

        The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the acquisitions of LaJobi and CoCaLo. The Company anticipates that such amendment will be consummated by early April 2008, although there can be no assurance that either acquisition or such amendment will be consummated.

The LaSalle Refinancing—Effective March 14, 2006

A. The Infantline Credit Agreement

        On March 14, 2006 (the "Closing Date"), Kids Line, LLC ("KL"), and Sassy, Inc. ("Sassy", and together with KL, the "Infantline Borrowers"), 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, the Company 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"). Unless otherwise specified herein, capitalized terms used but undefined in this Section A shall have the meanings ascribed to them in the Infantline Credit Agreement.

        The commitments under the Infantline Credit Agreement currently consist of (a) a $35.0 million revolving credit facility (the "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 "Term Loan"). The Infantline Borrowers drew down approximately $79.7 million on the Infantline Credit Agreement on the Closing Date, including the full amount of the Term Loan, which reflected the payoff of all amounts outstanding under the 2005 Credit Agreement and certain fees and expenses associated with the LaSalle Refinancing. As of December 31, 2007, the outstanding balance on the Revolving Loan was $15.5 million and the outstanding balance on the Term Loan was $43.5 million. As of December 31, 2007, the Company had availability under the Revolving Loan of $16.9 million and had a total of $0.9 million outstanding under its letter of credit facility. Mandatory Term Loan repayment obligations are as follows: $11.5 million in 2008, $14.5 million in 2009, $15.0 million in 2010; and $2.5 million in 2011. All obligations under the Infantline Credit Agreement are due and payable on March 14, 2011, subject to customary early termination provisions.

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        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 Term Loan, which was intended to enable the Infantline Borrowers to continue to utilize cash flows expected to be generated from operations to repay debt until the Earnout Consideration became due.

        Pursuant to the First Amendment, the Infantline Borrowers borrowed $20 million under the 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 Term Loan. The lenders agreed to provide 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 Earnout Consideration. Pursuant to the First Amendment, the Infantline Borrowers 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, the Infantline Borrowers paid $28.5 million of the Earnout Consideration, which amount was financed by drawing the TR Commitment of $20 million and drawing an additional $8.5 million on the Infantline Revolving Loan. The remaining portion of the Earnout Consideration ($3.6 million) was paid in January of 2008, also through a draw on the Infantline Revolving Loan.

        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 shall range from 1.75% - 2.50% for LIBOR Loans and from 0.25% - 1.00% for Base Rate Loans. The applicable interest rate margins as of December 31, 2007 were: 1.75% for LIBOR Loans and 0.25% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of December 31, 2007 were as follows:

	At December 31, 2007
	LIBOR Loans		Base Rate Loans
Infantline Revolving Loan	6.61	%	7.25	%
Infantline Term Loan	6.92	%	7.25	%

        An aggregate agency fee of $25,000 is payable on each anniversary of the Closing Date. The Revolving Loan is subject to an annual non-use fee (payable monthly, in arrears, and upon termination of the relevant obligations) of 0.50% for 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 1.75% - 2.50% and other customary letter of credit administration fees.

        The Infantline Borrowers are required to make prepayments of the Term Loan upon the occurrence of certain transactions, including most asset sales or debt or equity issuances. Additionally, commencing in early 2008 with respect to fiscal year 2007, annual mandatory prepayments of the Term Loan shall be 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 ended 2007, no Excess Cash Flow payment was required.

        The Infantline Credit Agreement contains customary affirmative and negative covenants, as well as the following financial covenants (the "Infantline Financial Covenants"): (i) a minimum EBITDA test, (ii) a minimum Fixed Charge Coverage Ratio, (iii) a maximum Total Debt to EBITDA Ratio and (iv) an annual capital expenditure limitation. In addition, upon the occurrence of an event of default under the credit agreement, including a failure to maintain compliance with the Infantline Financial Covenants, the lenders could elect to declare all amounts outstanding under the credit facility to be immediately due and payable.

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        As of December 31, 2007, the Company was in compliance with the financial covenants contained in the Infantline Credit Agreement.

        The Infantline Credit Agreement 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, including a cap (subject to certain exceptions) of $2.0 million per year on the amount that can be provided to RB to pay corporate overhead expenses.

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, U.S. Gift and other specified wholly-owned domestic subsidiaries of the Company (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" and, together with the Infantline Credit Agreement, the "2006 Credit Agreements"). Unless otherwise specified herein, capitalized terms used but undefined in this, 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 December 31, 2007, the outstanding balance on the Giftline Revolver was $7.8 million, there was no outstanding balance on the Canadian Revolving Loan (see Section 1.C below), and there was $1.2 million utilized under the Canadian sub-facility for letters of credit. At December 31, 2007, based on available collateral, the unused amount available to be borrowed under the Giftline Revolver was $5.7 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.

        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 shall 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

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margins as of December 31, 2007 were 2.25% for LIBOR Loans and 0.25% for Base Rate Loans. As of December 31, 2007, the interest rate was 7.25% for the one outstanding Base Rate loan ($3.8 million) and 7.17% for one outstanding LIBOR loan ($4.0 million).

        Aggregate agency fees of $20,000 are 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 Infantline Credit Agreement. 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 March 31, 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. As of December 31, 2007, the Company was in compliance with the remaining 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 their allocable portion of RB's corporate overhead expenses, including a cap (subject to certain exceptions) on the amount that can be provided to RB for corporate overhead expenses equal to $4.5 million per year for each of fiscal years 2006 and 2007, and $5.0 million for each fiscal year thereafter. 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

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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.

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 the Company) 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 (as amended on August 4, 2005, December 7, 2005 and March 14, 2006, 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 Infantline Credit Agreement will not constitute a default under the Canadian Credit Agreement. There were no borrowings under the Canadian Revolving Loan as of 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 December 31, 2007, there were no Base Rate or Libor Loans outstanding.

Russ Berrie (UK) Limited Business Overdraft Facility

        On March 19, 2007, Russ Berrie UK Limited entered into a Business Overdraft Facility (the "Facility") with the National Westminster Bank PLC (the "Bank") and the Royal Bank of Scotland plc (RBS), acting as agent for Bank. The Facility, as amended consists of a maximum credit line of £1.5 million. Interest will be 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 amount 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 replaces the Framework Agreement described in Note 5 to the Notes to Consolidated Financial Statements, which was terminated as of March 31, 2007. The Facility, like the Framework Agreement facility, was established to assist in meeting the working capital requirements of Russ Berrie UK Limited. As of December 31, 2007 there were no borrowings outstanding under the Facility.

Other Events and Circumstances Pertaining to Liquidity

        As previously disclosed, the Company believes it has substantially completed its gift segment restructuring. In the event that additional initiatives related to the PIP are implemented, however, certain significant restructuring charges may be recognized. As the determination to implement any or all such initiatives has not yet been made, estimates of the range of any additional charges or other related expenditures cannot be determined at this time. See our Annual Report on Form 10-K for the year ended December 31, 2006 for a more detailed description of the PIP and the restructuring activities undertaken in 2005 and 2006.

40

        Sassy has operated under a distribution agreement with MAM Babyartikel GmbH of Vienna, Austria (the "MAM Agreement") prior to and after the acquisition of Sassy by the Company in 2002. During the third quarter of fiscal 2007, the Company recorded an impairment charge of $3.6 million in the Company's infant and juvenile segment with respect to the MAM Agreement. Based on several factors, including the views of the Company's new chief executive officer (in consultation with senior management), the inability to obtain concessions from MAM during discussions in December 2007, the decreasing profitability of the products sold under the MAM Agreement and specified restrictions contained, therein limiting the Company's ability to enter into competitive product categories, the Company recognized an impairment charge and exercised its right to terminate the MAM Agreement, effective as of March 26, 2008. As a result of such termination, the Company recorded an additional impairment charge of $6.4 million for the fiscal year ended December 31, 2007 (for a total impairment charge of $10.0 million during 2007), reflecting the write-off of the remaining intangible assets related to the MAM Agreement. The Company expects to continue to distribute MAM products throughout 2008 pursuant to contractual transition procedures, but anticipates that it will experience a sales decline of approximately $20-25 million (although, as noted above, the agreement generates only limited profitability), until such time as the Company can generate replacement or alternate product sales. Pursuant to the MAM Agreement, the Company will be restricted from selling products competitive with the MAM products for a period of one year following the termination of the MAM Agreement. See "Item 1. Business" under the section captioned "Copyrights, Trademarks, Patents and Licenses" and Note 4 to Notes to Consolidated Financial Statements for further detail with respect to the MAM Agreement.

        The Company enters into foreign currency forward exchange contracts, principally to manage the economic currency risks associated with the purchase of inventory by its European, Canadian and Australian subsidiaries in the gift segment and by Sassy Inc. in the infant and juvenile segment. As of December 31, 2007 the Company had outstanding forward contracts with a notional amount totaling approximately $9.7 million. See Note 5 to Notes to Consolidated Financial Statements.

        The Company is dependent upon information technology systems in many aspects of its business. In 2002, the Company commenced a global implementation of an Enterprise Resource Planning ("ERP") system for its gift businesses. During 2003 and continuing into 2004, certain of the Company's international gift subsidiaries began to phase-in aspects of the new ERP system. In late 2005, the Company began to explore alternative global information technology systems for its gift business that could provide greater efficiencies, lower costs and greater reporting capabilities than those provided by the current ERP system. As a result of this review, all remaining international implementations were placed on hold pending a decision on whether or not to replace the current ERP system. The Company has not yet made a decision on whether to replace its current ERP system and will continue to explore whether such replacement is advisable.

        The Company is subject to legal proceedings and claims arising in the ordinary course of its business that the Company believes will not have a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows.

        Consistent with its past practices and in the normal course of its business, the Company regularly reviews acquisition opportunities of varying sizes. See "Anticipated Acquisitions" above for a description of our intended acquisitions of LaJobi and CoCaLo. The Company may consider the use of debt or equity financing to fund potential acquisitions. The 2006 Credit Agreements impose restrictions on the Company that could limit its ability to respond to market conditions or to take advantage of acquisitions or other business opportunities.

        The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the anticipated acquisitions of LaJobi and CoCaLo. The Company anticipates

41

that such amendment will be consummated by early April 2008, although there can be no assurance that either acquisition or such amendment will be consummated.

        The Company has entered into certain transactions with certain parties who are considered related parties, and these transactions are disclosed in Note 14 of Notes to Consolidated Financial Statements and Item 13, "Certain Relationships and Related Transactions and Director Independence."

Contractual Obligations

        The following table summaries the Company's significant known contractual obligations as of December 31, 2007 and the future periods in which such obligations are expected to be settled in cash (in thousands):

	Total		2008		2009		2010		2011		2012		Thereafter
Operating Lease Obligations(1)	$	44,815	$	7,309	$	6,643	$	5,977	$	5,290	$	5,301	$	14,295
Capitalized Leases	$	687	$	232	$	276	$	179	$	—	$	—	$	—
Purchase Obligations(2)	$	35,742	$	35,742	$	—	$	—	$	—	$	—	$	—
Debt Repayment Obligations(3)	$	43,500	$	11,500	$	14,500	$	15,000	$	2,500	$	—	$	—
Interest on Debt Repayment Obligations(5)	$	5,900	$	2,900	$	2,000	$	900	$	100	$	—	$	—
Earnout Consideration(4)	$	3,622	$	3,622	$	—	$	—	$	—	$	—	$	—
Royalty Obligations	$	4,248	$	2,408	$	1,763	$	77	$	—	$	—	$	—
Total Contractual Obligations	$	138,514	$	63,713	$	25,182	$	22,133	$	7,890	$	5,301	$	14,295

(1)

See Note 15 of Notes to Consolidated Financial Statements.

(2)

The Company's purchase obligations consist primarily of purchase orders for inventory.

(3)

Reflects repayment obligations under the Infantline Credit Agreement. See Note 8 of Notes to Consolidated Financial Statements for a description of the Infantline Credit Agreement, including provisions that create, increase and/or accelerate obligations thereunder. Excludes revolving loan facilities which expire on March 14, 2011. At December 31, 2007 there was approximately $15.5 million borrowed under the Infantline Revolving Loan and approximately $7.8 million borrowed under the Giftline Revolver.

(4)

This balance was paid in January 2008.

(5)

This amount reflects estimated interest payments on the long-term debt repayment obligation calculated using an interest rate range of 7.5%-8.5% and current levels of outstanding long-term debt. Such amounts are estimates only and actual interest payments could differ materially. See "Anticipated Acquisitions" above regarding an anticipated increase in long-term debt.

Of the total income tax payable of $11.3 million, the Company has classified $1.9 million as current, as such amount is expected to be resolved within one year. The remaining amount has been classified as a long-term liability. These amounts are not included in the above table as the timing of their potential settlement is not reasonably estimable.

Off Balance Sheet Arrangements

        The Company has obligations under certain letters of credit that contingently require the Company to make payments to guaranteed parties upon the occurrence of specified events. See Note 8 of Notes to Consolidated Financial Statements for further descriptions of the Company's letters of credit. There have not been any draws under any of the foregoing obligations, although there can be no assurance that no such draws will be required in the future.

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Critical Accounting Policies

        The SEC has issued disclosure advice regarding "critical accounting policies", defined as accounting policies that management believes are both most important to the portrayal of the Company's financial condition and results and require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

        Management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates and assumptions are reviewed periodically, and revisions made as determined to be necessary by management. Except as discussed below with respect to the MAM Agreement, there have been no material changes to the Company's significant accounting estimates, assumptions or the judgments affecting the application of such estimates and assumptions during 2007. The Company's significant accounting estimates described below have historically been and are expected to remain reasonably accurate, but actual results could differ from those estimates under different assumptions or conditions.

        Note 2 of Notes to Consolidated Financial Statements includes a summary of the significant accounting policies used in the preparation of the Company's consolidated financial statements. The following, however, is a discussion of those accounting policies which management considers being "critical" within the SEC definition discussed above.

Accounts Receivable Allowances

        Accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivable aging, and existing industry and national economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after commercially reasonable means of collection have been exhausted and the potential for recovery is considered unlikely. The Company does not have any off-balance sheet credit exposure related to its customers.

Revenue Recognition

        The Company recognizes revenue when title and risk of loss has passed to its customer, when persuasive evidence of a sales arrangement exists, the selling price is fixed and determinable, and collectibility is reasonably assured.

Inventory Reserves

        The Company values inventory at the lower of cost or its current estimated market value. The Company regularly reviews inventory quantities on hand, by item, and records inventory at the lower of cost or market based primarily on the Company's historical experience and estimated forecast of product demand using historical and recent ordering data relative to the quantity on hand for each item.

Long-Lived Assets

        In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", long-lived assets, such as property, plant, and

43

equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. If such actual future cash flows are less than the estimated future cash flows, certain of the Company's long-lived assets could be impaired.

        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 in the event of a triggering event indicating that an impairment may exist. The Company's annual impairment testing is performed in the fourth quarter. Sassy has operated under a distribution agreement with MAM Babyartikel GmbH of Vienna, Austria (the "MAM Agreement") prior to and after its acquisition by the Company in 2002. During the third quarter of fiscal 2007, due to the adverse impact of foreign exchange rates, the Company performed an analysis of the value of this agreement. In connection with such 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 the MAM Agreement. Based upon the fair values derived using a discounted cash flows analysis, an impairment charge of $3.6 million was recorded in the Company's infant and juvenile segment in the Company's consolidated statements of operations for the three and nine months ended September 30, 2007. In addition, during the third quarter of 2007, the Company determined that the MAM Agreement was a finite-lived asset and, as such, would be amortized over an 8.5 year life. In connection with such determination, the Company recorded $200,000 as amortization expense in each of the third and fourth quarters of 2007.

        Based on several factors, including the views of the Company's new chief executive officer (in consultation with senior management), the inability to obtain concessions from MAM during discussions in December 2007, the decreasing profitability of the products sold under the MAM Agreement and specified restrictions contained therein limiting the Company's ability to enter into competitive product categories, the Company exercised its right to terminate the MAM Agreement, effective as of March 26, 2008. As a result of such termination, the Company recorded an additional impairment charge of $6.4 million for the fiscal year ended December 31, 2007 (for a total impairment charge of $10.0 million during 2007 which has been recorded in cost of sales of the infant and juvenile segment), reflecting the write-off of the remaining intangible assets related to the MAM Agreement. See "Item 1. Business" under the section captioned "Copyrights, Trademarks, Patents and Licenses" and Note 4 for further detail with respect to the MAM Agreement.

Accrued Liabilities and Deferred Tax Valuation Allowances

        The preparation of the Company's Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States requires management to make certain estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent liabilities at the date of the financial statements. Such liabilities include, but are not limited to, accruals for various legal matters, tax exposures and valuation allowances for deferred tax assets. The settlement of the actual liabilities could differ from the estimates included in the Company's consolidated financial statements. The Company's valuation allowances for its deferred tax assets could change if the Company's estimate of future taxable income changes.

44

Accounting Standards Adopted During 2007

        In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") which clarifies the accounting for uncertain tax positions. FIN 48 requires we recognize in our consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on the technical merits of the position. We adopted FIN 48 on January 1, 2007. For a complete discussion of FIN 48 please see Note 12—Income Taxes in the accompanying notes to consolidated financial statements.

Recently Issued Accounting Standards

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company's year beginning January 1, 2009. However, on February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-2 which defers the effective date of SFAS No. 157 for one year for non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial position and results of operations.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, on its consolidated financial statements of SFAS No. 159.

Forward-Looking Statements

        This Annual Report on Form 10-K contains certain forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission ("SEC") filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. These statements may be identified by the use of forward-looking words or phrases including, but not limited to, "anticipate", "project", "believe", "expect", "intend", "may", "planned", "potential", "should", "will" or "would". The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, expenses, working capital, liquidity, capital needs, interest costs and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Specific risks and uncertainties include, but are not limited to, those set forth under Item 1A, "Risk Factors."

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company is exposed to market risk primarily from changes in interest rates and foreign currency exchange rates.

Interest Rate Changes

        Debt.    The interest applicable to the loans under the 2006 Credit Agreements is based upon the LIBOR Rate and the Base Rate (each as defined in the 2006 Credit Agreements). At December 31, 2007, a sensitivity analysis to measure potential changes in interest rates indicates that a one percentage point increase in interest rates would increase the Company's interest expense by approximately

45

$700,000 annually. See Note 8 of Notes to Consolidated Financial Statements for a discussion of the interest rate applicable to the Company's senior bank facilities.

Foreign Currency Exchange Rates

        At December 31, 2007 and 2006, a sensitivity analysis to changes in the value of the U.S. dollar on foreign currency denominated derivatives and monetary assets and liabilities indicates that if the U.S. dollar uniformly weakened by 10% against all currency exposures, the Company's income before income taxes would decrease by approximately $65,000 in 2007. Additional information required for this Item is included in Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources" and Note 5 of Notes to Consolidated Financial Statements. See also Item 1A, "Risk Factors—Currency exchange rate fluctuations could increase our expenses."

        We are exposed to market risk associated with foreign currency fluctuations. We periodically enter into foreign currency forward exchange contracts as part of our overall financial risk management policy, but do not use such instruments for speculative or trading purposes.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

		Page No.
1.	Financial Statements:
	Report of Independent Registered Public Accounting Firm	48
	Consolidated Balance Sheets at December 31, 2007 and 2006	50
	Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005	51
	Consolidated Statements of Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005	52
	Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005	53
	Notes to Consolidated Financial Statements	54
2.	Financial Statement Schedules:
	Schedule I—Condensed Financial Information of Registrant	112
	Schedule II—Valuation and Qualifying Accounts	117

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Russ Berrie and Company, Inc.:

        We have audited the accompanying consolidated balance sheets of Russ Berrie and Company, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedules "Schedule I—Condensed Financial Information of Registrant," and "Schedule II—Valuation and Qualifying Accounts." We also have audited Russ Berrie and Company, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Russ Berrie and Company, Inc.'s management is responsible for these consolidated financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules, and an opinion on the Company's internal control over financial reporting based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Russ Berrie and Company, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the

48

years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also in our opinion, Russ Berrie and Company, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        As discussed in Notes 2, 12 and 17 to the consolidated financial statements, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," on January 1, 2007 and Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" on January 1, 2006.

/s/ KPMG LLP
Short Hills, New Jersey
April 1, 2008

49

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(Dollars in Thousands)

			2007			2006
Assets
Current assets:
	Cash and cash equivalents		$	21,925		$	11,526
	Accounts receivable—trade, less allowances of $2,289 in 2007 and $1,402 in 2006			64,544			55,976
	Inventories, net			59,069			48,026
	Prepaid expenses and other current assets			3,137			12,025
	Income tax receivable			663			2,200
	Deferred income taxes			1,619			2,331
		Total current assets		150,957			132,084
Property, plant and equipment, net				13,093			13,993
Goodwill				120,777			89,242
Intangible assets				51,172			61,600
Restricted cash				916			824
Deferred income taxes				897			957
Other assets				4,163			5,067
		Total assets	$	341,975		$	303,767
Liabilities and Shareholders' Equity
Current liabilities:
	Current portion of long-term debt		$	11,500		$	9,000
	Short-term debt			23,344			21,832
	Accounts payable			19,822			16,286
	Accrued expenses			31,289			24,056
	Income taxes payable			1,869			15,038
		Total current liabilities		87,824			86,212
	Income taxes payable long-term			9,406			—
	Deferred income taxes			3,736			160
	Long-term debt, excluding current portion			32,000			23,500
	Other long-term liabilities			4,370			3,231
		Total liabilities		137,336			113,103
Commitments and contingencies
Shareholders' equity:
	Common stock: $0.10 stated value; authorized 50,000,000 shares; issued 26,727,780 and 26,712,780 shares at December 31, 2007 and 2006, respectively			2,674			2,673
	Additional paid in capital			90,844			91,836
	Retained earnings			200,228			191,320
	Accumulated other comprehensive income			16,976			14,985
	Treasury stock, at cost, 5,428,137 and 5,636,284 shares at December 31, 2007 and 2006, respectively			(106,083	)		(110,150	)
		Total shareholders' equity		204,639			190,664
		Total liabilities and shareholders' equity	$	341,975		$	303,767

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

50

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(Dollars in Thousands)

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(Dollars in Thousands, Except Per Share Data)

		2007			2006			2005
Net sales		$	331,173		$	294,769		$	290,031
Cost of sales			205,792			176,666			173,712
	Gross profit		125,381			118,103			116,319
Selling, general and administrative expenses			110,152			111,961			124,308
	Operating income (loss)		15,229			6,142			(7,989	)
Other (expense) income:
	Interest expense, including amortization and write-off of deferred financing costs		(4,947	)		(10,356	)		(15,454	)
	Interest and investment income		607			566			855
	Other, net		963			10			(326	)
			(3,377	)		(9,780	)		(14,925	)
	Income (loss) before income tax provision		11,852			(3,638	)		(22,914	)
Income tax provision			2,944			5,798			12,185
	Net income (loss)	$	8,908		$	(9,436	)	$	(35,099	)
Net income (loss) per share:
	Basic	$	0.42		$	(0.45	)	$	(1.69	)
	Diluted	$	0.42		$	(0.45	)	$	(1.69	)
Weighted average shares:
	Basic		21,130,000			20,876,000			20,825,000
	Diluted		21,215,000			20,876,000			20,825,000

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

51

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(in Thousands)

													Accumulated Other Comprehensive Income/(Loss)
	Total			Common Stock Shares Issued	Common Stock Amount		Additional Paid In Capital			Retained Earnings			Foreign Currency Translation Adjustment			Net Unrealized Gain/(Loss) on Forward Exchange Contracts/ Marketable Securities			Treasury Stock
Balance at December 31, 2004		234,516		26,461		2,648		88,693			237,937			15,746			(358	)		(110,150	)
Comprehensive loss:
Net loss		(35,099	)			—		—			(35,099	)		—			—			—
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment		(3,898	)			—		—			—			(3,898	)		—			—
Unrealized gain on forward exchange contracts		358				—		—			—			—			358			—
Comprehensive loss		(38,639	)
Share transactions under stock plans (11,497 shares)		59		11		1		58			—			—			—			—
Cash dividends ($0.10 per share)		(2,082	)			—		—			(2,082	)		—			—			—
Balance at December 31, 2005		193,854		26,472		2,649		88,751			200,756			11,848			—			(110,150	)
Comprehensive loss:
Net loss		(9,436	)			—		—			(9,436	)		—			—			—
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment		3,137				—		—			—			3,137			—			—
Comprehensive loss		(6,299	)
Share transactions under stock plans (240,524 shares)		2,907		241		24		2,883			—			—			—			—
Share-based compensation		202				—		202			—			—			—			—
Balance at December 31, 2006		190,664		26,713		2,673		91,836			191,320			14,985			—			(110,150	)
Comprehensive income:
Net income		8,908									8,908
Other comprehensive income, net of tax:
Foreign currency translation adjustment		1,991												1,991
Comprehensive income		10,899
Share transactions under stock plans (223,147 Shares)		2,890		15		1		(1,178	)											4,067
Share-based compensation		186						186
Balance at December 31, 2007	$	204,639		26,728	$	2,674	$	90,844		$	200,228		$	16,976		$	—		$	(106,083	)

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

52

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(in Thousands)

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(Dollars in Thousands)

					2007			2006			2005
Cash flows from operating activities:
Net income (loss)					$	8,908		$	(9,436	)	$	(35,099	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation and amortization					5,822			5,288			6,834
	Amortization and write-off of deferred financing costs					655			3,146			6,026
	Provision for accounts receivable allowance and other					1,686			700			(131	)
	Provision for note receivable allowance					940			—			—
	Impairment of intangible asset					10,000			—			—
	Provision for inventory reserve					5,533			3,425			5,072
	Deferred income taxes					4,348			(7,212	)		11,462
	Share-based compensation expense					186			202			—
	Other					136			591			432
	Change in assets and liabilities:
		Restricted cash				(2	)		(11	)		14,880
		Accounts receivable				(9,170	)		(3,080	)		17,538
		Income tax receivable				2,819			(59	)		8,380
		Inventories				(15,480	)		5,636			(14,398	)
		Prepaid expenses and other current assets				8,081			638			(238	)
		Other assets				(666	)		700			3,739
		Accounts payable				1,008			(3,077	)		5,843
		Accrued expenses				6,011			(1,856	)		(9,678	)
		Income taxes payable				(3,521	)		10,787			(38	)
			Total adjustments			18,386			15,818			55,723
				Net cash provided by operating activities		27,294			6,382			20,624
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment						—			2,577			16,336
Capital expenditures						(4,239	)		(4,357	)		(1,190	)
Payment of Kids Line, LLC earnout consideration						(28,449	)		—			(29	)
				Net cash (used in) provided by investing activities		(32,688	)		(1,780	)		15,117
Cash flows from financing activities:
Proceeds from issuance of common stock						2,890			2,907			59
Dividends paid to shareholders						—			—			(2,082	)
Issuance of long-term debt						20,000			60,000			53,000
Payments of long-term debt						(9,000	)		(104,016	)		(133,407	)
Net borrowings on revolving credit facility						1,512			21,832			31,924
Payment of deferred financing costs						—			(3,009	)		(3,796	)
	Net cash provided by (used in) financing activities					15,402			(22,286	)		(54,302	)
Effect of exchange rate changes on cash and cash equivalents						391			543			(871	)
Net increase (decrease) in cash and cash equivalents						10,399			(17,141	)		(19,432	)
Cash and cash equivalents at beginning of year						11,526			28,667			48,099
Cash and cash equivalents at end of year					$	21,925		$	11,526		$	28,667
Cash paid during the year for:
	Interest				$	4,206		$	5,692		$	9,426
	Income taxes				$	1,500		$	2,679		$	2,455
Supplemental cashflow information:
Goodwill from Earnout Consideration					$	3,622			—			—
Equipment financed by Capital lease obligations					$	455			—			—

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

53

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 1—Description of Business

        Russ Berrie and Company, Inc. and subsidiaries (the "Company") is a leading designer, importer, marketer and distributor of infant and juvenile and gift consumer products. The Company currently operates in two segments: (i) its infant and juvenile segment and (ii) its gift segment.

        The Company's infant and juvenile segment, which currently consists of Sassy, Inc. ("Sassy") and Kids Line LLC ("Kids Line"), designs, manufactures through third parties and markets products in a number of categories including, among others, infant bedding and accessories, bath toys and accessories, developmental toys, feeding items and baby comforting products. These products are sold to consumers, primarily in the United States, through national accounts and independent retailers, including toy, specialty, food, drug, apparel and other retailers, military post exchanges and other venues.

        The Company's gift segment designs, manufactures through third parties and markets a wide variety of gift products to retail stores throughout the United States and throughout the world via the Company's domestic and international wholly-owned subsidiaries and independent distributors. The Company's gift products are sold directly to retail customers in the United States and certain foreign countries, including but not limited to gift stores, pharmacies, card shops, home decor shops, apparel stores, craft stores, garden stores, book stores, stationery stores, hospitals, college and airport gift shops, resort and hotel shops, florists, chain stores, department stores, food stores, military post exchanges and internet companies. In recent years, the gift segment has also expanded its distribution to national accounts.

Note 2—Summary of Significant Accounting Policies

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company, after elimination of inter-company accounts and transactions.

Business Combinations

        The Company accounts for business combinations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", which requires that the purchase method of accounting be used, and that certain other intangible assets be recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they are separable or capable of being separated from the acquired entity and sold, transferred, licensed, rented or exchanged.

Revenue Recognition

        The Company recognizes revenue when title and risk of loss has passed to its customer, when persuasive evidence of a sales arrangement exists, the selling price is fixed and determinable, and collectibility is reasonably assured.

54

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 2—Summary of Significant Accounting Policies (Continued)

Cost of Sales

        The most significant components of cost of sales are cost of the product, including inbound freight charges, duty, packaging and display costs, labor, depreciation, any inventory adjustments, purchasing and receiving costs, product development costs and quality control costs.

Advertising Costs

        Production costs for advertising are charged to operations in the year the related advertising campaign begins. All other advertising costs are charged to operations during the year in which they are incurred. Advertising costs for the years ended December 31, 2007, 2006 and 2005 amounted to approximately $3.6 million, $584,000, and $641,000 respectively.

Fair Value of Financial Instruments

        Pursuant to SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", the Company has estimated that the carrying amount of accounts receivable, accounts payable and accrued expenses approximates fair value. The carrying value of the Company's short-term and long-term debt approximates fair value as the debt bears interest at a variable market rate.

Cash and Cash Equivalents

        Cash equivalents consist of investments in interest bearing accounts and highly liquid securities having a maturity of three months or less, at the date of purchase, and approximate fair market value.

Accounts Receivable

        Accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivable aging, and existing industry and national economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after commercially reasonable means of collection have been exhausted and the potential for recovery is considered unlikely. The Company does not have any off-balance sheet credit exposure related to its customers.

Inventories

        Inventories, which consist primarily of finished goods, are stated at the lower of cost or market value. Cost is determined using the weighted average cost method.

Property, Plant and Equipment

        Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which primarily range from three to twenty-five years.

55

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 2—Summary of Significant Accounting Policies (Continued)

Leasehold improvements are amortized using the straight-line method over the term of the respective lease or asset life, whichever is shorter. Major improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Equipment under capital leases is amortized over the lives of the respective leases or the estimated useful lives of the assets, whichever is shorter. Costs of internal use software and other related costs under certain circumstances are capitalized. External direct costs of materials and services related to the application development stage of the project are also capitalized. Such capitalized costs are amortized over a period of one to five years commencing when the system is placed in service. Training and travel costs related to systems implementations are expensed as incurred.

        Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Gain or loss on retirement or disposal of individual assets is recorded as income or expense in the period incurred and the related cost and accumulated depreciation removed from the respective accounts.

Restricted Cash

        Restricted cash classified as a long-term asset on the accompanying balance sheet at December 31, 2007 and 2006 represents cash collateral related to a long-term lease.

Impairment of Long-Lived Assets

        The Company accounts for the impairment or disposal of long-lived assets in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets". In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value as determined by an estimate of discounted future cash flows.

Goodwill and Other Intangible Assets

        Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company accounts for goodwill in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of SFAS No. 142.

        As of December 31, 2007, all of the Company's goodwill, and all of the Company's indefinite life intangibles except for the APPLAUSE® trade name, relate to the purchase of Sassy, Inc. in 2002 and Kids Line LLC in 2004, which together comprised the Company's infant and juvenile segment (see Note 20). The Company tests goodwill for impairment on an annual basis as of its year end. Goodwill of a reporting unit will be tested for impairment between annual tests if events occur or circumstances

56

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 2—Summary of Significant Accounting Policies (Continued)

change that would likely reduce the fair value of the reporting units below its carrying value. The Company uses a two-step process to test goodwill for impairment. First, the reporting units' fair value is compared to its carrying value. If a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired, and the second step of the impairment test would be performed. The second step of the goodwill impairment test is used to measure the amount of the impairment loss. In the second step, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge would be recorded for the difference. There was no goodwill impairment in 2007, 2006 and 2005.

        Intangible assets with indefinite lives other than goodwill are tested annually for impairment and the appropriateness of the indefinite life classification, or more often if changes in circumstances indicate that the carrying amount may not be recoverable. In testing for impairment, if the carrying amount exceeds the fair value of the assets, an impairment loss is recorded in the amount of the excess. The Company uses a present value analysis to estimate the fair value. An aggregate impairment charge of $10.0 million was recorded in the Company's consolidated statements of operations for 2007 with respect to the MAM Agreement (see Note 4 for details with respect to the breakdown of such impairment charges).

        Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets".

Foreign Currency Translation

        Aggregate foreign exchange gains or losses resulting from the translation of foreign subsidiaries' financial statements, for which the local currency is the functional currency, are recorded as a separate component of accumulated other comprehensive income (loss) within shareholders' equity. Gains and losses from foreign currency transactions are included in investment and other income—net.

Accounting for Income Taxes

        We establish accruals for tax contingencies when, notwithstanding the reasonable belief that our tax return positions are fully supported, we believe that certain filing positions are likely to be challenged and moreover, that such filing positions may not be fully sustained. Prior to the issuance of FIN 48, all uncertain income tax positions were accounted for under FASB Statement 5, Accounting for Contingencies ("SFAS 5"). We adopted FIN 48 in January 2007, which provides that recognition of a tax benefit from an uncertain tax position will only be recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. We continually evaluate our uncertain tax positions and will adjust such amounts in light of changing facts and circumstances all within accordance of the provisions of FIN 48 including but not limited to emerging case law, tax legislation, rulings by relevant tax authorities, and the progress of ongoing tax audits. Settlement of a given tax contingency could impact the income tax provision in the

57

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 2—Summary of Significant Accounting Policies (Continued)

period of resolution. Our accruals for gross uncertain tax positions are presented in the balance sheet within income taxes payable for current items and other noncurrent liabilities for long-term items.

        The Company accounts for income taxes under the asset and liability method in accordance with SFAS No. 109, "Accounting for Income Taxes," as disclosed in Note 12. Such approach results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Valuation allowances are established where expected future taxable income, the reversal of deferred tax liabilities and development of tax strategies does not support the realization of the deferred tax asset.

        The Company and its subsidiaries file separate foreign, state and local income tax returns and, accordingly, provide for such income taxes on a separate company basis.

Earnings Per Share

        The Company presents both basic and diluted earnings per share in the Consolidated Statements of Operations in accordance with SFAS No. 128, "Earnings per Share". Basic earnings per share ("EPS") are calculated by dividing income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing income (loss) by the weighted average number of common shares outstanding, adjusted to reflect potentially dilutive securities (stock options) using the treasury stock method, except when the effect would be anti-dilutive. As of December 31, 2007, the Company had 594,382 stock options outstanding that were included in the computation of diluted EPS. As of December 31, 2007, 2006 and 2005, the Company had 1,181,035, 1,516,740 and 1,769,238 stock options outstanding, respectively, that were excluded from the computation of diluted EPS in that they would be anti-dilutive due to their exercise price exceeding the average market price in 2007, or the loss the Company incurred in 2006 and 2005 (see Note 13).

Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the recoverability of property, plant and equipment, goodwill and other intangible assets; valuation allowances for receivables, inventories and deferred income tax assets; and accruals for income taxes and litigation. Actual results could differ from these estimates.

Accounting for Forward Exchange Contracts

        The Company enters into forward exchange contracts to hedge the effects of foreign currency on inventory purchases. In 2007, 2006 and 2005, the Company accounted for its forward exchange contracts as an economic hedge, with subsequent changes in the forward exchange contract's fair value recorded as foreign currency gain (loss), included in other income (expense).

58

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 2—Summary of Significant Accounting Policies (Continued)

Share-Based Compensation

        At December 31, 2007, the Company had share-based employee compensation plans which are described more fully in Note 17. On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which requires the costs resulting from all share-based payment transactions to be recognized in the financial statements at their grant date fair values. The Company adopted SFAS No. 123R using the modified prospective application method under which the provisions of SFAS No. 123R apply to new awards and to awards modified, repurchased or cancelled after the adoption date. Therefore, the financial statements for prior years have not been restated. Prior to January 1, 2006, the Company accounted for its stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, for 2005, no compensation cost was recognized for the options granted under the Company's stock plans or otherwise, except for the effect of Financial Accounting Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" related to options repriced in 2000, the effect of which was immaterial in 2007, 2006 and 2005.

        On November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP 123R-3"), "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards," that provides an elective alternative transition method to paragraph 81 of SFAS 123R of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R (the "hypothetical APIC Pool"). The Company has elected to use the alternative short-cut method to compute the hypothetical APIC pool, as permitted by FSP 123R-3.

        Effective December 28, 2005, the Company amended all outstanding stock option agreements which pertained to options with exercise prices in excess of the market price for the Company's Common Stock at the close of business on December 28, 2005 ("Underwater Options") which had remaining vesting requirements. As a result of these amendments, all Underwater Options, which represented all outstanding options (to purchase approximately 1,497,000 shares of the Company's common stock) which had not yet fully-vested, became fully vested and immediately exercisable at the close of business on December 28, 2005. Of the options accelerated, approximately 120,000 options were held by non-employee directors, approximately 868,000 were held by officers of the Company and the balance were held by other employees of the Company. Because the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25 prior to January 1, 2006, and because these options were priced above the then current market price, the acceleration of vesting of these options did not require accounting recognition in the Company's financial statements. The options were accelerated to reduce the financial statement expense impact in 2006 and beyond. Management believes that accelerating the vesting of these options prior to the adoption of the new accounting standard resulted or will result in the Company not being required to recognize compensation expense in 2006 in the amount of approximately $1.6 million (pre-tax) and in subsequent years through 2010 of approximately an aggregate of $3.7 million (pre-tax).

        As a result of the aforementioned, the effect of the provisions of SFAS No. 123R on the Company's 2006 and 2007 consolidated financial statements relate only to (i) the equity grants made in 2006 and 2007 and (ii) the Company's employee stock purchase plan (see note 17) which, in the

59

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 2—Summary of Significant Accounting Policies (Continued)

aggregate, resulted in a charge to compensation expense of $154,000 and $202,000 during 2007 and 2006, respectively.

        During the year ended December 31, 2007, there were 170,675 shares of restricted stock issued under the 2004 Option Plan. As a result of these grants, a charge to compensation expense of approximately $32,000 was made in 2007. No charge to compensation expense was made in 2006 or 2005.

        Had compensation cost for the Company's stock options been determined based on the fair value recognition provisions of SFAS No. 123 at the grant date for 2005, the Company's pro forma net loss and related per share amounts would have been as set forth below (in thousands, except per share data):

	2005
Net loss—as reported	$	(35,099	)
Deduction for stock-based compensation expense—pro forma		3,063
Net loss—pro forma	$	(38,162	)
Net loss per share (basic)—as reported	$	(1.69	)
Net loss per share (basic)—pro forma	$	(1.83	)
Net loss per share (diluted)—as reported	$	(1.69	)
Net loss per share (diluted)—pro forma	$	(1.83	)

Recently Issued Accounting Standards

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for the Company's fiscal year beginning January 1, 2009. However, on February 12, 2008, the FASB issued FASB Staff position (FSB) 157-2 which defers the effective date of SFAS No. 157 for one year for non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated statements.

        In February 2007, the FASB issued SFAS No.159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at a fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, on its consolidated financial statements of adopting SFAS No. 159.

Reclassifications

        Certain prior year amounts have been reclassified to conform to the 2007 consolidated financial statement presentation.

60

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 3—2004 Acquisition

        In December 2004, the Company purchased all of the outstanding equity interests and warrants in Kids Line, LLC (the "Purchase"), in accordance with the terms and provisions of a Membership Interest Purchase Agreement (the "Purchase Agreement"). At closing, the Company paid approximately $130.6 million, which represented the portion of the purchase price due at closing plus various transaction costs. The aggregate purchase price under the Purchase Agreement included the potential payment of contingent consideration (the "Earnout Consideration"). The Earnout Consideration was equal to 11.724% of the Agreed Enterprise Value (described below) of Kids Line as of the last day of the Measurement Period (the three year period ended November 30, 2007). The Agreed Enterprise Value was the product of (i) Kids Line's EBITDA during the twelve (12) months ended November 30, 2007 and (ii) the applicable multiple as set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, the total amount of additional consideration was $32.1 million of which 90% ($28.5 million) was paid in December 2007, and $3.6 million (see Note 9 of Notes to Consolidated Financial Statements) was paid in January 2008. The amount of the Earnout Consideration was charged to goodwill. The Company financed the Earnout Consideration by drawing down upon the Term Loan reborrowing commitment and short term borrowings which were available pursuant to the Infantline Credit Agreement (described in Note 8).

Note 4—Goodwill and Intangible Assets

        As of December 31, 2007 all of the Company's goodwill is in the infant and juvenile segment and resulted from the acquisition of Kids Line, LLC in 2004, and as increased during 2007 as discussed in Note 3 above, and Sassy in 2002. There was no change in the carrying value of Goodwill during the year ended December 31, 2006.

        Changes in the carrying amount of goodwill during the year ended December 31, 2007 are as follows:

	(in thousands)
Goodwill at December 31, 2006	$	89,242
Net increase in I & J Segment		31,535
Goodwill at December 31, 2007	$	120,777

        As of December 31, 2007 the components of intangible assets consist of the following (in thousands):

	Weighted Average Amortization Period	December 31, 2007		December 31, 2006
MAM distribution agreement and relationship	—	$	0	$	10,400
Sassy trade name	Indefinite life		7,100		7,100
Applause trade name	Indefinite life		7,646		7,646
Kids Line customer relationships	Indefinite life		31,100		31,100
Kids Line trade name	Indefinite life		5,300		5,300
Other intangible assets	4.4 years		26		54
Total intangible assets		$	51,172	$	61,600

61

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 4—Goodwill and Intangible Assets (Continued)

        Other intangible assets as of December 31, 2007 include the Kids Line and Sassy non-compete agreements, which are being amortized over four and five years, respectively, and a patent. Amortization expense was $429,000, $29,000 and $295,000 in 2007, 2006 and 2005, respectively. Estimated amortization expense for the fiscal years ending December 31, 2008 to December 31, 2009 is $18,000 in 2008 and $8,000 in 2009, 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 in the event of a triggering event indicating that an impairment may exist. The Company's annual impairment testing is performed in the fourth quarter. Sassy has operated under a distribution agreement with MAM Babyartikel GmbH of Vienna, Austria (the "MAM Agreement") prior to and after its acquisition by the Company in 2002. During the third quarter of fiscal 2007, due to the adverse impact of foreign exchange rates, the Company performed an analysis of the value of this agreement. In connection with such 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 the MAM Agreement. Based upon the fair values derived using a discounted cash flows analysis, an impairment charge of $3.6 million was recorded in the Company's infant and juvenile segment in the Company's consolidated statements of operations for the three and nine months ended September 30, 2007. In addition, during the third quarter of 2007, the Company determined that the MAM Agreement was a finite-lived asset and, as such, would be amortized over an 8.5 year estimated remaining useful life. In connection with such determination, the Company recorded $200,000 as amortization expense in each of the third and fourth quarters of 2007.

        Based on several factors, including the views of the Company's new chief executive officer (in consultation with senior management), the inability to obtain concessions from MAM during discussions in December 2007 the decreasing profitability of the products sold under the MAM Agreement and specified restrictions contained therein limiting the Company's ability to enter into competitive product categories, the Company recognized an impairment charge and exercised its right to terminate the MAM Agreement, effective as of March 26, 2008. As a result of such termination, the Company recorded an additional impairment charge of $6.4 million for the fiscal year ended December 31, 2007 (for a total impairment charge of $10.0 million during 2007 which was recorded in cost of sales of the infant and juvenile segment), reflecting the write-off of the remaining intangible asset related to the MAM Agreement. See "Item 1. Business" under the section captioned "Copyrights, Trademarks, Patents and Licenses" for further detail with respect to the MAM Agreement.

Note 5—Financial Instruments

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 December 31, 2007, the Company's forward contracts had expiration dates which ranged from one to twelve months.

62

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 5—Financial Instruments (Continued)

        At December 31, 2007 and 2006, an unrealized gain of $209,000 and $14,000, respectively, relating to forward contracts is included in accrued expenses in the Consolidated Balance Sheets.

        The Company had forward contracts to exchange British pounds sterling, Canadian dollars and Australian dollars for United States dollars with notional amounts of approximately $9.7 million and $5.9 million as of December 31, 2007 and 2006, respectively. The Company had forward contracts to exchange United States dollars to Euros with notional amounts of approximately $2.8 million and approximately $2.3 million as of December 31, 2007 and 2006, respectively. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts.

Concentrations of Credit Risk

        As part of its ongoing control procedures, the Company monitors concentrations of credit risk associated with financial institutions with which it conducts business. The Company avoids concentration with any single financial institution.

        The Company also monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Toys "R" Us, Inc. and Babies "R" Us, Inc. in the aggregate accounted for approximately 25% and 20% of the consolidated net sales of the Company for 2007 and 2006, respectively, and approximately 50% and 39% of the net sales of the infant and juvenile segment for 2007 and 2006, respectively. The loss of this customer, or a significant reduction in the volume of business conducted with such customer, could have a material adverse impact on the Company. The Company's infant and juvenile segment is dependent on several other large customers, the loss of one or more of which could have a material adverse impact on the Company. The Company does not normally require collateral or other security to support credit sales. See Item 1A, "Risk Factors."

Note 6—Inventory Reserves

        The Company values inventory at the lower of cost or its current estimated market value. The Company regularly reviews inventory quantities on hand, by item, and records inventory at the lower of cost or market based primarily on the Company's historical experience and estimated forecast of product demand using historical and recent ordering data relative to the quantity on hand for each item. At December 31, 2007 and 2006, the balance of the inventory reserve was approximately $6.3 million and $8.3 million, respectively. During 2006 and 2005, as a result of the domestic gift restructuring plan, the Company recorded an inventory write-down of $1.2 and $4.2 million (pretax), respectively.

63

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 7—Property, Plant and Equipment

        Property, plant and equipment consists of the following (in thousands):

	December 31,
	2007			2006
Land	$	690		$	690
Buildings		2,120			2,070
Machinery and equipment		43,606			40,737
Furniture and fixtures		3,884			3,472
Leasehold improvements		10,716			10,848
Construction in Progress		1,057			219
		62,073			58,036
Less Accumulated depreciation and amortization		(48,980	)		(44,043	)
	$	13,093		$	13,993

        Depreciation expense was approximately $5.4 million, $5.3 million and $6.8 million, for the years ended December 31, 2007, 2006 and 2005, respectively.

Note 8—Debt

        In connection with the Purchase of Kids Line in December 2004, the Company and certain of its subsidiaries entered into a financing agreement (the "Financing Agreement"). The Financing Agreement consisted of a term loan in the original principal amount of $125.0 million which was scheduled to mature on November 14, 2007 (the "2004 Term Loan"). The Company used the proceeds of the 2004 Term Loan to substantially finance the Purchase and pay fees and expenses related thereto. The 2004 Term Loan was repaid in full and the Financing Agreement was terminated in connection with the execution of a $105.0 million credit facility with LaSalle Bank as Agent (the "2005 Credit Agreement") and the 2005 Canadian Credit Agreement (defined below), as of June 28, 2005. There were no fees paid as a result of the early termination of the Financing Agreement. However, during 2005, in connection with the termination of the 2004 Term Loan, the Company wrote-off the remaining unamortized balance of approximately $4.8 million in deferred financing costs.

        In order to reduce overall interest expense and gain increased flexibility with respect to the financial covenant structure of the Company's senior financing, on March 14, 2006, the 2005 Credit Agreement was terminated and the obligations thereunder were refinanced (the "LaSalle Refinancing"). In connection with the LaSalle Refinancing, all outstanding obligations under the 2005 Credit Agreement (approximately $76.5 million) were repaid using proceeds from the Infantline Credit Agreement defined below, which is part of the LaSalle Refinancing. The Company paid a fee of approximately $1.3 million in connection with the early termination of the 2005 Credit Agreement. In addition, in 2006, the Company wrote-off approximately $2.5 million in deferred financing costs in connection with the LaSalle Refinancing.

64

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

        As part of the LaSalle Refinancing, the Company formed a wholly-owned Delaware subsidiary, Russ Berrie U.S. Gift Inc. ("U.S. Gift") to which it assigned (the "Assignment") substantially all of its assets and liabilities which pertain primarily to its domestic gift business, such that separate loan facilities could be made directly available to each of the Company's domestic gift business and its infant and juvenile business. The Assignment transaction reinforced the operation of the Company as two separate segments, and the credit facilities that have been extended to each segment are separate and distinct. There are no cross-default provisions between the Infantline Credit Agreement and Giftline Credit Agreement (which are described below).

        Long-term debt at December 31, 2007 and 2006 consisted of the following (in thousands):

		December 31,
		2007		2006
Term Loan (Infantline Credit Agreement)		$	43,500	$	32,500
Less current portion			11,500		9,000
	Long-term debt	$	32,000	$	23,500

        The aggregate maturities of long-term debt at December 31, 2007 are as follows (in thousands):

2008		$	11,500
2009			14,500
2010			15,000
2011			2,500
	Total	$	43,500

        At December 31, 2007, there was approximately $15.5 million borrowed under the Infantline Revolving Loan and approximately $7.8 million borrowed under the Giftline Revolving Loan, all of which is classified as short-term debt.

The LaSalle Refinancing—Effective March 14, 2006

A. The Infantline Credit Agreement

        On March 14, 2006 (the "Closing Date"), as amended as of December 22, 2006 (discussed below), Kids Line, LLC ("KL"), and Sassy, Inc. ("Sassy", and together with KL, the "Infantline Borrowers"), 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, the Company as loan party representative, Sovereign Bank as syndication agent, and Bank of America, N.A. as documentation agent (as amended, the "Infantline Credit Agreement"). Unless otherwise specified herein, capitalized terms used but undefined in this Note 8, Section A to the consolidated financial statements shall have the meanings ascribed to them in the Infantline Credit Agreement.

        The commitments under the Infantline Credit Agreement (the "Infantline Commitments") currently consist of (a) a $35.0 million revolving credit facility (the "Revolving Loan"), with a

65

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

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 "Term Loan"). The Infantline Borrowers drew down approximately $79.7 million on the Infantline Credit Agreement on the Closing Date, including the full amount of the Term Loan, which reflected the payoff of all amounts outstanding under the 2005 Credit Agreement and certain fees and expenses associated with the LaSalle Refinancing. As of December 31, 2007, the outstanding balance on the Revolving Loan was $15.5 million and the outstanding balance on the Term Loan was $43.5 million. As of December 31, 2007, the Company had availability under this Revolving Loan of $16.9 million and had a total of $0.9 million outstanding under its letter of credit facility. Mandatory Term Loan repayment obligations are as follows: $11.5 million in 2008, $14.5 million in 2009, $15.0 million in 2010; and $2.5 million in 2011.

        As a result of the LaSalle Refinancing, the obligation to pay the Earnout Consideration pursuant to the Kids Line acquisition (see Note 3) was no longer the obligation of RB, but the joint and several obligations of the Infantline Borrowers.

        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 Term Loan, which was intended to enable the Infantline Borrowers to continue to utilize cash flows expected to be generated from operations to repay debt until the Earnout Consideration became due.

        Pursuant to the First Amendment, the Infantline Borrowers borrowed $20 million under the 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 Term Loan. The lenders agreed to provide 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 Earnout Consideration. Pursuant to the First Amendment, the Infantline Borrowers 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, the Infantline Borrowers paid $28.5 million of the Earnout Consideration, which amount was financed by drawing on the TR Commitment of $20 million and drawing an additional $8.5 million on the Infantline Revolving Loan. The remaining portion of the Earnout Consideration ($3.6 million) was paid in January of 2008, also through a draw on the Infantline Revolving Loan.

        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 ranges from 1.75% - 2.50% for LIBOR Loans and from 0.25% - 1.00% for Base Rate Loans. The applicable interest rate margins as of December 31, 2007 were: 1.75% for LIBOR Loans and 0.25% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of December 31, 2007 were as follows:

	At December 31, 2007
	LIBOR Loans		Base Rate Loans
Infantline Revolver	6.61	%	7.25	%
Infantline Term Loan	6.92	%	7.25	%

66

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

        Interest is due and payable (i) with respect to Base Rate Loans, monthly in arrears on the last day of each calendar month, upon a prepayment and at maturity and (ii) with respect to LIBOR Loans, on the last day of each Interest Period, upon a prepayment (and if the Interest Period is in excess of three months, on the three-month anniversary of the first day of such Interest Period), and at maturity.

        In connection with the execution of the Infantline Credit Agreement, the Infantline Borrowers paid aggregate closing fees of $1.4 million and an aggregate agency fee of $25,000. An aggregate agency fee of $25,000 will be payable on each anniversary of the Closing Date. The Revolving Loan is subject to an annual non-use fee (payable monthly, in arrears, and upon termination of the relevant obligations) of 0.50% for 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 1.75% - 2.50% and other customary letter of credit administration fees.

        The principal of the Term Loan will be repaid in installments as follows: (a) $0.75 million on the last day of each calendar month for the period commencing March 2006 through and including February 2008, ($9.0 million in 2007), (b) $1.0 million on the last day of each calendar month for the period commencing March 2008 through and including February 2009 and (c) $1.25 million on the last day of each calendar month for the period commencing March 2009 through and including February 2011. A final installment in the aggregate amount of the unpaid principal balance of the Term Loan (in addition to all outstanding amounts under the Infantline Revolver) is due and payable on March 14, 2011, in each case subject to customary early termination provision (without any prepayment penalty) in accordance with the terms of the Infantline Credit Agreement.

        The Infantline Borrowers are required to make prepayments of the Term Loan upon the occurrence of certain transactions, including most asset sales or debt or equity issuances. Additionally, commencing in early 2008 with respect to fiscal year 2007, annual mandatory prepayments of the Term Loan shall be 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 ended 2007, no Excess Cash Flow payment was required.

        The Infantline Credit Agreement contains customary affirmative and negative covenants, as well as the following financial covenants (the "Infantline Financial Covenants"): (i) a minimum EBITDA test, (ii) a minimum Fixed Charge Coverage Ratio, (iii) a maximum Total Debt to EBITDA Ratio and (iv) an annual capital expenditure limitation. In addition, upon the occurrence of an event of default under the credit agreement, including a failure to maintain compliance with the Infantline Financial Covenants, the lenders could elect to declare all amounts outstanding under the credit facility to be immediately due and payable.

        As of December 31, 2007, the Company was in compliance with the financial covenants contained in the Infantline Credit Agreement.

        The Infantline Credit Agreement contains significant limitations on the ability of the Infantline Borrowers to distribute cash to Russ Berrie and Company, Inc. ("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

67

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

expenses, including a cap (subject to certain exceptions) of $2.0 million per year on the amount that can be provided to RB to pay corporate overhead expenses.

        To secure the obligations of the Infantline Borrowers to pay the Earnout Consideration, the Infantline Borrowers granted a subordinated lien on substantially all of their assets, on a joint and several basis, and RB granted a subordinated lien on the equity interests of each of the Infantline Borrowers to the Earnout Sellers Agent (as defined in the Infantline Credit Agreement). All such security interests and liens were subordinated to the senior indebtedness of the Infantline Borrowers arising under the Infantline Credit Agreement. As a result of the payment in full of the Earnout Consideration, all such subordinated security interests and liens were released as of February 29, 2008.

        Pursuant to the Infantline Pledge Agreement, RB has agreed that it will function solely as a holding company and will not, without the prior written consent of the Agent, engage in any business or activity except for specified activities, including those relating to its investments in its subsidiaries existing on the Closing Date, the maintenance of its existence and compliance with law, the performance of obligations under specified contracts and other specified ordinary course activities.

        The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the acquisitions of LaJobi and CoCaLo. The Company anticipates that such amendment will be consummated by early April 2008, although there can be no assurance that either acquisition or such amendment will be consummated.

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, U.S. Gift and other specified wholly-owned domestic subsidiaries of the Company (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 8, Section B to the consolidated financial statements 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

68

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

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 December 31, 2007, the outstanding balance on the Giftline Revolver was $7.8 million, there was no outstanding balance on the Canadian Revolving Loan (see Section 1.C below), and there was $1.2 million utilized under the Canadian sub-facility for letters of credit. At December 31, 2007, based on available collateral, the unused amount available to be borrowed under the Giftline Revolver was $5.7 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.

        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 December 31, 2007 were 2.25% for LIBOR Loans and 0.25% for Base Rate Loans. As of December 31, 2007, the interest rate was 7.25% for the one outstanding Base Rate loan ($3.8 million) and 7.17% for one outstanding LIBOR loan ($4.0 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 Infantline Credit Agreement. 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 March 31, 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

69

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

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. As of December 31, 2007, the Company was in compliance with the 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 $4.5 million per year for each of fiscal years 2006 and 2007, and $5.0 million for each fiscal year thereafter. 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 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.

70

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

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 the Company) 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 Infantline Credit Agreement will not constitute a default under the Canadian Credit Agreement. There were no borrowings under the Canadian Revolving Loan as of 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 December 31, 2007, there were no Base Rate or Libor Loans outstanding.

U.K. Accounts Receivable, Trade

        On December 30, 2005, Russ Berrie (U.K.) Limited ("Russ UK") entered into a Framework Agreement ("the A/R Agreement") with Barclays Bank PLC ("Barclays"), pursuant to which Russ UK sold to Barclays all existing and future accounts receivable created during the term of the A/R Agreement, subject to an aggregate maximum facility limit of £6.0 million (approximately $10.2 million) outstanding at any time. For each transaction at the election of the Company, Barclays would advance to Russ UK 75% of the value of the eligible accounts receivable, subject to reduction under certain circumstances and applicable reserves, in advance of their due dates. The remaining portion of the accounts receivable sold, including the full amount of any receivables not eligible for advance, less fees and expenses owing to Barclays, would be paid to Russ UK upon collection of the related receivable. The amount due from Barclays, which was included in prepaid expenses and other current assets as of December 31, 2006, was $6.9 million. The term of the A/R Agreement was one year with automatic renewals for additional one year periods unless either party provided advance notice of its intention to terminate. This agreement was terminated March 31, 2007.

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%

71

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 8—Debt (Continued)

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 replaced the Framework Agreement with Barclays Bank Plc described above, which was terminated as of March 31, 2007. The Facility, like the Framework Agreement facility, was established to assist in meeting the working capital requirements of Russ Berrie UK Limited. As of December 31, 2007, there were no borrowings outstanding under the facility.

Note 9—Accrued Expenses

        Accrued expenses consist of the following (in thousands):

	December 31,
	2007		2006
Payroll and incentive compensation	$	7,853	$	5,578
Rebates		4,468		4,184
Earnout Consideration		3,622		0
Other(a)		15,346		14,294
Total	$	31,289	$	24,056

(a)—No item exceeds five percent of current liabilities.

Note 10—Restructuring and Related Costs

        During 2007, the Company recorded $192,000 for severance costs for its gift employees, which is reflected in the table below. In addition, during 2007, the Company recorded: i) a charge of $2.9 million (not reflected in the table below) for severance related to the departure of the Company's former Chief Executive Officer, which will be paid in fiscal years 2008 and 2009, and for foreign statutory severance requirements; ii) charges of approximately $1.1 million in connection with the closure of one of its showrooms for the gift segment, additional inventory reserves and personnel costs, which are included in cost of sales and selling, general and administrative expenses, in connection with its foreign gift operations and iii) a charge of $0.9 million related to the writedown of a note receivable related to a divestiture for 2005. During 2006, the Company engaged in certain restructuring efforts with respect to its domestic gift business to reduce expenses, right-size the infrastructure consistent with current business levels, and re-align domestic gift operations to better meet the needs of different distribution channels. During the year ended December 31, 2006, the Company recorded a $4.2 million restructuring charge related to: (i) severance cost of employees at its Petaluma, California distribution center, which was closed; (ii) reduced sales staff in its U.S. gift segment; and (iii) a charge of $2.6 million related to down-sizing of its operations in Europe. The Company also incurred a charge of $1.3 million during 2006, which is included in selling, general and administrative expenses, in connection with the relocation of its distribution facility in the United Kingdom, primarily related to the write-off of fixed assets and moving costs.

72

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 10—Restructuring and Related Costs (Continued)

        The Company reassesses the reserve requirements under its restructuring efforts at the end of each reporting period. A rollforward of the restructuring accrual is set forth below (in thousands):

	Employee Separation		Facility Exit Cost		Total
Balance @ December 31, 2004	$	3,935	$	20	$	3,955
2005 Provision		2,892		181		3,073
Less Payments		5,196		128		5,324
Additional Cost Incurred		100		58		158
Balance @ December 31, 2005		1,731		131		1,862
2006 Provision		4,224		—		4,224
Less Payments		4,914		66		4,980
Balance @ December 31, 2006		1,041		65		1,106
2007 Provision		192		—		192
Less Payments		1,155		65		1,220
Balance @ December 31, 2007	$	78	$	—	$	78

Note 11—Barter Transaction

        During 2003, the Company entered into a barter transaction, exchanging inventory with a net book value of $1,192,000 for future barter credits to be utilized on future advertising, freight and other goods and services. Such credits were redeemable for a percentage of various goods and services purchased from certain vendors.

        The credits were recorded at the fair value of the inventory exchanged, in accordance with APB 29, "Accounting for Non-Monetary Transactions" and EITF 93-11 "Accounting for Barter Transactions," resulting in a pre-tax gain on this exchange of $491,000 which was recorded in the Company's Consolidated Statement of Operations, in 2003.

        In the fourth quarter of 2005, the Company evaluated the recoverability of such assets and determined that the likelihood of utilizing them was remote due to the lack of actual usage during 2005. Therefore, the Company wrote off the remaining value of the credits of $1,680,000 at December 31, 2005.

Note 12—Income Taxes

        The Company and its domestic subsidiaries file a consolidated Federal income tax return.

73

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 12—Income Taxes (Continued)

        Income (loss) before income tax provision (benefit) is as follows (in thousands):

	Years Ended December 31,
	2007		2006			2005
United States	$	11,597	$	1,945		$	(22,633	)
Foreign		255		(5,583	)		(281	)
	$	11,852	$	(3,638	)	$	(22,914	)

        Income tax provision (benefit) consists of the following (in thousands):

	Years Ended December 31,
	2007			2006			2005
Current
Federal	$	(2,551	)	$	10,292		$	(1,275	)
Foreign		1,105			1,121			1,924
State		42			1,597			74
		(1,404	)		13,010			723
Deferred
Federal		3,825			(6,796	)		10,460
Foreign		297			147			51
State		226			(563	)		951
		4,348			(7,212	)		11,462
	$	2,944		$	5,798		$	12,185

        The current tax benefit is primarily related to a decrease in tax reserves associated with the expiration of the statute of limitations in various jurisdictions during 2007, partially offset by foreign tax expense on profitable operations in Australia and Hong Kong.

        In fiscal 2007, the Company recorded a federal deferred tax expense of approximately $2.5 million related to the deferred tax liability associated with tax amortization of intangible assets relating to the Kids Line, Sassy and Applause acquisitions. These deferred tax liabilities are indefinite in nature for accounting purposes, and therefore cannot be offset by the Company's deferred tax assets. The Company has recorded valuation allowances against that portion of its deferred tax assets where management believes it is more likely than not that the Company will not be able to realize such deferred tax assets. The Company recorded a federal deferred tax expense of approximately $2.2 million to reflect an increase in the valuation allowance related to its Foreign Tax Credit carryforward. In fiscal 2007, the Company decreased its federal deferred tax liability by approximately $0.9 million related to the unrepatriated earnings of its foreign subs as the result of losses incurred in those foreign jurisdictions.

74

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 12—Income Taxes (Continued)

        A reconciliation of the provision (benefit) for income taxes with amounts computed at the statutory Federal rate is shown below (in thousands):

	Years Ended December 31,
	2007			2006			2005
Tax at U.S. Federal statutory rate	$	4,148		$	(1,273	)	$	(8,020	)
State income tax, net of Federal tax benefit		174			672			666
Foreign rate differences		(426	)		758			(296	)
Change in valuation allowance affecting income tax expense		(4,286	)		5,357			13,771
Tax on foreign dividends		3,048			118			7,081
Other, net		286			166			(1,017	)
	$	2,944		$	5,798		$	12,185

        As of December 31, 2007, the Company had tax receivables of approximately $0.3 million related to overpayment of estimated taxes in Canada and Hong Kong, and a tax refund of approximately $0.3 million in France related to a net operating loss carryback. The Company had a United States federal income tax receivable of $1 million as of December 31, 2006 as a result of foreign tax credit carrybacks generated in the calendar year ended December 31, 2004. The Company received this refund during the first quarter of 2007. The Company also received refunds of approximately $1.1 million during 2007 related to its foreign operations in Canada, Europe and Hong Kong.

75

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 12—Income Taxes (Continued)

        The components of the deferred tax asset and the valuation allowance, resulting from temporary differences between accounting for financial and tax reporting purposes, were as follows (in thousands):

	December 31,
	2007			2006
Assets (Liabilities)
Deferred tax assets:
Inventory	$	1,252		$	2,421
Accruals / reserves		2,344			2,923
Foreign tax credit carryforward		11,638			13,115
Charitable contributions carryforwards		1,042			3,644
Prepaid expenses		—			1,699
Deferred gain on sale of building		863			726
State net operating loss carryforwards		2,317			2,285
Federal net operating loss carryforwards		—			3,678
Foreign net operating loss carryforwards		6,944			5,740
Intangible assets		2,591			—
Depreciation		866			826
Other		323			1,128
Gross deferred tax asset		30,180			38,185
Less: valuation allowance		(17,865	)		(22,151	)
Net deferred tax asset		12,315			16,034
Deferred tax liability:
Depreciation and amortization		(11,857	)		(9,841	)
Receivable from sale of business					(534	)
Unrepatriated earnings of foreign subs		(1,632	)		(2,485	)
Other		(46	)		(46	)
		(13,535	)		(12,906	)
Total net deferred tax asset (liability)	$	(1,220	)	$	3,128

        At December 31, 2007 and 2006, the Company has provided total valuation allowances of $17.9 million and $22.2 million, respectively, on those deferred tax assets for which management has determined that it is more likely than not that such deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and other factors. The valuation allowance decreased $4.3 million in 2007 and increased $4.1 million in 2006. At December 31, 2007, the Company had deferred tax assets of approximately $6.9 million related to foreign net operating loss carryforwards aggregating approximately $23.4 million which expire at the earliest in 2019 with the balance of the carryforwards being indefinite. At December 31, 2007, the Company had deferred tax assets of approximately $2.3 million related to state net operating loss carryforwards primarily related to its operations in California, New Jersey and Minnesota which expire at the earliest in 2011.

76

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 12—Income Taxes (Continued)

        Provisions are made for estimated United States and foreign income taxes, less available tax credits and deductions, which may be incurred on the remittance of foreign subsidiaries' undistributed earnings. At December 31, 2007 and 2006, the Company has recorded a deferred tax liability of $1.6 million and $2.5 million, respectively, related to the repatriation of its foreign subsidiaries' undistributed earnings that it is no longer treating as permanently reinvested due to the Company's recent history of repatriation of these earnings. The liability decreased related to foreign net operating losses incurred in its European operations. The Company has sufficient foreign tax credit carryforwards to offset this deferred tax liability.

        The Company adopted FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain tax position may be recognized only if it is "more likely than not" that the position is sustainable, based on its technical merits. A tax benefit from an uncertain position was previously recognized if it was probable of being sustained. Under FIN 48, the liability for unrecognized tax benefits is classified as non-current unless the liability is expected to be settled in cash within 12 months of the reporting date. The Company has not made any additional adjustments to its 2007 opening balance sheet related to the implementation of FIN 48, other than to reclassify the portion of its tax liabilities to non-current which the Company does not anticipate will settle, or for which the statute of limitations will not close in the next twelve months, and the Company has not made any adjustments to its opening retained earnings related to the implementation of FIN 48. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	(in thousands)
Balance at January 1, 2007	$	14,731
Increases related to prior year tax positions	$	3,394
Decreases related to prior year tax positions	$	0
Increases related to current year tax positions/settlements	$	0
Lapse of statue	$	(4,731	)
Balance at December 31, 2007	$	13,394

        The above table includes interest and penalties of $0.6 million as of December 31, 2007, and interest and penalties of $0.6 million as of January 1, 2007. The Company has elected to record interest and penalties as an income tax expense. Included in the liability for unrecorded tax benefits as of December 31, 2007 are $3.9 million of unrecognized tax benefits that if recognized would impact the effective tax rate. The Company would seek competent authority relief in foreign jurisdictions to offset some or all of these recognized tax benefits. Also included in the liability for unrecorded tax benefits as of December 31, 2007 are $9.4 million of unrecognized tax benefits that, if recognized, would be offset by charitable contribution carryforwards, state NOL carryforwards, foreign tax credit carryforwards, and federal and state tax deductions related to the interest and state income tax paid. The Company has adjusted its valuation allowances on these items to recognize these benefits. The Company anticipates that the unrecorded tax benefits could decrease by approximately $3.9 million within the next twelve months as a result of the expiration of the statute of limitations.

77

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 12—Income Taxes (Continued)

        The Company files federal and state income tax returns in the United States, federal and provincial taxes in Canada, and federal and local taxes in Australia, Hong Kong China, the European Union, and the United Kingdom. The Company is not presently undergoing any significant tax audits in any of these jurisdictions. As of December 31, 2007, a summary of the tax years that remain subject to examination in the Company's major jurisdictions are:

United States—federal	2004 and forward
United States—states	2001 and forward
Foreign	2002 and forward

Note 13—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):

	Years Ended December 31,
	2007	2006	2005
Weighted average common shares outstanding	21,130	20,876	20,825
Dilutive effect of common shares issuable	85	—	—
Weighted average common shares outstanding assuming dilution	21,215	20,876	20,825

        As of December 31, 2007, 2006 and 2005, the Company had 1,181,035, 1,516,740 and 1,769,238 stock options outstanding, respectively, that were excluded from the computation of diluted EPS in that they would be anti-dilutive due to their exercise price exceeding the average market price in 2007, or the loss the Company incurred in 2006 and 2005.

Note 14—Related Party Transactions

        As of December 4, 2007, Bruce G. Crain assumed the position of President and Chief Executive Officer of the Company. From March 2007 until such appointment, Mr. Crain had provided consulting services to the Company for consideration of $45,833 per month plus reimbursement of legal fees in connection with such arrangement (up to a maximum $20,000) and expenses. The total consideration paid during 2007 was approximately $418,000.

Note 15—Leases

        At December 31, 2007, the Company and its subsidiaries were obligated under operating lease agreements (principally for buildings and other leased facilities) for remaining lease terms ranging from six months to 12 years.

        Rent expense for the years ended December 31, 2007, 2006 and 2005 amounted to approximately $7.0 million, $7.9 million and $8.6 million, respectively.

78

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 15—Leases (Continued)

        The approximate aggregate minimum future rental payments as of December 31, 2007 under operating leases are as follows (in thousands):

2008	$	7,309
2009		6,643
2010		5,977
2011		5,290
2012		5,301
Thereafter		14,295
Total	$	44,815

        During 2007, the gift segment entered into capital leases for equipment and software. The future payments under these capital leases are $232,000 in 2008, $276,000 in 2009 and $179,000 in 2010.

        Effective as of December 7, 2005, Amram's entered into a Sale Agreement, with Bentall Investment Management LP ("Bentall") as purchaser (the "Sale-Leaseback Agreement"), pursuant to which Amram's agreed to sell its principal facility located in Brampton, Ontario (Canada) (the "Facility") to Bentall for an aggregate purchase price of $10.2 million Canadian dollars (approximately US $8.8 million). The sale closed on December 29, 2005. In accordance with the terms of the Sale-Leaseback Agreement, on December 29, 2005, Amram's entered into a lease agreement of approximately ten years at an annual net rental ranging over the term from approximately $737,498 Canadian dollars to $769,206 Canadian dollars (approximately U.S. $751,805 to $784,129), payable monthly in advance, plus applicable taxes and defined operating costs (the "Amram's Lease"). The Amram's Lease is also subject to a management fee of 2% of the minimum annual rental, subject to adjustment as set forth therein. Amram's has the option of extending the 10-year term for one additional term of 5 years, at then-market rental rates. The gain on the Sale-Leaseback of approximately $4.0 million was deferred and will be recognized as income over the term of the lease. As of December 31, 2007 the deferred gain on the sale-leaseback was approximately $3.8 million of which $0.5 million is included in current liabilities and $3.3 million is included in long term liabilities in the accompanying balance sheet.

Note 16—Stock Repurchase Program

        In March 1990, the Board of Directors authorized the Company to repurchase an aggregate of 7,000,000 shares of common stock. As of December 31, 2007 and 2006, 5,643,284 shares had been repurchased since the beginning of the Company's stock repurchase program. During the twelve month periods ended December 31, 2007 and 2006, the Company did not repurchase any shares pursuant to this program or otherwise. During the year ended December 31, 2007 the Company issued from treasury stock 208,147 shares that were purchased under the stock repurchase program in prior years.

79

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 17—Shareholders' Equity

Share-Based Compensation

        On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which requires the costs resulting from all share-based payment transactions to be recognized in the financial statements at their grant date fair values (see Note 2).

        As further described in Note 2, effective December 28, 2005, the Company amended all outstanding stock option agreements which pertained to options with exercise prices in excess of the market price for the Company's Common Stock at the close of business on December 28, 2005 ("Underwater Options") which had remaining vesting requirements. As a result of these amendments, all Underwater Options, which represented all outstanding options (to purchase approximately 1,497,000 shares of the Company's common stock) which had not yet fully-vested, became fully vested and immediately exercisable at the close of business on December 28, 2005. Consequently, the effects of SFAS No. 123R on the Company's 2007 and 2006 consolidated financial statements relate only to the securities granted in 2007 and 2006 and the effect of SFAS No. 123R on the Company's employee stock purchase plan. The aggregate share-based compensation expense recorded in the consolidated statements of operations for the years ended December 31, 2007 and 2006 under SFAS No. 123R was $186,000 and $202,000, respectively. The Company's income/loss before provision for income taxes for the years ended December 31, 2007 and 2006 was income of $11,852,000 and a loss of $3,638,000, respectively, and $186,000 lower and $202,000 higher, respectively than if the Company had continued to account for share-based compensation under APB No. 25.

        SFAS No. 123R requires the cash flows related to tax benefits resulting from tax deductions in excess of compensation costs recognized for those equity compensation grants (excess tax benefits) to be classified as financing cash flows. For the years ended December 31, 2007 and 2006, there was no excess tax benefit recognized from share-based compensation costs because the Company was not in a taxpaying position in the United States in 2007 and 2006.

        As of December 31, 2007, the total remaining unrecognized compensation cost related to non-vested stock options, net of forfeitures was approximately $3.2 million, and is expected to be recognized over a weighted-average period of 4.3 years.

        The 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 discussed 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 granted are expected to be outstanding. Management monitors stock option exercises and employee termination patterns to estimate forfeitures 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

80

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 17—Shareholders' Equity (Continued)

option. The assumptions used to estimate the fair value of the stock options granted during the years ended December 31, 2007, 2006 and 2005 were as follows:

	Years Ended December 31,
	2007			2006			2005
Stock Options Outstanding
Dividend yield		0.0	%		0.0	%		2.00	%
Risk-free interest rate		3.48	%		4.52	%		3.83	%
Volatility		39.0	%		36.5	%		34.0	%
Expected term (years)		4.4			4.7			4.7
Weighted-average fair value of options granted	$	6.00		$	5.77		$	4.12

Stock Plans

        The Company currently maintains the 2004 Stock Option, Restricted and Non-Restricted Stock Plan (the "2004 Option Plan") and the Amended and Restated 2004 Employee Stock Purchase Plan (the "2004 ESPP"). As of December 31, 2007, there were 985,214 shares of common stock reserved for issuance under the 2004 Option Plan and the 2004 ESPP. The Company also continues to have options outstanding under the 1999 and 1994 Stock Option and Restricted Stock Plans, the 1999 and 1994 Stock Option Plans and the 1999 and 1994 Stock Option Plans for Outside Directors, (collectively, the "Predecessor Plans"). In addition, the Company may issue stock options outside the Plans discussed above. As of December 31, 2007 there were 370,000 stock options outstanding that were granted outside these plans.

        The exercise price for options issued under the 2004 Option Plan (or otherwise) and the Predecessor Plans is generally equal to the closing price of the Company's common stock as of the date the option is granted, except for 280,799 options granted in 2000 which were repriced to the closing price of the Company's stock effective February 29, 2000 and at $2.00 above the closing price of the Company's stock price effective February 29, 2000 for the Company's 1999 Stock Plan for Outside Directors. Generally, stock options under the 2004 Option Plan and the Predecessor Plans vest over a period ranging from one to five years from the grant date unless otherwise stated by the specific grant.

81

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 17—Shareholders' Equity (Continued)

Options generally expire 10 years from the date of grant. Activity regarding outstanding options for 2007, 2006 and 2005 is as follows:

	All Stock Options Outstanding
	Shares		Weighted Average Exercise Price
Outstanding as of December 31, 2004	856,149		$	23.11
Options Granted	1,115,000			13.02
Options Forfeited / Cancelled	(201,911	)		19.62
Outstanding as of December 31, 2005	1,769,238			17.16
Options Granted	150,000			15.05
Options Exercised	(215,100	)		12.37
Options Forfeited / Cancelled	(187,398	)		14.29
Outstanding as of December 31, 2006	1,516,740			17.99
Options Granted	570,600			16.52
Options Exercised	(197,118	)		18.13
Options Forfeited / Cancelled	(114,805	)		16.10
Outstanding as of December 31, 2007	1,775,417
Option price range at December 31, 2007	$11.19 - $34.80
Option price range for exercised shares	$11.52 - $13.74
Options available for grant and reserved for future issuance at December 31, 2007 under the 2004 Option Plan	698,647

        The aggregate intrinsic value of the outstanding options at December 31, 2007 was approximately $1.4 million. The aggregate intrinsic value of the exercisable options at December 31, 2007 was approximately $1.4 million. The aggregate intrinsic value is the total pretax value of in-the-money options, which is the difference between the fair value at December 31, 2007 and the exercise price of each option. The intrinsic value of stock options exercised for the years ended December 31, 2007, 2006 and 2005, was $1,022,000, $567,000, and $0, respectively. The fair value of stock options vested for the years ended December 31, 2007, 2006 and 2005, was $6,940,902, $7,886,090 and $7,289,261, respectively.

        The Company's policy is to issue shares from authorized shares reserved for such issuance to fulfill stock option exercises or to issue from treasury shares.

82

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 17—Shareholders' Equity (Continued)

        The following table summarizes information about fixed-price stock options outstanding at December 31, 2007:

		Options Outstanding				Options Exercisable
Exercise Prices		Number Outstanding at 12/31/07	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at 12/31/07	Weighted Average Exercise Price
$	26.250	8,431	Less than 1 Year	$	26.250	8,431	$	26.250
	23.625	6,564	1 Year		23.625	6,564		23.625
	18.375	1,387	3 Years		18.375	1,387		18.375
	30.980	6,296	4 Years		30.980	6,296		30.980
	20.750	4,546	4 Years		20.750	4,546		20.750
	34.800	10,233	5 Years		34.800	10,233		34.800
	19.530	250,000	6 Years		19.530	250,000		19.530
	22.210	400,000	6 Years		22.210	400,000		22.210
	34.050	60,478	6 Years		34.050	60,478		34.050
	13.050	319,882	7 Years		13.050	319,882		13.050
	13.060	15,000	7 Years		13.060	15,000		13.060
	13.740	10,000	7 Years		13.740	10,000		13.740
	11.610	30,000	7 Years		11.610	30,000		11.610
	11.520	20,000	7 Years		11.520	20,000		11.520
	11.190	2,000	7 Years		11.190	2,000		11.190
	15.050	60,000	8 Years		15.050	12,000		15.050
	16.300	49,300	9 Years		16.300	—		16.300
	14.900	17,500	9 Years		14.900	—		14.900
	16.770	383,800	9 Years		16.770	—		16.770
	16.050	120,000	9 Years		16.050	—		16.050
		1,775,417				1,156,817

        The weighted average remaining life of the outstanding options as of December 31, 2007 and 2006 is 7.2 years and 7.5 years, respectively.

        A summary of the Company's non-vested stock options at December 31, 2007 and changes during 2007 is as follows:

Non-vested stock options		Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2006		150,000		$	15.05
Granted		570,600		$	16.52
Vested		(12,000	)	$	15.05
Forfeited/cancelled		(90,000	)	$	15.05
	Non-vested at December 31, 2007	618,600		$	16.41

83

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 17—Shareholders' Equity (Continued)

        During the year ended December 31, 2007 there were 170,675 shares of restricted stock issued under the 2004 Option Plan. These restricted stock grants have vesting periods ranging from three to five years, with fair market values at date of grant ranging from $14.90 to $16.77. 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 effective on the date the award is made. As a result of these restricted stock grants, a charge to compensation expense of approximately $32,000 was made in 2007. No charge to compensation expenses was made in 2006 or 2005.

        As of December 31, 2007, the total remaining unrecognized compensation cost related to the Restricted Stock Plan was approximately $2.7 million, and is expected to be recognized over a weighted-average period of 3.8 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 the 2004 ESPP, 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 each plan year, an eligible employee may elect to participate in the 2004 ESPP 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 Company common stock under the 2004 ESPP that has a fair market 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 without interest, and his or her option expires. As of December 31, 2007 and 2006, the 2004 ESPP had 80,269 and 106,298, shares reserved for future issuance, respectively. During the year ended December 31, 2007, there were 142 enrolled participants in the 2004 ESPP and 26,029 shares were issued. Compensation expense related to the ESPP for the years ended December 31, 2007, 2006 and 2005 was approximately $117,000, $113,000 and $0, respectively.

	Employee Stock Purchase Plan
	2007		2006		2005
Exercise Price	$	13.04	$	9.69	$	9.70
Shares Purchased		26,029		25,424		11,497

84

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 17—Shareholders' Equity (Continued)

        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:

	Years Ended December 31,
	2007		2006		2005
Dividend yield	0.0	%	0.0	%	1.03	%
Risk-free interest rate	4.98	%	4.38	%	4.35	%
Volatility	36.7	%	50.04	%	50.00	%
Expected term (years)	1.0		1.0		1.0

        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 ESPP is one year, or the equivalent of the annual plan year.

Note 18—401(k) Plan

        The Company and its U.S. subsidiaries maintain a 401(k) Plan to which employees may, up to certain prescribed limits, contribute a portion of their compensation, and a portion of these contributions is matched by the Company. The provision for contributions charged to operations for the years ended December 31, 2007, 2006 and 2005 was approximately $1,131,000, $1,494,000 and $1,408,000, respectively.

Note 19—Deferred Compensation Plan

        Prior to December 31, 2005, the Company maintained a Deferred Compensation Plan (the "Plan") for certain employees. The obligations of the Company under the Plan consisted of the Company's unsecured contractual commitment to deliver, at a future date, any of the following: (i) deferred compensation credited to an account under the Plan, and (ii) notional earnings on the foregoing amounts. The obligations were payable in cash upon retirement, termination of employment and/or at certain other times in a lump-sum distribution or in installments, as elected by the participant in accordance with the Plan. In December 2005, the Board of Directors of the Company authorized the discontinuation of the Plan as of December 31, 2005. The Plan assets were converted into cash as of December 31, 2005. The Company made distributions of pre-2005 deferrals to the Plan participants of $1,708,000 in January of 2006, including earnings credited to participant's accounts. As of December 31, 2006, the Company had a liability under the Plan of approximately $313,000, which amount was distributed in the first quarter of 2007.

Note 20—Segment, Geographic and Related Information

        The Company operates in two segments: (i) the infant and juvenile segment, which as of December 31, 2007 is comprised of Sassy, Inc. and Kids Line, LLC. and (ii) the gift segment., This segmentation of the Company's operations reflects how the Company's Chief Executive Officer currently views the results of operations. There are no inter-segment revenues to eliminate. Corporate assets and overhead expenses are included for reporting purposes in the gift segment.

85

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 20—Segment, Geographic and Related Information (Continued)

        The Company's infant and juvenile businesses design and market products in a number of infant and juvenile categories including, among others, infant bedding and accessories, bath toys and accessories, developmental toys, feeding items and baby comforting products. These products are sold to consumers, primarily in the United States, through national accounts and independent retailers, including toy, specialty, food, drug, apparel and other retailers, military post exchanges and other venues.

        The Company's gift business designs, manufactures through third parties and markets a wide variety of gift products to retail stores throughout the United States and throughout the world via the Company's international wholly-owned subsidiaries. The Company's gift products are sold directly to retail customers in the United States and certain foreign countries, including but not limited to gift stores, pharmacies, card shops, home decor shops, apparel stores, craft stores, garden stores, book stores, stationery stores, hospitals, college and airport gift shops, resort and hotel shops, florists, chain stores, department stores, food stores, military post exchanges and internet companies. In recent years, the gift segment has also expanded its distribution to national accounts.

		Years Ended December 31,
		2007			2006			2005
		(Dollars in Thousands)
Gift:
	Net sales	$	168,107		$	147,669		$	158,512
	Operating loss		(9,380	)		(31,577	)		(42,568	)
	Depreciation and amortization		3,930			4,460			5,746
	Loss before income taxes	$	(8,929	)	$	(31,730	)	$	(41,948	)
Infant and juvenile:
	Net sales	$	163,066		$	147,100		$	131,519
	Operating income		24,609			37,719			34,579
	Depreciation and amortization		1,166			828			1,088
	Income before income taxes	$	20,781		$	28,092		$	19,034
Consolidated:
	Net sales	$	331,173		$	294,769		$	290,031
	Operating income (loss)		15,229			6,142			(7,989	)
	Depreciation and amortization		5,096			5,288			6,834
	Loss before income taxes	$	11,852		$	(3,638	)	$	(22,914	)

        Total assets of each segment were as follows:

	December 31,
	2007		2006
	(Dollars in Thousands)
Gift	$	104,911	$	98,360
Infant and juvenile		237,064		205,407
Total	$	341,975	$	303,767

86

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 20—Segment, Geographic and Related Information (Continued)

        The following table represents financial data of the Company by geographic area.

	Years Ended December 31,
	2007			2006			2005
	(Dollars in Thousands)
Revenues:
United States	$	238,215		$	218,637		$	203,177
Europe		40,000			36,112			43,977
Other		52,958			40,020			42,877
Total	$	331,173		$	294,769		$	290,031
Net Income (Loss):
United States	$	9,856		$	(2,928	)	$	(32,360	)
Europe		(219	)		(9,684	)		(6,193	)
Other		(729	)		3,176			3,454
Total	$	8,908		$	(9,436	)	$	(35,099	)
Identifiable Assets at December 31:
United States	$	295,407		$	252,121		$	271,706
Europe		22,055			22,289			29,704
Other		24,513			29,357			27,551
Total	$	341,975		$	303,767		$	328,961

        There were no material sales or transfers among geographic areas and no material amount of export sales to customers from the United States. Outside of the United States, no single country is deemed material for separate disclosure.

Concentration of Risk

        During 2007, approximately 85% of the Company's products were produced by independent manufacturers, generally in Eastern Asia, under the quality review of the Company's personnel.

        During 2007, the Company utilized approximately 75 manufacturers in Eastern Asia, with facilities primarily in the People's Republic of China ("PRC"). During 2007, approximately 82% of the Company's dollar volume of purchases was attributable to manufacturing in the PRC. The PRC currently enjoys "permanent normal trade relations" ("PNTR") status under U.S. tariff laws, which provides a favorable category of U.S. import duties. The loss of such PNTR status would result in a substantial increase in the import duty for products manufactured for the Company in the PRC and imported into the United States and would result in increased costs for the Company.

        A significant portion of the Company's staff of approximately 172 employees in Hong Kong and Korea, and the cities of Shenzhen and Qingdao in the PRC, monitor the production process with responsibility for the quality, safety and prompt delivery of the Company's products as well as design and product development. Members of the Company's Eastern Asia staff make frequent visits to such manufacturers. Certain of the Company's manufacturers sell exclusively to the Company. In 2007, the supplier accounting for the greatest dollar volume of the Company's purchases accounted for approximately 19% of such purchases and the five largest suppliers accounted for approximately 44% in

87

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 20—Segment, Geographic and Related Information (Continued)

the aggregate. The Company believes that there are many alternate manufacturers for the Company's products and sources of raw materials. See Item 1A. "Risk Factors—We rely on foreign suppliers, primarily in the PRC, to manufacture most of our products, which subjects us to numerous international business risks that could increase our costs or disrupt the supply of our products."

        See Note 2 above for information regarding dependence on certain large customers. See also, Item 1A, "Risk Factors—Our infant and juvenile business is dependent on several large customers."

Note 21—Litigation, Commitments and Contingencies

        In the ordinary course of its business, the Company is party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to its business, as plaintiff or defendant. In the opinion of management, the amount of ultimate liability with respect to these actions that are currently pending will not materially adversely affect the consolidated results of operations, financial condition or cash flows of the Company.

        The Company enters into various license agreements relating to trademarks, copyrights, designs and products which enable the Company to market items compatible with its product line. All license agreements other than the MAM Agreement (which was terminated effective March 26, 2008), are for three year terms with extensions if agreed to by both parties. Several of these license agreements require prepayments of certain minimum guaranteed royalty amounts. The amount of minimum guaranteed royalty payments with respect to all license agreements aggregates approximately $6.2 million, of which approximately $4.2 million remained unpaid at December 31, 2007, substantially all of which is due prior to December 31, 2009. During the years ended 2007, 2006 and 2005, the Company recorded charges to cost of sales of $0.3 million, $1.5 million and $2.3 million, respectively, against these royalty prepayments for amounts that management believed will not be realized. The Company's total royalty expense for the years 2007, 2006 and 2005, including the aforementioned charges, were approximately $8.8 million, $4.8 million and $4.7 million, respectively.

        During 2002, Russ Berrie (UK) Limited entered into a lease with a related party for warehousing space with a 20 year term. During August 2006, Russ Berrie (UK) Limited entered into an agreement, which closed on October 31, 2006, whereby Russ Berrie (UK) Limited agreed to vacate and cancel its lease prior to the expiration of the stated term. Russ Berrie (UK) Limited subsequently entered into a new third party lease for smaller space with a term of 10 years. In connection with these transactions, the Company recorded a charge of $1.3 million in 2006, primarily related to the write off of fixed assets and moving costs.

88

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 22—Quarterly Financial Information (Unaudited)

        The following selected financial data for the four quarters ended December 31, 2007 and 2006 are derived from unaudited financial statements and include all adjustments which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the results for the interim periods presented.

        The quarter ended December 31, 2007 includes a charge of $2.9 million before tax, primarily related to current and future severance obligations in the gift segment, and a $6.4 million impairment of the MAM Agreement in the infant and juvenile segment. The quarter ended September 30, 2007 includes charges before tax of $0.7 million for an inventory write-down in connection with certain foreign operations in the gift segment and a $3.6 million impairment of the MAM Agreement in the infant and juvenile segment. The quarter ended June 30, 2007 includes charges before tax of $0.3 million in connection with the closure of one of the showrooms in the gift segment. The quarter ended March 31, 2007 includes charges before tax of $0.4 million for severance costs in the Company's gift segment.

        The quarter ended December 31, 2006 includes a charge of $0.8 million before tax for a reserve against future royalty guarantees and a $0.5 million charge associated with the restructuring activities, primarily related to severance obligations, each of which is in the gift segment. The quarter ended September 30, 2006 includes charges of $1.2 million for an inventory write-down, $0.8 million for a reserve against future royalty guarantees and $1.3 million of costs associated with the relocation of the Company's gift segment distribution center in the U.K. The quarter ended June 30, 2006 includes charges of $1.0 million associated with the restructuring activities, $1.2 million of consulting costs incurred in connection with the development of the PIP and the write-off of deferred financing costs of $2.5 million. The quarter ended March 31, 2006 includes charges before tax of $2.7 million associated with restructuring activities and $1.3 million of consulting costs incurred in connection with the development of the PIP.

		For Quarters Ended
2007
		March 31		June 30		September 30		December 31
		(Dollars in Thousands, Except Per Share Data)
Net sales		$	75,073	$	70,714	$	100,928	$	84,458
Gross profit			31,327		28,368		40,359		25,327
Net income (loss)		$	2,546	$	365	$	14,307	$	(8,310	)
Net income (loss) per share
	Basic	$	0.12	$	0.02	$	0.68	$	(0.39	)
	Diluted	$	0.12	$	0.02	$	0.67	$	(0.39	)

		For Quarters Ended
2006
		March 31			June 30			September 30		December 31
		(Dollars in Thousands, Except Per Share Data)
Net sales		$	77,146		$	65,653		$	78,081	$	73,889
Gross profit			32,173			26,455			29,991		29,484
Net (loss) income		$	(4,992	)	$	(5,975	)	$	256	$	1,275
Net (loss) income per share
	Basic	$	(0.24	)	$	(0.29	)	$	0.01	$	0.06
	Diluted	$	(0.24	)	$	(0.29	)	$	0.01	$	0.06

89

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

Note 23—Dividends

        For the years ended December 31, 2007 and December 31, 2006, no cash dividends were paid. Cash dividends of approximately $2.1 million ($0.10 per share) were paid in the first quarter of the year ended December 31, 2005.

        See Note 8 for a discussion of dividend restrictions imposed by the Company's senior bank facilities.

Note 24—Subsequent Events

        On April 1, 2008, a newly-formed and indirectly wholly-owned Delaware subsidiary of the Company, LaJobi, Inc. entered into an Asset Purchase Agreement (the "Asset Agreement") with LaJobi Industries, Inc., a New Jersey corporation ("LaJobi"), and each of Lawrence Bivona and Joseph Bivona for the purchase of substantially all of the assets used in the business of LaJobi and specified obligations. LaJobi designs, imports and sells infant and juvenile furniture and related products (including cribs, changing tables, dressers, hutches, armoires, bookcases and end tables) to specialty stores and boutiques, baby superstores and mass merchandisers. LaJobi also sells mattresses and changing pads.

        Also, on April 1, 2008, a newly-formed, wholly-owned Delaware subsidiary of the Company, I&J Holdco, Inc. entered into a Stock Purchase Agreement (the "Stock Agreement"), with each of Renee Pepys Lowe and Stanley Lowe for the purchase of all of the issued and outstanding capital stock of CoCaLo, Inc., a California corporation ("CoCaLo"). 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 closing of each acquisition is subject to various closing conditions. We anticipate that each such acquisition will be closed early in April 2008. The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the anticipated acquisitions of LaJobi and CoCaLo. The Company anticipates that such amendment will be consummated by early April 2008, although there can be no assurance that either acquisition or such amendment will be consummated.

        For further detail with respect to the Asset Agreement and the Stock Agreement, please see the descriptions thereof under the section captioned "Anticipated Acquisitions" in the "Liquidity and Capital Resources" section of Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition".

90

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

        The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company's financial reports and to other members of senior management and the Board of Directors.

        The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that information required to be disclosed in our Exchange Act reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

        Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of December 31, 2007. Based upon our evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of December 31, 2007.

(b) Management's Annual Report on Internal Control Over Financial Reporting

        The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

        Management, with the participation of the principal executive officer and principal financial officer, recognizes that our internal control over financial reporting cannot prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resources constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

91

        Under the supervision and with the participation of the Company's management, including our principal executive officer and principal financial officer, the Company evaluated the effectiveness, as of December 31, 2007, of the Company's internal control over financial reporting. In making this evaluation, management used the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO Framework"). Based on its evaluation under the COSO Framework, management has concluded that our internal control over financial reporting was effective as of December 31, 2007.

        The effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by the Company's independent registered public accounting firm, KPMG LLP, as stated in their report which is included herein, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2007.

(c) Changes in Internal Control Over Financial Reporting

        There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9A(T).    CONTROLS AND PROCEDURES

        Not applicable.

ITEM 9B.    OTHER INFORMATION

Anticipated Acquisitions

        On April 1, 2008, a newly-formed and indirectly wholly-owned Delaware subsidiary of the Company, LaJobi, Inc. entered into an Asset Purchase Agreement (the "Asset Agreement") with LaJobi Industries, Inc., a New Jersey corporation ("LaJobi"), and each of Lawrence Bivona and Joseph Bivona for the purchase of substantially all of the assets used in the business of LaJobi and specified obligations. LaJobi designs, imports and sells infant and juvenile furniture and related products (including cribs, changing tables, dressers, hutches, armoires, bookcases and end tables) to specialty stores and boutiques, baby superstores and mass merchandisers. LaJobi also sells mattresses and changing pads.

        Also, on April 1, 2008, a newly-formed, wholly-owned Delaware subsidiary of the Company, I&J Holdco, Inc. entered into a Stock Purchase Agreement (the "Stock Agreement"), with each of Renee Pepys Lowe and Stanley Lowe for the purchase of all of the issued and outstanding capital stock of CoCaLo, Inc., a California corporation ("CoCaLo"). 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 closing of each acquisition is subject to various closing conditions. We anticipate that each such acquisition will be closed early in the second quarter of 2008. The Company has concluded negotiations with the senior lender under the Infantline Credit Agreement to amend such agreement in order to, among other things, increase the facilities available thereunder and to permit the anticipated acquisitions of LaJobi and CoCaLo. There can be no assurance that either acquisition or such amendment will be consummated.

        For further detail with respect to the Asset Agreement and the Stock Agreement, please see the descriptions thereof under the section captioned "Anticipated Acquisitions", in the "Liquidity and

92

Capital Resources" section of Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition".

MAM Agreement

        The MAM Agreement was assigned to Sassy in connection with RB's acquisition of the former Sassy's assets in 2002, and had an original expiration date of December 31, 2010 (subject to a 5-year extension unless specified notice is given), unless it is earlier terminated in accordance with its terms. Pursuant to the MAM Agreement, Sassy is the exclusive distributor of specified MAM products (principally medical pacifiers and related baby soothing products) in the United States, its territories and possessions (the "Territory"), with rights of first refusal for other specified products. Prices for the MAM products are set by MAM, and payments to MAM for such products are to be made in either Euros or dollars, depending on the applicable exchange rate, as specified in the MAM Agreement. In accordance with the MAM Agreement, Sassy committed to spending specified amounts on advertising of MAM products (a minimum of $600,000 annually). The MAM Agreement also contains limited indemnification provisions.

        During the third quarter of fiscal 2007, due to the adverse impact of foreign exchange rates, the Company performed an analysis of the value of the MAM Agreement. In connection with such 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 the MAM Agreement. Based upon the fair values derived using a discounted cash flows analysis, an impairment charge of $3.6 million was recorded in the Company's infant and juvenile segment in the Company's consolidated statements of operations for the three and nine months ended September 30, 2007. In addition, during the third quarter of 2007, the Company determined that the MAM Agreement was a finite-lived asset and, as such, would be amortized over an 8.5 year life. In connection with such determination, the Company recorded $200,000 as amortization expense in each of the third and fourth quarters of 2007.

        In connection with the preparation of the Company's financial statements for the year ended December 31, 2007, based on several factors, including the views of the Company's new chief executive officer (in consultation with senior management), the inability to obtain concessions from MAM during discussions in December 2007, the decreasing profitability of the products sold under the MAM Agreement and specified restrictions contained therein limiting the Company's ability to enter into competitive product categories, the Company recognized a further impairment charge and exercised its right to terminate the MAM Agreement, effective as of March 26, 2008. As a result of such termination, the Company recorded an additional impairment charge of $6.4 million for the fiscal year ended December 31, 2007 (for a total impairment charge of $10.0 million during 2007 which has been recorded in cost of sales of the infant and juvenile segment), reflecting the write-off of the remaining intangible assets related to the MAM Agreement. See "Item 1. Business" under the section captioned "Copyrights, Trademarks, Patents and Licenses" and Note 4 for further detail with respect to the MAM Agreement. The Company expects to continue to distribute MAM products through 2008 pursuant to contractual transition procedures, but anticipates that it will experience a decline in sales of approximately $20-25 million (although as noted above, the agreement generates limited profitability), until such time as the Company can generate replacement or alternate product sales. Pursuant to the MAM Agreement, the Company will be restricted from selling products competitive with MAM products for a period of one year following the termination of the MAM agreement.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE

        Information required by this Item 10 under Items 401 and 405 of Regulation S-K of the Exchange Act (other than with respect to executive officers), appears under the captions "ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE", respectively, of the 2008 Proxy Statement, which are each incorporated herein by reference. Information relating to executive officers is included under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K.

Audit Committee

        The Company maintains a separately designated standing Audit Committee established in accordance with Section 3(a) 58(a) of Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Audit Committee currently consists of Messrs. Salibello (Chair), Horowitz and Schaefer.

Audit Committee Financial Expert

        The Board of Directors has affirmatively determined that the Chair of the Audit Committee, Mr. Salibello, is an "audit committee financial expert", as that term is defined in Item 407(d)(5) of Regulation S-K of the Exchange Act, and is "independent" for purposes of current listing standards of the New York Stock Exchange.

Code of Ethics for Senior Financial Officers

        The Company has adopted a Code of Ethics for Senior Financial Officers that applies to its principal executive officer and principal financial officer (the "SFO Code"). The SFO Code can be found on the Company's website located at www.russberrie.com, by clicking onto the words "Corporate Governance" on the main menu and then on the "Code of Ethics for Principal Executive Officer and Senior Financial Officers" link. Such SFO code will be provided, without charge, to any person who makes a written request therefore to the Company at 111 Bauer Drive, Oakland, New Jersey 07436, Attention: Chief Financial Officer. The Company will post any amendments to the SFO Code, as well as the details of any waivers to the SFO Code that are required to be disclosed by the rules of the Securities and Exchange Commission, on our website within four business days of the date of any such amendment or waiver.

New York Stock Exchange Certification

        The certification of the Chief Executive Officer required by Section 303A.12(a) of the New York Stock Exchange listing standards, section 303A.12(a), relating to the Company's compliance with such exchange's corporate governance listing standards, was submitted to the New York Stock Exchange on December 19, 2007.

ITEM 11.    EXECUTIVE COMPENSATION

        Information required by this Item 11 under Items 402 and 407 (e)(4) and (e)(5) of Regulation S-K of the Exchange Act appears under the caption "EXECUTIVE COMPENSATION" of the 2008 Proxy Statement, which is incorporated herein by reference thereto.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        Information required by this Item 12 under Item 403 of Regulation S-K of the Exchange Act appears under the captions "SECURITY OWNERSHIP OF MANAGEMENT" and "SECURITY

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OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" of the 2008 Proxy Statement, which are each incorporated herein by reference thereto.

EQUITY COMPENSATION PLAN INFORMATION

        The following table sets forth information, as of December 31, 2007, regarding compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)
Equity compensation plans approved by security holders(1)	1,405,417		$	17.52	985,214	(2)
Equity compensation plans not approved by security holders	370,000	(3)(4)	$	20.79	0
Total	1,775,417		$	18.20	985,214

(1)

The plans are the Company's 2004 Stock Option, Restricted and Non-Restricted Stock Plan (the "2004 Option Plan"), Amended and Restated 2004 Employee Stock Purchase Plan (the "2004 ESPP"), 1999 Stock Option Plan for Outside Directors, 1999 Stock Option and Restricted Stock Plan ("1999 SORSP"), 1999 Stock Option Plan, 1999 Employee Stock Purchase Plan (the preceding four plans collectively, the "1999 Plans") and corresponding predecessor plans for 1994 (collectively, the "1994 Plans"). On May 7, 2004, the Company announced that the Board of Directors had authorized a cash tender offer to purchase outstanding options issued under the Company's various equity compensation plans for cash in amounts ranging from $0.25 per share to $5.00 per share, as is more fully described in the Statement on Schedule TO and related amendments filed by the Company with the Securities and Exchange Commission on May 7, 2004, May 28, 2004, June 15, 2004, June 22, 2004 and June 30, 2004, respectively. The tender offer closed in June 2004, with an aggregate purchase price of approximately $844,000 paid by the Company for the tender of options to purchase 757,609 shares of Common Stock.

(2)

The 2004 Option Plan and the 2004 ESPP were approved by the shareholders of the Company at the Annual Meeting of Shareholders on May 7, 2003, and such plans became effective January 1, 2004. An aggregate of 878,916 shares of Common Stock remain available for issuance for grants of stock options, restricted and non-restricted stock under the 2004 Option Plan and 106,298 shares of Common Stock remain available for issuance under the 2004 ESPP. Includes 100,000 options to purchase Common Stock granted to Mr. Crain on January 4, 2008 pursuant to the terms of his employment agreement with the Company. No awards may be made under the 2004 option Plan after December 31, 2008. No awards could be made under the 1999 Plans after December 31, 2003. No awards could be made under the 1994 Plans after December 31, 1998.

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(3)	(a)	Includes 150,000 shares issuable under stock options granted to Mr. Andrew R. Gatto outside of the 2004 Option Plan (due to grant limitations therein) in accordance with the terms of his employment agreement (the "Gatto Employment Agreement"), as a material inducement to Mr. Gatto becoming President and Chief Executive Officer of the Company. The options have an exercise price of $19.53 per share. As a result of the acceleration of the vesting provisions of all Underwater Options described in footnote 4 below, all such options became fully-vested as of December 28, 2005. As a result of the termination of Mr. Gatto's employment as of December 3, 2007, the options remain exercisable until December 3, 2009. The options are subject to anti-dilution and other adjustment provisions substantially similar to those set forth in the 2004 Option Plan. The Company shall, upon and to the extent of any written request from Mr. Gatto, use reasonable efforts to assure that all shares issued upon exercise of such options are, upon issuance and delivery, (i) fully registered (at the Company's expense) under the Securities Act of 1933, as amended, for both issuance and resale, (ii) registered or qualified (at the Company's expense) under such state securities laws as he may reasonably request, for issuance and resale and (iii) listed on a national securities exchange or eligible for sale on the NASDAQ National Market, and that all such shares, upon issuance, shall be validly issued, fully paid and nonassessable.
	(b)	Includes 100,000 shares issuable under stock options granted to Mr. Michael Levin (the "ML Options") outside of the 2004 option Plan (due to grant limitations therein), in accordance with the terms of his employment agreement (the "ML Employment Agreement"), as a material inducement to Mr. Levin becoming President and Chief Executive Officer of Kids Line following its acquisition by the Company. The ML Options have an exercise price of $22.21 per share. As a result of the acceleration of the vesting provisions of all Underwater Options described in footnote 4 below, all such options became fully-vested as of December 28, 2005. In general, the ML Options are exercisable for ten years from the date of grant. If the employment of Mr. Levin under the ML Employment Agreement is terminated by Kids Line by reason of his Disability (as defined in the ML Employment Agreement), or by reason of his death, any outstanding unexercised portion of the ML Options may be exercised by Mr. Levin's legal representatives, estate, legatee(s) or permitted transferee(s), as applicable, for up to one (1) year after such termination or the stated term of the option, whichever period is shorter. If the employment of Mr. Levin under the ML Employment Agreement is terminated by Kids Line for Cause or by Mr. Levin without Good Reason (each as defined in the ML Employment Agreement), any outstanding unexercised portion of the ML Options will be cancelled and deemed terminated as of the date of his termination. If Mr. Levin's employment under the ML Employment Agreement is terminated by Kids Line without Cause or by Mr. Levin with Good Reason (each as defined in the ML Employment Agreement), any outstanding unexercised portion of the ML Options may be exercised by Mr. Levin or his permitted transferee(s), as applicable, for up to six months after such termination or the stated term of the option, whichever period is shorter. The provisions set forth in the last three sentences are referred to herein as the "Termination Provisions". The ML Options are subject to anti-dilution and other adjustment provisions substantially similar to those set forth in the 2004 Option Plan.

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	c)	Includes 100,000 shares issuable under stock options granted to Ms. Joanne Levin (the "JL Options") outside the 2004 Option Plan (due to grant limitations therein) in accordance with the terms of her employment agreement (the "JL Employment Agreement"), as a material inducement to Ms. Levin becoming Executive Vice President of Kids Line following its acquisition by the Company. The JL Options have an exercise price of $22.21 per share. As a result of the acceleration of the vesting provisions of all Underwater Options described in footnote 4 below, all such options became fully-vested as of December 28, 2005. In general, the JL Options are exercisable for ten years from the date of grant. The JL Options are subject to the Termination Provisions. The JL Options are subject to anti-dilution and other adjustment provisions substantially similar to those set forth in the 2004 Option Plan.
	d)	Includes 20,000 shares issuable under stock options granted to Mr. Bruce G. Crain outside of the 2004 Option Plan (due to grant limitations therein) in accordance with the terms of his employment agreement (the "Crain Employment Agreement"), as material inducement to Mr. Crain becoming President and Chief Executive Officer of the Company. These options (the "Crain Options") have an exercise price of $16.05 per share, vest ratably over a five year period commencing on December 4, 2008, and are generally exercisable until December 4, 2017. If the employment of Mr. Crain is terminated by the Company for Cause or by Mr. Crain without Good Reason (each as defined in the Crain Agreement), the unvested portion of the Crain Option will be cancelled, and any unexercised, vested portion shall remain exercisable for the shorter of 90 days following the date of termination and the remainder of their term. If the Company terminates the employment of Mr. Crain without Cause or he terminates his employment for Good Reason, the Crain Option will become immediately vested to the same extent as if Mr. Crain had completed an additional two years of service after the date of termination, and shall remain exercisable for the shorter of 90 days following the date of termination and the remainder of their term. If the employment of Mr. Crain is terminated by the Company as a result of his death or Disability (as defined in the Crain Agreement), the Crain Option will become immediately vested to the same extent as if Mr. Crain had completed an additional two years of service after the date of termination, and shall remain exercisable for the shorter of one year following the date of termination and the remainder of their term. In the event of a Change of Control (as defined in the Crain Agreement), whether or not termination of employment occurs, the Crain Option will become immediately vested to the extent that such option was scheduled to vest within three years of the date of such Change in Control, and the vesting dates of the portion of the Crain Option that was not scheduled to vest within three years of the date of such Change in Control shall be accelerated by three years. If the Company terminates Mr. Crain's employment without Cause and a Change in Control occurs within six months of the date of such termination, the portion of the Crain Option that was scheduled to vest within three years of the date of termination, and which did not vest as described above, shall become vested and exercisable on the date of such Change in Control, and shall remain exercisable for the shorter of 90 days following the date of termination and the remainder of their term.
(4)	Effective December 28, 2005, the Company amended all outstanding stock option agreements which pertain to options with exercise prices in excess of the market price for the Company's Common Stock at the close of business on December 28, 2005 ("Underwater Options") which had remaining vesting requirements. As a result of these amendments, all Underwater Options became fully vested and immediately exercisable at the close of business on December 28, 2005.

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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

        Information required by this Item 13 under Items 404 and 407(a) of Regulation S-K of the Exchange Act appears under the captions "TRANSACTIONS WITH RELATED PERSONS", "CORPORATE GOVERANCE—I. INDEPENDENCE DETERMINATIONS" of the 2008 Proxy Statement, which is incorporated herein by reference thereto.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        Information required by this Item 14 appears under the captions "Independent Public Accountants", "Audit Fees", "Audit-Related Fees", "Tax Fees", "All Other Fees" and "Audit Committee Pre-Approval Policies and Procedures" of the 2008 Proxy Statement, which are each incorporated herein by reference thereto.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Report.

1.	Financial Statements:
	Report of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets at December 31, 2007 and 2006
	Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005
	Consolidated Statements of Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005
	Consolidated Statements of Cash Flows for the years December 31, 2007, 2006 and 2005
	Notes to Consolidated Financial Statements
2.	Financial Statement Schedules:
	Schedule I—Condensed Financial Information of Registrant
	Schedule II—Valuation and Qualifying Accounts—Years Ended December 31, 2007, 2006 and 2005

        Other schedules are omitted because they are either not applicable or not required or the information is presented in the Consolidated Financial Statements or Notes thereto.

3.

Exhibits:

        (Listed by numbers corresponding to Item 601 of Regulation S-K)

Exhibit No.
2.1	Asset Purchase Agreement by and among RBSACQ, Inc. and Sassy, Inc. and its shareholders dated July 26, 2002. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.(20)
2.2	Membership Interest Purchase Agreement among Kids Line, LLC, Russ Berrie and Company, Inc. and the various sellers party hereto dated as of December 15, 2005 In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.(29)
2.3	Asset Purchase Agreement, dated as of April 1, 2008, among LaJobi, Inc., LaJobi Industries, Inc. and each of Lawrence Bivona and Joseph Bivona. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.
2.4	Stock Purchase Agreement, dated as of April 1, 2008, among I&J Holdco. Inc. and Renee Pepys Lowe and Stanley Lowe. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.
3.1	(a) Restated Certificate of Incorporation of the Registrant and amendment thereto.(3)
	(b) Certificate of Amendment to Restated Certificate of Incorporation of the Company filed April 30, 1987.(10)
3.2	Second and Amended and Restated By-Laws of the Registrant.(50)

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4.1	Form of Common Stock Certificate.(1)
4.2	Financing Agreement by and among Russ Berrie and Company, Inc.(the "Borrower"), each subsidiary of the Borrower listed as a guarantor, the lenders from time to time a party hereto, and Ableco Finance LLC dated as of December 15, 2005(29)
4.3	Security Agreement among Granters and Ableco Finance LLC dated as of December 15, 2004(29)
4.5	Credit Agreement, dated as of June 28, 2005, among Russ Berrie and Company, Inc. and specified domestic wholly-owned subsidiaries thereof, the financial institutions parties thereto as Facility A Lenders, the financial institutions parties thereto as Facility B Lenders, LaSalle Bank National Association, in its capacity as "Issuing Bank" thereunder, and LaSalle Business Credit, LLC as administrative agent (the "Administrative Agent") for the lenders and the Issuing Bank, and those lenders, if any designated therein as the "Documentation Agent" or "Syndication Agent."(32)
4.6	Guaranty and Collateral Agreement made on June 28, 2005 among Russ Berrie and Company, Inc., its subsidiaries party thereto and the Administrative Agent.(32)
4.7	Credit Agreement dated as of June 28, 2005, among Amram's Distributing Ltd., 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 agent.(32)
4.8	Guaranty Agreement dated as of June 28, 2005, among Russ Berrie and Company, Inc., 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 agent.(32)
4.9	First Amendments to Credit Agreement, dated as of August 4, 2005, among Russ Berrie and Company, Inc. its domestic signatories party thereto, the Facility A Lenders and the Facility B Lenders from time to time parties to the Credit Agreement, the Issuing Bank and the Administrative Agent.(33)
4.10	Credit Agreement, dated as of March 14, 2006, among Kids Line, LLC and Sassy, Inc., as the Borrowers, and together with certain subsidiaries of the foregoing borrowers, as the Loan Parties, those financial institutions party thereto, as the Lenders, LaSalle Bank National Association, as Administrative Agent and Arranger, Sovereign Bank, as Syndication Agent, and Bank of America, N.A., as Documentation Agent.(41)
4.11	Guaranty and Collateral Agreement, dated as of March 14, 2006, among Kids Line, LLC and Sassy, Inc. and the other parties thereto as Grantors, and LaSalle Bank National Association, as the Administrative Agent.(41)
4.12	Credit Agreement, dated as of March 14, 2006, among Russ Berrie and Company, Inc., as the Loan Party Representative and Russ Berrie U.S. Gift, Inc., Russ Berrie & Co. (West), Inc., Russ Berrie and Company Properties,  Inc., RussPlus, Inc., and Russ Berrie and Company Investments, Inc. as the Borrowers, those financial institutions party thereto, as Lenders, LaSalle Business Credit, LLC, as Administrative Agent and Arranger, and LaSalle Bank National Association, as Issuing Bank.(41)

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4.13	Guaranty and Collateral Agreement, dated as of March 14, 2006, among Russ Berrie U.S. Gift, Inc., Russ Berrie & Co. (West), Inc., Russ Berrie and Company Properties, Inc., RussPlus, Inc., and Russ Berrie and Company Investments, Inc. and LaSalle Business Credit, LLC, as Administrative Agent and Arranger.(41)
4.14	Limited Recourse Guaranty and Collateral Agreement, dated as of March 14, 2006, among Russ Berrie and Company, Inc. and LaSalle Business Credit, LLC.(41)
4.15	Guaranty Agreement, dated as of March 14, 2006, made by Russ Berrie U.S. Gift, Inc. in favor of LaSalle Business Credit, a division of ABN AMRO Bank N.V., Canada Branch, as agent, for itself and the Lenders.(41)
4.16	Letter Agreement, dated as of March 14, 2006, between California KL Holdings, Inc., on behalf of itself and the Deferred Payoff Sellers, Michael Levin, as Unitholders Representative, Century Park Advisors, LLC, as Unitholders Representative, Russ Berrie and Company, Inc., Kids Line, LLC and Sassy, Inc.(41)
4.17	First Amendment to Credit Agreement, dated as of April 11, 2006, among Russ Berrie and Company, Inc., as the Loan Party Representative and Russ Berrie U.S. Gift, Inc., Russ Berrie & Co. (West), Inc., Russ Berrie and Company Properties, Inc., RussPlus, Inc., and Russ Berrie and Company Investments, Inc. as the Borrowers, those financial institutions party thereto, as Lenders, LaSalle Business Credit, LLC, as Administrative Agent and Arranger, and LaSalle Bank National Association, as Issuing Bank.(41)
4.18	Second Amendment to Credit Agreement, dated as of August 8, 2006, among Russ Berrie and Company, Inc. as of the Loan Party Representative and Russ Berrie U.S. Gift, Inc., Russ Berrie & Co. (West), Inc., Russ Berrie and Company Properties, Inc., RussPlus, Inc., and Russ Berrie and Company Investments, Inc. as the Borrowers, those financial institutions party thereto, as Lenders, LaSalle Business Credit, LLC, as Administrative Agent and Arranger, and LaSalle Bank National Association, as Issuing Bank.(43)
4.19	First Omnibus Amendment to Credit Agreement and Pledge Agreement, dated December 22, 2006, between Russ Berrie and Company, Inc., Kids Line, LLC, Sassy, Inc., the Credit Parties and LaSalle Bank National Association, Bank of America, National Association, Sovereign Bank, Wachovia Bank, National Bank, General Electric Capital Corporation and J P Morgan Chase Bank, N.A.(49)
4.20	First Omnibus Amendment Consisting of Third Amendment to Credit Agreement and First Amendment to Pledge Agreement, dated December 28, 2006, between Russ Berrie and Company, Inc., Russ Berrie U.S. Gift, Inc., Russ Berrie & Co., Russ Berrie and Company Properties, Inc., Russplus, Inc., and Russ Berrie and Company Investments, Inc., collectively, the Borrowers and LaSalle Bank National Association.(49)
4.21	Debenture among Russ Berrie (UK) Limited and National Westminster Bank Plc.(51)
4.22	Business Overdraft Facility among Russ Berrie (UK) Limited and The Royal Bank of Scotland(51)
4.23	Fourth Amendment to Credit Agreement, dated as of August 8, 2007 among RB, Russ Berrie U.S. Gift, Inc. Russ Berrie & Co. (West), Inc., Russ Berrie and Company Properties, Inc., Russplus, Inc. Russ Berrie and Company Investments, Inc., the financial institutions signatory thereto (the "Lenders"), LaSalle Business Credit, LLC, as administrative agents for the Lenders and LaSalle Bank National Association as Issuing Bank.(52)

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10.1	Lease Agreement, dated April 1, 1981, between Tri-State Realty and Investment Company and Russ Berrie and Company, Inc.(2)
10.2	Lease, dated December 28, 1983, between Russell Berrie and Russ Berrie and Company, Inc.(2)
10.3	Guarantee dated as of December 1, 1983, from Russ Berrie and Company, Inc. to the New Jersey Economic Development Authority, Bankers Trust Company as Trustee and each Holder of a Bond.(2)
10.4	Loan Agreement, dated as of December 1, 1983, between the New Jersey Economic Development Authority and Russell Berrie.(2)
10.5	Mortgage, dated December 28, 1983, between Russell Berrie and Citibank, N.A.(2)
10.6	Form of New Jersey Economic Development Authority Variable/Fixed Rate Economic Development Bond (Russell Berrie—1983 Project).(2)
10.7	Grant Deed, dated June 28, 1982, from Russ Berrie and Company, Inc. to Russell Berrie.(1)
10.8	Lease Agreement, dated July 1, 1987, between Hunter Street, Inc. and Russ Berrie and Co (West), Inc.(4)
10.9	Lease Agreement dated November 7, 1988 between Russell Berrie and Russ Berrie and Company, Inc.(5)
10.10	Lease Agreement dated June 8, 1989 between Americana Development, Inc. and Russ Berrie and Company, Inc.(6)
10.11	Lease dated December 25, 1989 between Kestrel Properties, Ltd. And Russ Berrie (U.K.) Ltd.(6)
10.12	Agreement for sale and purchase of parts or shares of Sea View Estate between Sino Rank Company Limited and Tri Russ International (Hong Kong) Limited dated March 10, 1990.(7)
	(a) Asset Purchase Agreement dated September 18, 1990 by and among Bright, Inc., Bright of America, Inc., Bright Crest, LTD. and William T. Bright.(7)
	(b) Non-Compete Agreement dated September 18, 1990 by and between William T. Bright and Bright, Inc.(7)
	(c) Deed of Trust dated September 18, 1990 by and among Bright, Inc., F.T. Graff Jr. and Louis S. Southworth, III, Trustees, and Bright of America, Inc.(7)
10.13	Transfer of Freehold land between British Telecommunications plc and BT Property Limited and Russ Berrie (UK) Ltd.(8)
10.14	Russ Berrie and Company, Inc. 1994 Stock Option Plan.*(8)
10.15	Russ Berrie and Company, Inc. 1994 Stock Option Plan for Outside Directors.*(8)
10.16	Russ Berrie and Company, Inc. 1994 Stock Option and Restricted Stock Plan.*(8)
10.17	Russ Berrie and Company, Inc. 1994 Employee Stock Purchase Plan.*(8)
10.18	Asset Purchase Agreement dated October 1, 1993 by and between RBTACQ, Inc. and Cap Toys, Inc.(9)
10.19	Asset Purchase Agreement I.C. September 30, 1994 by and among RBCACQ, Inc. and OddzOn Products, Inc., Scott Stillinger and Mark Button.(10)

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10.20	Asset Purchase Agreement By and Among PF Acquisition Corp., Zebra Capital Corporation, Papel/Freelance, Inc. and Russ Berrie and Company, Inc. dated December 15, 1995.(11)
10.21	Agreement dated March 24, 1997, by and between Russ Berrie and Company, Inc. and Ricky Chan.*(12)
10.22	Asset Purchase Agreement dated as of May 2, 1997 among Russ Berrie and Company, Inc., OddzOn Products, Inc., Cap Toys, Inc., OddzOn/Cap Toys, Inc. and Hasbro, Inc., together with exhibits thereto.(13)
10.23	Agreement of Purchase and Sale between Amram's Distributing Ltd. and Metrus Properties Ltd. dated November 25, 1997.(14)
10.24	Russ Berrie and Company, Inc. 1999 Stock Option Plan.*(15)
10.25	Russ Berrie and Company, Inc. 1999 Stock Option Plan for Outside Directors.*(15)
10.26	Russ Berrie and Company, Inc. 1999 Stock Option and Restricted Stock Plan.*(15)
10.27	Russ Berrie and Company, Inc. 1999 Employee Stock Purchase Plan.*(15)
10.28	Exercise of option to extend terms of leases dated December 28, 1983 and March 7, 1988 between Russell Berrie and Russ Berrie and Company, Inc.(16)
10.29	Executive Employment Agreement dated March 1, 2001 between Russ Berrie and Company, Inc. and Michael M. Saunders.*(17)
10.30	Russ Berrie and Company, Inc. Executive Deferred Compensation Plan.*(19)
10.31	Russ Berrie and Company, Inc. Change in Control Severance Plan.*(21)
10.32	Russ Berrie and Company, Inc. Severance Policy For Domestic Vice Presidents (And Above).*(21)
10.33	Agreement dated March 19, 2003 between Russ Berrie and Company, Inc. and A. Curts Cooke.*(21)
10.34	Agreement dated March 25, 2003 between Russ Berrie and Company, Inc. and Jeff Bialosky.*(22)
10.35	Letter dated July 2, 2003 between the Company and Arnold S. Bloom regarding retention bonus.*(23)
10.36	Letter dated July 2, 2003 between the Company and Chris Robinson regarding retention bonus.*(23)
10.37	Letter dated July 2, 2003 between the Company and A. Curts Cooke regarding retention bonus.*(23)
10.38	Letter dated July 2, 2003 between the Company and Dan Schlotterbeck regarding retention bonus.*(23)
10.39	Letter dated July 2, 2003 between the Company and Eva Goldenberg regarding retention bonus.*(23)
10.40	Letter dated July 2, 2003 between the Company and Jack Toolan regarding retention bonus.*(23)

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10.41	Letter dated July 2, 2003 between the Company and Jeffrey A. Bialosky regarding retention bonus.*(23)
10.42	Letter dated July 2, 2003 between the Company and John Wille regarding retention bonus.*(23)
10.43	Letter dated July 2, 2003 between the Company and Michael Saunders regarding retention bonus*(23)
10.44	Letter dated July 2, 2003 between the Company and Ricky Chan regarding retention bonus.*(23)
10.45	Letter dated July 2, 2003 between the Company and Tom Higgerson regarding retention bonus*(23)
10.46	Executive Employment Agreement dated September 22, 2003 between Russ Berrie and Company, Inc. and John T. Toolan*(23)
10.47	Stock Option Agreement dated September 8, 2003 between Russ Berrie and Company, Inc. and Geff Lee*(23)
10.48	Stock Option Agreement dated September 5, 2003 between Russ Berrie and Company, Inc. and Dennis Nesta*(23)
10.49	Russ Berrie and Company, Inc. 2004 Stock Option Plan, Restricted and Non-Restricted Stock Plan*(24)
10.50	Russ Berrie and Company, Inc. 2004 Employee Stock Purchase Plan*(24)
10.51	Amendment to and extension of lease agreement dated May 7, 2003 by and between Russ Berrie and Company, Inc. and Tri-State Realty and Investment Company(25)
10.52	Second Amendment to lease dated November 18, 2003 by and between Russ Berrie and Company, Inc. and Estate of Russell Berrie.(25)
10.53	Amendment to Russ Berrie and Company, Inc. Change In Control Severance Plan*(25)
10.54	Letter dated January 5, 2004 between the Company and Arnold S. Bloom regarding retention bonus*(25)
10.55	Letter dated January 5, 2004 between the Company and Chris Robinson regarding retention bonus*(25)
10.56	Letter dated January 5, 2004 between the Company and A. Curts Cooke regarding retention bonus*(25)
10.57	Letter dated January 5, 2004 between the Company and Dan Schlotterbeck regarding retention bonus*(25)
10.58	Letter dated January 5, 2004 between the Company and Eva Goldenberg regarding retention bonus*(25)
10.59	Letter dated January 5, 2004 between the Company and Jack Toolan regarding retention bonus*(25)
10.60	Letter dated January 5, 2004 between the Company and Jeffrey A. Bialosky regarding retention bonus*(25)
10.61	Letter dated January 5, 2004 between the Company and John Wille regarding retention bonus*(25)

104

10.62	Letter dated January 5, 2004 between the Company and Michael Saunders regarding retention bonus*(25)
10.63	Letter dated January 5, 2004 between the Company and Ricky Chan regarding retention bonus*(25)
10.64	Letter dated January 5, 2004 between the Company and Tom Higgerson regarding retention bonus*(25)
10.65	Agreement dated as of April 9, 2004 between Russ Berrie and Company, Inc. and Andrew R. Gatto*(26)
10.66	Offer to Purchase Specific Options dated May 28, 2004, as amended, incorporated herein by reference to Amendment No. 4 to the Statement on Schedule TO, as filed with the Securities and Exchange Commission on June 30, 2004.*
10.67	Letter of Transmittal, incorporated herein by reference to Exhibit (a) (1) (iii) of the Statement on Schedule TO, as filed with the Securities and Exchange Commission on May 28, 2004.*
10.68	Stock Option Agreement, dated as of June 1, 2004, between Russ Berrie and Company, Inc. and Andrew R. Gatto pertaining to options to purchase 100,000 shares of Common Stock*(27)
10.69	Stock Option Agreement, dated as of June 1, 2004, between Russ Berrie and Company, Inc. and Andrew R. Gatto pertaining to options to purchase 150,000 shares of Common Stock*(27)
10.70	Executive Employment Agreement dated August 24, 2004 between Russ Berrie and Company, Inc. and Lynn Moran*(28)
10.71	Option Purchase and Sale Agreement dated as of August 4, 2004, by and between Russ Berrie and Company, Inc. and John T. Toolan*(28)
10.72	Option Purchase and Sale Agreement dated as of September 10, 2004, by and between Russ Berrie and Company, Inc. Christopher Robinson*(28)
10.73	Option Purchase and Sale Agreement dated as of August 6, 2004, by and between Russ Berrie and Company, Inc. and William Landman*(28)
10.74	Option Purchase and Sale Agreement dated as of August 3, 2004, by and between Russ Berrie and Company, Inc. and Joseph Kling*(28)
10.75	Option Purchase and Sale Agreement dated as of August 2, 2004, by and between Russ Berrie and Company, Inc. and Raphael Benaroya*(28)
10.76	Option Purchase and Sale Agreement dated as of August 2, 2004, by and between Russ Berrie and Company, Inc. and Josh Weston*(28)
10.77	Option Purchase and Sale Agreement dated as of August 3, 2004, by and between Russ Berrie and Company, Inc. and Carl Epstein*(28)
10.78	Option Purchase and Sale Agreement dated as of August 2, 2004, by and between Russ Berrie and Company, Inc. and Ilan Kaufthal*(28)
10.79	Option Purchase and Sale Agreement dated as of August 4, 2004, by and between Russ Berrie and Company, Inc. and Charles Klatskin*(28)

105

10.80	Option Purchase and Sale Agreement dated as of August 6, 2004, by and between Russ Berrie and Company, Inc. and Sidney Slauson*(28)
10.81	Option Purchase and Sale Agreement dated as of August 3, 2004, by and between Russ Berrie and Company, Inc. and Jeff Bialosky*(28)
10.82	Order of U.S. Bankruptcy Court Central District of California San Fernando Division, dated October 15, 2004, authorizing and approving sale of "Applause" trademark and certain related assets free and clear of all encumbrances and other interests pursuant to Section 363 of the Bankruptcy Code(28)
10.83	Amended and Restated Trademark Purchase Agreement, dated as of September 21, 2004, by and between Applause, LLC and the Company, as amended by the First Amendment thereto.(28)
10.84	Form of Stock Option Agreement with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan*(40)
10.85	Form of Stock Option Agreement for Non-Employee Directors with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan*(40)
10.86	Form of Restricted Stock Agreement with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan*(40)
10.87	Letter dated September 30, 2004 between the Company and John T. Toolan regarding severance arrangements*(40)
10.88	Letter dated December 30, 2004 between the Company and Ricky Chan regarding severance arrangements*(40)
10.89	Stock Option Agreement dated March 24, 2005 between Russ Berrie and Company, Inc. and Joanne Levin*(40)
10.90	Stock Option Agreement dated March 24, 2005 between Russ Berrie and Company, Inc. and Michael Levin*(40)
10.91	Trademark Purchase Agreement between Russ Berrie and Company, Inc. and Applause, LLC(28)
10.92	Commitment Letter between Russ Berrie and Company, Inc. and Ableco Finance LLC dated November 24, 2005(40)
10.93	Incentive Compensation Program adopted on March 11, 2005*(31)
10.94	Employment Agreement dated July 27, 2005, effective August 1, 2005, between Russ Berrie and Company, Inc. and Mr. Anthony Cappiello*(34)
10.95	Employment Agreement dated September 26, 2005, between Russ Berrie and Company, Inc. and Marc S. Goldfarb.*(35)
10.96	Severance Agreement dated September 28, 2005, between Russ Berrie and Company, Inc. and Arnold S. Bloom.*(35)
10.97	Consulting Agreement dated September 28, 2005, between Russ Berrie and Company, Inc. and Arnold S. Bloom*(35)
10.98	Employment arrangement, dated as of November 03, 2005, effective November 7, 2005, between Russ Berrie and Company, Inc. and Keith Schneider.*(36)

106

10.99	Purchase and Sale Agreement, dated as of December 7, 2005, between Amram's Distributing Ltd. and Bentall Investment Management LP.(37)
10.100	Agreement made as of December 23, 2005, between Amram's Distributing Ltd. and Bentall Investment Management LP.(38)
10.101	Lease dated as of December 29, 2005 between Westpen Properties Ltd. and Amram's Distributing Ltd.(38)
10.102	Amended and Restated 2004 Employee Stock Purchase Plan effective January 3, 2006.*(38)
10.103	Framework Agreement, dated as of December 30, 2005, between Russ Berrie (UK) Limited and Barclays Bank PLC.(39)
10.104	Letter dated March 22, 2006 between the Company and John Wille.*(44)
10.105	Investor Rights Agreement, dated as of August 10, 2006, among the Company and the investors listed on the signature pages thereto.(46)
10.106	Lease Agreement, dated August 8, 2006, between Erachange Limited and Russ Berrie (UK) Limited.(48)
10.107	Agreement for the Sale and Purchase of Liberty House Bulls Copse Road Hounsdown Business Park Totton Southampton, SO40 9RB dated October 31, 2006, between Hounsdown, Inc., Russ Berrie (UK) Limited and Garmin (Europe) Limited.(48)
10.108	Amended and Restated VP Severance Policy for Domestic Vice Presidents (and Above)*(53)
10.109	Russ Berrie and Company, Inc. Transaction Bonus Plan*(53)
10.110	Employment Agreement, dated as of December 4, 2007, between the Company and Bruce G. Crain*.(54)
21.1	List of Subsidiaries
23	Consent of Independent Registered Public Accounting Firm
31.1	Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002
32.1	Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002
32.2	Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002

*

Represent management contracts or compensatory plans or arrangements.

(1)

Incorporated by reference to Amendment No. 2 to Registration Statement No. 2-88797 on Form S-1, as filed on March 29, 1984.

(2)

Incorporated by reference to Registration Statement No. 2-88797on Form S-1, as filed on February 2, 1984.

(3)

Incorporated by reference to Amendment No. 1 to Registration Statement No. 33-10077 of Form S-1, as filed on December 16, 1986.

(4)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1987.

(5)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988.

107

(6)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1989.

(7)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990.

(8)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1992.

(9)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.

(10)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.

(11)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995.

(12)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1996.

(13)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 1997

(14)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1997.

(15)

Incorporated by reference to Form S-8 Registration Statement No. 333-70081 as filed on January 4, 1999.

(16)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1998.

(17)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000.

(18)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2001.

(19)

Incorporated by reference to Form S-8 Registration Statement No. 333-76248 as filed on January 3, 2002.

(20)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

(21)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2002.

(22)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

(23)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

(24)

Incorporated by reference to the Company's definitive Proxy Statement dated March 21, 2003.

(25)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2003.

(26)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.

(27)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

(28)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

(29)

Incorporated by reference to Form 8-K filed on December 22, 2004.

(30)

Incorporated by reference to Form 8-K filed on February 15, 2005.

(31)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005

(32)

Incorporated by reference to Current Report on Form 8-K filed July 5, 2005.

108

(33)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.

(34)

Incorporated by reference to Current Report on Form 8-K filed August 2, 2005.

(35)

Incorporated by reference to Current Report on Form 8-K filed September 29, 2005.

(36)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.

(37)

Incorporated by reference to Current Report on Form 8-K filed December 15, 2005.

(38)

Incorporated by reference to Current Report on Form 8-K filed December 30, 2005.

(39)

Incorporated by reference to Current Report on Form 8-K filed January 4, 2006

(40)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2004.

(41)

Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2005.

(42)

Incorporated by reference to the Annual Report on Form 10-K/A for the year ended December 31, 2005, as filed on April 20, 2006.

(43)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

(44)

Incorporated by reference to Current Report on Form 8-K filed April 4, 2006

(45)

Incorporated by reference to Current Report on Form 8-K filed July 6, 2006.

(46)

Incorporated by reference to Current Report on Form 8-K filed August 14, 2006.

(47)

Incorporated by reference to Current Report on Form 8-K filed October 10, 2006.

(48)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

(49)

Incorporated by reference to Current Report on Form 8-K filed December 29, 2006.

(50)

Incorporated by reference to Current Report on Form 8-K January 7, 2008.

(51)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

(52)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

(53)

Incorporated by reference from the Current Report on Form 8-K filed on July 17, 2007.

(54)

Incorporated by reference from the Current Report on Form 8-K filed on December 7, 2007.

109

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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.

	RUSS BERRIE AND COMPANY, INC. (Registrant)
April 1, 2008 Date	By:	/s/  ANTHONY CAPPIELLOExecutive Vice President and Chief Administrative Officer (Principal Financial Officer)

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/  BRUCE G. CRAIN Bruce G. Crain, Chief Executive Officer and Director (Principle Executive Officer)	April 1, 2008 Date
/s/  RAPHAEL BENAROYA Raphael Benaroya, Chairman and Director	April 1, 2008 Date
/s/  MARIO CIAMPI Mario Ciampi, Director	April 1, 2008 Date
/s/  FREDERICK J. HOROWITZ Frederick J. Horowitz, Director	April 1, 2008 Date
/s/  LAUREN KRUEGER Lauren Krueger, Director	April 1, 2008 Date
/s/  SALVATORE SALIBELLO Salvatore Salibello, Director	April 1, 2008 Date
/s/  JOHN SCHAEFER John Schaefer, Director	April 1, 2008 Date
/s/  MICHAEL ZIMMERMAN Michael Zimmerman, Director	April 1, 2008 Date

110

Exhibit Index

Exhibit Numbers
2.3	Asset Purchase Agreement, dated as of April 1, 2008, among LaJobi, Inc., LaJobi Industries, Inc. and each of Lawrence Bivona and Joseph Bivona. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.
2.4	Stock Purchase Agreement, dated as of April 1, 2008, among I&J Holdco, Inc., Renee Pepys Lowe and Stanley Lowe. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.
21.1	List of Subsidiaries
23	Consent of Independent Registered Public Accounting Firm
31.1	Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002
32.1	Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002
32.2	Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002

111

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS

December 31, 2007 and 2006

(Dollars in Thousands)

			2007			2006
ASSETS
Current assets
	Cash and cash equivalents		$	6,271		$	2,031
	Prepaid expenses and other current assets			132			1,146
	Deferred income taxes			—			258
	Income tax receivable			—			1,046
		Total current assets		6,403			4,481
Investments in and advances to subsidiaries				259,832			229,253
Deferred income taxes				1,423			11,049
Other assets				439			425
		Total Assets	$	268,097		$	245,208
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
	Accrued expenses			3,206			1,395
	Other current liabilities			—			313
	Income taxes payable			1,841			13,499
		Total current liabilities		5,047			15,207
Due to subsidiaries				325,606			308,602
Deferred income taxes				13,139			—
Other long term liabilities				700			—
	Total Liabilities			344,492			323,809
Shareholders Deficit
	Common stock: $0.10 stated value per share; authorized 50,000,000 shares; issued 26,727,780 and 26,712,780 at December 31, 2007 and 2006 respectively			2,674			2,673
	Additional paid in capital			90,844			91,836
	Accumulated deficit			(63,830	)		(62,960	)
	Treasury stock, at cost, 5,428,137 shares and 5,636,284 shares at December 31, 2007 and 2006, respectively			(106,083	)		(110,150	)
		Total shareholders' deficit		(76,395	)		(78,601	)
		Total liabilities and shareholders' deficit	$	268,097		$	245,208

The accompanying notes are an integral part of the condensed financial information.

112

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

SCHEDULE I

CONSENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(In Thousands)

		2007			2006			2005
Net sales		$	—		$	10,152		$	49,346
Cost of sales			—			6,420			34,029
Gross profit			—			3,732			15,317
Selling, general and administrative expenses			9,155			17,366			59,657
Operating loss			(9,155	)		(13,634	)		(44,340	)
Other income (expense):
	Interest income (expense)		134			(158	)		402
	Dividends from subsidiaries		7,405			2,000			—
	Other, net		—			145			—
Loss before income tax(benefit) provision			(1,616	)		(11,647	)		(43,938	)
Income tax (benefit) provision			(746	)		2,019			5,857
Net loss		$	(870	)	$	(13,666	)	$	(49,795	)

The accompanying notes are an integral part of the condensed financial information.

113

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

SCHEDULE I

CONSENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(In Thousands)

		2007			2006			2005
Net cash (used in) provided by operating activities:		$	(6,055	)	$	89,504		$	7,659
Cash flows from investing activities:
Payment for purchase of Applause trade name			—			—			33
Proceeds from sale of property, plant and equipment			—			—			157
Capital expenditures			—			—			(333	)
Payment for purchase of Kids Line LLC			—			—			(299	)
Investment in Subsidiaries			—			(25,095	)		—
	Net cash (used in) provided by investing activities		—			(25,095	)		(442	)
Cash flows from financing activities:
Proceeds from issuance of common stock			2,890			2,907			102
Dividends paid to shareholders			—			—			23,209
Issuance of long-term debt			—			—			53,000
Payments of long-term debt			—			(76,515	)		(133,407	)
Net borrowings on revolving credit facility			—			—			31,924
Dividends received—intercompany			7,405			500			—
	Net cash provided by (used in) financing activities		10,295			(73,108	)		(25,172	)
Net increase (decrease) in cash and cash equivalents			4,240			(8,699	)		(17,955	)
Cash and cash equivalents at beginning of year			2,031			10,730			28,685
Cash and cash equivalents at end of year		$	6,271		$	2,031		$	10,730

The accompanying notes are an integral part of the condensed financial information.

114

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

SCHEDULE I

NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Note 1: Basis of Presentation

        The accompanying condensed financial information consists of the accounts of the parent company, Russ Berrie and Company, Inc. ("RB"), and excludes the operations of RB's subsidiaries. Prior to March 14, 2006, the accounts of RB include the assets and liabilities of RB's Eastern United States domestic gift business (the "Eastern Domestic Gift Business"). RB's Western United States and foreign gift business were operated by separate domestic and international subsidiaries of RB and, consequently, such operations are not included in the accompanying condensed financial information. On March 14, 2006, an Assignment and Assumption Agreement and Bill of Sale (the "Assignment") between RB and a newly created Delaware corporation, Russ Berrie U.S. Gift, Inc. ("U.S. Gift") was executed in conjunction with the Giftline Credit Agreement, as discussed in Note 8 of the Notes to the Consolidated Financial Statements. RB agreed to transfer and assign to U.S. Gift substantially all of the domestic Gift segment operating assets previously owned by RB. As a result of the Assignment, RB effectively became a holding company on March 14, 2006. Subsequent to March 14, 2006, RB's operations relate primarily to holding company and general corporate activities, and all operating activities are now being conducted by subsidiaries of RB. The Assignment enabled the Giftline Credit Agreement to be extended directly to U.S. Gift.

        In the condensed financial information of RB, we state our investments in subsidiaries at cost since the date of formation/acquisition. Such financial information and related notes should be read in conjunction with our consolidated financial statements and related notes thereto included in this 2007 Form 10-K.

        The accompanying condensed balance sheets of RB at December 31, 2007 and 2006 include certain "investments in and advances to subsidiaries," and "due to subsidiaries" that relate to inactive, dormant wholly-owned subsidiaries with no operations, that RB has owned for many years as separate legal entities. These subsidiaries' accounts contain the offsetting receivables due from RB, payables due to RB, and equity accounts resulting from RB's investments that eliminate in consolidation with the corresponding accounts on RB's books. As described in Note 2 to the consolidated financial statements, these accounts have been eliminated in consolidation in the consolidated financial statements.

Reclassification

        Certain prior year amounts have been reclassified to conform to the 2007 consolidated financial statement presentation.

Note 2: Restriction on Payments to RB

        As discussed in Note 8 of the Notes to the Consolidated Financial Statements, the terms of "The Infantline Credit Agreement" executed on March 14, 2006 contain significant limitations on the ability of the Infantline Borrowers to distribute cash to RB for the purpose of paying dividends to the shareholders of RB, or for the purpose of paying their allocable portion of RB's corporate overhead expenses. The provisions of the Infantline Credit Agreement include a cap (subject to certain exceptions) of $2.0 million per year on the amount that can be paid to RB to pay corporate overhead expenses. During 2007 and 2006, $2.0 million was paid annually to RB by the Infantline Borrowers as reimbursement of corporate overhead expenses.

115

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

SCHEDULE I

NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

Note 2: Restriction on Payments to RB (Continued)

        The Giftline Credit Agreement discussed in Note 8 of the Notes to the Consolidated Financial Statements 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 RB or for the purpose of paying RB's corporate overhead expenses. The provisions of the Giftline Credit Agreement include a cap (subject to certain exceptions) on the amount that can be paid to RB for the Gift Segment's allocable portion of RB's corporate overhead expenses equal to $4.5 million per year for each of fiscal years 2006 and 2007, and $5.0 million for each year thereafter during the term of the Giftline Credit Agreement. The amount paid by the Infant and Juvenile segment of $2.0 million for each of the years 2007 and 2006 has been recorded on the condensed statements of the registrant.

Note 3: Contingent Liabilities

        In connection with the formation of U.S. Gift, RB assigned to U.S. Gift its rights, and U.S. Gift assumed RB's obligations, to perform under contracts such as leases and royalty agreements relating to the gift business. RB did not receive releases from the other parties to these contracts and, accordingly, remains responsible for the obligations assumed by U.S. Gift by operation of law. Moreover, the Assignment did not by its terms apply to contracts that could not be assigned without the consent of the other party such as certain leases and royalty agreements, unless such consent was obtained. U.S. Gift has agreed with RB that it will perform RB's obligations under such contracts to the maximum extent permitted, and the accompanying condensed financial information of the registrant assumes that all such contracts were assigned. As of December 31, 2007, the aggregate amount of such contingent liabilities for leases and royalty agreements approximates $17.4 million, which is payable as follows: $3.3 million in 2008; $2.8 million in 2009; $2.7 million in 2010; $2.5 million in 2011; $2.5 million in 2012; and $3.6 million thereafter.

116

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

(Dollars in Thousands)

Column A	Column B		Column C			Column D		Column E
Description	Balance at Beginning of Period		Charged to Expenses			Deductions*		Balance at End of Period
Allowance for accounts receivable:
Year ended December 31, 2005	$	2,950	$	(131	)	$	876	$	1,943
Year ended December 31, 2006		1,943		700			1,241		1,402
Year ended December 31, 2007		1,402		1,686			799		2,289
Allowance for inventory:
Year ended December 31, 2005	$	9,771	$	5,072		$	3,692	$	11,151
Year ended December 31, 2006		11,151		3,425			6,326		8,250
Year ended December 31, 2007		8,250		5,533			7,473		6,310

*

Principally account write-offs and allowance for accounts receivable and disposal of merchandise for inventory.

117

EX-2.3

Exhibit 2.3

NOTE:  The representations and warranties contained in the following agreement have been made solely for the benefit of the parties thereto and should not be relied on by any other person. In addition, such representations and warranties: (i) have been qualified by disclosure schedules, (ii) are subject to the materiality standards set forth herein, which may differ from what may be considered to be material by investors, and (iii) were made only as of the date of the agreement or such other date as specified therein. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts.  Moreover, information concerning the subject matter of the representations and warranties may change after the date of the agreement, which subsequent information may or may not be fully reflected in the Company’s disclosures.

ASSET PURCHASE AGREEMENT

by and among

LaJobi, Inc.

(“Buyer”)

LaJobi Industries, Inc.

 (“Seller”)

and

Lawrence Bivona

Joseph Bivona

(the “Stockholders”)

Dated as of April 1, 2008

TABLE OF CONTENTS

			Page
ARTICLE I		DEFINITIONS; CONSTRUCTION	1
1.1	Definitions		1
1.2	Interpretation		9
ARTICLE II           SALE AND PURCHASE OF ACQUIRED ASSETS; ASSUMPTION OF ASSUMED OBLIGATIONS			9
2.1	Acquired Assets		9
2.2	Assignment of Contracts, Leases and Governmental Authorizations		11
2.3	Excluded Assets		11
2.4	Assumed Obligations		12
2.5	No Other Liabilities Assumed		12
2.6	Exceptions to Assignment of Contracts and Governmental Authorizations		13
ARTICLE III		PURCHASE PRICE AND PAYMENT	13
3.1	Purchase Price; Closing Date Cash Payment; Determination of Estimated Working Capital		13
3.2	Determination of Final Working Capital Adjustment		14
3.3	Prorations		15
3.4	Allocation of Purchase Price		16
3.5	Payment of Liabilities at Closing		16
3.6	Earnout Consideration		16
ARTICLE IV		REPRESENTATIONS AND WARRANTIES OF SELLER	18
4.1	Due Incorporation, etc.		18
4.2	Due Authorization		18
4.3	Subsidiaries and Investments		19
4.4	Consents and Approvals; No Conflicts, etc.		19
4.5	Financial Statements; No Undisclosed Liabilities		20
4.6	No Adverse Effects or Changes.		20
4.7	Title to Properties		22
4.8	Condition and Sufficiency of Assets		23
4.9	Real Property and Real Property Leases		23
4.10	Equipment		24
4.11	Inventories		24
4.12	Accounts Receivable		24
4.13	Intellectual Property		24
4.14	Contracts		25
4.15	Governmental Authorizations; Regulatory Compliance		26
4.16	Insurance		26
4.17	Employee Benefit Plans and Employment Agreements		27

			Page
4.18	Employment and Labor Matters		27
4.19	Taxes		28
4.20	No Defaults or Violations		29
4.21	Environmental Matters		30
4.22	Litigation		31
4.23	Brokers		31
4.24	No Conflict of Interest		31
4.25	Major Customers and Suppliers		31
4.26	Product Warranty and Product Liability		32
4.27	Budgets		32
4.28	Financial Projections		33
4.29	Accuracy of Statements		33
ARTICLE V		REPRESENTATIONS AND WARRANTIES OF BUYER	33
5.1	Due Organization		33
5.2	Due Authorization		33
5.3	Consents and Approvals; No Conflicts, etc.		33
5.4	No Proceedings		34
5.5	Sufficient Funds		34
5.6	Brokers		34
ARTICLE VI		COVENANTS	34
6.1	Implementing Agreement		34
6.2	Consents and Approvals		34
6.3	Access to Information and Facilities		35
6.4	2007 EBITDA Benchmark; Preservation of Business		35
6.5	Supplemental Disclosure Schedules		37
6.6	Negotiation With Others		38
6.7	Interim Financial Statements		38
6.8	Cooperation		39
6.9	Compliance with Bulk Sales Laws		39
6.10	Employees		39
6.11	Tax Indemnity		40
6.12	Access to Personnel Records		41
6.13	Change of Seller’s Name		41
6.14	License of Intellectual Property		41
6.15	LBI		41
6.16	Termination of LaJobi 401k Plan		42
6.17	Product Liability Insurance		42
ARTICLE VII		CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER	42
7.1	Accuracy of Representations and Warranties		42

ii

			Page
7.2	Compliance with Agreements and Covenants		42
7.3	Documents		42
7.4	Actions or Proceedings		42
7.5	Consents and Approvals		42
ARTICLE VIII		CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER	43
8.1	Accuracy of Representations and Warranties		43
8.2	Compliance with Agreements and Covenants		43
8.3	Documents		43
8.4	Actions or Proceedings		43
ARTICLE IX		CLOSING	43
9.1	Closing		43
9.2	Deliveries by Seller and the Stockholders		44
9.3	Deliveries by Buyer		45
ARTICLE X		TERMINATION	46
10.1	Termination		46
10.2	Effect of Termination		46
ARTICLE XI		INDEMNIFICATION	47
11.1	Survival		47
11.2	Indemnification and Payment of Damages by Seller and the Stockholders		47
11.3	Indemnification and Payment of Damages by Buyer		48
11.4	Procedure for Indemnification – Third Party Claims		48
11.5	Procedure for Indemnification – Other Claims		49
11.6	Indemnity Basket and Cap; De Minimis; Limitations		49
11.7	Right to Offset		50
11.8	Escrow		50
11.9	Sole Remedy		51
11.10	No Duplicate Recovery		51
11.11	Purchase Price Adjustments		51
ARTICLE XII		MISCELLANEOUS	51
12.1	Expenses		51
12.2	Amendment		51
12.3	Notices		51
12.4	Waivers		52
12.5	Assignment		52
12.6	No Third Party Beneficiaries		52
12.7	Publicity		52

iii

		Page
12.8	Further Assurances	53
12.9	Severability	53
12.10	Entire Understanding	53
12.11	Applicable Law	53
12.12	Dispute Resolution	53
12.13	Specific Performance	54
12.14	Counterparts	54
12.15	Facsimile Signatures	54

iv

APPENDIX A	Product Liability Insurance
EXHIBITS
Exhibit A	Form of Bill of Sale
Exhibit B	Form of Assignment and Assumption Agreement
Exhibit C	Form of Escrow Agreement
Exhibit D-1	Form of Seller Non-Compete and Non-Solicitation Agreement
Exhibit D-2	Form of Stockholder Non-Compete and Non-Solicitation Agreement
Exhibit E	Form of Opinion of Seller’s Counsel
Exhibit F	Form of Opinion of Buyer’s Counsel
SCHEDULES
Schedule 1.1-A	Audited Financial Statements
Schedule 1.1-B	Working Capital
Schedule 1.1-C	Factors in the Determination of EBITDA
Schedule 2.1(a)	Equipment
Section 2.1(b)	Inventories and Locations of Inventories
Section 2.1(e)	Intellectual Property
Schedule 2.2(a)	Personal Property Leases
Schedule 2.2(b)	Real Property Leases
Schedule 2.2(f)	Governmental Authorizations
Schedule 3.4	Allocation of Purchase Price
Schedule 3.5	Indebtedness and Seller Transaction Expenses to be paid at Closing
Schedule 3.6	Earnout Consideration
Schedule 4.1	Foreign Jurisdictions
Schedule 4.3	Subsidiaries and Investments
Schedule 4.4	Seller Consents and Approvals
Schedule 4.5(a)	Financial Statements and Intercompany Items
Schedule 4.5(b)	Undisclosed Liabilities
Schedule 4.6	Certain Changes
Schedule 4.7	Title to Properties
Schedule 4.8	Condition and Sufficiency of Assets
Schedule 4.12	Accounts Receivable
Schedule 4.14	Other Contracts
Schedule 4.16	Insurance
Schedule 4.17	Employee Benefit Plans
Schedule 4.18(a)	ADP Employees
Schedule 4.18(c)	Certain ADP Employees
Schedule 4.19	Tax Returns
Schedule 4.20	Defaults or Violations
Schedule 4.21	Environmental Matters
Schedule 4.22	Litigation
Schedule 4.23	Brokers
Schedule 4.24	Conflicts of Interest
Schedule 4.25(a)	Major Customers
Schedule 4.25(b)	Major Suppliers
Schedule 4.25(c)	Dealers and Distributors
Schedule 4.26	Product Warranty and Product Liability
Schedule 4.27	Budgets
Schedule 5.3	Buyer Consents and Approvals

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Schedule 6.4(c)(vii)	Compensation Increases in Excess of 5%
Schedule 6.15	Share Services Arrangements
Schedule 7.5	Key Consents
Schedule 11.2	Specified Liabilities and Obligations
Schedule 12.3	Addresses for Notices

2

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is made as of April 1, 2008, by and among LaJobi, Inc., a Delaware corporation (“Buyer”), LaJobi Industries, Inc., a New Jersey corporation (“Seller” or “LaJobi”), Lawrence Bivona, an individual resident in the State of New Jersey (“LB”) and Joseph Bivona, an individual resident in the State of New York (“JB”, and together with LB, the “Stockholders” and each a “Stockholder”).

RECITALS

WHEREAS, Seller is engaged in the business of designing, importing and selling infant and juvenile furniture and other bedroom items (the “Business”);

WHEREAS, the Stockholders own one hundred percent (100%) of the shares of Seller; and

WHEREAS, Buyer wishes to purchase from Seller and Seller wishes to sell to Buyer all of the Acquired Assets (as defined below), and Buyer wishes to assume all of the Assumed Obligations (as defined below), all upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants, agreements and warranties herein contained, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS; CONSTRUCTION

1.1           Definitions.  The following terms shall have the corresponding meanings for the purposes of this Agreement:

“Accounts Receivable” has the meaning provided in Section 2.1(c).

“Accruals” shall mean all operating costs, trade payables and other obligations (such as rebates) incurred in the ordinary course of business but which have not been invoiced to Seller or otherwise included in Seller’s Payables, which are required to be accrued and reflected as a liability as of a balance sheet date, in accordance with GAAP, including accrued payroll, sick leave, vacation and holiday pay, bonuses regularly paid by Seller, and the costs of all regularly provided employee benefits.

“Acquired Assets” has the meaning provided in Section 2.1 and Section 2.2.

“Acquisition Transaction” has the meaning provided in Section 6.6.

“Action” means any action, claim, suit, litigation, proceeding, labor dispute, arbitration, mediation, governmental audit, inquiry, criminal prosecution, investigation or unfair labor practice charge or complaint.

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“ADP” means ADP TotalSource, Inc..

“ADP Employees” has the meaning provided in Section 4.18(a).

“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly, controls, is under common control with, or is controlled by, such specified Person.  The term “control” as used in the preceding sentence means, with respect to a corporation, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares of the controlled corporation, or with respect to any Person other than a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person.

“Affiliated Group” means any affiliated group within the meaning of Section 1504(a) of the Code or any similar group defined under a similar provision of state, local, or foreign law.

“Agreed Enterprise Value” has the meaning provided in Schedule 3.6.

“Agreed Rate” means (i) 2.75% plus (ii) the six (6) month London Interbank Offered Rate published by the British Bankers’ Association, which appears on Dow Jones Markets Service (formerly known as Telerate) Page 3750 or Dow Jones Markets Service 3740 (as appropriate) (or such other page as may replace Page 3750 or Page 3740, as applicable, or the service as may be nominated by the British Bankers’ Association as the information vendor for the purpose of displaying British Bankers’ Association Average of Interbank Offered Rates for deposits in United States dollars) at or about 11:00 a.m. (London time) on the first day of the calendar month in which the Early Payment Date occurs, as that rate may vary from time to time, or if that rate is no longer published, a comparable rate.

“Agreement” means this Asset Purchase Agreement, including all Exhibits and Schedules hereto.

“Allocation Schedule” has the meaning provided in Section 3.4.

“Assignment and Assumption Agreements” has the meaning provided in Section 9.2(b).

“Assumed Obligations” has the meaning provided in Section 2.4.

“Basket” has the meaning provided in Section 11.6(a).

“Benefit Plans” means “employee benefit plans”, as defined in Section 3(3) of ERISA, deferred compensation plans, stock option plans, cash bonus programs, stock purchase plans, hospitalization, disability, individual benefit and other insurance plans, severance or termination pay plans and policies, whether or not described in Section 3(3) of ERISA.

“Bill of Sale” has the meaning provided in Section 9.2(a).

“Business” has the meaning provided in the Recitals.

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“Business Day” means any day of the year other than (i) any Saturday or Sunday or (ii) any other day on which banks located in either New York or California generally are closed for business.

“Buyer” has the meaning provided in the Preamble.

“Cap” has the meaning provided in Section 11.6(a).

“CAGR” means compound annual growth rate.

“Closing” means the consummation of the Contemplated Transactions in accordance with Article IX.

“Closing Date” means the date on which the Closing occurs.

“Closing Date Cash Payment” has the meaning provided in Section 3.1(b).

“Closing Date Statement” has the meaning provided in Section 3.2(a).

“Closing Obligations” has the meaning provided in Section 3.5.

“Code” means the United States Internal Revenue Code of 1986, as amended.

“Consents” has the meaning provided in Section 4.4.

“Contemplated Transactions” means all of the transactions contemplated by this Agreement and the Related Agreements.

“Continuing Employees” has the meaning provided in Section 6.10(b).

“Contract” means any contract, lease, commitment, understanding, sales order, purchase order, agreement, indenture, mortgage, note, bond, right, warrant, instrument, plan, permit or license which is legally binding and enforceable.

“Customer Purchase Orders” has the meaning provided in Section 2.2(d).

“Damages” means any and all claims, debts, obligations and other liabilities, monetary damages, diminution of value, fines, penalties, costs and expenses (including reasonable attorneys’ fee and expenses).

“Datasite” means that certain electronic data site, maintained by Gibbons P.C. on the Secure Gibbons Extranet System, under the code name “LaJobi Industries Inc. - M&A Project”.

“De Minimis Claim” has the meaning provided in Section 11.6(b).

“Disclosure Schedules” has the meaning provided in Section 6.5.

“Early Measurement Date” has the meaning provided in Section 3.6(b).

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“Early Payment Date” has the meaning provided in Section 3.6(b).

“Earnout Consideration” has the meaning provided in Section 3.6(a).

“EBITDA” for any period means (i) the net income or loss of the Business, plus (ii) depreciation and amortization expense for such period, plus (iii) foreign, federal, state and local income (or equivalent) Taxes paid or accrued for such period, plus (iv) total interest expense for such period, whether paid or accrued (including the interest component of capitalized leases), including all commissions, discounts and other fees and charges owed with respect to letters of credit, plus (v) extraordinary losses for such period, minus (vi) extraordinary gains for such period, in each case determined (A) in accordance with GAAP consistent with Seller’s past practices, (B) without giving effect to any acquisitions, material capital investments or similar transactions, (C) in the case of clauses (ii) through (vi), to the extent included in the determination of net income (or loss) for such period, and (D) in accordance with Schedule 1.1-C.

“Employment Agreement” means that certain Employment Agreement dated as of the Closing Date, between Buyer and LB.

“Environmental Governmental Authorization” means any permit, license, approval, consent or other authorization required by or pursuant to any applicable Environmental Law.

“Environmental Law” means any Law which relates to or otherwise imposes liability or standards of conduct concerning discharges, emissions, releases or threatened releases of noises, odors or any pollutants, contaminants or hazardous or toxic wastes, substances or materials, whether as matter or energy, into ambient air, water, or land, or otherwise relating to the manufacture, processing, generation, distribution, use, treatment, storage, disposal, cleanup, transport or handling of pollutants, contaminants, or hazardous or toxic wastes, substances or materials, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Toxic Substances Control Act of 1976, as amended, the Federal Water Pollution Control Act Amendments of 1972, the Clean Water Act of 1977, as amended, any so-called “Superfund” or “Superlien” Law (including those already referenced in this definition) and any other Law of any Governmental Authority having a similar subject matter.

“Equipment” has the meaning provided in Section 2.1(a).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Escrow” means the escrow held by the Escrow Agent under the Escrow Agreement.

“Escrow Account” has the meaning provided in Section 3.1(b).

“Escrow Agent” means JPMorgan Chase Bank N.A.

“Escrow Agreement” has the meaning provided in Section 9.2(c).

4

“Escrow Amount” has the meaning provided in Section 3.1(b).

“Estimated Working Capital” has the meaning provided in Section 3.1(c).

“Excluded Assets” has the meaning provided in Section 2.3.

“Excluded Contracts” has the meaning provided in Section 2.3(b).

“Final Working Capital” shall mean the amount of Working Capital as of the Closing Date as finally determined pursuant to Section 3.2(c).

“Financial Statements” means the audited financial statements of Seller as of December 31, 2005, December 31, 2006 and December 31, 2007 (including all notes thereto), which are set forth on Schedule 1.1-A, consisting of the balance sheet at such dates and the related statements of earnings, stockholders’ equity and cash flows for the twelve month periods then ended as reported on by Wilkin & Guttenplan, P.C.

“GAAP” means U.S. generally accepted accounting principles at the time in effect.

“Governmental Authority” means the government of the United States or any foreign country or any state or political subdivision thereof and any entity, body or authority exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Governmental Authorizations” has the meaning provided in Section 2.2(f).

“Graco License Agreement” means that certain Trademark License Agreement dated May 8, 2006, as amended by Addendum #1 to License Agreement dated February 6, 2008, by and between Seller and Graco Children’s Products, Inc..

“Hazardous Substance” means any material or substance which (i) constitutes a hazardous substance, toxic substance or pollutant (as such terms are defined by or pursuant to any Environmental Law) or (ii) is regulated or controlled as a hazardous substance, toxic substance, pollutant or other regulated or controlled material, substance or matter pursuant to any Environmental Law.

“HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Indemnified Persons” has the meaning provided in Section 11.2.

“Information and Records” has the meaning provided in Section 2.1(d).

“Indebtedness” has the meaning provided in Section 2.5(d).

“Intellectual Property” has the meaning provided in Section 2.1(e).

“Inventories” has the meaning provided in Section 2.1(b).

5

“JB” has the meaning provided in the Preamble.

“Key Consents” has the meaning provided in Section 7.5.

“Knowledge of Seller” or “Seller’s Knowledge” or words of similar import mean the actual knowledge of (i) LB, (ii) JB, (iii) Miles McGrath or (iv) Robert J. Rusnack.

“L&J” means L&J Industries, Ltd., a company organized under the laws of Thailand.

“LaJobi” has the meaning provided in the Preamble.

“Latest Balance Sheet” means the audited balance sheet of Seller, dated as of December 31, 2007, set forth on Schedule 1.1-A.

“Law” means any law, statute, regulation, ordinance, rule, order, decree, judgment, consent decree, settlement agreement or governmental requirement enacted, promulgated, entered into, agreed or imposed by any Governmental Authority, including all laws relating to safety of products intended for infants and children under specified ages, labeling, and consumer products safety laws.

“Lawsuits” has the meaning provided in Section 2.5(g).

“LB” has the meaning provided in the Preamble.

“LBI” has the meaning provided in Section 2.3(g).

“Leased Assets” means all assets subject to any of the Personal Property Leases, or otherwise leased by Seller.

“Lien” means any encumbrance, lien (except for any lien for taxes not yet due and payable), community property interest, charge, claim, right of any third party, covenant, condition, equitable interest, encumbrance, option, pledge, security interest, right of first refusal or restriction of any kind.

“License Agreements” has the meaning provided in Section 4.13(b).

“Material Adverse Effect” means an effect on the business, operations, results of operations, prospects or financial condition of the Business, taken as a whole, that is material and adverse; provided that in no event shall any event, occurrence or circumstance that arises or results directly or indirectly from (i) changes in the United States economy or general economic conditions, (ii) one or more downturns in the infant or juvenile furniture industry in which Seller operates, (iii) one or more acts of terrorism, or (iv) the announcement or consummation of the closing of the transactions contemplated hereby, constitute a Material Adverse Effect.

“Maximum Earnout Consideration Amount” has the meaning provided in Schedule 3.6.

“Measurement Date” has the meaning provided in Schedule 3.6.

6

“Measurement Period” has the meaning provided in Section 3.6(e).

“Non-Compete and Non-Solicitation Agreements” has the meaning provided in Section 9.2(d).

“Other Assets” has the meaning provided in Section 2.1(g).

“Other Contracts” has the meaning provided in Section 2.2(e).

“Other Filings” has the meaning provided in Section 6.2.

“Payables” means accounts payable for goods (including capitalized assets) and services delivered or provided to the Business as of the measuring date, determined in accordance with GAAP consistent with Seller’s past practices.

“Parent” means Russ Berrie and Company, Inc., a New Jersey corporation.

“Payment Date” has the meaning provided in Section 3.6(a).

“PEO Services Agreement” means that certain Client Services Agreement dated as of November 3, 2006, between LaJobi and ADP.

“Permitted Liens” has the meaning provided in Section 4.7.

“Person” means any individual, corporation, proprietorship, firm, partnership, limited partnership, limited liability company, trust, association or other entity.

“Personal Property Leases” has the meaning provided in Section 2.2(a).

“Products” has the meaning provided in Section 4.26.

“Purchase Price” has the meaning provided in Section 3.1(a).

“Real Property Leases” has the meaning provided in Section 2.2(b).

“Referee Accountant” has the meaning provided in Section 3.2(c).

“Related Agreements” means the Bill of Sale, the Assignment and Assumption Agreement and any other Contract which is or is to be entered into at the Closing or otherwise pursuant to this Agreement.

“Relocation of Buyer” means the occurrence of both (i) the relocation of the principal executive office of the Business more than fifty (50) miles from 21 Sentry Court, Basking Ridge, New Jersey, 07920 and (ii) the termination of LB’s employment with Buyer within sixty (60) days of the occurrence of clause (i).

“Seller” has the meaning provided in the Preamble.

“Seller Notice Date” has the meaning provided in Section 3.6(b).

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“Seller Purchase Orders” has the meaning provided in Section 2.2(c).

“Seller’s Equity Percentage” has the meaning provided in Schedule 3.6.

“Seller Transaction Expenses” has the meaning provided in Section 2.5(d).

“Specified Liabilities and Obligations” has the meaning provided in Section 11.2(e).

“Stockholder” or “Stockholders” has the meaning provided in the Preamble.

“Straddle Period” shall mean any taxable year or period beginning on, or before and ending after the Closing Date.

“Target Working Capital” means $7,300,000.

“Tax Bulk Sales Law” has the meaning provided in Section 6.9.

“Tax Return” means any report, return or other information required to be supplied to a Governmental Authority in connection with any Taxes.

“Taxes” means all taxes, charges, fees, duties (including customs duties), levies or other assessments, including income, gross receipts, net proceeds, ad valorem, turnover, real and personal property (tangible and intangible), sales, use, franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel, excess profits, occupational, interest equalization, windfall profits, license, payroll, environmental, capital stock, disability, severance, employee’s income withholding, other withholding, unemployment and Social Security taxes, which are imposed by any Governmental Authority, and such term shall include any interest, penalties or additions to tax attributable thereto.

“Termination Date” means April 30, 2008.

“Trade Secrets” means trade secrets and other confidential information, including, without limitation, know-how, technology, proprietary processes, formulae, models and methodologies.

“Transitional Services Agreement” means a Transitional Services Agreement by and between L&J and Buyer, delivered at Closing in a form mutually agreed upon by both Buyer and L&J.

“UCC Bulk Sales Law” has the meaning provided in Section 6.9.

“Updates to Disclosure Schedules” has the meaning provided in Section 6.5.

“Working Capital” shall mean, as of any date of measurement, an amount equal to (i) sum of (1) Inventory valued at the lower of cost or market, less any reserves for obsolete or slow moving items, (2) Accounts Receivable, less any reserves for returns, sales allowances (pricing or promotion), disputed items and uncollectible items, and (3) prepaid maintenance contracts, and prepayments relating to the normal and customary operations of the Business by

8

Seller, but only to the extent that such prepaid items are included in the Acquired Assets, less (ii) the sum of (1) Payables, (2) Accruals, and (3) any unearned customer deposits or advances, and (iii) plus (or minus) the adjustments described in Schedule 1.1-B, in each case determined as of the date of such measurement, without duplication, in accordance with GAAP and, to the extent not inconsistent with GAAP, the accounting policies of Seller.  By way of example, Schedule 1.1-B illustrates the calculation of Working Capital as of December 31, 2007, subject to verification of Buyer; provided, however, that in the event of an ambiguity, inconsistency or conflict between the language in this definition and the example set forth on Schedule 1.1-B, the language in this definition shall control.

“Working Capital Adjustment” shall mean (i) an increase in the Purchase Price in the amount, if any, by which the Final Working Capital exceeds the Target Working Capital or (ii) a decrease in the Purchase Price in the amount, if any, by which the Target Working Capital exceeds Final Working Capital.

1.2           Interpretation.  The headings preceding the text of Articles and Sections included in this Agreement and the headings to Schedules attached to this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement.  The use of the masculine, feminine or neuter gender or the singular or plural form of words herein shall not limit any provision of this Agreement.  The use of the terms “including” or “include” shall in all cases herein mean “including, without limitation” or “include, without limitation,” respectively.  Reference to any Person includes such Person’s successors and assigns to the extent such successors and assigns are permitted by the terms of any applicable agreement.  Reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof.  Reference to any Law means as amended, modified, codified, replaced or re-enacted, in whole or in part, and in effect on the date hereof, including rules, regulations, enforcement procedures and any interpretations promulgated thereunder.  References to Articles, Sections, clauses, Exhibits or Schedules shall refer to those portions of this Agreement, and any references to a clause shall, unless otherwise identified, refer to the appropriate clause within the same Section in which such reference occurs.  The use of the terms “hereunder”, “hereof”, “hereto” and words of similar import shall refer to this Agreement as a whole and not to any particular Article, Section or clause of or Exhibit or Schedule to this Agreement.  The consummation of the Contemplated Transactions shall not be deemed a waiver of a breach of or inaccuracy in any representation, warranty or covenant or of any party’s rights and remedies with regard thereto.  No specific representation, warranty or covenant contained herein shall limit the generality or applicability of a more general representation, warranty or covenant contained herein.

ARTICLE II

SALE AND PURCHASE OF ACQUIRED ASSETS;
ASSUMPTION OF ASSUMED OBLIGATIONS

2.1           Acquired Assets.  Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell, assign, convey, transfer and deliver to Buyer, and Buyer shall purchase, acquire and take assignment and delivery of, all of the assets owned by Seller related to, or used

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in conjunction with, the Business (wherever located), except for those assets specifically excluded pursuant to Section 2.3 (all of the assets sold, assigned, transferred and delivered to Buyer hereunder are referred to collectively herein as the “Acquired Assets”).  Without limiting the generality of the foregoing, the Acquired Assets include all of Seller’s right, title and interest in and to the following:

(a)           Equipment.  All machinery, equipment, vehicles, furniture, materials and other items of personal property of every kind and description (other than the Inventories, which are separately referenced in Section 2.1(b)) (the “Equipment”), including those items set forth on Schedule 2.1(a);

(b)           Inventories.  All inventories wherever located, as of the Closing Date, including without limitation, all raw materials, supplies, works-in-progress, finished goods, spare parts, replacement and component parts, containers and other packaging materials that are classified as “inventory” in accordance with GAAP, valued at the lower of cost or realizable market value for purposes of Working Capital, less any obsolete inventory (collectively, the “Inventories”), including those items set forth on Schedule 2.1(b) (which schedule includes a list of locations where Inventories are located);

(c)           Accounts Receivable.  Any and all accounts receivable, trade receivables, notes receivable and other receivables (the “Accounts Receivable”), including those Accounts Receivables that are included in the Closing Date Statement, but excluding those Accounts Receivables that are not included in the Closing Date Statement;

(d)           Information and Records.  All records, files, information, and data, and other proprietary information (except for Excluded Assets and other than the Intellectual Property, which is separately referenced in Section 2.1(e)), together with the following papers and records in Seller’s care, custody or control or otherwise available to it:  all personnel and labor relations records, all employee benefits and compensation plans and records, all environmental control, monitoring and test records and all maintenance records (the “Information and Records”);

(e)           Intellectual Property.  All trademarks, service marks, whether registered or existing at common law, trade names, Internet domain names, designs, logos, slogans, and general intangibles of like nature, including the name “LaJobi”, together with all goodwill, registrations and applications related to the foregoing; patents and industrial design registrations or applications (including any continuations, divisionals, continuations-in-part, renewals, reissues, reexaminations and applications for any of the foregoing); copyrights (including any registrations and applications for any of the foregoing); software, “mask works” (as defined under 17 USC § 901) and any registrations and applications for “mask works”, and Trade Secrets (collectively, the “Intellectual Property”), including those items set forth on Schedule 2.1(e);

(f)            Other Intangibles.  Goodwill, causes of action, rights in actions and other similar claims, and attorney-client work product and other legal privileges; and

(g)           Other Assets.  All other assets of Seller (except for Excluded Assets and other than those assets previously described in this Section 2.1), including the products liability

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insurance policies referenced in Section 6.17, prepaid expenses and lease, utility and similar deposits of Seller and any and all deposits, prepayments, guaranties, letters of credit and other security held by Seller, if any (the “Other Assets”).

2.2           Assignment of Contracts, Leases and Governmental Authorizations.  Subject to the terms and conditions of this Agreement including Section 2.6, Seller shall assign and transfer to Buyer, effective as of the Closing Date, all of Seller’s right, title and interest in and to the following Contracts and Governmental Authorizations (and all of the following shall be deemed included in the term “Acquired Assets” as used herein):

(a)           Personal Property Leases.  All leases of equipment, machinery, vehicles and other personal property (the “Personal Property Leases”), including those items set forth on Schedule 2.2(a);

(b)           Real Property Leases.  All real property leases (the “Real Property Leases”), including those items set forth on Schedule 2.2(b);

(c)           Seller Purchase Orders.  All written purchase orders and other Contracts for the purchase by Seller of goods, materials and/or services used in connection with the Business arising in the ordinary course of business (the “Seller Purchase Orders”);

(d)           Customer Purchase Orders.  All purchase orders and other Contracts for the sale by Seller of goods and/or services (the “Customer Purchase Orders”);

(e)           Other Contracts.  All Contracts other than the Excluded Contracts (the “Other Contracts”) not listed above; and

(f)            Governmental Authorizations.  All licenses, certificates, certifications, qualifications, permits, variances, interim permits, permit applications, approvals, franchises, rights, code approvals and private product approvals under any Law applicable to the Business or otherwise required by any Governmental Authority in connection with the Business, including any Law relating to child safety or consumer products (the “Governmental Authorizations”), including those items set forth on Schedule 2.2(f).

2.3           Excluded Assets.  The following assets of Seller shall be retained by Seller and are not being sold or assigned to Buyer hereunder (all of the following are referred to collectively as the “Excluded Assets”):

(a)           Corporate Records.  Corporate minute books and stockholder ledgers, or equivalents thereof;

(b)           Excluded Contracts.  This Agreement, the Related Agreements and that certain arrangement by and between Lawrence Bivona, Inc. and Seller relating to the management services of LB and JB provided to Seller (collectively, the “Excluded Contracts”);

(c)           Tax Refunds.  All refunds of Taxes to the extent the Taxes to which the refund relates was, or are, borne by the Stockholders, Seller or L&J;

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(d)           Tax Records.  All books and records relating to Tax matters (including, without limitation, copies of the Tax Returns of Seller);

(e)           Historical Financial Records.  All historical financial records of Seller; provided that Seller shall provide or make available copies of any such records to Buyer within five (5) days Business Days of any request therefor;

(f)            Copy of Policy and Procedure Manual.  A copy of Seller’s various policy and procedure manuals in electronic format for use by Seller in its discretion;

(g)           Affiliate Assets.  All assets of L&J and LBI Distributors, Inc., a New Jersey  corporation (“LBI”), including those which are located on real property that is owned or leased by Seller; and

(h)           Excluded Accounts Receivable and Cash.  Any and all Accounts Receivables that are not included in the Closing Date Statement and any and all cash held or deposited in any account controlled by, or in the name of, Seller.

2.4Assumed Obligations.  At the Closing, Buyer shall assume, and agree to pay, perform, fulfill and discharge, the following obligations of Seller (the “Assumed Obligations”):

(a)           Accruals and Payables.  To the extent not described in Section 2.4(b) below, all Accruals (but not any accrual owing to Stockholders or to any other Affiliate of Seller) and all Payables (but not any account payable owed or owing to Stockholders or to any other Affiliate of Seller) and any other current liability of the Business as of the Closing Date reflected on the Closing Date Statement as finally determined pursuant to Section 3.2(a), except to the extent such Payable, Accrual or liability relates to an Excluded Asset or arises under Section 2.5.

(b)           Assumed Contracts.  The obligations of Seller that are required to be performed under the following Contracts (but none other) and Governmental Authorizations: (i) the Intellectual Property; (ii) the Personal Property Leases; (iii) the Real Property Leases; (iv) Seller Purchase Orders, (v) the Customer Purchase Orders; (vi) the Other Contracts; (vii) the Governmental Authorizations; and (viii) any other Contract or Governmental Authorization that is assigned to Buyer pursuant to this Agreement or any Related Agreement;

(c)           Post-Closing Liabilities.  Obligations that arise from operation of the Business after the Closing Date.

(d)           Employee Obligations.  Those certain employee obligations that Buyer has agreed to assume pursuant to Section 6.10.

2.5No Other Liabilities Assumed.  Anything in this Agreement to the contrary notwithstanding, except as specifically set forth in Section 2.4, neither Buyer nor any of its Affiliates shall assume or otherwise be liable in respect of, or be deemed to have assumed or otherwise be liable in respect of, any debt, claim, obligation or other liability of Seller or any of its Affiliates whatsoever, including the following:

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(a)           Taxes.  Any Tax, except for Taxes specifically prorated in favor of Buyer under Section 3.3;

(b)           Excluded Contracts.  Any Excluded Contract;

(c)           Indebtedness.  Any indebtedness for borrowed money, in respect of any capital lease obligation and any accrued interest, fees and prepayment penalties or other amounts payable pursuant thereto, or any bank overdrafts (“Indebtedness”);

(d)           Transaction Expenses.  Except as otherwise provided herein, any costs or expenses incurred by Seller and the Stockholders in connection with this Agreement or with respect to the Contemplated Transactions, including any and all fees payable to any adviser or counsel of Seller or Stockholders (“Seller Transaction Expenses”);

(e)           Affiliate Obligations.  Any accounts payable, accrued obligations or other liability or obligation owing by Seller to Stockholders or to any other Affiliate of Seller which is not an Assumed Obligation.

(f)            Lawsuit.  Any obligations, liabilities or Damages with respect to, or arising, from any lawsuits commenced against Seller prior to Closing (the “Lawsuits”); and

(g)           Incentive or Bonus Plans.  Any obligation under any employee incentive or bonus plans for periods prior to Closing.

2.6Exceptions to Assignment of Contracts and Governmental Authorizations.  Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any Contract or Governmental Authorization or any claim or right or any benefit or obligation thereunder or resulting therefrom if an assignment thereof, without the consent of a third party thereto, would constitute a breach or violation thereof.  If such a consent is required or if an attempted assignment is ineffective, Seller and the Stockholders shall cooperate with Buyer in any reasonable arrangement necessary to provide Buyer with the benefits under any such Contract or Governmental Authorization.

ARTICLE III

PURCHASE PRICE AND PAYMENT

3.1Purchase Price; Closing Date Cash Payment; Determination of Estimated Working Capital.

(a)           The purchase price to be paid in consideration for the sale and transfer of the Acquired Assets and the assumption of the Assumed Obligations shall be an amount equal to Forty-Seven Million Dollars ($47,000,000) as adjusted by the Working Capital Adjustment as determined pursuant to Section 3.2 (the “Purchase Price”).

(b)           At the Closing, Buyer shall pay to Seller, by wire transfer of immediately available funds, an amount equal to (1) Forty-Four Million Five Hundred Thousand Dollars ($44,500,000), less (2) the amount, if any, by which the Target Working Capital exceeds the

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Estimated Working Capital or plus (3) the amount, if any, by which the Estimated Working Capital exceeds the Target Working Capital (collectively, the “Closing Date Cash Payment”).  Buyer shall, concurrently therewith, deposit Two Million Five Hundred Thousand Dollars ($2,500,000) (the “Escrow Amount”) with the Escrow Agent to hold pursuant to the Escrow Agreement.  The Escrow Amount shall be held in an account (the “Escrow Account”) and distributed by the Escrow Agent, all in accordance with the provisions hereof and of the Escrow Agreement.

(c)           Three (3) Business Days prior to the Closing Date, Seller shall deliver to Buyer a certificate executed on behalf of Seller by the chief executive or chief financial officer of Seller, dated the date of its delivery, setting forth a good faith best estimate of the Working Capital as of the Closing Date (the “Estimated Working Capital”), together with a statement of the calculation thereof, which amount of Estimated Working Capital shall be subject to the reasonable approval of Buyer.  Seller shall give Buyer and its representatives and agents access to such information and workpapers that Buyer reasonably requests in connection with its review of the Estimated Working Capital certificate.

3.2           Determination of Final Working Capital Adjustment.  The Working Capital Adjustment shall be determined as follows:

(a)           Within sixty (60) days after the Closing Date, Buyer shall prepare and deliver to Seller a report, including a calculation of the Working Capital as of 12:01 A.M. (Eastern Standard Time) on the Closing Date, which report shall reflect the Acquired Assets and the Assumed Obligations and be prepared in accordance with GAAP and, to the extent not inconsistent with GAAP, the accounting policies of Seller used in the preparation of the Financial Statements (the “Closing Date Statement”).  Representatives of each of Buyer and Seller may be present to observe the taking of the physical inventory of items included in the Closing Date Statement, which taking of inventory shall be at Buyer’s sole cost and expense, to review all calculations of applicable reserves and asset write-downs as well as in connection with the calculation of all current liabilities and accrued current trade accounts payable.

(b)           Following delivery by Buyer to Seller of the Closing Date Statement, Buyer will provide such work papers and other supporting detail as Seller may reasonably request, and Seller will complete its review of the Closing Date Statement within thirty (30) days after delivery thereof by Buyer.

(c)           Upon completion of its review of the Closing Date Statement, and in all events within thirty (30) days after delivery to Seller, Seller will, by written notice to Buyer, either accept it as prepared by Buyer or object or propose adjustments thereto.  If Seller accepts the Closing Date Statement as prepared by Buyer, or fails to provide a written objection or written proposal of adjustments within such thirty (30) day period, then the Closing Date Statement as submitted by Buyer shall be deemed final and binding on the parties, and the calculation of the Working Capital contained therein shall be deemed to be the “Final Working Capital” for purposes of this ARTICLE III.  If Seller objects or proposes adjustments to the Closing Date Statement, Seller shall specify, in reasonable detail, the amount of each proposed adjustment, the item to which such proposed adjustment relates, and the facts and circumstances supporting the adjustment.  Seller and Buyer shall then meet and use their best efforts to

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reconcile the proposed adjustments.  If the proposed adjustments have not been reconciled within thirty (30) days of Seller’s notification to Buyer of the proposed adjustments, or such longer period upon which Seller and Buyer shall agree, they shall refer their differences to (i) a mutually agreed certified public accountant, or if no agreement is reached within such thirty (30) day period on the identity of the accountant, to (ii) BDO Seidman, LLP (any Person described in clauses (i) and (ii) and designated in accordance with this sentence referred hereinafter as the “Referee Accountant”).  Buyer and Seller shall furnish to the Referee Accountant the Closing Date Statement (including the calculation of Working Capital contained therein), the adjustments proposed by Seller, and such work papers, books, records and other information and documents as the Referee Accountant shall reasonably request.  The Referee Accountant shall have thirty (30) days to reconcile the parties’ differences (all in accordance with GAAP and, to the extent not inconsistent with GAAP, the accounting policies of Seller used in the preparation of the Financial Statements) and in performing such reconciliation, the Referee Accountant shall consider only those items or amounts in the proposed Closing Date Statement as to which Buyer and Seller have disagreed and which affect Final Working Capital.  The decision of the Referee Accountant shall be final and binding upon Buyer and Seller.  Buyer and Seller shall each pay one-half of the fees and expenses of the Referee Accountant.

(d)           If, based on the Closing Date Statement (as agreed upon by Seller and Buyer or as determined by the Referee Accountant, in accordance with Section 3.2(c)):  (i) Final Working Capital is less than the Estimated Working Capital, then Seller shall remit to Buyer cash in the amount of such deficit and (ii) if Final Working Capital is greater than Estimated Working Capital, Buyer shall remit to Seller cash in the amount of such excess.  Any remittance made pursuant to this Section 3.2(d) shall be made not later than ten (10) Business Days after the Closing Date Statement has been agreed to by Seller and Buyer or determined by the Referee Accountant in accordance with Section 3.2(c).

3.3           Prorations.  To the extent accruals therefor or prepayments thereof are not reflected in the Closing Date Statement, all items listed below of Seller will be prorated as of the Closing Date, with Seller liable to the extent such items relate to any time period up to and including the Closing Date, and Buyer liable to the extent such items relate to periods subsequent to the Closing Date:

(a)           real and personal property rents, all Taxes, fees and other governmental charges related to real estate or the uses, and occupancy thereof, to the extent such rents, Taxes, fees or charges are imposed on a periodic basis and are imposed over a Straddle Period (for the avoidance of doubt, any such Taxes, fees and other governmental charges shall not include any Taxes for income, transfer, sales, use, and other Taxes arising in connection with the consummation of the Acquisition Transaction contemplated herein);

(b)           any sums payable by Seller pursuant to any Contract or Governmental Authorization to be assigned to or assumed by Buyer hereunder or under any Related Agreement; and

(c)           any and all workers compensation costs and other retrospectively adjusted cost items.

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Seller and Buyer agree to furnish the other with such documents and other records as they reasonably request in order to confirm all adjustment and proration calculations made pursuant to this Section 3.3.  The net aggregate amount of such prorations shall be paid separately by Buyer to Seller on the Closing Date.  If current payments with respect to items to be prorated pursuant to this Section 3.3 are not ascertainable on or before the Closing Date, such payments shall be prorated on the basis of the most recently ascertainable bill therefor and shall be reprorated between Seller and Buyer when the current bills with respect to such items have been issued and a cash settlement shall be made promptly thereafter.

3.4           Allocation of Purchase Price.  Within sixty (60) days after the Closing, Buyer shall deliver to Seller a schedule (the “Allocation Schedule”) allocating the Purchase Price (including, for purposes of this Section 3.4, any other consideration paid to Seller including the Assumed Obligations) among the Acquired Assets in accordance with Schedule 3.4.  The Allocation Schedule shall be reasonable and shall be prepared in accordance with Section 1060 of the Code and the Treasury Regulations thereunder.  Upon completion of its review of the Allocation Schedule, and in all events within thirty (30) days after delivery to Seller, Seller shall, by written notice to Buyer, either accept it as prepared by Buyer or propose adjustments.  If Seller accepts the Allocation Schedule as prepared by Buyer, or fails to provide written objections within such thirty (30) day period, then the Allocation Schedule as submitted by Buyer shall be deemed final and binding on the parties.  If Seller proposes adjustments to the Allocation Schedule, Seller shall specify the amount of each proposed adjustment, the item to which such proposed adjustment relates and the facts and circumstances supporting the adjustment.  Seller and Buyer shall then meet and use commercially reasonable efforts to reconcile the proposed adjustments.  If the proposed adjustments have not been reconciled within thirty (30) days of Seller’s notification to Buyer of the proposed adjustments (or such longer period upon as Seller and Buyer may agree), they shall refer their differences to the Referee Accountant.  The decision of the Referee Accountant shall be final and binding upon Buyer and Seller.  Buyer and Seller shall each pay one-half of the fees and expenses of the Referee Accountant.  Buyer and Seller each agree to file Internal Revenue Service Form 8594, and all federal, state, local and foreign Tax Returns, in accordance with the Allocation Schedule.  Seller shall timely and properly prepare, execute, file and deliver all such documents, forms and other information as Buyer may reasonably request to prepare such Allocation Schedule.  Buyer and Seller agree to provide the other promptly with any other information required to complete Form 8594.  Neither Buyer nor Seller shall take any position (whether in audits, Tax Returns or otherwise) that is inconsistent with the Allocation Schedule unless required to do so by applicable law.

3.5           Payment of Liabilities at Closing.  Not less than two (2) Business Days prior to the Closing Date, Seller shall deliver to Buyer a schedule that lists all Indebtedness and all Seller Transaction Expenses to be paid at Closing from the Purchase Price.  Any and all other Indebtedness and Seller Transaction Expenses not so listed on the foregoing schedule shall be borne solely by Seller.

3.6           Earnout Consideration.

(a)          Subject to Section 3.6(b), provided that the EBITDA of the Business has grown at a CAGR of not less than 4% during the period from January 1, 2008 through the

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Measurement Date or through the Early Measurement Date, as compared to EBITDA of the Business for calendar year 2007, as additional consideration for the purchase of the Acquired Assets at the Closing, Buyer shall pay to Seller Seller’s Equity Percentage of the Agreed Enterprise Value of Buyer as of the Measurement Date or Early Measurement Date, as the case may be (the “Earnout Consideration”); provided that the maximum amount of such Earnout Consideration to be paid to Seller shall not exceed the Maximum Earnout Consideration Amount.  On or prior to the sixtieth (60th) day after the Measurement Date (the “Payment Date”), Buyer shall provide to Seller a detailed calculation of the Earnout Consideration together with payment, if any, to Seller of such Earnout Consideration.

(b)           In the event of a Relocation of Buyer prior to the Measurement Date set forth in Section 3.6(a), Seller may elect to accelerate the calculation and payment of the Earnout Consideration by providing written notice thereof to Buyer (the date such notice delivered referred hereinafter as the “Seller Notice Date”).  For purposes of determining the Earnout Consideration in accordance with Section 3.6(a), CAGR shall be based on the period from January 1, 2008 through the last day of the month immediately preceding the Seller Notice Date (such last day of the month referred hereinafter as the “Early Measurement Date”).  On or prior to the sixtieth (60th) day after the Early Measurement Date (the “Early Payment Date”), Buyer shall provide to Seller a detailed calculation of the Earnout Consideration together with payment, if any, to Seller of such Earnout Consideration; provided, however, that the payment of such Earnout Consideration shall be discounted, at the Agreed Rate, from the Payment Date to, and including, the Early Payment Date.

(c)           Upon completion of its review of the calculations of the Earnout Consideration in either Section 3.6(a) or (b), and in all events within thirty (30) days after delivery of such calculations to Seller, Seller will, by written notice to Buyer, either accept it as prepared by Buyer or object or propose adjustments thereto.  If Seller accepts the calculations of the Earnout Consideration as prepared by Buyer, or fails to provide a written objection or written proposal of adjustments within such thirty (30) day period, then such calculations as submitted by Buyer shall be deemed final and binding on the parties.  If Seller objects or proposes adjustments to such calculations of the Earnout Consideration, Seller shall specify, in reasonable detail, the amount of each proposed adjustment, the item to which such proposed adjustment relates, and the facts and circumstances supporting the adjustment.  Seller and Buyer shall then meet and use their best efforts to reconcile the proposed adjustments.  If the proposed adjustments have not been reconciled within thirty (30) days of Seller’s notification to Buyer of the proposed adjustments, or such longer period upon which Seller and Buyer shall agree, they shall refer their differences to the Referee Accountant.  Buyer and Seller shall furnish to the Referee Accountant such calculations of the Earnout Consideration, the adjustments proposed by Seller, and such work papers, books, records and other information and documents as the Referee Accountant shall reasonably request.  The Referee Accountant shall have thirty (30) days to reconcile the parties’ differences (all in accordance with Schedule 1.1-C) and in performing such reconciliation, the Referee Accountant shall consider only those items or amounts in such calculations of the Earnout Consideration as to which Buyer and Seller have disagreed.  The decision of the Referee Accountant shall be final and binding upon Buyer and Seller.  Remittance by either Buyer or Seller to the Earnout Consideration of any adjustments shall be made no later than ten (10) Business Days after such determination by the Referee

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Accountant in accordance with this Section 3.6(c).  Buyer and Seller shall each pay one-half of the fees and expenses of the Referee Accountant.

(d)           The agreed EBITDA as of December 31, 2007 is set forth on Schedule 3.6.  Any payment of the Earnout Consideration under this Section 3.6 shall be treated as the payment of additional Purchase Price.

(e)           During the period commencing on the Closing Date and ending on the Measurement Date or the Early Measurement Date, as the case may be (such period referred hereinafter as the “Measurement Period”), Buyer agrees to:  (i) operate the Business in good faith, in the ordinary course of business and in a manner which is not intended to frustrate or diminish the amount of the Earnout Consideration; (ii) maintain its existence as a corporation and (iii) refrain from liquidating, dissolving, selling assets (other than inventory and surplus equipment sold in the ordinary course of business), merging, consolidating or reorganizing Buyer’s business structure; provided, however, that Buyer shall not be prohibited from merging, consolidating, or reorganizing itself (or certain of its operating functions) with Parent or any subsidiary of Parent so long as that the Business is maintained as a separate division.  Without limiting the generality of the foregoing, Buyer agrees that it will (w) only effect material changes to its business operations, or manner of conducting business, intended in its good faith judgment to increase the profitability of the Business during the Measurement Period, (x) maintain separate books and records for the Business; (y) not direct business opportunities that pertain to the Business to Parent or any other Affiliate, with the understanding that with respect to business opportunities that pertain to lines of business conducted by both Parent (and/or any subsidiary or division of Parent) and Buyer, all business opportunities will be directed in good faith and in a manner that Buyer believes will not impair Buyer’s profitability; and (z) not transfer or permit the licensing of any of its material operating assets, rights or properties of Buyer unless such license is for consideration and on an arms-length basis.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyer, as of the date of this Agreement as follows:

4.1           Due Incorporation, etc.  Seller is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and each other jurisdiction where it is licensed or qualified to do business, with all requisite power and authority to own, lease and operate its properties and to carry on the Business as it is now being conducted.  Seller is licensed or qualified to do business and is in good standing in each jurisdiction where the nature of the properties owned, leased or operated by it and the businesses transacted by it require such licensing or qualification, unless such failure would not have a Material Adverse Effect.  The jurisdictions in which Seller is licensed or qualified to do business are set forth on Schedule 4.1.  The Stockholders are the sole stockholders of Seller.

4.2           Due Authorization.  Seller has full power and authority to enter into this Agreement and the Related Agreements to which respectively is a party and to consummate the Contemplated Transactions.  The execution, delivery and performance by Seller of this

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Agreement and the Related Agreements have been duly and validly approved by Seller’s Board of Directors and by all stockholders of Seller entitled to vote thereon, and no other actions or proceedings on the part of Seller are necessary to authorize this Agreement, the Related Agreements and the Contemplated Transactions.  Seller and each Stockholder has duly and validly executed and delivered this Agreement and prior to or at the Closing will duly and validly execute and deliver the Related Agreements to which it respectively is a party.  This Agreement constitutes a legal, valid and binding obligation of Seller and the Stockholders and upon the execution and delivery by Seller and the Stockholders of the Related Agreements to which they are respectively a party, such Related Agreements will constitute legal, valid and binding obligations of Seller and the Stockholders, in each case, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors’ rights generally and by equitable limitations on the availability of specific remedies.

4.3           Subsidiaries and Investments.  Except as set forth on Schedule 4.3, since its date of incorporation, Seller has not directly or indirectly:  (a) owned, of record or beneficially, any subsidiary or any common stock or other equity interest in any corporation, partnership, limited liability company, joint venture, trust or other entity; (b) controlled any corporation, partnership, limited liability company, joint venture, trust or other entity; or (c) had any obligations to purchase equity or debt securities of any other entity.

4.4           Consents and Approvals; No Conflicts, etc.

(a)          Except for certain consents set forth on Schedule 4.4 (“Consents”), no consent, authorization or approval of, filing or registration with, or cooperation from, any Governmental Authority or any other Person not a party to this Agreement is necessary in connection with the execution, delivery and performance by Seller and the Stockholders of this Agreement and the Related Agreements or the consummation of the Contemplated Transactions.

(b)          Except as set forth on Schedule 4.4, the execution, delivery and performance by Seller and the Stockholders of this Agreement and the Related Agreements do not and will not (i) violate any Law, applicable to Seller, any of the Acquired Assets or the Business; (ii) violate or conflict with, result in a breach or termination of, constitute a default or give any third party any additional right (including a termination right) under, permit cancellation of, result in the creation of any Lien other than Permitted Liens upon any of the assets or properties of Seller under, or result in or constitute a circumstance which, with or without notice or lapse of time or both, would constitute any of the foregoing under, any material Contract (including any non-competition, non-solicitation, confidentiality, trade secret or other similar agreement) to which Seller or the Stockholders are a party or by which Seller or the Stockholders or any of the Acquired Assets are bound; (iii) permit the acceleration of the maturity of any indebtedness of Seller or indebtedness secured by any of the Acquired Assets; or (iv) violate or conflict with any provision of any of the Articles of Incorporation or Bylaws of Seller.

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4.5           Financial Statements; No Undisclosed Liabilities.

(a)          Except as set forth on Schedule 4.5(a), the Financial Statements present fairly in all material respects the financial position, assets and liabilities of Seller as of the dates thereof and the revenues, expenses, results of operations and cash flows of Seller for the periods covered thereby and changes in stockholders’ equity of Seller as of the dates and for the periods covered thereby, in each case in conformity with GAAP during such periods in accordance with the past accounting practices of Seller, subject to the lack of footnote disclosures.  The Financial Statements have been prepared, in all material respects, in accordance with the books and records of Seller.  Except as set forth on Schedule 4.5(a), the Financial Statements do not include any intercompany revenues, expenses, assets or liabilities among Seller and its Affiliates.

(b)          Seller does not have any liabilities, debts, claims or obligations (including “off-balance sheet” liabilities, debts, claims or obligations), whether accrued, absolute, contingent or otherwise, and whether due or to become due, other than (i) as set forth on Schedule 4.5(b) or reflected or reserved in the Latest Balance Sheet and (ii) accounts payable and accrued current liabilities incurred in the ordinary course of business since the date of the Latest Balance Sheet.

4.6           No Adverse Effects or Changes.

(a)          Except as set forth on Schedule 4.6, since January 1, 2008, Seller has conducted its Business in all respects in the ordinary course and consistent with past practices.  Without limiting the foregoing, except as set forth on Schedule 4.6, since January 1, 2008, Seller has not:

(i)           suffered any Material Adverse Effect and, to Seller’s Knowledge, no event has occurred that with or without the passage of time or any notice, would reasonably be expected to have a Material Adverse Effect;

(ii)          taken any action, or entered into or authorized any Contract or transaction other than in the ordinary course of business and consistent with past practice;

(iii)         sold, leased, transferred, conveyed, assigned or otherwise disposed of any of its assets or properties, except sales of inventory in the ordinary course of business and consistent with past practice; or

(iv)         permitted any damage, destruction, or loss of $100,000 or more, whether or not covered by insurance, or condemnation or other taking adversely affecting any of the Acquired Assets.

(b)          Except as set forth in Schedule 4.6, since January 1, 2008, Seller has not:

(i)           authorized, issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any equity securities or any option, warrant or other right to purchase, any of its capital stock or other equity interest or any security convertible into its capital stock or other equity interest;

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(ii)           authorized, issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any of its bonds, notes or other debt securities, or borrowed or agreed to borrow any funds, other than in the ordinary course of Business consistent with past practice;

(iii)          incurred or paid any obligation or liability (absolute or contingent) other than current liabilities or Indebtedness incurred in the ordinary course of Business consistent with past practice;

(iv)          committed to make or declare any payment of dividends or distributions (which have not been made or paid as of the date hereof), or committed to purchase or redeem any capital stock or other equity interest (which have not been purchased or redeemed as of the date hereof);

(v)           except in the ordinary course of Business consistent with past practice, made or permitted any material amendment or termination of any Contract;

(vi)          undertaken or committed to undertake capital expenditures that, when added to all other capital expenditures since January 1, 2007, exceeded $100,000;

(vii)         committed to make charitable donations (which have not yet been made as of the date hereof) in excess of $10,000 in the aggregate;

(viii)        cancelled any debts owed to or claims held (including the settlement of any claims or litigation) other than in the ordinary course of business consistent with past practice;

(ix)created, incurred or assumed, or agreed to create, incur or assume, any Indebtedness, other than any Permitted Liens;

(x)accelerated or delayed collection of notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of business consistent with past practice;

(xi)delayed or accelerated payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of business consistent with past practice;

(xii)allowed the levels of raw materials, supplies, work-in-process, finished goods, goods on consignment or other materials included in the inventory of the Business to vary in any material respect from the levels customarily maintained in the Business;

(xiii)adopted any stock based incentive plan;

(xiv)        changed Seller’s year end, revalued any of its assets or made any change in the accounting principles and practices used by Seller from those applied in the preparation of the Financial Statements;

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(xv)         effected or been a party to any merger, consolidation, amalgamation, share exchange or other business combination, or adopted a plan (or the resolutions) for a partial or complete liquidation, dissolution, restructuring, recapitalization, reorganization, reclassification of Seller’s shares, equity split, division of Seller’s shares, reverse equity split, consolidation of Seller’s shares or similar transaction;

(xvi)        established, adopted or materially amended any bonus, profit sharing, compensation, severance, termination, pension, retirement, or deferred compensation agreement or plan for the benefit of any officer or employee or entered into, amended or modified any employment, collective bargaining or other similar arrangements with any employee or officer;

(xvii)       instituted or incurred any increase (A) in any wages, salary, bonus or other compensation payable to any Person providing substantially full-time employee-equivalent services to the Business or (B) in any existing profit-sharing, bonus, incentive, deferred compensation, insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to any Person providing substantially full-time employee-equivalent services to the Business, other than amounts which, in the aggregate, do not exceed fifteen percent (15%) of the levels of compensation paid to all such Persons in 2006;

(xviii)      acquired any real property or committed to acquire any real property;

(xix)made any material change to its internal controls over financial reporting, or identified or became aware of any fraud or any significant deficiency or material weakness in internal control over financial reporting;

(xx)entered into any agreement containing any provision or covenant limiting in any respect its ability to (a) sell or buy any products or services to or from any other Person, (ii) engage in any line of business, or (iii) compete with any Person;

(xxi)commenced any action, suit or proceeding seeking an amount in excess of $100,000, or settled any pending action, suit or proceeding at a cost in excess of $50,000; or

(xxii)entered into or become committed to enter into any other transaction other than in the ordinary course of business and consistent with past practices.

4.7           Title to Properties.  Except as set forth on Schedule 4.7, Seller has good and valid record and marketable title to and are the lawful owner of, the Acquired Assets, free and clear of any Liens other than Permitted Liens.  Seller has the full right to sell, convey, transfer, assign and deliver the Acquired Assets to Buyer, and, at and as of the Closing Date, Buyer will have, good and valid record and marketable title to all of the Acquired Assets, free and clear of all Liens other than (i) Liens for Taxes, assessments or other governmental charges not yet due and payable, (ii) mechanics’, workmen’s, repairmen’s, warehousemen’s, carriers’ or other like Liens arising or incurred in the ordinary course of business if the underlying obligations are not past

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due, (iii) any interest or title of a lessor under any Personal Property Lease or Real Property Lease or of any licensor under a license (including, without limitation, licensed Intellectual Property) or restrictions imposed on a lessee under the terms of any such lease or license, (iv) Liens securing any liability or obligation described in Section 2.5 that shall be terminated at Closing; and (v) those Liens set forth on Schedule 4.7 (subsections (i) through (v), collectively “Permitted Liens”).

4.8           Condition and Sufficiency of Assets.  Except as set forth on Schedule 4.8, all of the tangible Acquired Assets, whether real or personal, owned or leased, are as a whole in good operating condition and repair (with the exception of normal wear and tear), and are usable in the conduct of normal operations of the Business.  The Acquired Assets constitute all the assets, properties and rights that are required for or currently used in connection with the conduct of the Business as it is presently conducted.

4.9           Real Property and Real Property Leases.

(a)           Seller does not presently own, and Seller has never owned, since the date of its incorporation, any fee simple interest in real property.

(b)           Schedule 2.2(b)sets forth a list and brief description of each lease or similar agreement (showing the parties thereto, any amendments or modifications thereto), under which Seller is a lessee of, or holds or operates, any real property owned by any third Person.  A true and complete copy of each such lease agreement has been made available to Buyer on the Datasite.

(c)           Except as set forth in Schedule 2.2(b):

(i)           Seller has complied in all material respects with all Real Property Leases and no event has occurred or circumstances exist which, with the delivery of notice, the passage of time or both, would constitute a material breach or default, or permit the termination, modification or acceleration of rent, under any lease agreement listed in Schedule 2.2(b); Seller has not received any written notice from any lessor alleging that Seller is not in compliance with the terms of such lease, other than those claims which have been fully resolved;

(ii)          to Seller’s Knowledge, Seller has the right to quiet enjoyment of all the real property covered by the Real Property Leases for the full term of the lease or similar agreement (and any renewal option related thereto) relating thereto, and, to Seller’s Knowledge, the leasehold or other interest of Seller in the Real Property Leases is not subject or subordinate to any Liens, other than Permitted Liens; and

(iii)         to Seller’s Knowledge, no security deposit or portion thereof deposited with respect to such lease agreement has been applied in respect of a breach or default under such lease agreement which has not been redeposited in full; Seller does not, and will not owe in the future, any brokerage commissions or finder’s fees with respect to any such lease agreement.

(d)           To Seller’s Knowledge, neither the whole nor any part of the Real Property leased pursuant to the Real Property Leases is subject to any pending suit for condemnation or other

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taking by any Governmental Authority, and, to the Knowledge of Seller, no such condemnation or other taking is threatened or contemplated.

4.10         Equipment.  Schedule 2.1(a) sets forth a true, accurate and complete list of all of the Equipment having an original acquisition cost of $20,000 or more per item.  The Equipment does not include any vehicles.  The Personal Property Leases set forth on Schedule 2.2(a) constitute all leases by Seller of any item of personal property used by Seller.

4.11         Inventories.  Schedule 2.1(b) sets forth a true, accurate and complete schedule of all Inventories as of December 31, 2007.  The Inventories, taken as a whole and net of any inventory reserves set forth on the Financial Statements, are of merchantable quality, are not obsolete and are usable or saleable in the ordinary course of business, have not been pledged or otherwise given as collateral, and are not held by Seller on assignment or consignment.  The Inventories are fairly reflected in the inventory accounts on the balance sheets included in the Financial Statements in accordance with GAAP, including all appropriate reserves, and are valued at the lower of cost or market.

4.12         Accounts Receivable.  Schedule 4.12 sets forth a true, accurate and complete aging schedule of all Accounts Receivable as of December 31, 2007.  Except as set forth on Schedule 4.12, all accounts receivable of Seller have arisen from bona fide transactions by Seller in the ordinary course of the Business.  To Seller’s Knowledge, all accounts receivable reflected in the Latest Balance Sheet are good and collectible in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowance for doubtful accounts reflected in the Latest Balance Sheet.  None of the accounts receivable to be reflected in the Closing Date Statement will be subject to any setoffs in excess of any reserve therefor contained in the Closing Date Statement or any counterclaim.

4.13         Intellectual Property.

(a)          Schedule 2.1(e) sets forth, for the Intellectual Property owned by Seller, an accurate list of all U.S. and foreign (i) issued and pending patents and patent applications; (ii) registered or pending trademarks; (iii) Internet domain registrations; and (iv) copyright registrations and mask work, copyright and mask work applications.  The Intellectual Property of Seller includes all Intellectual Property used in connection with Seller’s Business as currently conducted, whether registered or existing at common law.

(b)          Schedule 2.1(e) sets forth a complete and accurate list of all agreements (whether oral or written) to which Seller is a party or otherwise bound, (i) granting or obtaining for Seller any right to use or practice any rights under any Intellectual Property, or (ii) restricting Seller’s rights to use any Intellectual Property, including license agreements, development agreements, distribution agreements, settlement agreements, consent to use agreements, and covenants not to sue (collectively, the “License Agreements”).  Seller has not licensed or sublicensed its rights in any Intellectual Property to any Third Party other than pursuant to the License Agreements.  No royalties, honoraria or other fees are payable by Seller to any third parties for the use of or right to use any Intellectual Property except pursuant to the License Agreements.

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(c)           Except as set forth on Schedule 2.1(e):

(i)           Seller owns, or has a valid right to use and transfer to Buyer, free and clear of all Liens other than Permitted Liens, all of its Intellectual Property.  Seller is listed in the records of the appropriate United States, state, or foreign registry as the sole current owner of record for each application and registration listed on Schedule 2.1(e).

(ii)          The Intellectual Property listed on Schedule 2.1(e) owned by Seller and, to the Knowledge of Seller, any Intellectual Property used by Seller, is subsisting, in full force and effect, and has not been cancelled, expired, or abandoned, and is valid and enforceable.  None of the Intellectual Property owned by Seller has been developed by any employee of Seller or by any other Person except a Person who has either executed a “work for hire” agreement or assigned all rights to Seller or to a predecessor in interest.

(iii)         Except as set forth on Schedule 2.1(e), there is no pending or, to the Knowledge of Seller, threatened claim, suit, arbitration or other adversarial proceeding before any court, agency, arbitral tribunal, or registration authority in any jurisdiction (A) involving the Intellectual Property owned by Seller, or to the Knowledge of Seller, the Intellectual Property licensed to Seller or (B) alleging that the activities or the conduct of Seller’s business does or will infringe upon, violate or constitute the unauthorized use of the intellectual property rights of any third party or challenging the ownership, use, validity, enforceability or registrability of any Intellectual Property by Seller.  There are no settlements, forbearances to use, consents, judgments, or orders or similar obligations other than the License Agreements which (1) restrict Seller’s rights to use any Intellectual Property owned by Seller, (2) restrict the Business in order to accommodate a third party’s Intellectual Property or (3) permit third parties to use any Intellectual Property owned or controlled by Seller.

(iv)         The conduct of the Business as currently conducted or planned to be conducted does not infringe upon (either directly or indirectly such as through contributory infringement or inducement to infringe) any Intellectual Property owned by any third party.  Except as set forth on Schedule 2.1(e), to the Knowledge of Seller, no third party is misappropriating, infringing or violating any Intellectual Property owned by Seller and no such claims, suits, arbitrations or other adversarial proceedings have been brought against any third party by Seller which remain unresolved.

(v)          Seller has taken all measures necessary to protect the confidentiality of its Trade Secrets, including requiring its employees and other parties having access thereto to execute written confidentiality agreements.  To the Knowledge of Seller, no Trade Secret has been disclosed or authorized to be disclosed to any third party other than pursuant to a confidentiality or non-disclosure agreement.  To the Knowledge of Seller, no party to any non-disclosure agreement relating to its Trade Secrets is in breach or default thereof.

4.14         Contracts.  Schedule 2.2(a), Schedule 2.2(b), Schedule 2.2(f) and Schedule 4.14 set forth a true, accurate and complete list of all Personal Property Leases, Real Property Leases, Governmental Authorizations and Contracts to which Seller is a party or by which Seller is bound, except for Contracts that involve performance of services or delivery of goods or materials by or to Seller in an aggregate amount or value of up to $25,000 and Contracts

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consisting solely of purchase orders.  Seller has made available to Buyer on the Datasite true, accurate and complete copies of each document set forth on Schedule 2.2(a), Schedule 2.2(b), Schedule 2.2(f) and Schedule 4.14.

4.15         Governmental Authorizations; Regulatory Compliance.

(a)          Schedule 2.2(f) sets forth a true, accurate and complete list of all Governmental Authorizations held by Seller, which constitute all of the Governmental Authorizations used by Seller to conduct the Business as currently conducted.  All such Governmental Authorizations are in full force and effect.  Seller owns, holds or possesses all Governmental Authorizations, licenses, franchises, permits, privileges, immunities, approvals, registrations and other authorizations from a Governmental Authority which are necessary to entitle it to own or lease, operate and use its assets and to carry on and conduct the Business as presently conducted, except for such Governmental Authorizations as to which the failure to so own, hold or possess would not reasonably be expected to have a Material Adverse Effect.  Complete and correct copies of all of the Governmental Authorizations have heretofore been made available to Buyer on the Datasite.

(b)          Except as set forth in Schedule 2.2(f), (i) Seller is not in material violation of any of its obligations under or with respect to any of the Governmental Authorizations, and no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any such Governmental Authorization or which permits or, after notice or lapse of time or both, would permit revocation, alteration or termination of any such Governmental Authorization, or which is reasonably likely to adversely affect the rights of Seller under any such Governmental Authorization, and (ii) no notice of cancellation, of default or of any dispute concerning any Governmental Authorization, or of any event, condition or state of facts described in the preceding clause, has been received by, or is within the Knowledge of Seller.  To Seller’s Knowledge, each of the Governmental Authorizations is legal, valid, subsisting and in full force and effect.

(c)          The Acquired Assets include copies of all policies, procedures, plans and protocols currently used by Seller to operate the Business as currently being conducted, and no other policies, procedures, plans and protocols are required under any Law other than those provided under Schedule 2.2(f).  Seller has delivered or made available to Buyer on the Datasite correct and complete copies of all such policies, procedures, plans and protocols.

4.16         Insurance.  Schedule 4.16 sets forth a true, accurate and complete list of all policies of fire, liability, workmen’s compensation, title and other forms of insurance owned, held by or applicable to Seller and its assets, and Seller has provided or made available to Buyer on the Datasite a true, accurate and complete copy of all such policies, including all occurrence-based policies applicable to Seller and its assets for all periods prior to the Closing Date.  All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy.  Seller has not made any claim in excess of $50,000 with respect to such policies within the past three (3) years, except as reflected on Schedule 4.16.

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4.17         Employee Benefit Plans and Employment Agreements.

(a)          Schedule 4.17 contains a list setting forth each Benefit Plan or arrangement maintained, or directly contributed to, by Seller with respect to employees of Seller.  None of the Benefit Plans is a “multi-employer plan” as described in Section 3(37) of ERISA.  A true and correct copy of each of the Benefit Plans as in effect on the date hereof and all contracts, summary plan, descriptions and documents provided to or retrieved from any Governmental Authority relating thereto, or to the funding thereof, has been made available to Buyer on the Datasite.  Each Benefit Plan has been administered in all material respects in compliance with its terms and with all applicable Laws, including ERISA and the Code and there has been no notice issued by any Governmental Authority questioning or challenging such compliance.  Each Benefit Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS that such Benefit Plan is so qualified under the Code and, to Seller’s Knowledge, no circumstance exists which might cause such Benefit Plan to cease being so qualified.  There are no actions, suits or claims (other than routine claims for benefits) pending or, to the Knowledge of Seller, threatened involving any Benefit Plan or the assets of any Benefit Plan.  Seller does not have any liability of any kind whatsoever, whether direct, indirect, contingent or otherwise, (i) on account of any violation of the health care requirements of Part 6 of Subtitle B of Title I of ERISA or Section 4980B of the Code, (ii) under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the Code, (iii) under Section 302 of ERISA or Section 412 of the Code or (iv) under Title IV of ERISA.  All Benefit Plans and other compensation arrangements subject to Section 409A of the Code are in good faith compliance with the currently applicable requirements of Section 409A and the regulations, rulings and notices thereunder.  No amounts related to any Benefit Plan or other compensation arrangement will become payable as a result of the Closing or at any time thereafter for which Buyer could bear any liability.

(b)          Seller does not have, and has never had, any liability of any kind whatsoever, whether direct, indirect, contingent or otherwise, in respect to any Benefit Plan or arrangement  maintained, or contributed to, by ADP.

4.18         Employment and Labor Matters.

(a)          Schedule 4.18(a) sets forth a list of all employees of ADP provided under the PEO Services Agreement (“ADP Employees”) as of March 7, 2008 and the details of all aspects of their compensation by Seller including position, start date, salary, bonus, vacation pay or entitlement.  All ADP Employees are provided to Seller by ADP pursuant to the PEO Services Agreement.  To Seller’s Knowledge, there is, and during the past three (3) years there has been, no labor strike, dispute, slow-down, work stoppage or other labor difficulty actually pending or threatened against or involving ADP or Seller by ADP Employees.  To Knowledge of Seller, none of the ADP Employees is covered by any collective bargaining agreement, no collective bargaining agreement is currently being negotiated and no attempt is currently being made or during the past three (3) years has been made to organize the ADP Employees to form or enter a labor union or similar organization.

(b)          All Seller’s policy and procedure manuals have been delivered or made available to Buyer on the Datasite.

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(c)           Schedule 4.18(c) sets forth a list of all ADP Employees who were provided by ADP to Seller and: (i) whose assignment from ADP to Seller has been terminated or expired since January 1, 2007, or (ii) to Seller’s Knowledge, who have indicated that they will be leaving or considering leaving ADP’s employ.

(d)           At no point in the last twelve months has Seller employed, either individually or jointly with others, 100 or more full-time employees or ADP Employees or 100 or more employees or ADP Employees who, in the aggregate, worked at least 4,000 hours per week.  Seller is not an “employer” as defined under the Worker Adjustment and Retraining Notification Act (“WARN”), 29, U.S.C. Section 2101, et seq., or similar state law provisions.

(e)           Seller (i) has complied in all substantial respects with all Laws applicable to Seller with respect to all Persons who have provided services to Seller on a substantially full-time employee-equivalent basis, and (ii) has not incurred any liability, whether direct, indirect, contingent or otherwise (including any Tax liability), with respect to the utilization of services provided to Seller by the ADP Employees except pursuant to obligations arising under the PEO Services Agreement.

4.19Taxes.

(a)           Seller has timely filed all Tax Returns that it was required to file.  All such Tax Returns were correct and complete in all respects and were prepared in substantial compliance with all applicable Laws and regulations.  All Taxes owed by Seller or for which Seller would have liability under any Law (whether or not shown or required to be shown on any Tax Return) have been paid except such Taxes, if any, as are being contested in good faith and to which adequate reserves have been provided in accordance with GAAP.  Seller is not currently the beneficiary of any extension of time within which to file any Tax Return.  To Seller’s Knowledge, no claim has ever been made by an authority in a jurisdiction where Seller does not file Tax Returns that Seller is or may be subject to taxation by that jurisdiction.  There are no Liens, other than Permitted Liens, on any of the assets of Seller that arose in connection with any failure (or alleged failure) to pay any Tax.

(b)           Seller has withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party, and all Forms W-2 and 1099 required with respect thereto have been properly completed and timely filed.

(c)           To the Knowledge of Seller, no authority is likely to assess any additional Taxes for any period for which Tax Returns have been filed.  There is no dispute or claim concerning any Tax Liability of Seller either (A) claimed or raised by any authority in writing or (B) to Seller’s Knowledge, based upon personal contact with any agent of such authority.  Schedule 4.19 lists all federal, state, local, and foreign income Tax Returns filed with respect to Seller for taxable periods ended on or after December 31, 2004, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. Seller has made available to Buyer on the Datasite correct and complete copies of all income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Seller since December 31, 2004.

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(d)           Seller has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

(e)           The unpaid Taxes of Seller (A) did not, as of the December 31, 2007, exceed the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Latest Balance Sheet (rather than in any notes thereto) and (B) do not exceed the amount of such reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of Seller in filing its Tax Returns.

(f)            None of the Assumed Obligations is an obligation to make a payment that is not deductible under Section 280G of the Code.  Seller has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code.  Seller is not a party to any Tax allocation or sharing agreement.  Seller (A) has not been a member of an Affiliated Group filing a consolidated federal income Tax Return (other than a group the common parent of which was Target) and (B) does not have any liability for the Taxes of any Person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

4.20No Defaults or Violations.  Except as set forth on Schedule 4.20:

(a)           Seller is not currently in default under, or in violation of, the terms of any Contract or Governmental Authorization to which it is a party or under which it has any rights or by which it is bound, and to the Knowledge of Seller, no other party to any such Contract or Governmental Authorization has breached such Contract Governmental Authorization or is in default thereunder.  Since January 1, 2005, Seller has not (i) breached or violated the terms of any Governmental Authorization nor (ii) breached, defaulted under, or violated any Contract (which breach, default or violation has heretofore been waived or cured), where the cost to Seller of such breach, default or violation (by way of credit, offset and/or payment) exceeded, in the aggregate, $100,000.  Seller has not received any notice of any and, to Seller’s Knowledge, there exists no, dispute, claim, event of default or event which constitutes or would constitute (with notice or lapse of time or both) a default under any Contract or Governmental Authorization to which Seller is a party or under which it has any rights or by which it is bound.

(b)           All of the Contracts and Governmental Authorizations to which Seller is a party are in full force and effect and constitute the legal, valid and binding obligation of Seller and, to Seller’s Knowledge, the other parties thereto, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors’ rights generally and by equitable limitations on the availability of specific remedies.

(c)           Seller, each of the Acquired Assets and each of the Leased Assets is in compliance in all material respects with all Laws or Governmental Authorizations applicable to Seller, such Acquired Assets and such Leased Assets.

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(d)           Since January 1, 2005, no written notice from any Governmental Authority has been received by Seller claiming any violation of any Law or requiring any capital expenditure, or asserting any Tax, assessment or penalty.

4.21Environmental Matters.  Except as set forth on Schedule 4.21:

(a)           The Business, the Acquired Assets and the Real Property pursuant to the Real Property Leases are in full compliance with all Environmental Laws in effect as of the date hereof, and no condition exists or event has occurred which, with or without notice or the passage of time or both, would constitute a violation of or give rise to any Lien under any Environmental Law;

(b)           Seller is in possession of all Environmental Governmental Authorizations required for the conduct or operation of its Business (or any part thereof), and is in full compliance with all of the requirements and limitations included in such Environmental Governmental Authorizations;

(c)           There are no, and Seller has never used or stored any, Hazardous Substances in, on, or at any of the properties or facilities which are part of the Acquired Assets or the Real Property pursuant to the Real Property Leases, and no Hazardous Substances have been used in the construction or repair of, or any alterations or additions to, any of the Acquired Assets or the Real Property pursuant to the Real Property Leases, except in each case for inventories of substances set forth on Schedule 4.21 which are used or are to be used in the ordinary course of business (which inventories have been stored and used in accordance with all applicable Environmental Laws and Governmental Authorizations, including all so-called “Right To Know Laws”);

(d)           Since January 1, 2005, Seller has not received any notice from any Governmental Authority or any other Person that any aspect of the Business or the operation thereof or the Acquired Assets or the Real Property pursuant to the Real Property Leases is in violation of any Environmental Law or Governmental Authorization, or that Seller is responsible (or potentially responsible) for the cleanup or remediation of any substances at any location;

(e)           Since January 1, 2003, Seller has never deposited or incorporated any Hazardous Substances into, on, beneath, or adjacent to any property which is part of the Acquired Assets or the Real Property pursuant to the Real Property Leases;

(f)            Since January 1, 2005, Seller has never been subject to any pending or, to Seller’s Knowledge, threatened litigation or proceedings in any forum, judicial or administrative, involving a demand for damages, injunctive relief, penalties, or other potential liability with respect to violations of any Environmental Law; and

(g)           Seller has since January 1, 2005, timely filed all reports and notifications required to be filed with respect to all of its properties and facilities and has generated and maintained all required records and data under all applicable Environmental Laws.

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4.22Litigation.

(a)           Except as set forth on Schedule 4.22, there are no pending actions, suits, arbitrations, regulatory proceedings or other litigation, proceedings or governmental investigations pending or, to Seller’s Knowledge, threatened against or affecting Seller or any of its officers, directors, employees, agents or stockholders thereof in their capacity as such, or any of the properties or businesses of Seller, including the Acquired Assets, the Leased Assets and the Real Property Leases, and Seller is not aware of any facts or circumstances which may reasonably be expected to give rise to any of the foregoing.  Except as set forth on Schedule 4.22, all of the proceedings pending or, to Seller’s Knowledge, threatened against Seller are fully covered (subject to any applicable deductibles) by insurance policies (or other indemnification agreements with third parties) and are being defended by the insurers (or such third parties).  Except as set forth on Schedule 4.22, Seller is not subject to any order, judgment, decree, injunction, stipulation or consent order of or with any court or other Governmental Authority.  Seller has not entered into any agreement to settle or compromise any proceeding pending or threatened against it which has involved any obligation other than the payment of money or for which Seller has any continuing obligation.

(b)           There are no claims, actions, suits, proceedings or investigations pending or, to Seller’s Knowledge, threatened by or against Seller with respect to this Agreement or the Related Agreements, or in connection with the Contemplated Transactions, and Seller has no reason to believe there is a basis for any such claim, action, suit, proceeding, or investigation.

4.23Brokers.  Except as set forth on Schedule 4.23 and subject to the provisions of Section 5.4, Seller has not employed or made use of the services of any broker or finder in connection with the Contemplated Transactions, and neither Buyer nor any Affiliate of Buyer has or shall have any liability or otherwise suffer or incur any Damages as a result of or in connection with any brokerage or finder’s fee or other commission of any Person retained by Seller in connection with any of the Contemplated Transactions.

4.24No Conflict of Interest.  Except as disclosed on Schedule 4.24, since January 1, 2004 neither the Stockholders nor any of their Affiliates have or claim to have any direct or indirect interest in any tangible or intangible property used in the Business, except as a holder of shares of capital stock in Seller.  Except as disclosed on Schedule 4.24, since January 1, 2004 neither the Stockholders nor any of their Affiliates (i) have any direct or indirect interest in, or any financial arrangement with, any other Person that has any Contract, arrangement, or does business, with Seller or (ii) otherwise have any claim or rights against Seller or the Acquired Assets.  Schedule 4.24 contains a complete and accurate description of all such Persons, interests, Contracts, arrangements, claims, rights and other matters.  Except as set forth in Schedule 4.24, neither the Stockholders nor any of their Affiliates are engaged in competition with Seller with respect to the Business.

4.25Major Customers and Suppliers.

(a)           Major Customers.  Schedule 4.25(a) contains a list of the ten (10) largest customers of Seller, including distributors, for each of 2005, 2006 and 2007 (determined on the basis of the total dollar amount of sales) showing the total dollar amount of net sales to each such

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customer during each such period.  Except as set forth in Schedule 4.25(a), to Seller’s Knowledge, none of the customers listed on Schedule 4.25(a) will cease to be a customer of the purchased Business after the Closing or will substantially reduce its purchases during the next twelve (12) months.

(b)           Major Suppliers.  Schedule 4.25(b) contains a list of the ten (10) largest suppliers to Seller for each of 2005, 2006 and 2007 (determined on the basis of the total dollar amount of purchases) showing the total dollar amount of purchases from each such supplier during each such period.  To Seller’s Knowledge, the suppliers listed on Schedule 4.25(b) will continue to supply goods to the Business after the Closing in substantially the same quantities and quality and at substantially the same prices as provided prior to Closing.

(c)           Dealers and Distributors.  Schedule 4.25(c) contains a list by product line of all sales representatives, dealers, distributors and franchisees of Seller showing the commission or other compensation arrangements between Seller and any such Person.  Seller has delivered or made available to Buyer on the Datasite true, correct and complete copies of all sales representative, dealer, distributor and franchise contracts and written policy statements relating to Persons listed in Schedule 4.25(c).

4.26Product Warranty and Product Liability.  Schedule 4.26 contains a true, correct and complete copy of Seller’s current standard warranty or warranties for sales of Products.  Schedule 4.26 contains a description of all product liability claims in excess of $50,000 and similar Litigation relating to Products manufactured or sold, or services rendered, which are presently pending against Seller or which, to the Knowledge of Seller, have been threatened in writing, or which have been commenced against Seller since January 1, 2005, in which a party thereto either requests injunctive relief or alleges damages in excess of $25,000 (whether or not covered by insurance).  To the Knowledge of Seller, there are no defects in design, construction or manufacture of Products which would materially adversely affect performance or create an unusual risk of injury to Persons or property.  Except as set forth on Schedule 4.26, none of the Products has been the subject of any replacement, field fix, retrofit, modification or recall campaign by Seller and, to the Knowledge of Seller, no facts or conditions exist which could reasonably be expected to result in such a recall campaign.  Seller has timely complied with all inspections required or contemplated under 16 C.F.R. §§ 1303 and 1508 (1999) and the American Society for Testing and Materials (ASTM) standards and specifications relating to child and consumer safety.  To the Knowledge of Seller, the Products have been designed, manufactured and tested so as to meet and comply with 16 C.F.R. §§ 1303 and 1508 (1999) and the American Society for Testing and Materials (ASTM) standards and specifications relating to child and consumer safety.  As used in this Agreement, the term “Products” means any and all products manufactured, distributed and sold by Seller to anyone other than Buyer, or by any predecessor of Seller under any brand name or mark under which products are or have been manufactured, distributed and sold by Seller.

4.27Budgets.  Schedule 4.27 sets forth (i) as of the date hereof the operating and capital expenditures budgets of Seller prepared in the ordinary course of business for the fiscal year ending December 31, 2007 and (ii) the total capital expenditures from January 1, 2008 through February 29, 2008.

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4.28         Financial Projections.  Seller has made available to Buyer on the Datasite certain financial projections with respect to the Business, which projections were prepared for internal use only.  Seller makes no representation or warranty regarding the accuracy of such projections or as to whether such projections will be achieved or otherwise, except that Seller represents and warrants that such projections were prepared in good faith and are based on assumptions believed by Seller to be reasonable.

4.29         Accuracy of Statements.  Neither this Agreement, nor any schedule or exhibit attached hereto, nor any certificate by or on behalf of Seller delivered in connection herewith or at Closing contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements by Seller contained herein or therein, in light of the circumstances under which they are made, not misleading.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller, as of the date of this Agreement and as of the Closing Date (as if such representations and warranties were remade on the Closing Date), as follows:

5.1           Due Organization.  Buyer is a corporation, duly formed, validly existing and in good standing under the laws of Delaware, with all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as they are now being conducted.

5.2           Due Authorization.  Buyer has full power and authority to enter into this Agreement and the Related Agreements to which it is a party and to consummate the Contemplated Transactions.  The execution, delivery and performance by Buyer of this Agreement and its Related Agreements have been duly and validly approved by the Board of Directors of Buyer, and no other actions or proceedings on the part of Buyer are necessary to authorize this Agreement, the Related Agreements and the Contemplated Transactions.  Buyer has duly and validly executed and delivered this Agreement and prior to or at the Closing will duly and validly execute and deliver the Related Agreements to which it is a party.  This Agreement constitutes a legal, valid and binding obligation of Buyer and upon the execution and delivery by Buyer of the Related Agreements to which it is a party, such Related Agreements will constitute legal, valid and binding obligations of Buyer, in each case, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors’ rights generally and by equitable limitations on the availability of specific remedies.

5.3           Consents and Approvals; No Conflicts, etc.

(a)          Except as set forth on Schedule 5.3, no consent, authorization or approval of, filing or registration with, or cooperation from, any Governmental Authority or any other Person not a party to this Agreement is necessary in connection with the execution, delivery and

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performance by Buyer of this Agreement and the Related Agreements and the consummation of the Contemplated Transactions.

(b)           Except as set forth on Schedule 5.3, the execution, delivery and performance by Buyer of this Agreement or the Related Agreements do not and will not (i) violate any Law applicable to Buyer or any of its properties or assets; (ii) violate or conflict with, result in a breach or termination of, constitute a default or give any third party any additional right (including a termination right) under, permit cancellation of, result in the creation of any Lien upon any of the assets or properties of Buyer under, or result in or constitute a circumstance which, with or without notice or lapse of time or both, would constitute any of the foregoing under, any Contract to which Buyer is a party or by which Buyer or any of its assets or properties are bound; (iii) permit the acceleration of the maturity of any indebtedness of Buyer or indebtedness secured by any of its assets or properties; or (iv) violate or conflict with any provision of Buyer’s Certificate of Incorporation or Bylaws.

5.4No Proceedings.  No action or proceeding by an Governmental Authority or other Person has been instituted or threatened against Buyer which would reasonably be expected to enjoin, restrain or prohibit, or result in substantial damages in respect of, any provision of this Agreement or the consummation of the Contemplated Transactions.

5.5Sufficient Funds.  Buyer has, on the date hereof and as of the Closing Date, the financial capability to purchase the Acquired Assets on the terms and subject to the conditions set forth in this Agreement.

5.6Brokers.  Buyer has not employed or made use of the services of any broker or finder in connection with the Contemplated Transactions, and Seller, Stockholders nor any Affiliate of Seller or Stockholders has or shall have any liability or otherwise suffer or incur any Damages as a result of or in connection with any brokerage or finder’s fee or other commission of any Person retained by Buyer in connection with any of the Contemplated Transactions.  Notwithstanding the foregoing, Buyer shall be fully responsible for any and all sums due to Century Park Capital Partners II, L.P. with respect to the Contemplated Transactions.

ARTICLE VI

COVENANTS

6.1Implementing Agreement.  Subject to the terms and conditions hereof, each party hereto shall use commercially reasonable efforts to facilitate the consummation of the Contemplated Transactions.  Without limiting the generality of the foregoing, Seller shall not encumber the Acquired Assets, shall not sell the Acquired Assets (except for sales of Inventories in the ordinary course) to any Person other than Buyer (or an Affiliate of Buyer) and shall not take any other action which would have the effect of preventing or disabling Seller’s performance of its obligations under this Agreement.

6.2Consents and Approvals.  Seller shall diligently pursue the Key Consents, certificates and other documents required in connection with the performance by them of this Agreement and the consummation of the Contemplated Transactions, including all such consents

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and approvals by each party to any of the Contracts referred to in Section 2.2; provided that no Contract will be made by Seller (or any representative of Seller) with any third party to obtain any such consent or approval except in accordance with a plan previously approved by Buyer in writing.  Seller and Buyer shall make all filings, applications, statements and reports to all Governmental Authorities and other Persons that are required to be made by them in connection with the foregoing prior to the Closing Date by, or on behalf of, Seller or any of its Affiliates pursuant to any applicable Law or Contract in connection with this Agreement, the Related Agreements and the Contemplated Transactions (including filings, if any, required under the HSR Act or other applicable merger control, antitrust or similar Laws) (collectively, the “Other Filings”).  Buyer and Seller will each promptly notify the other of the receipt of any comments on, or any request for amendments or supplements to, any Other Filings by any Governmental Authority or official, and Buyer and Seller will each supply the other with copies of all correspondence between Buyer or Seller, as the case may be, and any other appropriate governmental official with respect to any Other Filings.  Buyer and Seller hereby covenant and agree to use commercially reasonable efforts to secure termination of any waiting periods under the HSR Act or other applicable merger control, antitrust or similar Laws and obtain the approval of any Governmental Authority necessary to consummate the transactions contemplated hereby.  Except with respect to fees in connection with filings under the HSR Act, which shall be borne solely by Buyer, all transfer fees and expenses incurred in connection with this Section 6.2 (including the assignment fee payable under the Graco License Agreement) and the Taxes described in Section 6.11(b) shall be paid (a) one-half by Seller and (b) one-half by Buyer; provided, that in no event shall Buyer’s payment of such transfer fees and expenses and such Taxes exceed $100,000.

6.3Access to Information and Facilities.  From and after the date of this Agreement until the Closing Date, Seller shall (a) upon reasonable notice from Buyer to Seller, give Buyer and Buyer’s representatives reasonable access during or after normal business hours, at Seller’s election, to all of the facilities, properties, books, records and Contracts of Seller and (b) furnish or make available to Buyer and its representatives copies of any and all information concerning Seller which Buyer or its representatives reasonably request, including access to Seller’s accountants and to the work papers of such accountants, provided that nothing herein will obligate Seller to take any actions that would unreasonably interrupt the normal course of its business or to violate any Law or the terms of any Contract to which Seller is a party or to which any of its assets are subject.  Between the date of this Agreement and the Closing, Seller shall confer with Buyer concerning material operational matters related to the Business and shall report periodically to Buyer concerning the Business as reasonably requested by Buyer.

6.42007 EBITDA Benchmark; Preservation of Business.

(a)           On or before the Closing Date, Seller shall deliver to Buyer a certificate, together with evidence that supports such certificate, that the Business has achieved or exceeded the agreed EBITDA as of December 31, 2007 as set forth on Schedule 3.6.

(b)           From the date of this Agreement until the Closing Date, Seller shall, in all material respects, operate only in the ordinary course of business in a manner consistent with past practice and, to the extent consistent therewith, shall (i) preserve intact the present business organization and personnel of Seller, (ii) preserve the goodwill and advantageous relationships of

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Seller with customers, suppliers, independent contractors, employees and other Persons material to the operation of the Business, (iii) not permit any action or omission which would cause any of its representations or warranties contained herein to become inaccurate or any of its covenants to be breached or (iv) prevent the occurrence of any event or series of related events that cause or would reasonably be expected to cause a Material Adverse Effect.

(c)Without limiting the generality of the foregoing, prior to the Closing Seller shall not, in all material respects, without the prior written consent of Buyer:

(i)            sell, transfer, convey or otherwise dispose of, or encumber with any Lien, other than Permitted Liens, any Acquired Assets other than cash or property except sales of inventory in the ordinary course of business and consistent with past practice;

(ii)           make any changes in its accounting systems, policies, principles or practices;

(iii)          enter into, authorize or permit any transaction with the Stockholders or any of their Affiliates;

(iv)          authorize for issuance, issue, sell or deliver, or agree or commit to issue, sell or deliver, any shares of capital stock or any other securities of Seller, or amend any of the terms of any such capital stock or other securities;

(v)           make any borrowings or incur any debt, or assume, guarantee, endorse (except for the negotiation or collection of negotiable instruments in the ordinary course of business and consistent with past practice) or otherwise become liable (whether directly, contingently or otherwise) for any obligations of any other Person or make any payment or repayment in respect of any indebtedness (other than trade payables and accrued expenses incurred in the ordinary course of business and consistent with past practice);

(vi)          make any loans, advances or capital contributions to, or investments in, any other Person;

(vii)         enter into, adopt, amend or terminate any bonus, profit sharing, compensation, termination, stock option, stock appreciation right, restricted stock, performance unit, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan or fund for the benefit or welfare of any director, officer or employee, or increase the compensation or benefits of any director, officer or employee not required by an existing plan or arrangement; provided that the foregoing shall exclude increases in compensation and benefits in the ordinary course of business as long as such increases do not exceed five percent (5%) of all compensation and benefits paid, in the aggregate, to employees of Seller and the ADP Employees in 2007 (other than those ADP Employees listed on Schedule 6.4(c)(vii));

(viii)        acquire, lease, convey, or otherwise transfer or dispose of any assets (other than cash) having an individual book value in excess of $15,000 or make

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any other capital expenditures which individually or in the aggregate are in excess of $15,000;

(ix)           amend, modify, extend, renew or terminate any Personal Property Lease or Real Property Leases, nor enter into any new lease, sublease, license or other agreement for the use or occupancy of any real property, without the prior written consent of Buyer;

(x)            agree to any obligation in settlement or compromise of any suit or claim of liability that could be binding on Buyer;

(xi)           merge into or with or consolidate with any other Person;

(xii)          make any change to its organizational documents;

(xiii)         enter into any other Contract other than in the ordinary course of business and consistent with past practice;

(xiv)        adopt any collective bargaining agreement;

(xv)         waive, release or cancel any claims against third parties or debts owing to it, or any rights which have any value; or

(xvi)        agree, whether in writing or otherwise, to do any of the foregoing.

(d)Without limiting the generality of Section 6.4(a), until the Closing, Seller shall:

(i)            maintain its books, accounts and records in the usual, regular and ordinary manner, and on a basis consistent with the Financial Statements and past practices of Seller;

(ii)           continue to carry its existing insurance through the Closing Date, and shall not allow any breach, default, termination or cancellation of such insurance policies or agreements to occur or exist; and

(iii)          duly comply with all Laws applicable to the Business.

6.5Supplemental Disclosure Schedules.  Contemporaneously with the execution and delivery of this Agreement by the parties hereto, Seller is delivering to Buyer a document of even date herewith entitled Disclosure Schedules (as amended from time to time as provided herein, the “Disclosure Schedules”), which Disclosure Schedules, as provided in greater detail therein, contain the Schedules referred to throughout this Agreement.  Such Disclosure Schedules are hereby incorporated by reference into, and form an integral part of, this Agreement.  At any time and from time to time on or prior to the third (3rd) Business Day prior to the Closing Date, Seller may deliver to Buyer  modifications, changes and updates to the Disclosure Schedules (“Updates to Disclosure Schedules”) in order to disclose or take account of facts, matters or circumstances that arise or occur between the date of this Agreement and the

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Closing Date, which facts, matters or circumstance are required or permitted, by the provisions of Article IV or by other provisions hereof, to be disclosed in such Disclosure Schedules.  Such Updates to Disclosure Schedules shall not be deemed to be a breach of any representation, warranty or covenant made in this Agreement provided that (i) the information delivered in such Updates to Disclosure Schedules is limited to matters that first arise after the date of this Agreement, (ii) the delivery of such Update to Disclosure Schedules shall not prevent Buyer from exercising any termination right under this Agreement in accordance with Section 10.1(f), and (iii) any matter included in such Updates to Disclosure Schedules is not a result of any breach by Seller of any of its covenants under this Agreement, in which case, the Disclosure Schedules for purposes of this Agreement (and for no other purpose) shall be the Disclosure Schedules as amended by such Updates to Disclosure Schedules.  Each item included in any Update to Disclosure Schedules shall be written in specific terms, in a manner consistent with the Disclosure Schedules delivered to Buyer contemporaneously as of the date of this Agreement, and sufficient to put Buyer on notice of the information being disclosed.  Each item included in such Update to Disclosure Schedules shall identify the particular representation or warranty that must be qualified in light of the event or circumstance requiring disclosure, and in any event such disclosure shall modify the respective representations and warranties of Seller only to the extent necessary to make them true in light of the item being disclosed.  No item included in any such Update to Disclosure Schedules may contain a narrative statement that generally qualifies one or more of Seller’s representations or warranties with respect to information not specifically disclosed to Buyer in the Disclosure Schedules.

6.6           Negotiation With Others.  During the period between the date of this Agreement and the earlier to occur of the Closing or the termination of this Agreement pursuant to Section 10.1, neither Seller nor any of its Affiliates shall, or shall not permit any director, officer, employee, agent or other representative of any of such Persons to, directly or indirectly:  (a) solicit, initiate or engage in discussions or negotiations with any Person (other than Buyer or its Affiliates) or their respective directors, officers, employees, representatives or agents or take any other action to facilitate the efforts of any Person (other than Buyer or its Affiliates) relating to the possible acquisition of Seller or the Acquired Assets, whether by way of merger or consolidation, purchase of capital stock, purchase or lease of assets or otherwise, or of any portion of the capital stock or assets of Seller, other than as permitted under this Agreement (any such acquisition being referred to as an “Acquisition Transaction”); (b) provide information to any Person (other than to Buyer or its Affiliates) relating to a possible Acquisition Transaction; (c) enter into an agreement with any Person (other than Buyer or any of its Affiliates) relating to or providing for a possible Acquisition Transaction; or (d) consummate an Acquisition Transaction with any Person (other than Buyer or any of its Affiliates).

6.7           Interim Financial Statements.  Seller shall provide to Buyer as soon as practicable (but no more than twenty-one (21) days) after the end of each calendar month financial statements of Seller, consisting of a balance sheet as of the end of such month and an income statement and statement of cash flows for that month and for the portion of the year then ended.  Each set of interim financial statements, when delivered to Buyer, shall be accompanied by a certificate of the chief financial officer of Seller, certifying that such interim financial statements present fairly in all material respects the financial position, assets and liabilities of Seller as of the dates thereof and the revenues, expenses, results of operations and cash flows of Seller for the period covered thereby as of the dates and for the period covered thereby, ineach case in

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conformity with the cash basis of accounting applied consistently during such periods in accordance with the past accounting practices of Seller, subject to the lack of footnote disclosures.

6.8Cooperation.  The parties shall reasonably cooperate after Closing with each other with respect to matters for which Buyer or Seller is responsible hereunder.  Further, each party shall remit to the other any payments it shall receive belonging to the other promptly, and in any event not more than three Business Days after receipt.

6.9Compliance with Bulk Sales Laws.  Buyer hereby waives compliance by Seller with the provisions of Article 6 of the Uniform Commercial Code (“UCC Bulk Sales Law”) in each applicable jurisdiction and all other Law relating to bulk sales and/or the sale and purchase of the Acquired Assets, including any relevant state taxing authority laws with respect to bulk sales (“Tax Bulk Sales Law”).  Seller shall defend, indemnify and hold harmless Buyer, and shall reimburse Buyer, in accordance with Section 11.2(c) for, from and against any Damages incurred by Buyer to the extent arising out of or resulting from such waiver or any noncompliance by Seller with the UCC Bulk Sales Law or Tax Bulk Sales Law.

6.10Employees.

(a)           From and after the Closing Date: (i) Buyer shall assume any and all obligations arising under the PEO Services Agreement from and after the Closing Date, and (ii) Seller shall cause L&J to provide the services described in the Transitional Services Agreement, on the terms and conditions set forth therein in consideration for fees as set forth therein.

(b)           In the event that Buyer shall terminate the PEO Services Agreement prior to the expiration of the current term thereunder and offer employment, on an at-will basis, to the ADP Employees who, as of the date of this Agreement, are providing services to Seller (all such persons referred to herein as “Continuing Employees”), Buyer shall provide through December 31, 2008 health and other employee benefits to the Continuing Employees, of which the average monthly cost per employee shall be no less than the average monthly cost per employee incurred by ADP to provide health and other employees benefits to such Continuing Employees.  Notwithstanding anything to the contrary herein, (i) nothing in this Agreement shall create any obligation on the part of Buyer to continue the employment of any individual for any definite period following the Closing Date, and (ii) nothing in this Agreement shall preclude Buyer from altering, amending, or terminating any of its employee benefit plans, or the participation of any of its employees in such plans, at any time.

(c)           Seller shall be responsible for and shall pay all short-term disability and long-term disability benefits with respect to claims by any ADP Employee arising from events occurring on or prior to the Closing Date.  Subject to Buyer’s relevant policies and procedures, Buyer shall be responsible for and will pay all short-term disability and long-term disability benefits to which any ADP Employee or Continuing Employee, as the case may be, is entitled and that arise from events occurring after the Closing Date through the termination of the PEO Services Agreement.  Seller will be responsible for all workers’ compensation benefits with respect to injuries occurring to any ADP Employee prior to the Closing Date.  Buyer will be responsible for all workers’ compensation benefits with respect to injuries occurring to any ADP

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Employee or Continuing Employee, as the case may be, from and after the Closing Date through the termination of the PEO Services Agreement.

(d)           In respect of Continuing Employees, for purposes of determining eligibility and vesting (but not benefit accruals) under Buyer’s employee benefit plans, including, but not limited to, Buyer’s 401(k) plan, retirement plan, group health plan, group life insurance plan, vacation, sick pay and severance policies, such policies shall recognize employment of the Continuing Employee that was recognized by ADP as employment with Buyer.

(e)           Seller shall terminate the participation by the Continuing Employees in all of its Benefit Plans for periods from and after the Closing Date.

6.11Tax Indemnity.

(a)           Seller and the Stockholders shall, jointly and severally, be liable for and pay, and pursuant to Article XI shall indemnify each Indemnified Person against, all Taxes (including, without limitation, any amounts owed by an Indemnified Person relating to Taxes pursuant to a contract or otherwise) applicable to the Business, the Acquired Assets and the Assumed Obligations, in each case attributable to taxable years or periods ending on or prior to the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date; provided, however, that neither Seller nor the Stockholders shall be liable for or pay, and shall not indemnify any Indemnified Person from and against, any Taxes for which Buyer is liable under this Agreement; including without limitation, pursuant to the following sentence or Section 3.3.  Buyer shall be liable for and pay, and pursuant to Article XI shall indemnify Seller and the Stockholders, and their respective Affiliates, from and against, all Taxes applicable to the Business, the Acquired Assets and the Assumed Obligations that are attributable to taxable years or periods beginning after the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period beginning after the Closing Date; provided, however, that Buyer shall not be liable for or pay, and shall not indemnify Seller from and against, any Taxes for which Seller is liable under this Agreement; including without limitation, pursuant to the preceding sentence or Section 3.3.  For purposes of this Section 6.11(a), any Straddle Period shall be treated on a “closing of the books” basis as two partial periods, one ending at the close of the Closing Date and the other beginning on the day after the Closing Date, except that Taxes (such as property Taxes) imposed on a periodic basis shall be allocated on a daily basis.

(b)           Notwithstanding Section 6.11(a), but subject to Buyer’s contribution obligations set forth in Section 6.2, any sales Tax, use Tax, real property transfer or gains Tax, asset transfer Tax, documentary stamp Tax or similar Tax and all conveyance fees, recording charges and other fees and charges (including any penalties and interest) attributable to the sale or transfer of the Business, the Acquired Assets or the Assumed Obligations incurred in connection with the consummation of the Acquisition Transaction contemplated by this Agreement shall be borne solely by Seller.  Seller and the Stockholders shall, at their own expense, file all necessary Tax Returns and other documentation with respect to all such Taxes, fees and charges, and, if required by applicable law, Buyer shall, and shall cause its Affiliates to, join in the execution of any such Tax Returns and other documentation.  Buyer agrees to timely

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sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns with respect to, such Taxes.

(c)           After the Closing Date, Seller and Buyer shall (and cause their respective Affiliates to):  (i) assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing; (ii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Business or the Acquired Assets; (iii) make available to the other and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Business or the Acquired Assets; (iv) provide timely notice to the other in writing of any pending or threatened Tax audits or assessments relating to Taxes of the Business or the Acquired Assets for taxable periods for which the other may have a liability under this Section 6.11; and (v) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period.

6.12Access to Personnel Records.  For a period of three (3) years (or if Seller is required to have such access for a longer period by applicable law, such longer period) from and after the Closing Date, Buyer shall (a) upon reasonable notice from Seller to Buyer, give Seller reasonable access during normal business hours to Seller’s personnel and labor relations records and Seller’s employee benefit and compensation plans that existed prior to the Closing Date.

6.13Change of Seller’s Name.  Seller shall, and shall cause its Affiliates to, take such steps as may be required or appropriate so that their corporate names will be changed within five (5) days of the Closing Date to eliminate therefrom the word “LaJobi” or any variation thereof.  At Seller’s expense, Seller shall execute such consents as may be appropriate so that Buyer or any Affiliate of Buyer may use Seller’s current names or any variation thereof in any jurisdiction in which Seller have used such name.

6.14License of Intellectual Property.  Prior to the Measurement Date, Buyer shall not license or otherwise transfer any Intellectual Property to any Person, including, without limitation, any Affiliate of Buyer, except pursuant to a license agreement providing for a customary royalty (not to exceed five percent (5%)) to Buyer therefor.

6.15LBI.  The Stockholders own one hundred percent (100%) of LBI’s business (the “LBI Business”), which is in the same or a similar industry as, and therefore may compete with, Seller’s Business.  In addition, LBI has certain existing arrangements with Seller in respect of certain fundamental business services provided to LBI, including without limitation, lease of real property, employee services, equipment, insurance, administrative services (including management and accounting services), warehouse space and utilities, all as more fully described on Schedule 6.15 (collectively, the “Shared Services Arrangements”).  As such, by no later than December 31, 2008, LB agrees to have (a) sold or transferred to JB, or otherwise disposed of or completed winding up and dissolving, the LBI Business and (b) terminated all Shared Services Arrangements.  Buyer agrees that, during the period from the Closing Date to December 31, 2008, it shall not make any changes in the rates charged to LBI for the Shared Services Arrangements from the applicable rates charged for such Shared Services Arrangements during the quarter ending on December 31, 2007.

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6.16Termination of LaJobi 401k Plan. On or prior to the Closing Date, LaJobi shall have commenced termination of its 401k Plan, which such plan shall be terminated, and all proceeds thereunder distributed in accordance with all Laws, no later than six (6) months of the Closing Date.

6.17Product Liability Insurance. From and after the Closing Date, Buyer and Seller agree to abide by the covenants set forth in Appendix A with respect to matters relating to product liability insurance.

ARTICLE VII

CONDITIONS PRECEDENT
TO OBLIGATIONS OF BUYER

The obligations of Buyer under ARTICLE II and ARTICLE III of this Agreement are subject to the satisfaction or waiver by Buyer of the following conditions precedent on or before the Closing Date:

7.1Accuracy of Representations and Warranties. The representations and warranties of Seller contained herein and in the Related Agreements not qualified by materiality shall have been true, accurate and correct in all material respects, and if so qualified by materiality (or references to Material Adverse Effect), shall have been true, accurate and correct in all respects, in each case on and as of (i) the date of this Agreement and (ii) the Closing Date as if such representations and warranties were remade by Seller on and as of the Closing Date, in each case without giving effect to any Updates to Disclosure Schedules delivered to Buyer by Seller under Section 6.5.

7.2Compliance with Agreements and Covenants. Seller and the Stockholders shall have:  (i) performed and complied with their covenants set forth in Sections 2.1, 2.2, 2.3, 3.5, 6.1, 6.2, 6.4(a), 6.4(b), 6.4(c), 6.5, 6.6 and 6.7 of this Agreement to be performed and complied with by them on or prior to the Closing Date and (ii) in all material respects, performed and complied with all of their other covenants, obligations and agreements contained in this Agreement and in the Related Agreements to be performed and complied with by them on or prior to the Closing Date.

7.3Documents. Buyer shall have received all of the agreements, documents and items specified in Section 9.2.

7.4Actions or Proceedings. No action or proceeding by any Governmental Authority or Person (other than an action or proceeding commenced by Buyer or Parent, or any of their respective Affiliates) shall have been instituted which seeks to enjoin, restrain or prohibit the Contemplated Transactions contemplated by this Agreement.

7.5Consents and Approvals. Buyer shall have received written evidence satisfactory to Buyer that those Consents set forth on Schedule 7.5 (“Key Consents”) have been obtained.

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For the avoidance of doubt, it shall not be a condition precedent to the obligations of Buyer under this Agreement on the Closing Date that Buyer or Parent, or any of their respective Affiliates, obtain financing of any kind or nature.

ARTICLE VIII

CONDITIONS PRECEDENT
TO OBLIGATIONS OF SELLER

The obligations of Seller under ARTICLE II and ARTICLE III of this Agreement are subject to the satisfaction or waiver by Seller of the following conditions precedent on or before the Closing Date:

8.1Accuracy of Representations and Warranties. The representations and warranties of Buyer contained herein and in the Related Agreements not qualified by materiality shall have been true, accurate and correct in all material respects, and if so qualified by materiality, shall have been true, accurate and correct in all respects, in each case on and as of (i) the date of this Agreement and (ii) the Closing Date as if such representations and warranties were remade by Buyer on and as of the Closing Date.

8.2Compliance with Agreements and Covenants. Buyer shall have:  (i) performed and complied with its covenants set forth in Sections 2.1, 2.2, 2.4, 3.1, 3.5, 6.1, 6.2, 6.5, 6.9 and 6.10 of this Agreement to be performed and complied with by it on or prior to the Closing Date and (ii) in all material respects, performed and complied with all of its other covenants, obligations and agreements contained in this Agreement and in the Related Agreements to be performed and complied with by it on or prior to the Closing Date.

8.3Documents. Seller shall have received all of the agreements, documents and items specified in Section 9.3.

8.4Actions or Proceedings. No action or proceeding by any Governmental Authority or other Person (other than an action or proceeding commenced by Seller or the Stockholders, or any of their respective Affiliates) shall have been instituted or threatened against Seller (a) which, if successful, could have a Material Adverse Effect; or (b) which seeks to enjoin, restrain or prohibit the Contemplated Transactions; or (c) which is reasonably likely to result in Seller becoming liable for substantial damages in respect of any provision of this Agreement, the Related Agreements, or the consummation of the Contemplated Transactions.

ARTICLE IX

CLOSING

9.1Closing. The Closing shall take place at the offices of Sidley Austin LLP, at 787 Seventh Avenue, New York, New York 10019, (a) on the later of (i) April 2, 2008 and (ii) the date that is two (2) Business Days after the satisfaction or waiver of the conditions precedent set forth in ARTICLE VII and ARTICLE VIII, or (b) on such date to which the parties hereto shall agree in writing. The Closing, and all transactions to occur at the Closing, shall be deemed to

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have occurred at, and shall be effective as of, 12:01 A.M. (Eastern Standard Time) on the Closing Date.

9.2Deliveries by Seller and the Stockholders. At the Closing, in addition to any other documents or agreements required under this Agreement, Seller and the Stockholders shall deliver to Buyer the following:

(a)Bill of Sale in the form set forth in Exhibit A (the “Bill of Sale”), duly executed by Seller;

(b)Assignment and Assumption Agreements in the form set forth in Exhibit B (the “Assignment and Assumption Agreements”), duly executed by Seller;

(c)An Escrow Agreement in the form set forth in Exhibit C (the “Escrow Agreement”), duly executed by LaJobi;

(d)Non-Compete and Non-Solicitation Agreements in the forms set forth in Exhibit D-1 and Exhibit D-2 (the “Non-Compete and Non-Solicitation Agreements”), duly executed by Seller and the Stockholders, as applicable;

(e)Evidence, in form and substance reasonably satisfactory to Buyer, that all Key Consents have been obtained;

(f)A written statement from each Person holding a Lien, other than a Permitted Lien, upon any of the Acquired Assets, confirming the repayment of the indebtedness secured thereby and the release as of the Closing Date of (i) such Lien and (ii) all obligations under any and all Contracts relating thereto;

(g)The certificate required under Section 6.4(a);

(h)Subject to Section 6.2, the originals and/or duly executed assignments (in form suitable for filing or recording with the appropriate Governmental Authority, if applicable) of all of the Governmental Authorizations;

(i)Other instruments of transfer reasonably required by Buyer to evidence the transfer of the Acquired Assets to Buyer, including assignments with respect to any Intellectual Property registered, recorded or filed with any Governmental Authority, in form suitable for registration, recordation or filing with such Governmental Authority, in each case duly executed by Seller;

(j)A certificate dated the Closing Date of an executive officer of Seller certifying as to the compliance by Seller with Section 7.1 and Section 7.2;

(k)A certificate of the secretary of Seller certifying resolutions of the Board of Directors, if applicable, of Seller and of the Stockholders approving and authorizing the execution, delivery and performance of this Agreement and its Related Agreements to which Seller is a party and the consummation of the Contemplated Transactions (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of Seller);

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(l)The certificate of incorporation or similar instruments of Seller certified by the Secretary of State of the state of Seller’s incorporation, and the Bylaws of Seller, certified by the secretary of Seller;

(m)A Certificate of Good Standing for Seller from the Secretary of State of the State of New Jersey;

(n)The Employment Agreement, duly executed by LB;

(o)An opinion, dated the Closing Date, of Gibbons, P.C., counsel for Seller and the Stockholders, in the form set forth in Exhibit E; and

(p)The Transitional Services Agreement between L&J and Buyer, duly executed by L&J.

9.3Deliveries by Buyer. At the Closing, in addition to any other documents or agreements required under this Agreement, Buyer shall deliver to Seller the following:

(a)The Closing Date Cash Payment, payable as provided in Section 3.1(b);

(b)The Assignment and Assumption Agreements, duly executed by Buyer;

(c)The Escrow Agreement, duly executed by Buyer;

(d)A certificate dated the Closing Date of an executive officer of Buyer certifying as to the compliance by Buyer with Section 8.1 and Section 8.2;

(e)A closing statement setting forth the calculation of the net amount of the prorations made on the Closing Date under Section 3.3 and agreed to by Buyer and Seller, duly executed by Buyer;

(f)A certificate of Buyer’s secretary certifying resolutions of the Board of Directors of Buyer approving and authorizing the execution, delivery and performance of this Agreement and the Related Agreements to which it is a party and its obligations under the Contemplated Transactions (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of Buyer);

(g)An opinion, dated the Closing Date, of Sidley Austin LLP, counsel for Buyer, in the form set forth in Exhibit F;

(h)The certificate of incorporation or similar instruments of Buyer certified by the Secretary of State of Delaware, and the Bylaws or similar instruments of Buyer, certified by the secretary of Buyer;

(i)A Certificate of Good Standing for Buyer from the Secretary of State of the State of Delaware;

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(j)The Transitional Services Agreement between L&J and Buyer, duly executed by Buyer; and

(k)The Employment Agreement, duly executed by Buyer.

ARTICLE X

TERMINATION

10.1Termination. This Agreement may be terminated at any time on or prior to the Closing Date:

(a)with the mutual written consent of Seller and Buyer;

(b)by Seller or Buyer, if the Closing shall not have taken place on or before the Termination Date;

(c)by Buyer if any of the conditions precedent to obligation of Buyer under ARTICLE VII hereof shall not have been satisfied by the Termination Date;

(d)by Seller if any of the conditions precedent to obligations of Seller under ARTICLE VIII hereof shall not have been satisfied by the Termination Date; or

(e)by Buyer, if Seller delivers Updates to Disclosure Schedules to Buyer in accordance with Section 6.5 and Buyer deems, in good faith, the information being disclosed on such Update to Disclosure Schedules to be material and adverse to the Business as a whole;

provided, however, that neither Buyer nor Seller may terminate this Agreement pursuant to clauses (a) through (e) above if the basis for termination results from a breach or failure to perform by such party of any of its agreements, covenants or obligations contained in this Agreement.

In the event of any termination pursuant to this Section 10.1 (other than pursuant to clause (a)), written notice setting forth the reasons thereof shall promptly be given by the terminating party to the other party. Upon a termination pursuant to Section 10.1(e), Seller shall reimburse Buyer for any and all reasonable costs and expenses (including all reasonable attorneys’ fees and expenses, but excluding any incidental or consequential damages) incurred by Buyer (or any of its Affiliates) through the date of such termination, relating to or in connection with this Agreement, the Related Agreements or the Contemplated Transactions, which shall be Buyer’s sole remedy arising out of this Agreement in the event of a termination pursuant to Section 10.1(e).

10.2Effect of Termination. If this Agreement is terminated pursuant to Section 10.1, all obligations of the parties hereunder shall terminate, except for the obligations set forth in Section 12.1 (Expenses) and Section 12.7 (Publicity), which shall survive the termination of this Agreement, and except that no such termination shall relieve any party from liability for any prior breach of this Agreement.

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ARTICLE XI

INDEMNIFICATION

11.1Survival. All representations, warranties, covenants and obligations in this Agreement, the Schedules, the supplements, if any, to the Schedules, and the certificate delivered pursuant Section 9.2(j) and any other certificate or document delivered pursuant to or in contemplation of this Agreement shall survive the Closing for a period of eighteen (18) months, except that (i) the representations and warranties in Section 4.19 (Taxes) and Section 4.21 (Environmental Matters) shall survive until the termination of the applicable statue of limitations and (ii) the representations and warranties in Section 4.2 (Due Authorization) and Section 4.7 (Title to Properties) shall survive forever. No party may seek any indemnification under this Agreement for any breach of any representation, warranty, covenant or obligation if such party received written notification thereof pursuant to Section 6.5 or otherwise had actual knowledge, on or prior to the Closing Date, that the other party had breached such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Damages or other remedy based on such representations, warranties, covenants and obligations, unless the related written waiver expressly so provides.

11.2Indemnification and Payment of Damages by Seller and the Stockholders. Seller and the Stockholders shall, jointly and severally, indemnify and hold harmless Buyer, its respective Affiliates and their respective officers, directors and other representatives (collectively, the “Indemnified Persons”) for, and will pay to the Indemnified Persons the amount of, any Damages arising, directly or indirectly, from or in connection with:

(a)any breach of or any inaccuracy in any representation or warranty made by Seller or any Stockholder in this Agreement or any Related Agreement or any document delivered by Seller or any Stockholder at the Closing; provided that for purposes of determining whether Seller or any Stockholder has breached any representation or warranty in this Agreement, such representations and warranties shall be deemed to have been made on the date hereof and on the Closing Date as if such representations and warranties were remade by Seller and the Stockholders on and as of the Closing Date, in each case, after giving effect to any modifications, changes or Updates to Disclosure Schedules delivered to Buyer by Seller under Section 6.5;

(b)any breach of or failure by Seller or any Stockholder to perform any of their respective covenants or obligations set out in this Agreement or any Related Agreement or any document delivered by Seller or any Stockholder at the Closing;

(c)Buyer’s waiver of Seller’s compliance with the UCC Bulk Sales Law or Tax Bulk Sales Law as described in Section 6.9 (without regards to the Basket, Cap, or De Minimis Claim limitations set forth in Section 11.6);

(d)any Tax matters described in Section 6.11 (without regards to the Basket, Cap, or De Minimis Claim limitations set forth in Section 11.6); and

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(e)any of the specific liabilities and obligations described in Schedule 11.2 (the “Specified Liabilities and Obligations”) (without regards to the Basket, Cap, or De Minimis Claim limitations set forth in Section 11.6).

11.3Indemnification and Payment of Damages by Buyer. Buyer shall indemnify and hold harmless Seller, and will pay to Seller the amount of any Damages arising, directly or indirectly, from or in connection with:

(a)any breach of or any inaccuracy in any representation or warranty made by Buyer in this Agreement;

(b)any breach of or failure by Buyer to perform any of its covenants or obligations set out in this Agreement;

(c)any Assumed Obligation;

(d)any liabilities or obligations under the PEO Services Agreement or the Continuing Employees, in each case, from and after the Closing Date; or

(e)any action of Buyer after the Closing Date which relates to the Business.

11.4Procedure for Indemnification – Third Party Claims.

(a)Promptly after receipt by an indemnified party under Section 11.2 or Section 11.3 of written notice of the commencement of any Action against it, such indemnified party shall, if a claim is to be made against an indemnifying party under such section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except to the extent that the defense of such action is materially prejudiced by the indemnified party’s failure to give such notice.

(b)If any Action referred to in Section 11.4(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Action, the indemnifying party will, unless the claim involves Taxes, be entitled to participate in such Action and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Action and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Action and provide indemnification with respect to such Action), to assume the defense of such Action with counsel of its choosing who is reasonably satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Action, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Article XI for any fees of other counsel or any other expenses with respect to the defense of such Action, in each case subsequently incurred by the indemnified party in connection with the defense of such Action, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Action, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Action are within the scope of and subject to indemnification under this Article XI; (ii) no compromise or settlement of such claims

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may be effected by the indemnifying party without the indemnified party’s consent unless (A) there is no finding or admission of any violation of Law or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (iii) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an indemnifying party of the commencement of any Action and the indemnifying party does not, within thirty (30) days after the indemnified party’s notice is given, give notice to the indemnified party of its election to assume the defense of such Action and the name of its chosen counsel, the indemnifying party will be bound by any determination made in such Action or any compromise or settlement effected by the indemnified party.

(c)Notwithstanding the foregoing, if any party entitled to indemnification hereunder determines in good faith that there is a reasonable probability that an Action may adversely affect it or its Affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the right to defend, compromise, or settle such Action, but the indemnifying party will not be bound by any determination of a Action so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld, delayed or conditioned).

11.5Procedure for Indemnification – Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought.

11.6Indemnity Basket and Cap; De Minimis; Limitations.

(a)Subject to Subsection 11.6(b) hereof, neither Seller nor the Stockholders shall be liable to the Indemnified Persons for any Damages arising under Section 11.2 unless the aggregate amount of all Damages incurred by the Indemnified Persons exceeds Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate (the “Basket”), in which case Seller and the Stockholders shall be liable for all such Damages in excess of the Basket; provided, however, that neither Seller nor the Stockholders, nor such parties collectively, shall be liable to the Indemnified Persons for any Damages arising under Section 11.2 in excess of Ten Million Dollars ($10,000,000) in the aggregate (the “Cap”).

(b)Neither Seller nor the Stockholders shall be liable to the Indemnified Persons for any Damages arising under Section 11.2 relating to an individual claim resulting in Damages in the amount of Fifteen Thousand Dollars ($15,000) or less (a “De Minimis Claim”), regardless of whether or not aggregate Damages have exceeded the Basket; nor shall the amount of any such De Minimis Claims be taken into account in determining whether the Basket has been reached.

(c)Notwithstanding Sections 11.6(a) or 11.6(b) above, none of the Basket, the Cap or the De Minimis Claim limitations shall apply to any Damages arising under or in connection with Sections 11.2(c), 11.2(d) or 11.2(e), or for breach of Section 6.11, or for failure

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to close the Contemplated Transactions, or for any breach of or any inaccuracy in any representation or warranty made by Seller or any Stockholder in Sections 4.2 and 4.7.

(d)Buyer acknowledges and agrees that Seller shall not have any liability under any provisions of this Agreement for any Damages to the extent such Damages arise by virtue of action taken by Buyer after the Closing Date. Buyer shall take, and cause its Affiliates to take, commercially reasonable steps to mitigate any Damages upon becoming aware of any event which would reasonably be expected to, or does, give rise to any such Damages, including incurring costs only to the minimum extent necessary to remedy the breach which gives rise to the Damages, provided, however, that any failure to comply with the foregoing shall not affect the Indemnified Person’s right to indemnification hereunder, but rather the amount of any Damages for which such Indemnified Person may recover indemnification under this ARTICLE XI or Section 6.11, shall be reduced by the amount of such Damages which could reasonably been avoided had such Indemnified Person mitigated Damages as required by this Section 11.6(d). Further, the amount of Damages shall be reduced by the amount of any recovery which the Indemnified Person actually receives under any insurance policy, or any other reimbursement of such amount that is actually received, from third parties. An Indemnified Person shall use commercially reasonable efforts to pursue, and to cause its Affiliates to pursue, to the extent, in its reasonable judgment, such Indemnified Person believes that such action will be economically justified, all insurance claims to which may be entitled in connection with any Damages it incurs, and each of Buyer and Seller, with respect to any indemnification claim, shall provide reasonable cooperation, at no out-of-pocket cost to it, to the other party in pursuing insurance claims with respect to any Damages or any indemnification obligations owed by any third party with respect to Damages.

11.7Right to Offset. A party entitled to indemnification hereunder may offset such amount against any amount it may owe to the indemnifying party. In the event there is a dispute as to the amount of an alleged offsetting liability, the indemnified party shall be entitled to offset the undisputed amount against any other payment due to the other party, pending resolution of the balance of the claim.

11.8Escrow.

(a)As a source of payment of indemnification obligations, and as security for the indemnity rights of the Indemnified Persons provided for in Section 11.2, the Escrow Funds will be deposited in the Escrow Account, as contemplated by Section 3.1(b), with the Escrow Agent and administered in accordance with the terms of the Escrow Agreement.

(b)Upon compliance with, and subject to the terms of, this ARTICLE XI and the Escrow Agreement, each Indemnified Person shall be entitled to payment from the Escrow Amount for all Damages incurred by it, which are indemnifiable under Section 11.2 and payable from the Escrow Funds under Section 11.8(c).

(c)The amount of indemnification to which an Indemnified Person shall be entitled under this ARTICLE XI shall be enforceable as follows:

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(i)in respect of claims for Damages arising under or in connection with (a) Sections 11.2(c), 11.2(d) or 11.2(e), (b) any breach of Section 6.11, (c) any failure to close the Contemplated Transactions, or (d) any breach of or any inaccuracy in any representation or warranty made by Seller or any Stockholder in Sections 4.2 and 4.7, subject to Section 11.6, against either the Escrow Amount or Seller, or both, at Buyer’s sole and absolute discretion; and

(ii)in the case of all other indemnification claims pursuant to Section 11.2, subject to Section 11.6, first against the Escrow Amount, and second, if, and only if and when such Escrow Amount has been exhausted, against Seller, in an amount equal to the amount of the Damages in excess of the Escrow Amount.

11.9Sole Remedy. Subject to the additional remedies specified in Section 10.1 (upon a termination pursuant to Section 10.1(e)) and Section 12.13, the sole remedy of Buyer and Seller for any and all Damages with respect to the Contemplated Transactions (except in the case of fraud) shall be the indemnity set forth in this ARTICLE XI and neither Buyer nor Seller nor any Affiliate thereof shall have any other entitlement, remedy or recourse, whether in contract, tort or otherwise, against the other parties with respect to the Contemplated Transactions, all of such remedies, entitlements and  recourse being expressly waived by the parties hereto to the fullest extent permitted by Law.

11.10No Duplicate Recovery. Notwithstanding any other provision of this Agreement to the contrary, in no event shall the indemnified parties under this ARTICLE XI be entitled to recover more than once with respect to any claims or Damages or any other item that gives rise to any right of indemnification, recovery or adjustment to the Purchase Price, and there shall be no duplicate payment, reimbursement, indemnification, adjustment to the Purchase Price or other form of recovery in respect of any such item.

11.11Purchase Price Adjustments. To the extent permitted by Law, any amounts payable under Section 11.2 or Section 11.3 shall be treated by Buyer and Seller as an adjustment to the Purchase Price.

ARTICLE XII

MISCELLANEOUS

12.1Expenses. Except as otherwise provided in this Agreement, (a) any and all Seller Transaction Expenses shall be borne solely by Seller and shall not be assumed by Buyer at Closing, and (b) any costs or expenses incurred by Buyer in connection with this Agreement or with respect to the Contemplated Transactions, including any and all fees payable to any adviser or counsel of Buyer, shall be borne solely by Buyer.

12.2Amendment. This Agreement may be amended, modified or supplemented solely by an instrument in writing identified as an amendment or supplement and signed by all parties hereto.

12.3Notices. Any notice, request, instruction or other document to be given hereunder by a party hereto shall be in writing and shall be deemed to have been given (a) when received if

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given in person or by courier or a courier service, (b) on the first Business Day following date of transmission if sent by telex, facsimile or other wire transmission or (c) five (5) Business Days after being deposited in the mail, certified or registered, postage prepaid and addresses as set forth on Schedule 12.3 or to such other address as a party hereto may designate for itself by notice given as herein provided.

12.4Waivers. The rights and remedies of the parties to this Agreement are cumulative and shall not preclude the assertion or exercise of any other rights or remedies available by law, in equity or otherwise. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

12.5Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no assignment of any rights or obligations shall be made by any party hereto without the express written consent of each other party hereto. Notwithstanding the foregoing sentence, Buyer may at any time effective on or after the Closing Date assign all of its rights hereunder to any lender (or any agent for lenders) providing financing to Buyer for collateral security purposes.

12.6No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and no provision of this Agreement shall be deemed to confer upon third parties any remedy, claim, liability, reimbursement, cause of action or other right.

12.7Publicity. Prior to the Closing, no public announcement or other publicity regarding the existence of this Agreement or its contents or the Contemplated Transactions shall be made by the parties hereto or their respective representatives or Affiliates, without the prior written agreement of Buyer and Seller; provided, however, that Parent shall be permitted (i) to file a copy of this Agreement (excluding any and all schedules, appendices and exhibits thereto) as an exhibit to its form 10-K for calendar year 2007 and a form 8-K so long as the disclosure of the contents of the Contemplated Transactions in each of such forms 10-K and 8-K is in a form mutually agreed upon by Buyer and Seller prior to filing with the Securities and Exchange Commission; and (ii) to issue a press release in a form mutually agreed upon by Buyer and Seller prior to its issuance. Each party shall act promptly and in good faith such as to enable Parent to file such Form 10-K or Form 8-K or issue such press release in a timely manner as required by the federal securities laws. On and after the Closing Date, Seller and Buyer agree to hold confidential the terms and provisions of this Agreement and the terms of the Contemplated Transactions. Subject to the foregoing, nothing in this Section 12.7 shall prevent either party from (a) making any public announcement or disclosure required by Law, court process or by

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national securities exchange rule, (b) discussing this Agreement or its contents or the Contemplated Transactions with those Persons whose approval, agreement or opinion, as the case may be, is required for consummation of such particular transaction or transactions, or (c) enforcing its rights hereunder, in each case, whether prior to, or on or after, the Closing.

12.8Further Assurances. Upon the reasonable request of Buyer, Seller will on and after the Closing Date execute and deliver to Buyer such other documents, releases, assignments and other instruments as may be reasonably required to effectuate completely the transfer and assignment to Buyer of, and to vest fully in Buyer title to, each of the Acquired Assets, and to otherwise carry out the purposes of this Agreement.

12.9Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

12.10Entire Understanding. This Agreement and the Related Agreements set forth the entire agreement and understanding of the parties hereto in respect to the Contemplated Transactions and supersede any and all prior agreements, arrangements and understandings among the parties relating to the subject matter hereof, including the letter of intent between Century Park Capital Partners II, L.P., which has assigned its interest in such letter to Buyer, and the Stockholders dated November 5, 2007.

12.11Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New Jersey, without giving effect to the principles of conflicts of law thereof.

12.12Dispute Resolution. Except as otherwise provided in Section 12.13:

(a)The parties to this Agreement will make a good faith effort to informally mediate any dispute arising under this Agreement by means of negotiations between their authorized representatives, including the retention of a third party mediator if mutually agreed to by the parties. Each party shall pay one-half of the expenses, if any, of mediation fees and costs.

(b)Any dispute arising under this Agreement not resolved by informal mediation shall be submitted to binding, non-appealable arbitration, before an arbitrator appointed in accordance with the procedures of JAMS. Such arbitration shall be held in Newark, New Jersey. All of the arbitration rules of JAMS shall apply to such proceeding, except that the arbitrator shall limit discovery and other pre-hearing procedures to the maximum extent deemed appropriate so that the hearing can be held expeditiously, and judgment shall be rendered within thirty (30) days after the hearing is completed. The arbitrator’s award shall be in writing and need not have any written opinion or other written support for the award. The prevailing party, as determined by the arbitrator, shall be entitled to recover the costs incurred in the arbitration, including all reasonable legal fees and expenses, and all reasonable costs of experts and other consultants retained in connection with the proceeding. Pending such award, each party shall pay one-half of the arbitration fees and costs.

(c)Nothing in this Section 12.12 shall be deemed to limit or restrict the right of any party to obtain injunctive relief from any court of the United States or any state or jurisdiction

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thereof having jurisdiction over the parties or the matter, or prevent any party from enforcing any arbitration award or judgment in any such court.

12.13Specific Performance. Each party acknowledges and agrees that the other party would be damaged irreparably in the event that, prior to or simultaneously with Closing, any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each party agrees that the other party may be entitled to an injunction or injunctions or other equitable relief to prevent breaches of the provisions of this Agreement that are to be performed prior to or simultaneously with Closing and to enforce specifically this Agreement and the terms and provisions hereof that are to be performed prior to or simultaneously with Closing in any action instituted in any court of the United States or any state or jurisdiction thereof having jurisdiction over the parties or the matter.

12.14Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

12.15Facsimile Signatures. Any signature page delivered pursuant to this Agreement or any Related Agreement via facsimile shall be binding to the same extent as an original signature. Any party who delivers such a signature page agrees to later deliver an original counterpart to any party that requests it.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.

LAJOBI, INC.
By:	/s/ Charles Ginn
Name:	Charles Ginn,
Title:	Chief Financial Officer and Secretary

LAJOBI INDUSTRIES, INC.
By:	/s/ Lawrence Bivona
Name:	Lawrence Bivona,
Title:	President

LAWRENCE BIVONA

JOSEPH BIVONA

EX-2.4

EXHIBIT 2.4

NOTE:  The representations and warranties contained in the following agreement have been made solely for the benefit of the parties thereto and should not be relied on by any other person. In addition, such representations and warranties: (i) have been qualified by disclosure schedules, (ii) are subject to the materiality standards set forth herein, which may differ from what may be considered to be material by investors, and (iii) were made only as of the date of the agreement or such other date as specified therein. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts.  Moreover, information concerning the subject matter of the representations and warranties may change after the date of the agreement, which subsequent information may or may not be fully reflected in the Company’s disclosures.

STOCK PURCHASE AGREEMENT

Dated as of April 1, 2008

by and between

I & J HOLDCO, INC.

RENEE PEPYS LOWE

and

STANLEY LOWE

TABLE OF CONTENTS

		Page
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1.	Definitions	1
1.2.	Interpretation	12
ARTICLE II
PURCHASE PRICE
2.1.	Base Purchase Price	12
2.2.	Determination of Estimated Base Purchase Price	12
2.3.	Determination of Base Purchase Price.	13
2.4.	Adjustment	14
2.5.	Payment of Base Purchase Price.	15
2.6.	Additional Earnout Payments.	15
ARTICLE III
CLOSING
3.1.	Closing Date	18
3.2.	Payment on the Closing Date	18
3.3.	Buyer’s Additional Deliveries	18
3.4.	Seller’s Deliveries	19
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.1.	Organization of the Company; Title to Shares.	20
4.2.	Subsidiaries and Investments; Predecessors	20
4.3.	No Conflict.	21
4.4.	Financial Statements	21
4.5.	Operations Since November 1, 2007; Operations Since January 1, 2007.	22
4.6.	No Undisclosed Liabilities	25
4.7.	Taxes.	25
4.8.	Availability of Assets	27
4.9.	Governmental Permits.	27
4.10.	Real Property.	28
4.11.	Personal Property.	29
4.12.	Intellectual Property; Software.	29
4.13.	Accounts Receivable; Inventories.	31
4.14.	Title to Property	32
4.15.	Employees and Related Agreements; ERISA.	32
4.16.	Employee Relations	35
4.17.	Contracts	36

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4.18.	Status of Contracts	38
4.19.	No Violation or Litigation	39
4.20.	Environmental Matters	39
4.21.	Insurance.	41
4.22.	Customers and Suppliers	42
4.23.	Budgets	42
4.24.	Warranties; Product Defects.	42
4.25.	Authority to Bind the Company	43
4.26.	No Finder	43
4.27.	Financial Projections	43
4.28.	Bank Accounts; Power of Attorney; Minute Books.	43
4.29.	Related and Other Transactions.	43
4.30.	Disclosure	44
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
5.1.	Organization of Buyer	44
5.2.	Authority of Buyer; No Conflict.	45
5.3.	No Finder	45
5.4.	Investment Representation	45
5.5.	Solvency	45
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1.	Use of Names	46
6.2.	Taxes.	46
6.3.	Conduct of Business Pending the Closing; Disclosure Supplements.	52
6.4.	Conduct of Business Following the Closing	52
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
7.1.	No Misrepresentation or Breach of Covenants and Warranties	53
7.2.	No Changes or Destruction of Property	53
7.3.	Necessary Governmental Approvals	53
7.4.	Necessary Consents	53
7.5.	FIRPTA Certificate	53
7.6.	Transaction Documents	53
7.7.	No Judgment	53
7.8.	Master Lease Consent and Waiver	54
7.9.	Sublease Amendment	54

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ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
8.1.	No Misrepresentation or Breach of Covenants and Warranties	54
8.2.	Necessary Governmental Approvals	54
8.3.	Transaction Documents	54
8.4.	Levin Employment	54
ARTICLE IX
INDEMNIFICATION
9.1.	Indemnification by Seller.	55
9.2.	Indemnification by Buyer.	56
9.3.	Notice and Determination of Claims.	57
9.4.	Third Person Claims.	58
9.5.	Payment of Buyer Group Member Indemnification	59
9.6.	Offset	59
9.7.	Adjustment to Base Purchase Price	59
9.8.	Coordination with Tax Contests	59
9.9.	Exclusive Remedies	59
9.10.	Actions Based on Fraud	59
9.11.	Materiality Qualification	60
ARTICLE X
GENERAL PROVISIONS
10.1.	Confidential Nature of Information	60
10.2.	No Public Announcement	60
10.3.	Notices	61
10.4.	Successors and Assigns.	62
10.5.	Access to Records after Closing	62
10.6.	Entire Agreement; Amendments	62
10.7.	Partial Invalidity	62
10.8.	Waivers	62
10.9.	Fees and Expenses	63
10.10.	Execution in Counterparts	63
10.11.	Enforcement of Agreement	63
10.12.	Further Assurances	63
10.13.	Governing Law	64
10.14.	Time is of the Essence	64
10.15.	Submission to Jurisdiction	64
10.16.	Dispute Resolution.	64

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STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT, dated as of April 1, 2008 (this “agreement”), is entered into by and between I & J HOLDCO, CO., a Delaware corporation (“Buyer”), Renee Pepys Lowe, an individual, and Stanley Lowe, an individual (Renee Pepys Lowe and Stanley Lowe are collectively referred to herein as “Seller”).  Buyer and Seller are sometimes collectively referred to herein as the “Parties” and each as a “Party.”

RECITALS:

WHEREAS, Seller is the owner, beneficially and of record, of all of the issued and outstanding shares (the “Shares”) of capital stock of CoCaLo, Inc., a California corporation (the “Company”);

WHEREAS, the Company is engaged in the business of selling infant bedding, accessories and blankets (the “Business”); and

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, all of the capital stock of the Company owned by Seller on the terms and subject to the conditions set forth herein (the “Stock Purchase”).

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Parties to this Agreement agree as follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

1.1.         Definitions.  In this Agreement, the following terms have the meanings specified or referred to in this Section 1.1 and shall be equally applicable to both the singular and plural forms.

“Actual Three Year Combined EBITDA” shall mean the sum of the Company’s EBITDA and Kids Line’s EBITDA during the three year period commencing on January 1, 2008 and ending on December 31, 2010.

“Actual Three Year Gross Profit” of the Company shall mean the aggregate Gross Profit of the Company during the three year period commencing on January 1, 2008 and ending on December 31, 2010.

“Actual Three Year Net Sales” of the Company shall mean the aggregate Net Sales of the Company during the three year period commencing on January 1, 2008 and ending on December 31, 2010.

“Additional Earnout Payment” means an Additional Earnout Payment made by Buyer, calculated and paid in accordance with Section 2.6.

“Affiliate” means, with respect to any Person, any other Person which, at the time of determination, directly or indirectly through one or more intermediaries Controls, is Controlled by or is under Common Control with such Person.

“Agreement” has the meaning specified in the first paragraph hereof.

“Aggregate Adjusted Base Gross Profit” shall have the meaning set forth on Schedule 1.1(a).

“Aggregate Adjusted Base Net Sales” shall have the meaning set forth on Schedule 1.1(a).

“Aggregate Adjusted Combined Base EBITDA” shall have the meaning set forth on Schedule 1.1(a).

“Aggregate Maximum Earnout Combined EBITDA” shall have the meaning set forth on Schedule 1.1(a).

“Aggregate Maximum Earnout Gross Profit” shall have the meaning set forth on Schedule 1.1(a).

“Aggregate Maximum Earnout Net Sales” shall have the meaning set forth on Schedule 1.1(a).

 “Agreed Accounting Firm” means RSM McGladrey, provided such firm confirms it has provided no material services to the Parent (or any Subsidiary) during the twelve (12) months before such firm’s services are requested by Parent (or any Subsidiary) or Seller.  If such firm has provided such services, Buyer and Seller shall agree on another independent national accounting firm.

“Agreed Accounting Principles” means GAAP consistently applied; provided that, with respect to any matter as to which there is more than one generally accepted accounting principle, Agreed Accounting Principles means the generally accepted accounting principles applied in the preparation of the Balance Sheet;

“Agreed Adjustments” has the meaning specified in Section 2.3(c).

“Allocations” shall mean the methodology, and allocations set forth on Exhibit A, which shall be reflected on Forms 8883 (and for financial accounting purposes consistent therewith), and with respect to post-Closing payments and liabilities referred herein, as either agreed upon mutually or determined by the Company Accountants (which shall be determined pursuant to the relevant Treasury Regulations under Section 338 of the Code).

“Asset Sale Tax” shall mean the amount of Tax payable by the Seller in respect of the Stock Purchase, calculated as if the only income and deductions of the Company were its income and deductions from the deemed sale of its assets pursuant to the Section 338(h)(10) Election and as if the only income of the Seller were the income allocated to it from the Company in respect of such deemed sale (net of any deductions required to be separately stated and allocated to the Seller).  Such computation shall take into account the deductibility of state

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and local Taxes for federal income tax purposes, including any state or local Tax imposed on the Company with respect to such deemed sale of assets.

“Associate” means (i) a corporation or organization of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Person or any of its parents or subsidiaries.

“Balance Sheet” means the unaudited balance sheet of the Company as of October 31, 2007, included in Schedule 4.4.

“Balance Sheet Date” means October 31, 2007.

“Base Purchase Price” has the meaning specified in Section 2.1.

“Brand” has the meaning specified in Section 2.6(c).

“Business” has the meaning specified in the second recital of this Agreement.

“Business Day” means any day, other than a Saturday, Sunday or federal holiday, on which banks are open for business in New York City.

“Buyer” has the meaning specified in the first paragraph of this Agreement.

“Buyer Ancillary Agreements” means all agreements, instruments and documents (including, without limitation, the Note and the Employment Agreement) being or to be executed and delivered by Buyer under this Agreement or in connection herewith.

“Buyer Group Member” means (i) Buyer and its Affiliates, (ii) the equity holders, managers, officers, employees, agents and representatives of each of Buyer and its Affiliates and (iii) the respective successors and assigns of each of the foregoing.

“Calculation” has the meaning specified in Section 2.6(d).

“Capitalized Lease Obligations” has the meaning given such term in the Statement of Financial Accounting Standards No. 13.

“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 et seq., any amendments thereto, any successor statutes, and any regulations promulgated thereunder.

“Certification of Non-Foreign Status” means the certificate substantially in the form attached hereto as Exhibit B, dated prior to or as of the Closing Date.

“Claim Notice” has the meaning specified in Section 9.3(a).

“Closing” means the closing of the transfer of the Shares from Seller to Buyer.

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“Closing Date” has the meaning specified in Section 3.1.

“Closing Date Balance Sheet” has the meaning specified in Section 2.3(b).

“Closing Date Net Working Capital” means the Company’s Working Capital determined based on the Closing Date Balance Sheet.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Accountants” means Singer Lewak Greenbaum & Goldstein LLP.

“Company Agreements” has the meaning specified in Section 4.18(a).

“Company EBITDA” means the EBITDA of Company during the appropriate measurement period.

“Company Group” shall mean any “affiliated group” (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that, at any time on or before the Closing Date, includes or has included the Company or any Subsidiary or any predecessor of or successor to the Company or any Subsidiary (or another such predecessor or successor), or any other group of corporations that, at any time on or before the Closing Date, files or has filed Tax Returns on a combined, consolidated or unitary basis with the Company or any Subsidiary or any predecessor of or successor to the Company or any Subsidiary (or another such predecessor or successor).

“Company Property” means any real or personal property, plant, building, facility, structure, underground storage tank, equipment or unit, or other asset used in the Business or owned, leased or operated by Company or any predecessor thereto, but with respect to buildings used by both the Company and another party, not including the portions of such property not under the control of the Company.

“Confidentiality Agreement” means the Confidentiality Agreement dated November 27, 2006 between Kids Line and Meridian Capital LLC.

“Contaminant” means any waste, pollutant, hazardous or toxic substance or waste, petroleum, petroleum-based substance or waste, special waste, or any constituent of any such substance or waste.

“Control” means, as to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.  The terms “Controlled by,” “under Common Control with” and “Controlling” shall have correlative meanings.

“Copyrights” has the meaning specified in Section 4.12(a).

“Court Order” means any judgment, order, award or decree of any United States federal, state or local, or any supra-national or non-U.S., court or tribunal and any award in any arbitration proceeding.

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“Debt” means: (i) indebtedness for borrowed money of a Person; (ii) any indebtedness of a Person evidenced by any note, bond, debenture or other debt security; (iii) Capitalized Lease Obligations for which a Person is liable; (iv) all amounts owing by a Person under purchase money mortgages, indentures, deeds of trust or other purchase money liens or conditional sale or other title retention agreements; (v) all indebtedness secured by any mortgage, indenture or deed of trust upon any of the assets of a Person, even though such Person has not assumed or become liable for the payment of such indebtedness; (vi) all accrued and unpaid interest on or any fees, penalties, including, without limitation, prepayment fees or other amounts due with respect to any of the foregoing described indebtedness whether at maturity or otherwise; and (vii) without duplication, any obligations of any other Person of a type referred to in clauses (i) — (vi) to the extent guaranteed by a Person.  The determination of the amount of the Debt of Company at the relevant time of determination shall be made in accordance with GAAP, consistently applied.

“EBITDA” means the earnings (determined in accordance with GAAP) before interest, depreciation, amortization and income taxes, as calculated consistently with Appendix A hereto¸ which Appendix A shall include the individual components used to calculate such adjustment.  For avoidance of doubt, no costs of the transactions contemplated by this Agreement shall be deducted as expenses to compute EBITDA for the Company or Kids Line.

“Employment Agreement” means that certain Employment Agreement between Renee Pepys Lowe and the Company, in the form attached hereto as Exhibit C.

“Encumbrance” means any lien (statutory or other), claim, charge, security interest, mortgage, deed of trust, pledge, hypothecation, assignment, conditional sale or other title retention agreement, preference, priority or other security agreement or preferential arrangement of any kind, and any easement, encroachment, covenant, restriction, right of way, defect in title or other encumbrance of any kind, including, without limitation, voting agreements with respect to voting securities, directly or indirectly, in the Company.

“Environmental Encumbrance” means an Encumbrance in favor of any Governmental Body for (i) any liability under any Environmental Law, or (ii) damages arising from, or costs incurred by such Governmental Body in response to, a Release or threatened Release of a Contaminant into the environment.

“Environmental Law” means all Requirements of Law enacted and in effect on or prior to the Closing Date derived from or relating to all federal, state and local laws or regulations relating to or addressing protection of the environment, public or worker health or safety, emissions, discharges, generation, storage, releases or threatened releases of waste into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of waste, including without limitation, the Clean Water Act, the Clean Air Act, RCRA, the Toxic Substances Control Act, CERCLA, OSHA and any state and local equivalents thereof.

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“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” has the meaning specified in Section 4.15(i).

“ERISA Benefit Plans” has the meaning specified in Section 4.15(a).

“Estimated Base Purchase Price” means the Base Purchase Price, as defined herein, but determined on an estimated basis by Seller in good faith and as reflected in the certificate referred to in Section 2.2.

“Excluded Assets” means the personal property identified on Schedule 1.1(b), which is not owned by the Company.

“Excluded Taxes” has the meaning specified in Section 6.2(a).

“Expenses” means any and all internal and out-of-pocket expenses incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against hereunder (including court filing fees, court costs, arbitration fees or costs, witness fees, and reasonable fees and disbursements of legal counsel, investigators, expert witnesses, consultants, accountants and other professionals).

“GAAP” means accounting principles generally accepted in the United States.

“Governing Documents” means the governing documents of an entity (e.g., articles or certificate of incorporation, bylaws, certificate of limited partnership, partnership agreement, certificate of formation and/or operating agreement), as each such document is amended or restated from time to time.

“Governmental Body” means any United States federal, state or local, or any supra-national or non-U.S., government, political subdivision, governmental, regulatory or administrative authority, instrumentality, agency body or commission, self-regulatory organization, court, tribunal or judicial or arbitral body.

“Governmental Permits” has the meaning specified in Section 4.9.

“Gross Profit” means Net Sales, less cost of sales, as determined in accordance with GAAP and in a manner consistent with the preparation of the Reviewed Financial Statements and as shown on Schedule 1.1(c).

“Indemnification Deductible” has the meaning specified in Section 9.1(a).

“Indemnified Party” has the meaning specified in Section 9.3(a).

6

“Indemnitor” has the meaning specified in Section 9.3(a).

“Indemnity Cap” has the meaning specified in Section 9.1(a).

“Intellectual Property” has the meaning specified in Section 4.12(a).

“IRS” means the Internal Revenue Service.

“JAMS” means the Judicial Arbitration and Mediation Service.

“Kids Line” means Kids Line, LLC, a Delaware limited liability company.

“Kids Line EBITDA” means the earnings (determined in accordance with GAAP) before interest, amortization and income taxes, of Kids Line, but determined without consolidating the results of any Subsidiary, whether now owned or hereafter acquired, including without limitation, the Company.

“Knowledge” means: (i) with respect to the Company, the actual knowledge or conscious awareness of Renee Pepys Lowe, James Gillan or Stanley Lowe, after reasonable inquiry of Persons likely to know, and (ii) with respect to Buyer, the actual knowledge or conscious awareness of Michael Levin or Charles Ginn, after reasonable inquiry of Persons likely to know.

“Leased Real Property” has the meaning specified in Section 4.10(b).

“Letter of Intent” means the letter agreement dated November 15, 2007 between Buyer and the Company.

“Levin” means Michael Levin, President of Buyer.

“Licensed Products” has the meaning specified in Section 2.6(c).

“Losses” means any and all losses, costs, obligations, liabilities, settlement payments, awards, judgments, Taxes, fines, penalties, damages, deficiencies or other charges.

“Master Lease” means that certain Standard Form Lease, dated October 26, 1999, as amended by that certain First Amendment to Standard Form Lease dated July 15, 2004, between the Sublessor and the Master Lessor, whereby the Sublessor leases from the Master Lessor the premises located at 2920 Redhill Avenue, Costa Mesa, CA 92626.

“Master Lessor” means Barry Todd Miller Family Trust, d/b/a Barry Todd Miller Company.

“Material Adverse Effect” or “Material Adverse Change” means any fact, occurrence, condition, circumstance, change, effect or development that could reasonably be expected to be materially adverse to the Shares, the Business or the assets, liabilities, equity, internal controls, profits, financial condition, results of operations, cash flow, liquidity or prospects of the Company, but excluding any condition, circumstance, change, effect or

7

development affecting general economic conditions in the United States or generally affecting the bedding industry in the United States.

“Materiality Qualification” means, as to any representation or warranty, covenant, obligation or undertaking herein, words such as “material,” “materially,” “material to the Business,” “in all material respects,” or similar qualifications.

“Net Estimated Base Purchase Price” shall mean the Estimated Base Purchase Price, less $1,600,000.

“Net Sales” means total sales less returns, discounts, rebates and allowances, all as determined in accordance with GAAP and in a manner consistent with the preparation of the Reviewed Financial Statements.

“Non-ERISA Commitments” has the meaning specified in Section 4.15(b).

“Note” has the meaning specified in Section 2.5(b).

“OSHA” means the Occupational Safety and Health Act (29 U.S.C. §§ 651 et seq., any amendment thereto, any successor statute, and any regulations promulgated thereunder).

“Patent Rights” has the meaning specified in Section 4.12(a).

“Pension Plans” has the meaning specified in Section 4.15(a).

“Permitted Encumbrances” means: (i) liens for Taxes and other governmental charges and assessments which are not yet due and payable; (ii) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen and other similar liens imposed by law arising in the ordinary course of business for sums not yet due and payable; and (iii) other liens or imperfections on property which do not adversely affect title to, detract from the value of, or impair the existing use of, the property affected by such lien or imperfection.

“Person” means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or Governmental Body.

“Pre-Closing Disclosure” has the meaning specified in Section 6.3(b).

“Preliminary Accounting Report” has the meaning specified in Section 2.3.

“Preliminary Base Purchase Price” has the meaning specified in Section 2.3.

“Preliminary Closing Date Balance Sheet” has the meaning specified in Section 2.3.

“Preliminary Working Capital Statement” has the meaning specified in Section 2.3.

8

“Prior Pension Plans” has the meaning specified in Section 4.15(a).

“Products” means all products manufactured, marketed, sold or licensed by the Company (or any predecessor) with respect to the Business prior to the Closing Date.

“Purchase Price” means the Base Purchase Price plus the Additional Earnout Payments.

“RCRA” means the Resource Conservation and Recovery Act (42 U.S.C. §§ 6901 et seq., any amendments thereto, and any regulations promulgated thereunder).

“Related Persons” has the meaning specified in Section 4.29(b).

“Release” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant into the indoor or outdoor environment or into or out of any Company Property, including the movement of Contaminants through or in the air, soil, surface water, groundwater or Company Property.

“Remedial Action” means actions required to: (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threatened Release or minimize the further Release of Contaminants; or (iii) investigate and determine if a remedial response is needed and to design such a response and post-remedial investigation, monitoring, operation and maintenance and care.

“Requirements of Law” means any United States federal, state and local, and any non-U.S., laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued or promulgated by any Governmental Body (including those pertaining to electrical, building, zoning, subdivision, land use, environmental and occupational safety and health requirements) or common law.

“Resolution Period” has the meaning specified in Section 2.6(d)(ii).

“Review Period” has the meaning specified in Section 2.3(b).

“Reviewed Financial Statements” has the meaning specified in Section 2.3(b).

“Royalty Net Sales” shall mean actual gross sales less (i) the sum of actual returns, cash discounts, quantity discounts and freight discounts actually taken, and (ii) the amount of actual returns for defective or damaged products.

“Russ Berrie” or “Parent” means Russ Berrie and Company, Inc., a New Jersey corporation and the sole shareholder of Buyer.

“Section 338(h)(10) Election” means an election under Section 338(h)(10) (and any corresponding election under state, local, and foreign tax law) with respect to the purchase and sale of the Shares.

“Seller” has the meaning specified in the first paragraph of this Agreement.

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“Seller Acknowledgement and Release” means that certain Acknowledgement and Release in the form attached hereto as Exhibit D, between the Company and each Seller.

“Seller Ancillary Agreements” means all agreements, instruments and documents (including, without limitation, the Certification of Non-Foreign Status, the Seller Non-Competition Agreement, the Seller Acknowledgement and Release and the Employment Agreement) being or to be executed and delivered by Seller under this Agreement or in connection herewith.

“Seller Non-Competition Agreement” means that certain Non-Disclosure, Non-Solicitation and Non-Competition Agreement entered into between each Seller and the Company, dated as of or prior to the Closing Date, in the form of Exhibit E hereto.

“Shares” has the meaning specified in the first recital to this Agreement.

“Software” means computer software programs and software systems, including all databases, compilations, tool sets, compilers, higher level or “proprietary” languages, related documentation and materials, whether in source code, object code or human readable form.

“Stock Purchase” has the meaning specified in the third recital to this Agreement.

“Stock Sale Tax” shall mean the amount of Tax that would have been payable by the Seller in respect of the Stock Purchase, calculated as if the only income and deductions of the Company were its income and deductions from the sale of the Shares and no Section 338(h)(10) Election were made.  Such computation shall take into account the deductibility of state and local Taxes for federal income tax purposes.

“Straddle Period” means any taxable year or period beginning on or before and ending after the Closing Date.

“Sublease” means that certain Commercial Sublease Agreement, dated December 15, 2004, as amended by that certain Amendment Number 1 to Commercial Sublease Agreement, dated January 14, 2008 and that certain Amendment to Sublease dated March 31, 2008, between the Sublessor and the Company, whereby the Company subleases from the Sublessor a portion of the premises located at 2920 Redhill Avenue, Costa Mesa, CA 92626.

“Sublessor” means The Dot Printer Inc.

“Subsidiary” means any corporation, partnership, limited liability company, joint venture or other entity in which any Person, directly or indirectly, owns of record or beneficially 50% or more of the outstanding voting securities or of which it is a general partner.

“Target Net Working Capital” means $5,800,000.

“Tax” (and, with correlative meaning, “Taxes”) shall mean:  (i)  any federal, state, local or foreign net income, gross income, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding,

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alternative or add-on minimum, ad valorem, value-added, transfer, stamp, or environmental tax (including taxes under Code Section 59A), escheat payments or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority; and (ii) any liability of the Company or any Subsidiary for the payment of amounts with respect to payments of a type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation of the Company or any Subsidiary under any Tax Sharing Arrangement or Tax indemnity arrangement.

“Tax Increment” has the meaning specified in Section 6.2(g)(ii).

“Tax Return” means any return, report or similar statement required to be filed with respect to any Taxes (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax.

“Tax Sharing Arrangement” means any written or unwritten agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return which Tax Return includes or included the Company or any Subsidiary.

“Third Person Claim” has the meaning specified in Section 9.3(a).

“Trademarks” has the meaning specified in Section 4.12(a).

“Trade Secrets” has the meaning specified in Section 4.12(a).

“Transaction” means the Stock Purchase and any related transactions to which Seller is or the Company is a party.

“Transaction Expenses” means all fees, commissions, costs and expenses incurred by Seller (to the extent the Company pays or is obligated to pay such fees and expenses incurred by Seller) in connection with this Agreement or the Transactions contemplated hereby or bonuses or other compensation payable by the Company as a result of the Stock Purchase or the Transactions contemplated hereby to the extent not included as a liability in calculating the Closing Date Net Working Capital, including (i) all brokerage or finders’ fees or agents’ commissions or any similar charges, (ii) all legal, accounting, financial advisory, consulting and other fees and expenses of third parties or affiliated parties and (iii) all employee bonuses accrued for the period through December 31, 2007, to the extent unpaid, regardless of when such bonuses are actually payable.

“Unaudited Financial Statements” has the meaning specified in Section 4.4.

“WARN” has the meaning specified in Section 4.15(f).

“Welfare Plans” has the meaning specified in Section 4.15(a).

“Working Capital” means the excess, if any, of (i) the sum of inventory and accounts receivable over (ii) accounts payable (excluding any accounts payable relating to Debt)

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and accrued expenses (other than interest or Taxes payable), in all cases as of the date of measurement.  Working Capital shall be calculated consistently with the sample calculation as of December 31, 2007 attached hereto as Appendix B¸ which sample shall include the individual components and line items used to calculate such sample.

“Working Capital Adjustment” has the meaning specified in Section 2.1.

1.2.         Interpretation.  For purposes of this Agreement, (i) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation,” (ii) the word “or” is not exclusive and (iii) the words “herein”, “hereof”, “hereby”, “hereto” and “hereunder” refer to this Agreement as a whole.  Unless the context otherwise requires, references herein: (i) to Articles, Sections, Appendices, Exhibits and Schedules mean the Articles and Sections of, and the Exhibits and Schedules attached to, this Agreement; (ii) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement; and (iii) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder.  The Schedules and Exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein.  Titles to Articles and headings of Sections are inserted for convenience of reference only and shall not be deemed a part of or to affect the meaning or interpretation of this Agreement.  This Agreement, Buyer Ancillary Agreements and the Seller Ancillary Agreements shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to be drafted.

ARTICLE II

PURCHASE PRICE

2.1.         Base Purchase Price.  The base purchase price for the Shares (the “Base Purchase Price”) shall be determined in accordance with Section 2.3 and shall be equal to the result of: (1) $16,000,000; minus (2) the aggregate Debt of the Company outstanding as at the Closing Date (including accrued interest); minus (3) Transaction Expenses.  The Base Purchase Price shall be decreased in the event, and to the extent, that Closing Date Net Working Capital is less than Target Net Working Capital, and shall be increased in the event, and to the extent, that Closing Date Net Working Capital is greater than Target Net Working Capital (the “Working Capital Adjustment”).

2.2.         Determination of Estimated Base Purchase Price.  At least two Business Days prior to the Closing Date, Seller shall deliver to Buyer a certificate executed by Renee Pepys Lowe and the Company’s Chief Financial Officer, dated the date of its delivery, stating that there has been conducted under the supervision of such persons a review of all relevant information and data then available and setting forth Seller’s best estimate of the Estimated Base Purchase Price, including an estimate of (i) any Working Capital Adjustment required and (ii) the various accounts which such officer anticipates will be reflected on the Closing Date Balance Sheet, based upon the most recent available financial statements and prepared in accordance with

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Agreed Accounting Principles.  Such Estimated Base Purchase Price shall be subject to reasonable approval by Buyer.

2.3.         Determination of Base Purchase Price.

(a)           As promptly as practicable following the Closing Date (but not later than 60 days after the Closing Date), Buyer shall:

(i)            prepare, in accordance with Agreed Accounting Principles, a balance sheet of the Company as of 11:59 p.m. on the Closing Date (the “Preliminary Closing Date Balance Sheet”), except that such Preliminary Closing Date Balance Sheet shall not have notes attached thereto;

(ii)           prepare a calculation of the Closing Date Net Working Capital as of 11:59 p.m. on the Closing Date (the “Preliminary Working Capital Statement”);

(iii)          determine the Base Purchase Price including the components thereof specified in Section 2.1, in accordance with the provisions of this Agreement (such Purchase Price as determined by Buyer being called the “Preliminary Base Purchase Price”); and

(iv)          deliver to Seller the Preliminary Closing Date Balance Sheet and a certificate setting forth the Preliminary Base Purchase Price (the “Preliminary Accounting Report”), together with the Preliminary Working Capital Statement.

(b)           Promptly following receipt of the Preliminary Accounting Report and the Preliminary Working Capital Statement, Seller may review the same and, within thirty (30) days after the date of such receipt (the “Review Period”), may deliver to Buyer a certificate setting forth any objections to the Preliminary Working Capital Statement, the Preliminary Accounting Report, and/or any elements thereof, together with a summary of the reasons therefor and calculations which, in the view of Seller, are necessary to eliminate such objections.  In the event Seller does not so object within the Review Period, the Preliminary Accounting Report and all of the components thereof shall be final and binding as the Closing Date Balance Sheet (as so determined, the “Closing Date Balance Sheet”), the Base Purchase Price and the Working Capital Adjustment for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement

(c)           In the event Seller objects to the Preliminary Working Capital Statement, the Preliminary Accounting Report, or any element thereof within the Review Period, Buyer and Seller shall use their reasonable efforts to resolve by written agreement (the “Agreed Adjustments”) any differences as to the Preliminary Accounting Report, the Preliminary Working Capital Statement or any element thereof and, in the event Seller and Buyer so resolve any such differences, the Preliminary Accounting Report and/or the Preliminary Working Capital Statement, as applicable and as adjusted by the Agreed Adjustments, shall be final and binding and shall determine the Closing Date Balance Sheet, the Base Purchase Price and the Working Capital Adjustment for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement.

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(d)           In the event any objections raised by Seller are not resolved by Agreed Adjustments within the 30-day period following the applicable Review Period, then Buyer and Seller shall submit the objections that are then unresolved to the Agreed Accounting Firm (or if such firm is unwilling, or unable, to resolve such objections to such other national accounting firm acceptable to both Buyer and Seller) and such firm shall be directed by Buyer and Seller to resolve the unresolved objections (based solely on the written presentations by Buyer and by Seller as to whether any disputed matter had been determined in accordance with the requirements of this Agreement) as promptly as reasonably practicable and to deliver written notice to each of Buyer and Seller setting forth its resolution of the disputed matters.  The Preliminary Accounting Report and/or the Preliminary Working Capital Statement, as applicable, after giving effect to any Agreed Adjustments and to the resolution of disputed matters by the Agreed Accounting Firm, shall be final and binding and shall determine the Closing Date Balance Sheet, the Base Purchase Price and the Working Capital Adjustment for purposes of this Agreement but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement.

(e)           The parties hereto shall make available to Buyer, Seller and, if applicable, the Agreed Accounting Firm, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare, review or determine, as applicable, the Preliminary Accounting Report or the Preliminary Working Capital Statement or any matters submitted to the Agreed Accounting Firm.  The fees and expenses of the Agreed Accounting Firm for services provided pursuant to Section 2.3(d) shall be paid 50% by Buyer and 50% by Seller.  The Agreed Accounting Firm may, but shall not be obligated to, direct that all (or such portion as the Agreed Accounting Firm determines) of the reasonable out-of-pocket legal fees and out-of-pocket expenses of the party whom the Agreed Accounting Firm deems to have “prevailed” in the dispute, shall be reimbursed by the other party to the dispute.

2.4.         Adjustment.  Promptly (but not later than five (5) Business Days) after the determination of the Base Purchase Price pursuant to Section 2.3 that is final and binding as set forth therein:

(a)           if the actual Base Purchase Price less $1,600,000 is greater than the Net Estimated Base Purchase Price (after giving effect to the estimated Working Capital Adjustment as compared to the actual, final Working Capital Adjustment), Buyer shall pay to Seller, by wire transfer of immediately available funds to such bank account of Seller as Seller shall designate in writing to Buyer, an amount equal to the excess of the Base Purchase Price over the Estimated Base Purchase Price; or

(b)           if the Net Estimated Base Purchase Price is greater than the Base Purchase Price less $1,600,000 (after giving effect to the estimated Working Capital Adjustment as compared to the actual, final Working Capital Adjustment), Seller shall pay to Buyer, by wire transfer of immediately available funds to such bank account of Buyer as Buyer shall designate in writing to Seller, an amount equal to the excess of the Estimated Base Purchase Price over the Base Purchase Price.

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2.5.         Payment of Base Purchase Price.

(a)           The Net Estimated Base Purchase Price shall be paid in cash at Closing pursuant to Section 3.2.

(b)           Subject to the provisions of Section 9.6 hereof, Buyer shall, in addition to the payment made pursuant to Section 2.5(a), pay the sum of $533,333.33 on each of the first, second and third anniversary dates of the Closing, which shall be evidenced by Buyer’s non-negotiable promissory note (the “Note”) paid to Renee Pepys Lowe and Stanley Lowe, delivered at the Closing, in the form attached hereto as Exhibit F.  All amounts owed by Buyer as maker of the Note to Renee Pepys Lowe, Stanley Lowe and their successors or assigns as payees under the Note, shall be subject to offset by any amounts owing by Seller hereunder or under any of the Seller Ancillary Agreements as provided in Section 9.6 hereof.

2.6.         Additional Earnout Payments.

(a)           Subject to the terms and conditions set forth in this Section 2.6, there shall be paid to Seller, as additional purchase price for the Shares, the following Additional Earnout Payments upon the satisfaction of the applicable condition associated with each such Additional Earnout Payment, each of which shall be calculated consistent with the sample calculations set forth on Schedule 1.1(a):

(i)            $666,666.67 will be paid if the Company’s Actual Three Year Net Sales is greater than the Company’s Aggregate Adjusted Base Net Sales.

(ii)           $666,666.66 will be paid if the Company’s Actual Three Year Gross Profit is greater than the Company’s Aggregate Adjusted Base Gross Profit.

(iii)          $666,666.66 will be paid if the Actual Three Year Combined EBITDA is greater than the Aggregate Adjusted Combined Base EBITDA.

(iv)          $666,666.67 will be paid, on a sliding scale basis, to the extent that the Company’s Actual Three Year Net Sales is greater than the Aggregate Adjusted Base Net Sales, with the full $666,666.67 being paid in the event that the Actual Three Year Net Sales equals or exceeds the Aggregate Maximum Earnout Net Sales.  The sliding scale payment shall equal the product of $666,666.67 times the result of (i) the difference between (A) the Actual Three Year Net Sales less (B) the Aggregate Adjusted Base Net Sales, divided by (ii) the difference between (A) the Aggregate Maximum Earnout Net Sales less (B) the Aggregate Adjusted Base Net Sales.  In no event shall the Buyer required to pay greater than $666.666.67 under this Section 2.6(a)(iv).

(v)           $666,666.66 will be paid, on a sliding scale basis, to the extent that the Company’s Actual Three Year Gross Profit is greater than the Aggregate Adjusted Base Gross Profit, with the full $666,666.66 being paid in the event that the Actual Three Year Gross Profit equals or exceeds the Aggregate Maximum Earnout Gross Profit.  The sliding scale payment shall equal the product of $666,666.66 times the result of (i) the difference between (A) the Actual Three Year Gross Profit less (B) the Aggregate Adjusted Base Gross Profit, divided by (ii) the difference between (A) the Aggregate Maximum Earnout Gross Profit less

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(B) the Aggregate Adjusted Base Gross Profit  In no event shall the Buyer required to pay greater than $666.666.66 under this Section 2.6(a)(v).

(vi)          $666,666.66 will be paid, on a sliding scale basis, to the extent that the Actual Three Year Combined EBITDA is greater than the Aggregate Adjusted Combined Base EBITDA, with the full $666,666.66 being paid in the event that the Actual Three Year Combined EBITDA equals or exceeds the Aggregate Maximum Earnout Combined EBITDA.  The sliding scale payment shall equal the product of $666,666.66 times the result of (i) the difference between (A) the Actual Three Year Combined EBITDA less (B) the Aggregate Adjusted Combined Base EBITDA, divided by (ii) the difference between (A) the Aggregate Maximum Earnout Combined EBITDA less (B) the Aggregate Adjusted Combined Base EBITDA.  In no event shall the Buyer required to pay greater than $666.666.66 under this Section 2.6(a)(vi).

(b)           For purposes of Section 2.6(a)(iii) and (vi), in determining the combined EBITDA of Kids Line and the Company, corporate charges imposed by Russ Berrie for items or services which have not historically been charged to Kids Line shall be ignored, and no costs or expenses incurred due to a change in form of business of Kids Line or the Company after the Closing shall be taken into account in such determination (for example, if either of Kids Line or the Company becomes a public company, accounting, legal and related costs associated with being a public company shall be ignored).

(c)           For purposes of computing Company’s Gross Profit and Net Sales: (i) if Parent, Buyer, Kids Line or any other Subsidiary of Parent (other than, after the Closing, the Company) determines after the Closing to create or sell any product of a type or category not then being marketed by the Company and bearing a brand name, Trademark or recognizable and identifiable design, scheme or theme (“Brand”) owned or used exclusively by the Company, Parent, Kids Line, Buyer or such Subsidiary, as applicable, shall be obligated  to pay to the Company a five percent (5%) royalty based on Royalty Net Sales of all products bearing such Brand (“Licensed Products”) and Company’s Gross Profit and Net Sales shall include such royalty income whether or not paid; (ii) if Parent or Buyer determines after the Closing to transfer any Company products, product lines or categories of products that were marketed by the Company prior to Closing to Parent, Kids Line, Buyer or any other Subsidiary of Parent, whether or not in conjunction with the use of any of the Company’s Brands, all sales of such products, product lines or categories of products by Parent, Kids Line, Buyer or such Subsidiary, as applicable, shall be deemed sales by the Company and the Gross Profit realized by Parent, Kids Line, Buyer or such Subsidiary shall be included in the Company’s Gross Profit during the same period; (iii) if Parent, Kids Line, Buyer or any other Subsidiary of Parent authorizes the Company to market products under a Brand owned or used exclusively by such licensor, the Company shall pay to such licensor a royalty of five percent (5%) of Royalty Net Sales and such royalty expense shall be a cost in determining Gross Profit and EBITDA of the Company; (iv) no payments of the Purchase Price under this Agreement shall be included as costs of the Company or Kids Line in determining Gross Profit or EBITDA of Company or Kids Line; and (v)  no costs or expenses related to negotiating, closing or enforcing any term of this Agreement shall be considered costs of the Company, Kids Line or Parent in determining Gross Profit or EBITDA of Company or

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Kids Line.  In each of (i) and (ii) above, appropriate records shall be kept in order to properly account for the correct attribution of sales or royalties in accordance with this Section 2.6(c).

(d)           Within seventy-five (75) days after the close of the 2010 fiscal year of the Company, Buyer shall deliver, or cause to be delivered, to Seller a written statement setting forth the calculation of each Additional Earnout Payment and the individual applicable components thereof (the “Calculation”).  Seller shall have thirty (30) days after Seller’s receipt of a Calculation to object by written notice to the Calculation.

(i)            In the event Seller fails to deliver such written notice of objection to Buyer within such 30-day period with respect to the Calculation, the amount determined by Buyer pursuant to the Calculation shall be the final and binding amount for purposes of calculating the Additional Earnout Payment(s) in Section 2.6(a).

(ii)           In the event Seller does timely deliver to Buyer a written notice of objection, Buyer and Seller shall use their reasonable efforts to resolve by mutual agreement their differences as to the Calculation within thirty (30) days of delivery by Seller of Seller’s objection (the “Resolution Period”).  In the event any objections raised by Seller are not resolved within such Resolution Period, then Buyer and Seller shall submit the objections that are then unresolved to the Agreed Accounting Firm, which shall be directed by Buyer and Seller to resolve the unresolved objections as promptly as reasonably practicable (but in any event within sixty (60) days after such objections are submitted to the Agreed Accounting Firm) and to deliver written notice to each of Buyer and Seller setting forth its resolution of the disputed matters.  The amount as determined during any Resolution Period and/or by the Agreed Accounting Firm with respect to the Calculation shall be the final and binding amount for purposes of calculating the Additional Earnout Payment(s) in Section 2.6(a).

(e)           The amount of each Additional Earnout Payment as finally determined pursuant to Section 2.6(d)(i) or (ii) shall be paid by Buyer to Seller, by wire transfer of immediately available funds to such bank account of Seller as Seller shall designate in writing to Buyer, within fifteen (15) days of the date such amount is deemed finally determined.

(f)            The parties hereto shall make available to Buyer, Seller, each of their respective agents and representatives and, if applicable, the Agreed Accounting Firm, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare, review or determine, as applicable, the calculations described in this Section 2.6 prepared by Buyer, any elements thereof, any objections of Seller and/or any matters submitted to the Agreed Accounting Firm.  The fees and expenses of the Agreed Accounting Firm for services provided pursuant to Section 2.6(d)(ii) shall be paid 50% by Buyer and 50% by Seller.

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ARTICLE III

CLOSING

3.1.         Closing Date.  The Closing shall be consummated at 9:00 a.m., Pacific Standard Time, on April 2, 2008, or such other time or date as may be agreed upon by Buyer and Seller after the conditions set forth in ARTICLE VII and ARTICLE VIII have been satisfied, at the offices of Sidley Austin LLP, Los Angeles, California, following the satisfaction or waiver of all the conditions to Closing, or as soon thereafter as reasonable practicable, consistent with the terms and provisions of this Agreement.  The Closing shall be deemed to have become effective as of 11:59 p.m., Pacific Standard Time, on the date on which the Closing is actually held (the “Closing Date”).

3.2.         Payment on the Closing Date.  Subject to fulfillment or waiver of the conditions set forth in ARTICLE VII, on the Closing Date, Buyer shall, as provided in Section 2.5(a), (i) pay Seller an amount equal to the Net Estimated Base Purchase Price by wire transfer of immediately available funds to the account specified in Schedule 3.2 and (ii) to the extent included in the calculation of the Net Estimated Base Purchase Price, on behalf of Company, to all persons to whom Debt is owing by the Company, the amounts necessary to discharge in full all of such Debt, to the extent it is to be repaid in connection with the Closing as determined by Buyer.

3.3.         Buyer’s Additional Deliveries.  Subject to fulfillment or waiver of the conditions set forth in ARTICLE VII, at Closing, Buyer shall deliver to Seller all the following:

(a)           a copy of Buyer’s Certificate of Incorporation, certified as of a recent date by the Secretary of State of the State of Delaware;

(b)           a certificate of good standing of Buyer issued as of a recent date by the Secretary of State of the State of Delaware;

(c)           an opinion of Sidley Austin LLP, counsel to Buyer, dated the Closing Date and in form and substance reasonably satisfactory to Seller, substantially in the form contained in Exhibit G;

(d)           the guaranty of Kids Line, LLC, dated the Closing Date and in form and substance reasonably satisfactory to Seller, substantially in the form contained in Exhibit H, guaranteeing all obligations of Buyer under this Agreement;

(e)           a certificate of the secretary or an assistant secretary of Buyer, dated the Closing Date, in form and substance reasonably satisfactory to Seller, as to (i) no amendments to the Certificate of Incorporation of Buyer since a specified date; (ii) resolutions of the sole member of Buyer authorizing the execution, delivery and performance of this Agreement and Buyer Ancillary Agreements and the transactions contemplated hereby and thereby; and (iii) incumbency and signatures of the officers of Buyer executing this Agreement and any Buyer Ancillary Agreement;

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(f)            the certificate of Buyer contemplated by Section 8.1, executed by an authorized officer of Buyer;

(g)           each of the Buyer Ancillary Agreements executed by Buyer; and

(h)           each other document reasonably requested by Seller.

3.4.         Seller’s Deliveries.  Subject to fulfillment or waiver of the conditions set forth in ARTICLE VIII, at Closing, Seller shall deliver, or cause to be delivered, to Buyer all the following:

(a)           a certificate of the secretary, assistant secretary or officer of the Company, dated the Closing Date, in form and substance reasonably satisfactory to Buyer, (i) attaching a copy of the Articles of Incorporation of the Company certified as of a recent date by the Secretary of State of the State of California; and (ii) attaching the by-laws of the Company in effect as of the Closing Date;

(b)           an opinion of Paul, Hastings, Janofsky & Walker, LLP, counsel to Seller, dated the Closing Date and in form and substance reasonably satisfactory to Buyer, substantially in the form contained in Exhibit I;

(c)           a stock certificate or certificates representing the Shares, together with stock powers duly executed in blank by Seller;

(d)           all consents, waivers or approvals required to be obtained by Seller with respect to the transfer of the Shares or the consummation of the transactions contemplated by this Agreement, including without limitation, consents described in Article VII;

(e)           a certificate from Seller contemplated by Sections 7.1and 7.2, duly executed by Seller;

(f)            a signed resignation by each of the directors of the Company;

(g)           minute books, stock ledger and corporate seal, if any, of the Company;

(h)           each of the Seller Ancillary Agreements, duly executed by the respective counterparties thereto; and

(i)            such other documents and other instruments as Buyer may reasonably request or as may be otherwise necessary to evidence and effect the sale, assignment, transfer, conveyance and delivery of the Shares to Buyer.

In addition to the above deliveries, Seller shall take all steps and actions as Buyer may reasonably request or as may otherwise be necessary to put Buyer in actual possession or control of the Shares.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLER

As an inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, Seller represents and warrants to Buyer and agrees as follows, except as modified by the schedules to such representations and warranties, with disclosure on a particular schedule being deemed applicable to other sections of this Agreement to the extent reasonably appropriate:

4.1.         Organization of the Company; Title to Shares.

(a)           The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California.  No other jurisdiction has demanded, requested or otherwise indicated that the Company is required so to qualify on account of the ownership or leasing of its assets and properties or the conduct of the Business.  The Company has full power and authority to own or lease and to operate and use its properties and assets, and has all licenses, permits and authorizations necessary to carry on the Business as now conducted.

(b)           True and complete copies of the Articles of Incorporation and all amendments thereto and of the by-laws, as amended to date, of the Company have been delivered to Buyer.

(c)           Except as set forth on Schedule 4.1(c), the Company does not have any authorized, issued or outstanding capital stock.  All of the Shares have been duly authorized, validly issued, are fully paid and nonassessable, and are owned beneficially and held of record by Seller, free from Encumbrances.  None of the Shares has been issued in violation of, or is subject to, any preemptive or subscription rights.  The Company has no securities (or other contractual obligations) in the nature of stock appreciation rights, phantom stock, stock participation, profit participation or similar instruments or plans.  None of the Shares have been registered on any national securities exchange or market, nor been registered or qualified for sale under any securities law of any other jurisdiction.

(d)           Upon delivery to Buyer on the Closing Date of the Shares as contemplated by Section 3.4, Seller will thereby transfer to Buyer good and marketable title to the Shares, free and clear of all Encumbrances, which shall constitute all of the issued and outstanding equity interests in the Company.

4.2.         Subsidiaries and Investments; Predecessors.  Except as set forth on Schedule 4.2, since its date of incorporation, the Company has not directly or indirectly: (a) owned, of record or beneficially, any Subsidiary or any common stock or other equity interest in any corporation, partnership, limited liability company, joint venture, trust or other entity; (b) Controlled any corporation, partnership, limited liability company, joint venture, trust or other entity; or (c) had any obligations to purchase equity or debt securities of any other entity.  The Company has no predecessors in interest.

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4.3.         No Conflict.

(a)           Seller has full power and authority to own the Shares and to execute, deliver and perform this Agreement and all of the Seller Ancillary Agreements.  The execution, delivery and performance of this Agreement and the Seller Ancillary Agreements by Seller does not require any further authorization or consent of any other Person. This Agreement is the legal, valid and binding obligation of Seller enforceable in accordance with its terms, and each of the Seller Ancillary Agreements, upon execution and delivery by Seller, will be a legal, valid and binding obligation of Seller enforceable in accordance with its terms.

(b)           Except for this Agreement, Seller is not a party to any stockholder agreement, voting trust agreement or any other similar contract, agreement, arrangement, commitment, plan or understanding restricting or otherwise relating to the voting, dividend, ownership or transfer rights of any Shares, nor are any of the Shares subject to any put, call, first refusal, option similar agreement or commitment.

(c)           Except as set forth in Schedule 4.3(c), neither the execution and delivery of this Agreement or any of the Seller Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will:

(i)            conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon any of the Shares or any assets or properties of Seller or the Company, under (A) the Articles of Incorporation or by-laws or other Governing Documents of the Company, (B) any Company Agreement, (C) any other material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which Seller or the Company is a party or the Shares or the assets or properties of the Company are subject or by which Seller or the Company is bound, (D) any Court Order to which Seller or the Company is a party or any of the Shares are subject or by which Seller or the Company is bound, (E) any Governmental Permits or (F) any Requirements of Law affecting Seller or the Company, the Shares or the assets or Business of the Company; or

(ii)           require the approval, consent, authorization or act of, or notice to, any Person or any Governmental Body, or the making by Seller or the Company of any declaration, filing or registration with, any Person.

(d)           Seller does notdirectly or otherwise own, of record or beneficially, any common stock or other equity interest in or otherwise control any corporation, partnership, limited liability company, joint venture, trust or other entity which is involved in or relates to the Business.

4.4.         Financial Statements.  Schedule 4.4 contains (i) the balance sheet of the Company as of December 31, 2006 and the related statements of income and cash flows for the period then ended, together with the appropriate notes to such financial statements, together with the review report thereon of the Company Accountants (the “Reviewed Financial Statements”),

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and (ii) the unaudited Balance Sheet of the Company as of the Balance Sheet Date and the related statements of income and cash flows for the ten (10) months then ended (the “Unaudited Financial Statements”).  Except as set forth therein or in the notes thereto, the Reviewed Financial Statements and the Unaudited Financial Statements (a) have been prepared in conformity with GAAP consistently applied, (b) fairly present in all material respects the financial position of the Company at the dates of such balance sheets and the results of its operations and cash flows for the respective periods indicated and (c) are consistent with the books and records of the Company (which books and records are correct and complete).  None of the financial statements referred to in this Section 4.4 contain any material items of special or nonrecurring income except as expressly specified therein.  Except as set forth on Schedule 4.4 or in the Unaudited Financial Statements, the Unaudited Financial Statements include all adjustments, which consist only of normal recurring accruals, necessary for such fair presentation.  All costs and expenses incurred in generating the revenues reflected in the Reviewed Financial Statements during the respective periods covered thereby which are required by GAAP to be reflected in the Reviewed Financial Statements are so reflected.

4.5.         Operations Since November 1, 2007; Operations Since January 1, 2007.

(a)           Except as set forth in Schedule 4.5(a), since November 1, 2007, the Company has operated only in the ordinary course of business consistent with past practices and there has been:

(i)            no Material Adverse Change in the assets or properties of the Company, or the operations, liabilities, profitability or prospects or condition (financial or otherwise) of the Company, and no fact or condition exists or is contemplated or threatened which might reasonably be expected to cause a Material Adverse Change to occur in the future; and

(ii)           no damage, destruction, loss or claim, whether or not covered by insurance, or condemnation or other taking adversely affecting any of the Shares, the assets or properties of the Company or the Business.

(b)           Except as set forth in Schedule 4.5(b), since January 1, 2007, the Company has not:

(i)            authorized, issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any equity securities or any option, warrant or other right to purchase, any of its capital stock or other equity interest or any security convertible into its capital stock or other equity interest;

(ii)           authorized, issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any of its bonds, notes or other debt securities, or borrowed or agreed to borrow any funds, other than in the ordinary course of Business consistent with past practice;

(iii)          incurred or paid any obligation or liability (absolute or contingent) other than Current Liabilities reflected on the Balance Sheet and Current

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Liabilities incurred since the Balance Sheet Date in the ordinary course of Business consistent with past practice;

(iv)          committed to make or declare any payment of dividends or distributions (which have not been made or paid as of the date hereof), or committed to purchase or redeem any capital stock or other equity interest (which have not been purchased or redeemed as of the date hereof);

(v)           except in the ordinary course of Business consistent with past practice, made or permitted any material amendment or termination of any Company Agreement;

(vi)          undertaken or committed to undertake capital expenditures that, when added to all other capital expenditures since January 1, 2007, exceeded $50,000;

(vii)         made any investment in equity or debt securities of any other person that, when added to all other similar investments since January 1, 2007, exceeded $50,000 in the aggregate;

(viii)        committed to make charitable donations (which have not yet been made as of the date hereof) in excess of $10,000 in the aggregate;

(ix)           sold, leased (as lessor), transferred, licensed, assigned or otherwise disposed of (including any transfers to Seller or any of Seller’s Affiliates), or mortgaged or pledged, or imposed or suffered to be imposed any Encumbrance on, any of the assets (tangible or intangible) or property, including any Intellectual Property, reflected on the balance sheet included in the Reviewed Financial Statements or any assets acquired after January 1, 2007, except for inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of the Business consistent with past practice and except for Permitted Encumbrances;

(x)            cancelled any debts owed to or claims held (including the settlement of any claims or litigation) other than in the ordinary course of the Business consistent with past practice;

(xi)           created, incurred or assumed, or agreed to create, incur or assume, any indebtedness for borrowed money (other than money borrowed or advances from Seller or any of Seller’s Affiliates in the ordinary course of the Business consistent with past practice) or entered into, as lessee, any Capitalized Lease Obligations;

(xii)          accelerated or delayed collection of notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of the Business consistent with past practice;

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(xiii)         delayed or accelerated payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of the Business consistent with past practice;

(xiv)        allowed the levels of raw materials, supplies, work-in-process, finished goods, goods on consignment or other materials included in the inventory of the Business to vary in any material respect from the levels customarily maintained in the Business, after giving effect to the build-up of inventories in anticipation of new product introductions or to allow for seasonal shut-downs by suppliers;

(xv)         adopted any stock based incentive plan;

(xvi)        changed the Company’s year end, revalued any of its assets or made any change in the accounting principles and practices used by the Company from those applied in the preparation of the Reviewed Financial Statements;

(xvii)       amended the Company’s Articles of Incorporation or by-laws;

(xviii)      effected or been a party to any merger, consolidation, amalgamation, share exchange or other business combination, or adopted a plan (or the resolutions) for a partial or complete liquidation, dissolution, restructuring, recapitalization, reorganization, reclassification of the Shares, equity split, division of the Shares, reverse equity split, consolidation of the Shares or similar transaction;

(xix)         established, adopted or materially amended any bonus, profit sharing, compensation, severance, termination, pension, retirement, or deferred compensation agreement or plan for the benefit of any officer or employee or entered into, amended or modified any employment, collective bargaining or other similar arrangements with any employee or officer;

(xx)          instituted any increase in any wages, salary, bonus or other compensation payable to any employee or officer of the Company or in any existing profit-sharing, bonus, incentive, deferred compensation, insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to employees or officers of the Company;

(xxi)         acquired any real property or undertaken or committed to undertake capital expenditures exceeding $25,000 in the aggregate;

(xxii)        made any material change to its internal controls over financial reporting, or identified or became aware of any fraud or any significant deficiency or material weakness in internal control over financial reporting;

(xxiii)       entered into any agreement containing any provision or covenant limiting in any respect its ability to (i) sell or buy any products or services to or

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from any other Person, (ii) engage in any line of business, or (iii) compete with any Person;

(xxiv)       commenced any action, suit or proceeding seeking an amount in excess of $100,000, or settled any pending action, suit or proceeding at a cost in excess of $25,000; or

(xxv)        entered into or become committed to enter into any other material transaction.

4.6.         No Undisclosed Liabilities.  Except as set forth in Schedule 4.6, the Company is not subject to any liability (including, without limitation, unasserted claims, whether known or unknown), whether absolute, contingent, accrued or otherwise, which is not shown or which is in excess of amounts shown or reserved for in the Balance Sheet, other than liabilities of the same nature as those set forth in the Balance Sheet and reasonably incurred in the ordinary course of the Business after the Balance Sheet Date.

4.7.         Taxes.

(a)           Except as set forth on Schedule 4.7, (i) the Company has filed all Tax Returns required to be filed; (ii) all such Tax Returns are complete and accurate in all material respects and disclose all Taxes required to be paid by the Company for the periods covered thereby and all Taxes shown to be due on such Tax Returns have been timely paid; (iii) the Company is not currently the beneficiary of any extension of time within which to file any Tax Return; (iv) all Taxes (whether or not shown on any Tax Return) owed by the Company have been timely paid; (v) the Company has not waived or been requested to waive any statute of limitations in respect of Taxes which waiver is currently in effect; (vi) the Tax Returns referred to in clause (i) have been examined by the appropriate taxing authority or the period for assessment of the Taxes in respect of which each such Tax Return was required to be filed (taking into account all applicable extensions and waivers) has expired; (vii) there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened with respect to Taxes of the Company and, to the best of Company’s Knowledge, no basis exists therefor; (viii) all deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (i) have been paid in full; (ix) there are no Tax rulings, requests for rulings, or closing agreements relating to the Company which could reasonably affect the Company’s liability for Taxes for any period after the Closing Date; (x) as a result of a change in accounting method for a Tax period beginning on or before the Closing Date or for any Straddle Period, the Company will not be required to include any adjustment under Section 481(c) of the Code (or any corresponding provision of state, local or other Tax law) in taxable income for any Tax period ending after the Closing Date; (xi) as a result of any “closing agreement” (as described in Section 7121 of the Code or any corresponding provision of state or local Tax law), the Company will not be required to include any item of income in, or exclude any item of deduction from, any taxable period ending after the Closing Date; (xii) no written claim has ever been made by a taxing authority in a jurisdiction where the Company has never paid Taxes or filed Tax Returns asserting that the Company is or may be subject to Taxes assessed by such jurisdiction; (xiii) there are no Tax Sharing Arrangements or Tax indemnity arrangements relating to the Company in existence and the Company has no liability under any such arrangement; (xiv) there are no

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liens for Taxes upon the assets of the Company except liens relating to current Taxes not yet due; (xv) all Taxes which the Company is required by law to withhold or to collect for payment have been duly withheld and collected and have been paid to the appropriate governmental authority; (xvi) none of the assets reflected on the Reviewed Financial Statements or Unaudited Financial Statements is “tax-exempt use property” within the meaning of Section 168(h) of the Code, or subject to a so-called “TRAC lease” under Section 7701(h) of the Code (or any predecessor provision), none of the property of the Company is properly treated as owned by persons other than the Company for income Tax purposes; (xvii) the accruals for deferred Taxes reflected in the Reviewed Financial Statements or Unaudited Financial Statements are adequate to cover any deferred Tax liability of the Company determined in accordance with generally accepted accounting principles through the date thereof; (xviii) the Company is not properly treated as the owner of any property for income Tax purposes pursuant to Section 168(f)(8) of the Code (as in effect prior to its amendment by the Tax Reform Act of 1986) or corresponding provisions of state or foreign income Tax laws that is owned by any other person for non-income Tax purposes; (xix) no intercompany obligation (as described in Treas. Reg. § 1.1502-13(g)) between or among the Company or any member of any Company Group will remain outstanding following the Closing; (xx) there are no facts which the Company has recognized that, if known to any taxing authority, would be likely to result in the issuance of a notice of proposed deficiency or similar notice of intention to assess Taxes against the Company; (xxi) the Company has not participated in or cooperated with an international boycott, within the meaning of Section 999 of the Code, nor has had operations which are or may hereafter become reportable under Section 999 of the Code; (xxii) the Company has not disposed of property in a transaction being accounted for under the installment method pursuant to Section 453 or 453A of the Code; (xxiii) the Company has not incurred corporate acquisition indebtedness, as described in Section 279(b) of the Code; (xxiv) during the four taxable years ending on December 31, 2006 for federal (and corresponding state, local and foreign) income Tax purposes, the Company has not been subject to the alternative minimum tax imposed by Section 55 of the Code (or comparable provisions of state, local and foreign income Tax laws); (xxv) the Company does not have any liability for Taxes of another person under Treasury Regulation § 1.1502-6 (or any similar provision of state, local or foreign law); (xxvi) to the extent that any the Company has participated in a transaction that is described as a “reportable transaction” within the meaning of Treasury Regulation § 1.6011-4(b)(1), such participation has been adequately disclosed to the IRS on IRS Form 8886 (Reportable Transaction Disclosure Statement) (or predecessor Form); (xxvii) the Company has made a valid election under Section 1362 of the Code to be treated as an “S corporation” and has at all times during its existence qualified as an “S corporation” for purposes of Subchapter S of the Code, and will be an “S corporation” up to and including the Closing Date; (xxviii) with respect to all states which for state Tax purposes allow a corporation to be treated as an “S corporation” or similar entity entitled to special Tax treatment, all elections for such treatment have been properly and validly made in such states and the Company has complied at all times with all applicable requirements and filing procedures for such treatment; (xxix) the Company will not be subject to Tax under Section 1374 of the Code with respect to the transactions contemplated by this Agreement; (xxx) during the last three years, the Company has not been a party to any transaction (other than a transaction described in Section 355(e)(2)(C) of the Code) treated by the parties thereto as one to which Section 355 of the Code (or any similar provision of state, local or foreign law) applied; and (xxxi) there are no Tax credits, grants or similar amounts that are or will be subject to “clawback” or recapture as a result of (1) the transactions

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contemplated by this Agreement or (2) an act (or failure to act) by the Company to satisfy certain requirements on which the credit, grant or similar amount is or was conditioned.

(b)           No transaction contemplated by this Agreement is subject to withholding under Section 1445 of the Code (relating to “FIRPTA”) and no stock transfer Taxes, sales Taxes, use Taxes, real estate transfer or gains Taxes, or other similar Taxes will be imposed on the transactions contemplated by this Agreement.

(c)           The Company is not, and has never been, since the date of its incorporation, a member of any Company Group.

4.8.         Availability of Assets.  Except as set forth in Schedule 4.8, the assets and properties owned or leased by the Company constitute all the assets and properties used in or necessary for the operation of the Business as presently conducted (including all books, records, computers and computer programs and data processing systems) and are in good condition (subject to normal wear and tear) and serviceable condition and are suitable for the uses for which intended.

4.9.         Governmental Permits.

(a)           Except as described on Schedule 4.9(a), the Company owns, holds or possesses all licenses, franchises, permits, privileges, immunities, approvals, registrations and other authorizations from a Governmental Body which are necessary to entitle it to own or lease, operate and use its assets and to carry on and conduct the Business as presently conducted (collectively, the “Governmental Permits”), except for such Governmental Permits as to which the failure to so own, hold or possess would not reasonably be expected to have a Material Adverse Effect on the Company.  Schedule 4.9(a) sets forth a list and brief description of each Governmental Permit, which constitute all of the Governmental Permits necessary to enable the Company to conduct the Business as currently conducted, except for incidental licenses, permits and other authorizations which would be readily obtainable by any qualified applicant without undue burden in the event of any lapse, termination, cancellation or forfeiture thereof.  Complete and correct copies of all of the Governmental Permits have heretofore been delivered to Buyer by Seller.

(b)           Except as set forth in Schedule 4.9(b), (i) the Company has fulfilled and performed its obligations under each of the Governmental Permits, and no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any such Governmental Permit or which permits or, after notice or lapse of time or both, would permit revocation, alteration or termination of any such Governmental Permit, or which is reasonably likely to adversely affect the rights of the Company under any such Governmental Permit, and (ii) no written, or to the Knowledge of the Company, other notice of cancellation, of default or of any dispute concerning any Governmental Permit, or of any event, condition or state of facts described in the preceding clause, has been received by, or is within the Knowledge of, the Company.  To the Company’s Knowledge, each of the Governmental Permits is legal, valid, subsisting and in full force and effect and, except as set forth in Schedule 4.9(b), will continue in full force and effect following the Closing, in each case without (x) the occurrence of any breach, default or forfeiture of rights

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thereunder, or (y) the consent, approval, or act of, or the making of any filing with, any Governmental Body.

4.10.       Real Property.

(a)           The Company does not presently own, and has never owned, since the date of its incorporation, any fee simple interest in real property.

(b)           Schedule 4.10(b) sets forth a list and brief description of each lease or similar agreement (showing the parties thereto, any amendments or modifications thereto), under which the Company is lessee of, or holds or operates, any real property owned by any third Person (the “Leased Real Property”).  A true and complete copy (or a summary of non-written agreements) of each such lease agreement has been delivered to Buyer.

(c)           Except as set forth in Schedule 4.10(c):

(i)            the Company has complied in all material respects with all leases covering the Leased Real Property and the Company has not received any written notice from any lessor alleging that the Company is not in compliance with the terms of such lease, other than those claims which have been fully resolved;

(ii)           the Company has the right to quiet enjoyment of all the Leased Real Property for the full term of the lease or similar agreement (and any renewal option related thereto) relating thereto, subject to the maintenance in effect of the primary leases in circumstances in which the Company is a subtenant, and the leasehold or other interest of the Company in the Leased Real Property is not subject or subordinate to any Encumbrance except for Permitted Encumbrances;

(iii)          except for Permitted Encumbrances, there are no agreements or other documents governing or affecting the occupancy or tenancy of any of the Leased Real Property by the Company.  Complete and correct copies of any instruments evidencing Encumbrances, title opinions, surveys and appraisals in the Company’s or Seller’s possession or any policies of title insurance currently in force and in the possession of the Company or Seller with respect to each parcel of Leased Real Property have heretofore been delivered to Buyer; and

(iv)          no event has occurred or circumstances exist which, with the delivery of notice, the passage of time or both, would constitute a material breach or default, or permit the termination, modification or acceleration of rent, under any lease agreement listed in Schedule 4.10(b); no security deposit or portion thereof deposited with respect to such lease agreement has been applied in respect of a breach or default under such lease agreement which has not been redeposited in full; the Company does not, and will not owe in the future, any brokerage commissions or finder’s fees with respect to any such lease agreement.

(d)           Neither the whole nor any part of the Leased Real Property is subject to any pending suit for condemnation or other taking by any Governmental Body, and, to the

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Knowledge of the Company, no such condemnation or other taking is threatened or contemplated.

4.11.       Personal Property.

(a)           Except as set forth in Schedule 4.11(a) all machinery, equipment, materials, prototypes, tools, supplies, vehicles, furniture, fixtures, improvements and all other tangible personal property owned by the Company, having an original cost of $10,000 or more and used in or relating to the Business as presently conducted: (i) is located at the Company’s Costa Mesa, California facility or, to the extent described in Schedule 4.11(a), with suppliers or customers; (ii) is in good operating condition (other than ordinary wear and tear), maintained in accordance with normal industry practices; (iii) is, on the whole, suitable for the purposes for which they are presently used, without present need for material repair or replacement; and (iv) and conforms in all material respects with all applicable Requirements of Law.

(b)           Schedule 4.11(b) contains a list and description of each lease or other agreement or right, whether written or oral (showing in the case of each oral lease, the periodic rental, the expiration date thereof and a brief description of the property covered), under which the Company is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third Person, except for any such lease, agreement or right that is terminable by the Company without penalty or payment on notice of 30 days or less, or which involves the payment by the Company of rentals of less than $10,000 per year.

4.12.       Intellectual Property; Software.

(a)           Schedule 4.12(a) contains a list and description (showing in each case the products, devices, processes, services, businesses or publications related thereto, the registered or other owner, expiration date and registration or application number, if any) of all material intellectual property owned by, or licensed to, the Company in the conduct of the Business (“Intellectual Property”).  The term “Intellectual Property” includes, in each case below, each of the following which is owned by, or licensed to, the Company:

(i)            all United States, state and non-U.S. patents, filed provisional patent applications, filed patent applications, filed continuations, filed continuation-in-part patent applications, filed divisional patent applications, reissued patents, patent disclosures, filed industrial design applications, registered industrial designs (“Patent Rights”);

(ii)           all United States, state and non-U.S. trademark and service mark applications and registrations, logos, trade dress and trade names (including all assumed or fictitious names under which the Company is conducting its business or has within the previous five years conducted its business), Internet domain names, moral rights, designs, logos and slogans and general intangibles of like nature, whether registered or unregistered, and pending applications to register the foregoing, and all goodwill of the business associated therewith (“Trademarks”);

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(iii)          all United States, state and non-U.S. copyrights and copyrightable works, whether registered or unregistered and pending applications to register the same (“Copyrights”); and

(iv)          all confidential ideas, trade secrets, know-how, concepts, methods, processes, formulae, technology, algorithms, models, reports, data, customer lists, supplier lists, mailing lists, business plans, or other proprietary information (“Trade Secrets”).

(b)           Schedule 4.12(b) contains a list and description (showing in each case any owner, licensor or licensee) of all Software owned by, licensed to or used by the Company in the conduct of the Business, provided that Schedule 4.12(b) does not list mass market Software licensed to the Company that is commercially available and subject to “shrink-wrap” or “click-through” license agreements.

(c)           Schedule 4.12(c) contains a list and brief description (showing in each case the parties thereto and the dates thereof) of all material written agreements, commitments, contracts, licenses, sublicenses, assignments and indemnities which relate to any Intellectual Property or Software identified in Sections 4.12(a) and4.12(b).  The Company is not in material breach of any agreement, commitment, contract, understanding, license, sublicense, assignment or indemnity so listed, and the Company has not taken any action which would impair or otherwise adversely effect its rights in any of the Intellectual Property or Software so listed.

(d)           Except as disclosed in Schedule 4.12(d), the Company either:  (i) owns the entire right, title and interest in and to the Intellectual Property and Software, free and clear of any Encumbrance; or (ii) has the perpetual, royalty-free right to use the same, and to the Knowledge of the Company, there is no other Intellectual Property necessary for the Company to conduct the Business as currently conducted or planned to be conducted.  Except as set forth in Schedule 4.12(d), the Company is listed in the records of the appropriate United States, state or non-U.S. registry as the sole current owner of record for each application or registration required to be identified in Schedules 4.12(a) and 4.12(b) as being owned by the Company.

(e)           The transactions contemplated by this Agreement and Seller Ancillary Agreements will have no adverse effect on the validity and enforceability of any of the Intellectual Property, Software or materials identified in Section 4.12(c), and the Company’s rights, title and interest thereto immediately after the Closing Date shall be identical to such rights, title and interest thereto immediately prior to the Closing Date.

(f)            Except as disclosed on Schedule 4.12(f), to the Company’s Knowledge: (i) all registrations for Intellectual Property identified as being owned by the Company remain in force, and all applications to register any unregistered Intellectual Property are pending and in good standing, all without challenge of any kind; (ii) the Intellectual Property owned by the Company is valid and enforceable; (iii) the Company has the sole and exclusive right to bring actions for infringement or unauthorized use of the Intellectual Property and Software; and (iv) the Company is unaware of any infringement by any Person on any Intellectual Property owned by the Company.  Correct and complete copies of (x) registrations for all registered copyrights, trademark registrations, trade names, and patents identified as being owned by the Company, (y)

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all pending applications to register unregistered Intellectual Property (together with any subsequent correspondence or filings relating to the foregoing), and (z) all items identified in Section 4.12(c), have heretofore been delivered to Buyer.

(g)           To Seller’s Knowledge, except as disclosed in Schedule 4.12(g): (i) no infringement by the Company of any copyright, trademark, service mark, patent, trade secret or other property right of any other Person has occurred or results in any way from the operations of the Business; (ii) no claim of any infringement of any copyright, trademark, service mark, patent, trade secret or other property right of any other Person has been made or asserted in respect of the Company or the operation of the Business; and (iii) the Company has had no actual notice of, nor any Knowledge of any claim against the Company that its operations, activities, products, software, equipment, machinery or processes of the Business infringe any copyright, trademark, service mark, patent, trade secret or other property right of any other Person.

(h)           Except as disclosed on Schedule 4.12(h), to the Company’s Knowledge, the Software is not subject to any transfer, assignment, site, equipment, or other operational limitations.

(i)            The Company does not own or possess any Software and uses only Software that is an “off the shelf” package, except as listed on Schedule 4.12(i).

(j)            Except as disclosed on Schedule 4.12(j), each employee, agent, consultant, or contractor who has contributed to or participated in the creation or development of any Intellectual Property on behalf of the Company or any predecessor in interest thereto either:  (i) is a party to a “work-for-hire” agreement under which the Company is deemed to be the original owner/author of all property rights therein; or (ii) has executed an assignment or an agreement to assign in favor of the Company (or such predecessor in interest, as applicable) of all right, title and interest in such material.

4.13.       Accounts Receivable; Inventories.

(a)           Set forth on Schedule 4.13(a) is an aging of accounts receivable as of the Balance Sheet Date.  All accounts receivable of the Company have arisen from bona fide transactions by the Company in the ordinary course of the Business.  To the Company’s Knowledge, all accounts receivable reflected in the Balance Sheet are good and collectible in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowance for doubtful accounts reflected in the Balance Sheet and not subject to any setoffs or counterclaims.  None of the accounts receivable to be reflected in the Closing Date Balance Sheet will be subject to any setoffs or counterclaims.

(b)           The inventory obsolescence policies of the Company are appropriate for the nature of the products sold and the marketing methods used by the Company, the reserve for inventory obsolescence contained in the Balance Sheet fairly reflects the amount of obsolete inventory as of the Balance Sheet Date, and the reserve for inventory obsolescence to be contained in the Closing Date Balance Sheet will fairly reflect the amount of obsolete inventory as of the Closing Date.  Schedule 4.13(b) sets forth a list of locations where material inventories of the Company are located.

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4.14.       Title to Property.  The Company has good and marketable title to all of its assets reflected on the Balance Sheet as being owned by it and all of the assets thereafter acquired by it (except to the extent that such assets have been disposed of after the Balance Sheet Date in the ordinary course of business consistent with past practice), free and clear of all Encumbrances, except for Permitted Encumbrances and except as set forth in Schedule 4.14.  Except as set forth on Schedule 4.14, the Company has fulfilled and performed in all material respects all of its obligations, and all obligations binding upon any property, under each of the Encumbrances to which any property is subject, and the Company is not in material breach or default under, or in material violation of, or material noncompliance with, any such Encumbrances, and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a breach, default, violation or noncompliance.  The consummation of the transactions contemplated by this Agreement will not result in any breach, default, violation, noncompliance or forfeiture or impairment of any rights under any Encumbrance to which any property is subject, or require any consent, approval or act of, or the making of any filing with, any other party to or benefited by or holding rights under or with respect to any such Encumbrance.

4.15.       Employees and Related Agreements; ERISA.

(a)           Set forth in Schedule 4.15(a) is a true and complete list of each “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA) maintained by the Company or any ERISA Affiliate, or with respect to which the Company or any ERISA Affiliate has any liability or is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company or any ERISA Affiliate due to such employment (the “Pension Plans”).  Set forth in Schedule 4.15(a) is a true and complete list of each “employee welfare benefit plan” (as such term is defined in Section 3(1) of ERISA) maintained by the Company, or with respect to which the Company is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company due to such employment (the “Welfare Plans”) (the Pension Plans and Welfare Plans being the “ERISA Benefit Plans”).  In addition, set forth in Schedule 4.15(a) is a true and complete list of each other “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA) that is or has ever been subject to Section 302 of ERISA and (i) maintained by the Company or any ERISA Affiliate at any time during the six-year period prior to the Closing Date, or (ii) with respect to which the Company or any ERISA Affiliate was required to make any payment at any time during such period (the “Prior Pension Plans”).

(b)           Other than those listed in Schedule 4.15(a), set forth in Schedule 4.15(b) is a true and complete list of each of the following to which the Company is a party or with respect to which it has any liability or is or will be required to make any payment (the “Non-ERISA Commitments”):

(i)            each retirement, savings, profit sharing, deferred compensation, severance, stock ownership, stock purchase, stock option, performance, bonus, incentive, vacation or holiday pay, hospitalization or other medical, disability, life or other insurance, or other welfare, benefit or fringe benefit plan, policy, trust, understanding or arrangement of any kind, whether written or oral; and

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(ii)           each employee collective bargaining agreement and each agreement, understanding or arrangement of any kind, whether written or oral, with or for the benefit of any present or prior officer, director, employee, agent or consultant (including, without limitation, each employment, compensation, deferred compensation, severance or consulting agreement or arrangement, confidentiality agreement, covenant not to compete and any agreement or arrangement associated with a change in ownership or control of the Company, but excluding employment agreements terminable by the Company without premium or penalty on notice of thirty (30) days or less under which the only monetary obligation of the Company is to make current wage or salary payments and provide current fringe benefits).

(c)           The Company has delivered to Buyer correct and complete copies of: (i) all written Non-ERISA Commitments; (ii) all insurance and annuity policies and contracts and other documents relevant to any Non-ERISA Commitment; and (iii) a written summary of each Non-ERISA Commitment.  Schedule 4.15(b) contains a complete and accurate description of all oral Non-ERISA Commitments.  Except as disclosed in Schedule 4.15(a) or Schedule 4.15(b), none of the ERISA Benefit Plans or the Non-ERISA Commitments is subject to the law of any jurisdiction outside of the United States of America.

(d)           The Company has never been party to, or been required to contribute to, any ERISA Benefit Plan which is a “multiemployer plan” (as such term is defined in Section 3(37) of ERISA).  With respect to each ERISA Benefit Plan of the Company, the Company has delivered to Buyer correct and complete copies, where applicable, of (i) all plan documents and amendments thereto, trust agreements and amendments thereto and insurance and annuity contracts and policies, (ii) the current summary plan description, (iii) the Annual Reports (Form 5500 series) and accompanying schedules, as filed, for the most recently completed three plan years for which such reports have been filed, (iv) the financial statements for the most recently completed three plan years for which such statements have been prepared, (v) the actuarial reports for the most recently begun three plan years for which such reports exist, (vi) the most recent determination letter issued by the IRS and the application submitted with respect to such letter, (vii) PBGC Form 1 for the most recently begun plan year and (viii) all correspondence with the IRS, Department of Labor and Pension Benefit Guaranty Corporation concerning any controversy.  Each report described in clause (v) of the preceding sentence accurately describes the funded status of the plan to which it relates and subsequent to the date of such report there has been no adverse change in the funding status or financial condition of such plan.

(e)           With respect to each Pension Plan subject to Section 302 of ERISA, (i) no proceeding has been initiated to terminate such plan, (ii) there has been no “reportable event” (as such term is defined in Section 4043(b) of ERISA), (iii) no “accumulated funding deficiency” (within the meaning of Section 412 of the Code), whether or not waived, has occurred, (iv) no person has failed to make a required installment or any other payment required under Section 412 of the Code before the applicable due date, (v) neither the Company nor any ERISA Affiliate has provided or is required to provide security to such plan under Section 401(a)(29) of the Code due to a plan amendment that results in an increase in current liability, and (vi) without any additional contributions being made to such plan, the assets of such plan are sufficient to satisfy all obligations of the plan if the plan were to terminate (regardless of whether the plan can

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legally terminate) the present value of all “benefit liabilities” (as such term is defined in Section 4001(a)(16) of ERISA) does not exceed the current fair market value of the assets of such plan (determined by using the actuarial assumptions used for the most recent actuarial valuation.) Each Pension Plan which is intended to qualify under Section 401(a) of the Code has been determined to be so qualified by the IRS, and no circumstance has occurred or exists which might cause such plan to cease being so qualified.

(f)            To the Company’s Knowledge, there is no pending or threatened claim in respect of any of the ERISA Benefit Plans or Non-ERISA Commitments other than non-disputed claims for benefits in the ordinary course of business.  Except as set forth in Schedule 4.15(f), each of the ERISA Benefit Plans (i) has been administered substantially in accordance with its terms and (ii) complies in form, and has been administered substantially in accordance with the applicable Requirements of Law, including without limitation, ERISA and, where applicable, the Code.  The Company and each ERISA Affiliate has complied with the health care continuation requirements of Part 6 of Title I of ERISA.  The Company has no current or future obligation under any ERISA Benefit Plans or otherwise to provide health or other welfare benefits to any prior employees or any other person, except as required by Part 6 of Title I of ERISA.  The consummation of the transaction contemplated by this Agreement will not result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any compensation or benefits payable to or in respect of any participant.  The Company is in substantial compliance with the requirements of the Workers Adjustment and Retraining Notification Act (“WARN”) and has no liabilities pursuant to WARN or similar state law provisions.

(g)           Neither the Company nor any other “disqualified person” (within the meaning of Section 4975 of the Code) or “party in interest” (within the meaning of Section 3(14) of ERISA) has taken any action with respect to any ERISA Benefit Plan which is reasonably likely to subject any such plan (or its related trust) or the Company or any officer, director or employee of any of the foregoing to the penalty or tax under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the Code.

(h)           The Company has no potential liability, whether direct or indirect, contingent or otherwise, under Section 4063, 4064, 4069, 4204 or 4212(c) of ERISA.

(i)            Schedule 4.15(i) contains a list of all ERISA Affiliates of the Company.  For purposes of this Agreement, “ERISA Affiliate” means (i) any corporation which at any time on or before the Closing Date is or was a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company; (ii) any partnership, trade or business (whether or not incorporated) which at any time on or before the Closing Date is or was under common control (within meaning of Section 414(c) of the Code) by Seller; and (iii) any entity which at any time on or before the Closing Date is or was a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as Seller or any corporation described in clause (i) of this paragraph or any partnership, trade or business described in clause (ii) of this paragraph.

(j)            Schedule 4.15(j) contains:  (i) a list of all employees or commission salespersons of the Company as of November 30, 2007 who, in 2007, earned or will likely earn at a rate of

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compensation in excess of $60,000; (ii) the then current rate of annual compensation of, and a description of the fringe benefits (other than those generally available to all employees of the Company) provided by the Company to any such employees or commission salespersons; (iii) a list of all present or former employees or commission salespersons of the Company who were paid or will likely be paid at a rate of compensation in excess of $60,000 in calendar year 2007 who have terminated or given notice of their intention to terminate their relationship with the Company; (iv) a list of any increase, effective after November 30, 2007, in the rate of compensation of any employees or commission salespersons if such increase exceeds 3% of the previous annual salary of such employee or commission salesperson; and (v) a list of all substantial changes in job assignments of, or arrangements with, or promotions or appointments of, any employees or commission salespersons made with respect to any employee or sales person so listed since January 1, 2007.

(k)           Except as set forth in Schedule 4.15(k), to the Company’s Knowledge, (i) the Company is not involved in any transaction or other situation with any employee, officer, director or Affiliate of the Company which may be generally characterized as a “conflict of interest”, including, but not limited to, direct or indirect interests in the business of competitors, suppliers or customers of the Company or any Subsidiary, and (ii) there are no situations with respect to the Company or any Subsidiary which involved or involves (A) the use of any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (B) the making of any direct or indirect unlawful payments to government officials or others from corporate funds or the establishment or maintenance of any unlawful or unrecorded funds, (C) the violation of any of the provisions of The Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder, (D) the receipt of any illegal discounts or rebates or any other violation of the antitrust laws or (E) any investigation by any federal, foreign, state or local government agency or authority.

(l)            Neither the Company nor any officer, employee or agent thereof or other person acting on its behalf has, directly or indirectly, since its date of incorporation, given or agreed to give any gift or similar benefit (other than with respect to bona fide payments for which adequate consideration has been given) to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the Business of the Company (or assist the Company in connection with any actual or proposed transaction) (i) which is unlawful and might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) which, if not continued in the future, would have an adverse effect on the assets, the Business, operations or prospects of the Company or which would subject the Company to suit or penalty in any private or governmental litigation or proceeding, (iii) for any of the purposes described in Section 162(c) of the Code, or (iv) for establishment or maintenance of any concealed fund or concealed bank account.

4.16.       Employee Relations.  Except as set forth in Schedule 4.16, the Company has  substantially complied with all applicable Requirements of Law relating to prices, wages, hours, discrimination in employment and collective bargaining and is not liable for any arrears of wages or any Taxes or penalties for failure to comply with any of the foregoing.  The Company has not received a written notice of any unfair labor practice charge or complaint pending against it or, to the Knowledge of the Company, is any such charge or complaint threatened against it.  There is no lockout of any employees of the Company and no such action is contemplated by the

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Company.  There is no labor strike, material dispute, request for representation, slowdown or stoppage actually pending or to the Knowledge of the Company, threatened against or affecting the Company nor, to the Company’s Knowledge, any secondary boycott with respect to products of the Company.  The Company believes that its relations with the employees of the Company are satisfactory.  The Company is not a party to any collective bargaining agreement, and the Company is not affected by or threatened with, any dispute or controversy with a union or with respect to unionization or collective bargaining involving the employees of the Company.  Schedule 4.16 sets forth a description of any union organizing or election activities involving any non-union employees of the Company which have occurred since January 1, 2005 or, to the Knowledge of the Company, are threatened as of the date hereof.  No executive or manager of the Company (a) has, to the Company’s Knowledge, any present intention to terminate his or her employment or (b) is a party to any confidentiality, non-competition, proprietary rights or other such agreement between such employee and any Person other than the Company.

4.17.       Contracts.  Except as set forth in Schedule 4.17 or any other Schedule hereto, the Company is not a party to or bound by:

(i)            any contract for the purchase or sale of real property or contract for the lease or sublease of real property having an annual base rent in excess of $10,000;

(ii)           any executory contract (other than a contract consisting solely of a purchase order) for the purchase of services, materials, supplies or equipment which (x) involved the payment of more than $25,000 in 2007, (y) can reasonably be expected to involve the payment of more than $25,000 in 2008 or (z) has a term that extends beyond June 30, 2008;

(iii)          any executory contract (other than a contract consisting solely of a purchase order) for the purchase or sale of machinery, equipment or other tangible assets (other than inventory) that involves the payment of more than $25,000, or lease or use (whether as a lessee or lessor) of personal property having an annual base rent in excess of $10,000;

(iv)          any executory contract (other than a contract consisting solely of a purchase order) for the sale of goods or services which (x) involved the payment of more than $25,000 in 2007, (y) can reasonably be expected to involve the payment of more than $25,000 in 2008 or (z) has a term that extends beyond June 30, 2008;

(v)           any executory contract for the purchase, licensing or development of Software or relating to Intellectual Property that involved the fixed payment of more than $25,000 in 2007 or under which royalties paid by or to the Company exceeded in fiscal year 2007, or is expected to exceed in fiscal year 2008, $25,000;

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(vi)          any executory consignment, distributor, dealer, manufacturers representative, sales agency, advertising representative or advertising or public relations contract;

(vii)         any guaranties, surety bonds or surety agreements;

(viii)        any executory contract which limits or restricts where the Company may conduct the Business or the type or line of business in which the Company may engage;

(ix)           any agreement which provides for, or relates to (a) the incurrence of indebtedness for borrowed money by the Company or under which it has imposed an Encumbrance on any of the Company’s assets, tangible or intangible, or (b) extension of credit (including any interest rate or non-U.S. currency swap, cap, collar, hedge or insurance agreements, or options or forwards on such agreements, or other similar agreements for the purpose of managing the interest rate and/or non-U.S. exchange risk associated with its financing) in favor of the Company by a third Person, including officers and employees, other than in the ordinary course of business consistent with past practice;

(x)            any contract which provides for, or relates to, any non-competition or confidentiality arrangement with any Person, including any current or former officer or employee of Seller;

(xi)           any written contract (i) for the employment of any individual or third Person provider on a full-time, part-time, consulting, or other basis providing annual rate of compensation (or minimum fixed compensation) in excess of $60,000 or (ii) providing, in the case of an employee, severance benefits other than as specified in the general policies of the Company;

(xii)          any executory contract or group of related contracts for capital expenditures in excess of $25,000 for any single project or related series of projects;

(xiii)         any executory contract relating to the distribution, marketing, advertising or sales of its products and/or services;

(xiv)        plans or contracts or arrangements providing for bonuses, options, deferred compensation, severance, retirement payments, profit sharing, medical or dental benefits or other fringe benefit plans or arrangements covering its current and former officers and employees;

(xv)         any contract between the Company, on the one hand, and any of its Affiliates, on the other hand;

(xvi)        any partnership, joint development, joint venture, strategic alliance or other similar arrangement or agreement involving a sharing of profits or losses;

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(xvii)       settlement, conciliation or similar agreements pursuant to which the Company will be required as of and after the date of this Agreement to pay consideration in excess of $25,000;

(xviii)      any collective bargaining agreements;

(xix)         any contract which (i) involves payments or receipts by the Company of more than $25,000 (other than for the purchase or sale of goods or rendering services in the ordinary course of business), or (ii) is not terminable on one hundred eighty (180) days or less notice; or

(xx)          any agreement under which the consequence of a default or termination would reasonably be expected to have a Material Adverse Effect on the Company.

4.18.       Status of Contracts.  Except as set forth in Schedule 4.18 or in any other Schedule hereto:

(a)           each of the leases, contracts and other agreements listed in Schedules 4.10(b), 4.11(b), 4.12(c), 4.15(b) and 4.17 (collectively, the “Company Agreements”) constitutes, to the extent it confers benefits on the Company, to the Knowledge of the Company, a legal, valid, binding and enforceable obligation of the other Person thereto and is in full force and effect and (except as set forth in Schedule 4.3(c) and except for those Company Agreements which by their terms will expire prior to the Closing Date or are otherwise terminated prior to the Closing Date in accordance with the provisions hereof) will continue to be legal, valid, binding and enforceable and in full force and effect on identical terms after the Closing, in each case without the Company having breached the terms thereof, without any forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other party;

(b)           the Company has fulfilled and performed its material obligations under each of the Company Agreements, and the Company is not in, or alleged to be in, material breach or default under, nor, to the Company’s Knowledge, is there or is there alleged to be any basis for termination of, any of the Company Agreements.  To the Company’s Knowledge, no party to any of the Company Agreements has breached or defaulted thereunder, and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by any such other party, or give any Person the right to declare a default, exercise any remedy, accelerate the maturity or performance under any of the Company Agreements;

(c)           the Company has not repudiated any provision of, or is currently renegotiating any of, the Company Agreements or paying liquidated damages in lieu of performance thereunder;

(d)           the Company has not received any notice from any party to any Company Agreement claiming a breach by the Company thereunder or indicating such party’s intention  to terminate, renegotiate, cancel or decrease the rate of business done with the Company;

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(e)           the Company is not party to any contract requiring it to purchase goods or services above prevailing market rates and prices or to sell goods or services below prevailing market rates or below the cost of such goods or services to the Company; or

(f)            Seller has delivered to Buyer complete and correct copies of each Company Agreement (as amended to date, together will all waivers thereto) and a written summary of each oral Company Agreement.

4.19.       No Violation or Litigation.  Except as set forth in Schedule 4.19:

(a)           none of the Shares, the Seller or the Company, or any of Company’s assets or properties is subject to any Court Order;

(b)           the assets and properties of the Company and their uses substantially comply with all applicable Requirements of Law and Court Orders;

(c)           the Company is in substantial compliance with all Requirements of Law and Court Orders which are applicable to the Company, its assets, properties or the Business;

(d)           there are no lawsuits, claims, suits, proceedings or investigations pending or, to the Knowledge of the Company, threatened against or affecting the Shares or the Company or its assets or properties or the Business nor, to the Knowledge of the Company, is there any basis for any of the same, and there are no lawsuits, suits or proceedings pending in which the Company is the plaintiff or claimant or which relates to the Shares, the Company’s assets or properties or the Business;

(e)           there is no action, suit or proceeding pending or, to the Knowledge of the Company, threatened which questions the legality or propriety of the transactions contemplated by this Agreement; and

(f)            to the Knowledge of the Company, no legislative or regulatory proposal has been adopted or is pending which could reasonably be expected to materially adversely affect the Shares, the Company or the Business.

4.20.       Environmental Matters.  Except as set forth in Schedule 4.20:

(a)           the operations of the Company comply in all material respects with, and, for the past five (5) years, the Business has been in compliance in all material respects with, all applicable Environmental Laws;

(b)           the Company has obtained all environmental, health and safety Governmental Permits necessary for its operations, and all such Governmental Permits are in good standing and the Company is, and has been since the date of its incorporation, in compliance with all terms and conditions of such permits in all material respects;

(c)           all Persons being utilized by the Company as of the Closing Date to remove, store, handle, transport, dispose, bury, incinerate, recover or treat any waste have, to the Company’s Knowledge, all franchises, permits, licenses, certificates of compliance, consents,

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approvals and authorizations of, and registrations with, all Governmental Bodies necessary or required under all Environmental Laws to perform the services for which they have been hired;

(d)           none of the Company, nor any of the present Company Property or operations, or the past Company Property or operations, is subject to any on-going investigation by, order from or agreement with any Person (including, to the Knowledge of the Company any prior owner or operator of Company Property) respecting (i) any Environmental Law, (ii) any Remedial Action or (iii) any claim of Losses and Expenses arising from the Release or threatened Release of a Contaminant into the environment;

(e)           the Company is not subject to any judicial or administrative proceeding, order, judgment, decree or settlement alleging or addressing a violation of or liability under any Environmental Law;

(f)            since January 1, 2003, neither the Company nor the Business has:

(i)            reported a Release of a hazardous substance pursuant to Section 103(a) of CERCLA, or any state equivalent;

(ii)           filed a notice pursuant to Section 103(c) of CERCLA;

(iii)          been listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the Comprehensive Environmental Response, Compensation and Liability Information System List or any state list of sites requiring Remedial Action;

(iv)          filed notice pursuant to Section 3010 of RCRA indicating the generation of any hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent; or

(v)           filed any notice under any applicable Environmental Law reporting a substantial violation of any applicable Environmental Law;

(g)           there is not now, nor to the Knowledge of Company has there ever been, on or in any Company Property:

(i)            any treatment, recycling, storage or disposal of any Contaminant or hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent, that requires or required a Governmental Permit pursuant to Section 3005 of RCRA; or

(ii)           any underground storage tank or surface impoundment or landfill or waste pile;

(h)           there is not now on or in any Company Property any polychlorinated biphenyls (PCB) used in pigments, hydraulic oils, electrical transformers or other equipment;

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(i)            the Company has not received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant;

(j)            no Environmental Encumbrance has attached to any Company Property;

(k)           any asbestos-containing material which is on or part of any Company Property is in good repair according to the current standards and practices governing such material, and its presence or condition does not violate any currently applicable Environmental Law; and

(l)            none of the Products in the past contained or now contains asbestos or asbestos-containing material.

Pursuant to this Section 4.20, Seller has provided to Buyer all environmental audits, assessments and reports and all other documentation relating to environmental, health or safety liabilities, in each case relating to the past or current properties, facilities or operations of the Company and its predecessors, which are in its possession or under its reasonable control.

4.21.       Insurance.

(a)           The Company maintains policies of fire and casualty, liability (general, products and other liability), workers’ compensation and other forms of insurance and bonds in such amounts and against such risks and losses as are insured against by companies engaged in the same or a similar business.  Schedule 4.21(a) sets forth a list and brief description (including nature of coverage, limits, deductibles, premiums and the loss experience for the most recent five years with respect to each type of coverage) of all policies of insurance maintained, owned or held by the Company.  All such insurance policies are legal, valid, binding, and enforceable.  The Company shall keep or cause such insurance or comparable insurance in full force and effect through the Closing Date and such insurance shall continue to be in full force and effect on identical terms after the Closing Date.  The Company has complied in all material respects with each of such insurance policies and has not failed to give any notice or present any claim thereunder in a due and timely manner.  Except as disclosed in Schedule 4.21(a), the full policy limits (subject to deductibles provided in such policies) are available and unimpaired under each such policy and to the Knowledge of the Company, no insurer under any of such policies has a basis to void such policy on grounds of non-disclosure on the part of the policyholder or the insured thereunder.  Each of such policies is in full force and effect and will not in any way be affected by or terminate or lapse by reason of the transactions contemplated by this Agreement.  Seller has delivered to Buyer correct and complete copies of the most recent inspection reports, if any, received from insurance underwriters as to the condition of the Company’s assets.

(b)           Schedule 4.21(b) includes a list of (i) each product liability claim submitted to the Company since January 1, 2005, except for those claims which the Company’s insurers have accepted defense without reservation of rights.  Except for such claims, the full policy limits (subject to deductibles provided therein) are available and unimpaired under each such policy.  The Company has complied with each such policy in all material respects and has not failed to give any notice or present any claim thereunder in a due and timely manner.

(c)           The liability and excess liability insurance policies listed on Schedule 4.21(c) provide product liability coverage for the Company on an occurrence basis, cover all claims for

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injuries which have occurred or may occur on or prior to the Closing Date and will (subject to their policy limits) cover payment of any adverse judgment rendered against the Company in any claim arising out of a product liability occurrence occurring on or prior to the Closing Date.

4.22.       Customers and Suppliers.  Schedule 4.22 sets forth (i) a list of names and addresses of the twenty (20) largest customers and the ten (10) largest suppliers (measured by dollar volume of purchases or sales in each case) of the Company and the percentage of the Business which each such customer or supplier represents or represented during the year ended December 31, 2006 and the eleven (11) months ended November 30, 2007; and (ii) copies of the forms of purchase order for inventory and other supplies and sales contracts for finished goods used by the Company.  Except as set forth in Schedule 4.22, there exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship of the Company with any customer or group of customers listed in Schedule 4.22, or whose purchases individually or in the aggregate are material to the operations of the Business, or with any supplier or group of suppliers listed in Schedule 4.22, or whose sales individually or in the aggregate are material to the operations of the Company, and there exists no present or future condition or state of facts or circumstances involving customers, suppliers or sales representatives which could reasonably be expected to have a Material Adverse Effect on the Company or interfere with the conduct of the Business after the consummation of the transactions contemplated by this Agreement in essentially the same manner in which it has heretofore been conducted.

4.23.       Budgets.  Schedule 4.23 sets forth as of the date hereof the operating budget of the Company prepared in the ordinary course of the Business for the fiscal year ending December 31, 2008.  Seller hereby represents that the Company does not prepare capital expenditure budgets.

4.24.       Warranties; Product Defects.

(a)           Schedule 4.24(a) describes the warranties covering the Company’s existing product line (identifying the products or models to which each such warranty applies).  The Company’s products manufactured, merchandised, serviced, distributed, sold or delivered by the Company at any time on or prior to the Closing Date have been in substantial conformity with all applicable Requirements of Law and all contractual commitments and express or implied warranties.  To the Knowledge of the Company, no material liability exists for any return claim, warranty claim or other obligation to provide parts and service on, or to repair or replace, any products sold or delivered by the Company at any time on or prior to the Closing Date beyond the amounts reserved for warranty expense reflected in the Balance Sheet.

(b)           Schedule 4.24(b) sets forth a list of all (i) of the Company’s products which have been recalled, withdrawn or suspended (other than (x) products discontinued or suspended in the ordinary course of business or by reason of business decisions made without regard to (1) concerns as to design or other inherent defect or risk to the safety of the users thereof or (2) concerns of any Governmental Body and (y) isolated instances with respect to particular product units which are not representative of an entire product category) since January 1, 2005 and (ii) proceedings pending against the Company at any time since January 1, 2005 (whether such proceeding have since been resolved or remain pending) seeking the recall, withdrawal,

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suspension or seizure of any of the Company’s products or seeking to enjoin the Company from engaging in activities pertaining to any of the Company’s products.

                4.25.       Authority to Bind the Company.Schedule 4.25 sets forth each employee and sales representative of the Company who has the authority to bind the Company in connection with price quotations or acceptance of orders for the Company’s goods.

4.26.       No Finder. Except as set forth on Schedule 4.26, the Company has not paid, become obligated to pay, or will become obligated to pay, any fee, commission or similar payment to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

4.27.       Financial Projections. The Company has made available to Buyer certain financial projections with respect to the Business, which projections were prepared for internal use only. Seller makes no representation or warranty regarding the accuracy of such projections or as to whether such projections will be achieved or otherwise, except that Seller represents and warrants that such projections were prepared in good faith and are based on assumptions believed by Seller to be reasonable.

4.28.       Bank Accounts; Power of Attorney; Minute Books.

(a)           Schedule 4.28 sets forth a complete and correct list of all bank accounts and safe deposit boxes of the Company and persons authorized to sign or otherwise act with respect thereto as of the date hereof and a complete and correct list of all persons holding a general or special power of attorney granted by the Company and a complete and correct copy thereof.

(b)           True and complete copies of the minute books of the Company have been delivered to Buyer. Such minute books contain true and complete records of all meetings and other corporate action taken by the board of directors and stockholders of the Company.

4.29.       Related and Other Transactions.

(a)           Schedule 4.29(a) sets forth (i) a description of (A) all services provided by the Company to Seller or any Affiliate of Seller and (B) any use by Seller or any other Affiliate thereof of either (x) any assets or properties of the Company or (y) any employees of the Company for any purpose other than the conduct of the Business, and the manner in which the Company has been compensated for the costs of providing such services or use, and (ii) a description of (A) all services provided by Seller or any Affiliate of Seller to the Company and (B) any use by the Company of either (x) any assets or properties owned by the Seller or any other Affiliate thereof or (y) any employees of Seller or any other Affiliate thereof for the conduct of the Business, and the manner in which the Company has compensated the Seller or such Affiliate for the costs of providing such services or use.

(b)           Except as set forth in Schedule 4.29(b), since January 1, 2006, the Company has not, directly or indirectly, purchased, leased or otherwise acquired any material property or obtained any material services, or sold, leased or otherwise disposed of any material property or furnished any material services (except with respect to remuneration for services rendered as a director, officer or employee of the Company as disclosed to Buyer), or entered into any business

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relationship or arrangement, in the ordinary course of business or otherwise, from or to (i) Seller, (ii) any Affiliate of Seller or the Company, (iii) any Person who is an officer, director or employee (or any family member of the foregoing Persons), of the Company, (iv) any member of Seller’s immediate family or other relative of first degree, or (v) any Associate of any person referred to in clause (i), (ii), (iii), or (iv) above (collectively, “Related Persons”). Except as set forth in Schedule 4.29(b), the Company does not owe any amount in excess of $10,000 to, or have any contract with or commitment to, any Related Person (other than for compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business as disclosed to Buyer) and none of such Related Persons owes any amount in excess of $10,000 to the Company.

4.30.       Disclosure. None of the representations or warranties of Seller contained herein, none of the information contained in the Schedules referred to in this ARTICLE IV, and none of the other information or documents furnished to Buyer or any of its representatives by Seller or their representatives pursuant to the terms of this Agreement, is false or misleading in any material respect or omits to state a fact herein or therein necessary to make the statements herein or therein not misleading in any material respect. Seller is aware of no fact or facts which will adversely affect, or in the future is or are likely to adversely affect, the Shares, the Company or the Business in any material respect which has not been set forth or referred to in this Agreement or the Schedules hereto.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER

As an inducement to Seller to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer hereby represents and warrants to Seller and agrees as follows:

5.1.         Organization of Buyer. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full power and authority to own or lease and to operate and use its assets and properties and to carry on its business as now conducted.

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5.2.         Authority of Buyer; No Conflict.

(a)           Buyer has full power and authority to execute, deliver and perform this Agreement and all Buyer Ancillary Agreements. The execution, delivery and performance of this Agreement and Buyer Ancillary Agreements by Buyer have been duly authorized and approved by the board of directors of Buyer and such actions do not require any further authorization or consent of Buyer’s shareholders. This Agreement has been duly authorized, executed and delivered by Buyer and is the legal, valid and binding agreement of Buyer enforceable in accordance with its terms, and each of Buyer Ancillary Agreements has been duly authorized by Buyer and upon execution and delivery by Buyer will be a legal, valid and binding obligation of Buyer enforceable in accordance with its terms.

(b)           Neither the execution and delivery of this Agreement nor any of the Buyer Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will:

(i)            conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under (A) the Certificate of Formation or operating agreement of Buyer, (B) any material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which Buyer is a party or any of its assets or properties is subject or by which Buyer is bound, (C) any Court Order to which Buyer is a party or by which it is bound or (D) any Requirements of Law affecting Buyer; or

(ii)           require the approval, consent, authorization or act of, or the making by Buyer of any declaration, filing or registration with, any Person.

5.3.         No Finder. Neither Buyer nor any Person acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

5.4.         Investment Representation. The Shares are being acquired by Buyer for its own account for investment, and not with a view to the sale or distribution of any part thereof without registration under the Securities Act of 1933 or pursuant to an applicable exemption therefrom.

5.5.         Solvency. Buyer is solvent and has adequate capital and financing resources, and as of the Closing Date will have adequate capital and financing resources, to purchase the Shares and to make all payments required to be made by Buyer under this Agreement.

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ARTICLE VI

ADDITIONAL AGREEMENTS

6.1.         Use of Names. Seller agrees that, from and after the Closing Date, Seller shall, and shall cause each of Seller’s Affiliates to, discontinue the use of the name “CoCaLo” or “CoCaLo Inc.” (or any derivative thereof).

6.2.         Taxes.

(a)           Liability for Taxes. Seller shall be liable for and pay, and pursuant to ARTICLE IX shall indemnify and hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from all Taxes imposed on the Company, or for which the Company may otherwise be liable, for any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date (including, without limitation, any obligations to contribute to the payment of a Tax determined on a consolidated, combined or unitary basis with respect to any Company Group); provided, however, that Seller, shall not be responsible for (a) any Taxes to the extent shown as a liability or reserve for Tax liabilities (excluding any liability or reserve for deferred Taxes established to reflect timing differences between book and Tax income) on the Closing Date Balance Sheet and included in the actual Working Capital, and (b) notwithstanding anything to the contrary herein, any Taxes resulting from a sale of the Company by Buyer (the Taxes described in this proviso, hereinafter “Excluded Taxes”).

(i)            For purposes of the foregoing paragraph, whenever it is necessary to determine the liability for Taxes of the Company for a Straddle Period, the determination of the Taxes of the Company for the portion of the Straddle Period ending on and including, and the portion of the Straddle Period beginning after, the Closing Date shall be determined by assuming that the Straddle Period consisted of two taxable years or periods, one which ended at 11:59 p.m. (Pacific Standard Time) on the Closing Date and the other which began at the 12:00 a.m. (Pacific Standard Time) on the day following the Closing Date and items of income, gain, deduction, loss or credit of the Company for the Straddle Period shall be allocated between such two taxable years or periods on a “closing of the books basis” by assuming that the books of the Company were closed at the close of the Closing Date, provided, however, that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned between such two taxable years or periods on a daily basis.

(ii)           Seller shall be liable for and pay, and pursuant to ARTICLE IX shall indemnify and hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from any real property transfer or gains Tax, sales Tax, use Tax, stamp Tax, stock transfer Tax, or other similar Tax imposed on the transactions contemplated by this Agreement. For the avoidance of doubt, Seller shall pay any Tax imposed on the Company attributable to the deemed sale of the

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assets arising from the making of the Section 338(h)(10) Election, including (i) any Tax imposed under Section 1374 or (ii) any state, local or foreign Tax imposed on the Company’s deemed sale gain; provided, however, that Seller may be reimbursed for any Tax Increment relating to the Section 338(h)(10) Election in accordance with Section 6.2(g)(ii).

(iii)          If Buyer or the Company becomes entitled to a refund or credit of Taxes for which Seller is liable under this Section 6.2(a) to indemnify Buyer and the Company, and such refund or credit is attributable to the carryback of losses, credits or similar items from a taxable year or period that begins after the Closing Date and is attributable to Buyer or the Company, Seller shall not be entitled to the benefit of such refund or credit. In the event that any Taxes for which a payment has been made to Buyer by Seller are subsequently reduced or eliminated, Buyer shall pay to Seller the amount by which such Taxes are reduced or eliminated, provided that any such reduction or elimination is not attributable to the carryback of losses, credits or similar items from a taxable year or period that begins after the Closing Date.

(iv)          For purposes of this Section 6.2, Tax refunds shall include any interest that is paid as part of the payment of such refunds, reduced by the increase in the original payee’s federal, state, local, foreign or other Taxes payable attributable to such interest after taking into account any offsetting deductions or credits.

(b)           Tax Returns.

(i)            Seller shall timely file or cause to be timely filed when due (taking into account all extensions properly obtained) all Tax Returns that are required to be filed by or with respect to the Company for periods ending on or prior to the Closing Date and Seller shall remit (or cause to be remitted) any Taxes due in respect of such Tax Returns. Buyer shall timely file or cause to be timely filed when due (taking into account all extensions properly obtained) all Tax Returns that are required to be filed by or with respect to Buyer and/or the Company after the Closing Date (other than those covered by the first sentence of this Section 6.2(b)(i)) and Buyer shall remit (or cause to be remitted) any Taxes due in respect of such Tax Returns.

(ii)           Seller or Buyer shall reimburse the other party for the Taxes for which Seller or Buyer is liable pursuant to paragraph (a) of this Section 6.2 but which are remitted in respect of any Tax Return to be filed by the other party pursuant to this paragraph (b) upon the written request of the party entitled to reimbursement setting forth in detail the computation of the amount owed by Seller or Buyer, as the case may be, but in no event earlier than 10 days prior to the due date for paying such Taxes. In no event shall the foregoing reimbursement obligations be limited in any way by limitations set forth in Sections 9.1 or 9.2. All Tax Returns which Seller is required to file or cause to be filed in accordance with this paragraph (b) shall be prepared and filed in a manner

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consistent with past practice and, on such Tax Returns, no position shall be taken, election made or method adopted that is inconsistent with positions taken, elections made or methods used in preparing and filing similar Tax Returns in prior periods (including, but not limited to, positions, elections or methods which would have the effect of deferring income to periods for which Buyer is liable under this Section 6.2 or accelerating deductions to periods for which Seller is liable under this Section 6.2).

(c)           Contest Provisions.

(i)            Buyer shall notify Seller in writing upon receipt by Buyer, any of its Affiliates or, after the Closing Date, the Company of notice of any pending or threatened federal, state, local or foreign Tax audits or assessments which may materially affect the Tax liabilities of the Company for which Seller would be required to indemnify Buyer Group Members pursuant to paragraph (a) of this Section 6.2, provided that failure to comply with this provision shall not affect Buyer’s right to indemnification hereunder except to the extent such failure materially impairs Seller’s ability to contest any such Tax liabilities.

(ii)           Seller shall have the sole right to represent the Company’s interests in any Tax audit or administrative or court proceeding relating to Tax liabilities for which Seller would be required to indemnify Buyer Group Members pursuant to paragraph (a) of this Section 6.2 and which relate to taxable periods ending on or before the Closing Date, and to employ counsel of Seller’s choice at Seller’s expense; provided, however, that Seller shall have no right to represent the Company’s interests in any Tax audit or administrative or court proceeding unless Seller shall have first notified Buyer in writing of Seller’s intention to do so and of the identity of counsel, if any, chosen by Seller in connection therewith, and shall have agreed with Buyer in writing that, as between Buyer and Seller, Seller shall be liable for any Losses and Expenses relating to Taxes that result from such audit or proceeding; provided, further, that Buyer and its representatives shall be permitted, at Buyer’s expense, to be present at, and participate in, any such audit or proceeding. Nothing herein shall be construed to impose on Buyer or any Affiliate thereof any obligation to defend the Company in any Tax audit or administrative or court proceeding. Buyer shall have the sole right to defend the Company with respect to any issue arising with respect to any such Tax audit or administrative or court proceeding to the extent Buyer shall have agreed in writing to forego any indemnification under this Agreement with respect to such issue. Notwithstanding the foregoing, Seller shall not be entitled to settle, either administratively or after the commencement of litigation, any claim for Taxes which could reasonably be expected to adversely affect the liability for Taxes of any Buyer Group Member or the Company for any period after the Closing Date to any extent unless Seller has received the prior written consent of Buyer, which consent shall not be unreasonably withheld.

(iii)          In the case of any Tax audit or administrative or court proceeding relating to a Straddle Period, Buyer shall have the sole right to represent the

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Company’s interests and Seller shall be entitled to participate in any Tax audit or administrative or court proceeding relating to Taxes attributable to the portion of such Straddle Period ending on and including the Closing Date for which Seller would be required to indemnify Buyer Group Members pursuant to paragraph (a) of this Section 6.2; provided, however, that to the extent that such audit or proceeding relates solely to Tax liabilities for which Sellers would be required to indemnify Buyer Group Members pursuant to paragraph (a) of this Section 6.2 and to the taxable period of such Straddle Period ending on or before the Closing Date this Section 6.2(c)(iii) shall not apply and Section 6.2(c)(ii) shall apply.

(d)           Assistance and Cooperation. After the Closing Date, Seller and Buyer shall (and shall cause their respective Affiliates to):

(i)            timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns or other reports with respect to, Taxes described in paragraph (a) of this Section 6.2 (relating to sales, transfer and similar Taxes);

(ii)           assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing in accordance with paragraph (b) of this Section 6.2, and in connection therewith provide the other party necessary powers of attorney;

(iii)          cooperate fully in preparing for and conducting any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Company;

(iv)          make available to the other and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Company; and

(v)           furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period.

(e)           Survival of Obligations. Notwithstanding anything to the contrary in this Agreement, the obligations of the parties set forth in this Section 6.2 shall be unconditional and absolute and shall remain in effect without limitation as to time.

(f)            No Duplication of Indemnities. To the extent that the provisions of this Section 6.2 conflict with the provisions of ARTICLE IX, the provisions of this Section 6.2 shall control and no double payment shall be made with respect to any breach or alleged breach of any representation or warranty contained in Section 4.7.

(g)           Section 338(h)(10) Election.

(i)            Seller will join with Buyer in making a Section 338(h)(10) Election with respect to the Company. Buyer and Seller shall take (or cause to be taken) all actions necessary and appropriate (including timely filing such forms,

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Tax returns, elections, schedules and other documents as may be required), at such party’s cost and expense, to effect and preserve a timely Section 338(h)(10) Election in accordance with the requirements of Section 338 of the Code and under similar provisions of state, local or foreign tax law with respect to the purchase of the Shares. Seller represents that a Section 338(h)(10) Election can be made with respect to the Company in connection with the sale of the Shares contemplated by this Agreement. Buyer shall be responsible for the preparation and filing of all forms and documents required in connection with the Section 338(h)(10) Election and shall provide Seller with properly completed copies of Form 8023 for the Section 338(h)(10) Election (and any corresponding state or local Tax forms) forty-five (45) days before each is required to be filed. Seller shall review and comment on such Forms within twenty (20) days of Seller’s receipt thereof. As long as Buyer incorporates any reasonable comments of Seller (and has not made any other revisions to such Forms except those approved by Seller) and Seller is provided with such revised Forms at least 10 days prior to the filing deadline, Seller shall execute and deliver to Buyer within such 10 days any such Forms for filing by Buyer. Any disagreement over the content of such Forms shall be settled by the Company Accountants. Attached hereto as Exhibit A is the methodology by which the Base Purchase Price shall be allocated among the assets of the Company to be reflected on IRS Form 8883, Asset Allocation Statement. Buyer and Seller shall, not later than forty-five (45) days after the final determination of the amount of any payment required by Section 2.1, jointly agree upon the additional allocations to be reflected on such IRS Form 8883, Asset Allocation Statement. If they cannot so agree, the additional allocations shall be determined by the Company Accountants. Each of the parties hereto shall prepare all Tax returns in a manner consistent with the Allocations and shall not take or fail to take, any action to the extent such action or failure to act, as the case may be, is inconsistent with or would otherwise prejudice the Section 338(h)(10) Election. The parties shall cooperate fully with each other and make available to each other such Tax data and other information as may be reasonably required by the Buyer or Seller in order to timely file the Section 338(h)(10) Election.

(ii)           In the event that the making of the Section 338(h)(10) Election increases the Tax the Seller would required to pay with respect to the sale of Shares hereunder, the Buyer shall reimburse the Seller in an amount equal to the sum of (i)(A) the amount of the Asset Sale Tax, less (B) the amount of the Stock Sale Tax, plus (ii) any additional Tax due because of such reimbursement (the “Tax Increment”). As promptly as practicable following the filing of IRS Form 8883 (but in no event later than 45 days after such filing), Seller shall furnish a computation provided by Seller’s tax advisor showing Seller’s calculation of the Tax Increment. Unless Buyer and its accountants shall deliver a written notice objecting to such calculation within twenty (20) Business Days, such calculation shall be final and Buyer shall pay the Seller the Tax Increment, which shall be deemed an additional amount of Purchase Price and an adjustment thereto. If Buyer disputes Seller’s computation of the Tax Increment, and Buyer and Seller are unable to resolve Buyer’s objections within an additional twenty (20)

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Business Days, either Buyer or Seller may submit their dispute about the Tax Increment to the Agreed Accounting Firm for a decision in accordance with the procedures outlined in Section 2.3(d) and (e).

(iii)          As promptly as practicable following the payment of the Additional Earnout Payment, and to the extent required, the filing of a supplemented IRS Form 8883 (but in no event later than 45 days after such filing), Seller shall furnish a computation provided by Seller’s tax advisor showing Seller’s calculation of the additional Tax Increment, if any, due by reason of the payment of the Additional Earnout Payment (the “Additional Tax Increment”).  Unless Buyer and its accountants shall deliver a written notice objecting to such calculation within twenty (20) Business Days, such calculation shall be final and Buyer shall pay the Seller the Additional Tax Increment, which shall be deemed an additional amount of Purchase Price and an adjustment thereto.  If Buyer disputes Seller’s computation of the Additional Tax Increment, and Buyer and Seller are unable to resolve Buyer’s objections within an additional twenty (20) Business Days, either Buyer or Seller may submit their dispute about the Additional Tax Increment to the Agreed Accounting Firm for a decision in accordance with the procedures outlined in Section 2.3(d) and (e).

(iv)          Notwithstanding any provision in Section 6.2(g)(ii) or Section 6.2(g)(iii) or any other provision in this Agreement, Buyer shall, to the extent that there are any outstanding amounts of Taxes for which Seller is liable under Section 6.2(a) or any claim for Losses and Expenses by Buyer relating to Taxes resulting from a breach of the representations and warranties contained in Section 4.7 at the time such payment of such Tax Increment or Additional Tax Increment becomes due, be entitled to withhold from such payment an amount equal to the maximum amount of such Tax, Losses or Expenses payable by Seller, as determined by Buyer in its reasonable discretion. Unless Seller and its accountants shall deliver a written notice objecting to such Tax, Losses or Expenses withheld within twenty (20) Business Days, such Tax, Losses or Expenses withheld shall be final. If Seller disputes Buyer’s computation of the such Tax, Losses or Expenses payable by Seller, and Buyer and Seller are unable to resolve Seller’s objections within an additional twenty (20) Business Days, either Buyer or Seller may submit their dispute about such amount withheld to the Agreed Accounting Firm for a decision in accordance with the procedures outlined in Section 2.3(d) and (e).  Buyer’s setoff of such Tax, Losses or Expenses against the Tax Increment or Additional Tax Increment in accordance with this Section shall not be a waiver of any claim in respect such Tax, Losses or Expenses to the extent that such Tax, Losses or Expenses exceed such Tax Increment or Additional Tax Increment, which such excess shall remain reimburseable to Buyer pursuant to the indemnification provisions hereof.  For the avoidance of doubt, there shall be no reimbursements hereunder attributable to any Tax imposed under Section 1374 of the Code (or any similar provision of state or local law) with respect to the deemed asset sale arising from the Section 338(h)(10) Election (or from any similar provision under state, local or foreign law).

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6.3.         Conduct of Business Pending the Closing; Disclosure Supplements.

(a)           From the date hereof until the Closing, except as otherwise contemplated by this Agreement including the Schedules hereto or with the consent of the Buyer, Seller shall cause the Company to be operated in the ordinary course in a manner consistent with past practice.

(b)           From time to time before the Closing, Seller will use Seller’s commercially reasonable efforts to promptly advise Buyer in writing (any such written disclosure, a “Pre-Closing Disclosure”) of any matter that becomes known to Seller that, if existing, occurring or known at or before the date of this Agreement, would have been required to have been set forth or described on any Schedule attached hereto, or that is necessary to correct any information on any such Schedule that is or has become inaccurate; provided, however, that if any matter described on such Pre-Closing Disclosure is material (determined in the Buyer’s sole and absolute discretion), Buyer shall have the right to terminate this Agreement immediately.  During the same period, Seller shall also promptly notify Buyer of the occurrence of any breach of any covenant of Seller in this Agreement or of the occurrence of any event that may make the satisfaction of the conditions in Article VII impossible or unlikely and Buyer shall also promptly notify the Seller if it becomes aware of the occurrence of any breach of any covenant of Seller in this Agreement or of the occurrence of any event that may make the satisfaction of the conditions in Article VII impossible or unlikely.

6.4.Conduct of Business Following the Closing.   Following the Closing, Buyer shall cause the Business to be operated in substantially the same manner as previously conducted, to the extent commercially reasonable and feasible, except (i) that it is anticipated that all operating functions other than design, sales and marketing will be integrated by Parent or its Subsidiaries on a time schedule determined after reasonable, good faith consultation with Renee Pepys Lowe, and in a manner which is intended to protect the separate identity of the Company’s Brands, with similar operations (including warehousing, accounting, inventory planning, human resources, and risk management) conducted by Parent or its Subsidiaries on Parent’s or its Subsidiaries’ premises, or (ii) as may be agreed upon by Renee Pepys Lowe, acting in good faith, with the goal of accomplishing the achievement of the targets set forth in Section 2.6 above.  The integration described in (i) of the preceding sentence shall be conducted on a time schedule determined by Buyer subject to the consent of Renee Pepys Lowe (which consent shall not be unreasonably withheld).  Notwithstanding the foregoing, if during any twelve month period the end of which occurs on or prior to December 31, 2010, the Company’s Gross Profit for such twelve month period is materially less than the Company’s Gross Profit for 2007, Buyer shall be entitled to make any operational, design, sales, marketing or other changes with respect to the Business as it deems appropriate in its sole discretion.

ARTICLE VII

CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER

The obligations of Buyer under this Agreement shall, at the option of Buyer, be subject to the satisfaction, on or prior to the Closing Date, of the following conditions:

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7.1.         No Misrepresentation or Breach of Covenants and Warranties.  There shall have been no breach by Seller in the performance of any of its covenants, obligations, undertakings and agreements herein; each of the representations and warranties of Seller contained or referred to herein (including, without limitation, those contained in Article IV) shall be true and correct in all respects on the Closing Date (except for representations made as of a specific date, which shall continue to be true as of such date, and changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by Buyer or any transaction contemplated by this Agreement); and there shall have been delivered to Buyer a certificate to such effect, dated the Closing Date, signed by Seller.

7.2.         No Changes or Destruction of Property.  As of the Closing Date, there shall have been: (a) no Material Adverse Change in the Shares, the assets or properties of the Company, the Business or the operations, liabilities, profits, prospects or condition (financial or otherwise) of the Company since December 31, 2007; (b) no Material Adverse Change in any federal or state law or regulation affecting the Business or the Company’s products or services; and (c) no material damage to the assets or properties of the Company by fire, flood, casualty, act of God or the public enemy or other cause, regardless of insurance coverage for such damage; and there shall have been delivered to Buyer a certificate to such effect, dated the Closing Date and signed by Seller.

7.3.         Necessary Governmental Approvals.  Seller shall have received all approvals and actions of or by all Governmental Bodies which are necessary to consummate the transactions contemplated hereby, which are either specified in Schedule 4.3(c) or otherwise required to be obtained prior to the Closing by applicable Requirements of Law or which are necessary to prevent a Material Adverse Change in the Shares, the assets or properties of the Company, the Business or the operations, liabilities, profits, prospects or condition (financial or otherwise) of the Company.

7.4.         Necessary Consents.  Seller shall have received consents, in form and substance reasonably satisfactory to Buyer, to the transactions contemplated hereby from the other parties to all contracts, leases, agreements and permits to which the Company is a party or by which the Company or any of the its assets is affected and which are specified in Schedule 7.4 or are otherwise necessary to prevent a Material Adverse Change in the Shares, the assets of the Company, the Business or in the operations, liabilities, profits, prospects or condition (financial or otherwise) of the Company.

7.5.         FIRPTA Certificate.  Seller shall have delivered to Buyer a Certification of Non-Foreign Status, in form and substance reasonably satisfactory to Buyer, in accordance with Treas. Reg. § 1.1445-2(b), and Buyer shall have no actual Knowledge that such certification is false or receive a notice that the certification is false pursuant to Treas. Reg. § 1.1445-4.

7.6.         Transaction Documents.  Buyer shall have received fully executed originals of: (i) this Agreement and (ii) each of the Seller Ancillary Agreements.

7.7.         No Judgment.  No judgment, order or decree shall have been rendered which has the effect of enjoining the consummation of the transactions contemplated by this Agreement.

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7.8.         Master Lease Consent and Waiver.  The Company shall have obtained: (i) a consent to the assignment by the Sublessor under the Master Lease in respect of the sale of the Shares hereby; (ii) a waiver, in favor of Buyer’s financiers, of the Master Lessor’s right to assert a lien against any of the Company’s assets; and (iii) a consent of the Master Lessor to certain other actions of Buyer’s financiers, in a customary form, which is reasonably satisfactory to Buyer’s financier.

7.9.         Sublease Amendment.  The Company shall have obtained an amendment to the Sublease, in a form reasonably satisfactory to Buyer, whereby Sublessor shall become solely liable (as between the Sublessor and the Company) for (i) all repairs to the exterior walls, roof, parking areas and other areas other than the internal space actually leased to and utilized by Company, and (ii) all environmental obligations under the Master Lease and/or with respect to the premises located at 2920 Redhill Avenue, Costa Mesa, CA 92626, except for those directly caused by Company.  For avoidance of doubt, Company shall remain obligated for all repairs to interior portions of the space occupied by Company, and to all fixtures located therein, to the extent such repairs are necessitated by the act or omission of Company or its invitees.

ARTICLE VIII

CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER

The obligations of Seller under this Agreement shall, at the option of Seller, be subject to the satisfaction, on or prior to the Closing Date, of the following conditions:

8.1.         No Misrepresentation or Breach of Covenants and Warranties.  There shall have been no material breach by Buyer in the performance of any of its covenants and agreements herein; each of the representations and warranties of Buyer contained or referred to in this Agreement shall be true and correct on the Closing Date as though made on the Closing Date (except for representations made as of a specific date, which shall continue to be true as of such date, and changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by Seller or any transaction contemplated by this Agreement); and there shall have been delivered to Seller a certificate to such effect, dated the Closing Date and signed on behalf of Buyer by the President, Chief Executive Officer, Managing Member or similar officer or manager of Buyer.

8.2.         Necessary Governmental Approvals.  Buyer shall have received all approvals and actions of or by all Governmental Bodies necessary to consummate the transactions contemplated hereby, which are required to be obtained prior to the Closing by applicable Requirements of Law.

8.3.         Transaction Documents.  Seller shall have received fully executed originals of: (i) this Agreement; and (ii) each of the Buyer Ancillary Agreements.

8.4.         Levin Employment.  Seller shall have received written confirmation from Kids Line that Levin has agreed to extend the term of Levin’s employment with Kids Line for a term ending not earlier than December 31, 2010.

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ARTICLE IX

INDEMNIFICATION

9.1.         Indemnification by Seller.

(a)           Seller hereby indemnifies and agrees to hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from:

(i)            any failure of Seller to obtain prior to the Closing any consent set forth in Schedule 4.3(c);

(ii)           any liabilities in respect of the lawsuits, claims, suits, proceedings or investigations set forth in Schedule 4.19, if any;

(iii)          any liabilities of Seller or Seller’s Affiliates (other than the Company);

(iv)          any liabilities specified on Schedule 9.1;

(v)           the failure of Seller to pay, perform or discharge any and all Transaction Costs of the Seller incurred in connection with the Transaction that were not paid prior to Closing, nor included in the determining Base Purchase Price;

(vi)          any breach of any warranty or the inaccuracy of any representation of Seller contained or referred to in this Agreement or any certificate delivered by or on behalf of Seller pursuant hereto or in any Seller Ancillary Agreement; or

(vii)         any breach by Seller of any of Seller’s covenants or agreements, or any failure of Seller to perform any of Seller’s obligations, in this Agreement or in any Seller Ancillary Agreement;

provided, however, that: (i) Seller shall not be required to indemnify and hold harmless under clauses (vi) and (vii) of this Section 9.1(a) with respect to Losses and Expenses incurred by Buyer Group Members unless the aggregate amount of such Losses and Expenses subject to indemnification by Seller exceeds $100,000 (the “Indemnification Deductible”), and once such amount is exceeded, Seller shall indemnify Buyer Group Members only for the amount in excess of such Indemnification Deductible; and (ii) in no event shall the aggregate amount required to be paid by Seller pursuant to this Section 9.1(a) exceed $3,000,000 (the “Indemnity Cap”).  Notwithstanding the foregoing proviso or anything in this Agreement to the contrary, Losses and Expenses incurred as a result of clauses (i) — (v) of this Section 9.1(a) and inaccuracies of the representations and warranties contained in Sections 4.1, 4.2, 4.3, 4.7, 4.15, 4.20 and 6.2 shall be subject to neither the Indemnification Deductible nor the Indemnity Cap.

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(b)           The indemnification provided for in Section 9.1(a) shall terminate on the third anniversary of the Closing Date (and no claims shall be made by any Buyer Group Member under Section 9.1(a) thereafter), except that the indemnification by Seller shall continue as to:

(i)            the representations and warranties set forth in Sections 4.2, 4.3, 4.15, and the covenants of Seller under Sections 2.4, 6.1, 6.2 and this ARTICLE IX as to all of which no time limitation shall apply;

(ii)            the representations and warranties set forth in Sections 4.7, 4.20 and 4.15, which applicable statutes of limitations shall apply, and the covenants set forth in Section 6.2, which shall survive indefinitely pursuant to Section 6.2(e) hereof; and

(iii)           any Loss or Expense of which any Buyer Group Member has notified Seller in accordance with the requirements of Section 9.3 on or prior to the date such indemnification would otherwise terminate in accordance with this Section 9.1, as to which the obligations of Seller shall continue until the liability of Seller shall have been determined pursuant to this ARTICLE IX, and Seller shall have reimbursed all Buyer Group Members for the full amount of such Loss and Expense in accordance with this ARTICLE IX.

(c)           In the event of the breach of any of the Seller’s representations and warranties that arises because of an undisclosed Company Agreement which obligates the Company to pay commissions based on sales to any of Company’s ten largest customers (by dollar volume) in 2007, Buyer’s Loss shall, in addition to the  loss actually sustained by virtue of the incurrence of a liability or obligation to pay sales commissions, be deemed to be in an amount equal to five (5.0) times the amount that must be so paid.  By way of example, if it is determined that Company is obligated to pay commissions based on  sales to one of the ten largest customers that were required to be disclosed on Schedule 4.15(j), but such commissions were not so disclosed and as a consequence the Company is obligated to pay an additional $100,000 to the claimant, Buyer’s Loss shall, in addition to the liability to pay such $100,000 commission, also include $500,000, for a total of $600,000.  In no other circumstance will Buyer’s Loss be calculated to be in an amount greater than the actual out of pocket liability incurred.

9.2.         Indemnification by Buyer.

(a)           Buyer hereby indemnifies and agrees to hold harmless Seller from and against any and all Losses and Expenses incurred by Seller in connection with or arising from:

(i)            any breach of any warranty or the inaccuracy of any representation of Buyer contained ARTICLE V or in any certificate delivered by or on behalf of Buyer pursuant hereto or in any Buyer Ancillary Agreement; or

(ii)           any breach by Buyer of any of its covenants or agreements, or any failure by Buyer to perform any of its obligations, in this Agreement or in any Buyer Ancillary Agreement.

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(b)           The indemnification provided for in Section 9.2(a) shall terminate on the third anniversary of the Closing Date (and no claims shall be made by Seller under Section 9.2(a) thereafter), except that the indemnification by Buyer shall continue as to:

(i)             the covenants set forth in Section 6.2, which shall survive indefinitely pursuant to Section 6.2(e) hereof; and

(ii)           any Loss or Expense of which Seller has notified Buyer in accordance with the requirements of Section 9.3 on or prior to the date such indemnification would otherwise terminate in accordance with this Section 9.2, as to which the obligation of Buyer shall continue until the liability of Buyer shall have been determined pursuant to this ARTICLE IX, and Buyer shall have reimbursed Seller for the full amount of such Loss and Expense in accordance with this ARTICLE IX.

9.3.         Notice and Determination of Claims.

(a)           Any Buyer Group Member, as one Party, or Seller, as the other Party, as applicable (the “Indemnified Party”), seeking indemnification hereunder shall give to the party obligated to provide indemnification to such Indemnified Party (the “Indemnitor”) a notice (a “Claim Notice”) describing in reasonable detail the facts giving rise to any claim for indemnification hereunder and shall include in such Claim Notice (if then known) the amount or the method of computation of the amount of such claim, and a reference to the provision of this Agreement or any other agreement, document or instrument executed hereunder or in connection herewith upon which such claim is based; provided, that a Claim Notice in respect of any pending or threatened action at law or suit in equity by or against a third Person as to which indemnification will be sought (each such action or suit being a “Third Person Claim”) shall be given promptly after the action or suit is commenced and governed under Section 9.4; provided further that failure to give such notice shall not relieve the Indemnitor of its obligations hereunder except to the extent it shall have been materially prejudiced by such failure.

(b)           After the giving of any Claim Notice pursuant hereto, the amount of indemnification to which an Indemnified Party shall be entitled under this ARTICLE IX shall be paid within fifteen (15) days of receipt of the Claim Notice, unless the Indemnitor has given written notice to the Indemnified Party of an objection regarding the Claim Notice, in which case the claim for indemnification shall be resolved: (i) in accordance with the dispute resolution procedures of Section 10.16; (ii) by written agreement between the Indemnified Party and the Indemnitor; (iii) by a final judgment or decree of any court of competent jurisdiction (for purposes of this Section 9.3, the judgment or decree of a court shall be deemed final when the time for appeal, if any, shall have expired and no appeal shall have been taken or when all appeals taken shall have been finally determined); or (iv) by any other means to which the Indemnified Party and the Indemnitor shall agree.

(c)           In calculating any Loss or Expense incurred by an Indemnified Party, there shall be deducted any insurance recovery actually received in respect thereof (and no right of subrogation shall accrue hereunder to any insurer), provided that any such deduction shall be net

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of any retrospective or prospective premium adjustments and any out-of-pocket costs and expenses incurred in connection with such insurance recovery.

9.4.         Third Person Claims.

(a)           Subject to Section 9.4(b) hereof, the Indemnified Party shall have the right to conduct and control, through counsel of its choosing, the defense, compromise or settlement of any Third Person Claim against such Indemnified Party as to which indemnification will be sought by any Indemnified Party from any Indemnitor hereunder, and in any such case the Indemnitor shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Indemnified Party in connection therewith; provided, that:

(i)            the Indemnitor may participate, through counsel chosen by it and at its own expense, in the defense of any such Third Person Claim as to which the Indemnified Party has so elected to conduct and control the defense thereof; and

(ii)           the Indemnified Party shall not, without the written consent of the Indemnitor (which written consent shall not be unreasonably withheld), pay, compromise or settle any such Third Person Claim, except that no such consent shall be required if, following a written request from the Indemnified Party, the Indemnitor shall fail, within 14 days after the making of such request, to acknowledge and agree in writing that, if such Third Person Claim shall be adversely determined, such Indemnitor has an obligation to provide indemnification hereunder to such Indemnified Party without regards to the Indemnity Cap.

Notwithstanding the foregoing, the Indemnified Party shall have the right to pay, settle or compromise any such Third Person Claim without such consent, provided that in such event the Indemnified Party shall waive any right to indemnity therefor hereunder unless such consent is unreasonably withheld.

(b)           If any Third Person Claim against any Indemnified Party is solely for money damages not in excess of the Indemnity Cap, where Seller is the Indemnitor, and such Third Person Claim will have no continuing effect in any material respect on the assets or properties or Business of the Company or the Shares, then any Indemnitor shall have the right to conduct and control, through counsel of its choosing, the defense, compromise or settlement of any such Third Person Claim against such Indemnified Party as to which indemnification will be sought by any Indemnified Party from any Indemnitor hereunder if the Indemnitor has acknowledged and agreed in writing that, if the same is adversely determined, the Indemnitor has an obligation to provide indemnification to the Indemnified Party in respect thereof, and in any such case the Indemnified Party shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Indemnitor in connection therewith; provided, that the Indemnified Party may participate, through counsel chosen by it and at its own expense, in the defense of any such Third Person Claim as to which the Indemnitor has so elected to conduct and control the defense thereof.  Notwithstanding the foregoing, the Indemnified Party shall have the right to pay, settle or compromise any such Third Person Claim,

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provided that in such event the Indemnified Party shall waive any right to indemnity therefor hereunder unless the Indemnified Party shall have sought the consent of the Indemnitors to such payment, settlement or compromise and such consent was unreasonably withheld, in which event no claim for indemnity therefor hereunder shall be waived.

9.5.         Payment of Buyer Group Member Indemnification.  The amount of indemnification to which a Buyer Group Member shall be entitled under this ARTICLE IX shall be enforceable as follows:  in the case of all indemnification claims in excess of the Indemnification Deductible (other than claims for Losses and Expenses incurred as a result of Losses and Expenses incurred as a result of conditions described in Sections 9.1(i) — 9.1(v) or as a result of inaccuracies of the representations and warranties contained in Sections 4.1, 4.2, 4.3, 4.7, 4.15, 4.20 and 6.2, as to which the Indemnification Deductible does not apply), first as an offset pursuant to Section 9.6, and second, if, and only if, no such payments are currently due or remain under Sections 2.5 or 2.6, against Seller, in an amount equal to the amount of the Loss and/or Expense in excess of the offsets to be made pursuant to Section 9.6.

9.6.         Offset.  As a source of payment of indemnification obligations to Buyer Group Members provided for in Section 9.1, Buyer may offset any amounts due to any Buyer Group Member under Section 9.1 hereof against any payments otherwise due to Seller under any of Sections 2.5, 2.6 or 6.2(g) hereof, including all sums evidenced by the Note.

9.7.         Adjustment to Base Purchase Price.  Any payment by Buyer or Seller under this ARTICLE IX shall be treated by the parties as an adjustment to the Base Purchase Price.

9.8.         Coordination with Tax Contests.  If there shall be any conflicts between the provisions of this ARTICLE IX and Section 6.2(c) (relating to Tax contests), the provisions of Section 6.2(c) shall control with respect to Tax contests.

9.9.         Exclusive Remedies.  Except for remedies that cannot be waived as a matter of law and injunctive and provisional relief (including specific performance), including, without limitation, Sections 6.1 and 6.2 from and after the Closing, this ARTICLE IX shall be the exclusive remedy for breaches of this Agreement (including any covenant, obligation, representation or warranty contained in this Agreement or in any certificate delivered pursuant to this Agreement).

9.10.       Actions Based on Fraud.  Nothing in this Agreement, including without limitation the provisions of Section 9.9, shall affect or otherwise limit the ability of any Buyer Group Member to pursue an action based on intentional misrepresentation, fraud or willful breach against any and all participants in such misrepresentation, fraud or breach.  Any such claim based upon an intentional misrepresentation made by either Seller or James Gillan, or in which any of those Persons actively participated, may be made without regard to the limitations herein otherwise applicable to claims by Buyer Group Members, including, without limitation, any limitations (a) on the amount of Losses or Expenses that can be recovered, (b) with respect to deductibles, minimum amounts, or the time period during which any such claim may be asserted or (c) otherwise set forth in this ARTICLE IX.

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9.11.       Materiality Qualification.  For purposes of this ARTICLE IX, as to any representation or warranty, covenant, obligation or undertaking herein that contains a Materiality Qualification, such Materiality Qualification shall be disregarded for purposes of determining the amount of Loss and/or Expense incurred by Buyer or Seller, as applicable.

ARTICLE X

GENERAL PROVISIONS

10.1.       Confidential Nature of Information.  Each party agrees that it will treat in confidence all documents, materials and other information which it shall have obtained regarding the other party during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the date of this Agreement), the investigation provided for herein and the preparation of this Agreement and other related documents.  Such documents, materials and information shall not be communicated to any third Person (other than, in the case of Buyer, to its counsel, accountants, financial advisors or lenders, and in the case of a Seller, to its counsel, accountants or financial advisors or as may be required to be disclosed under the Federal securities laws).  No other party shall use any confidential information in any manner whatsoever except solely for the purpose of evaluating the proposed purchase and sale of the Shares; provided, however, that after the Closing, Buyer may use or disclose any confidential information with respect to or about the Company or otherwise reasonably related to the Business or the Shares.  The obligation of each party to treat such documents, materials and other information in confidence shall not apply to any information which (i) is or becomes available to such party from a source other than the other party that is not known by such party to be subject to a obligation of confidentiality with respect to such information, (ii) is or becomes available to the public other than as a result of disclosure by such party or its agents in breach hereof, (iii) is required to be disclosed under applicable law or judicial process, but only to the extent required by such law or process, determined under the advice of counsel, or (iv) such party reasonably deems necessary to disclose to obtain any of the consents or approvals contemplated hereby.

10.2.       No Public Announcement.  No party shall, without the approval of the other parties, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such party shall be so obligated by law or the rules of any stock exchange, in which case the other parties shall be advised and the parties shall use their best efforts to cause a mutually agreeable release or announcement to be issued; provided, that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with the accounting and Securities and Exchange Commission disclosure obligations.  Initial communications with Company’s employees, customers and vendors shall be made only in accordance with a plan or procedure approved by Renee Pepys Lowe.

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10.3.       Notices.  All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered when (i) delivered personally, (ii) if transmitted by facsimile upon confirmation that such facsimile has been received or (iii) when sent by registered or certified mail or by overnight courier service that obtains a receipt, addressed as follows:

If to Buyer, to:

2601 Sequoia Drive
Southgate, CA  90280
Attention: Michael Levin, President
Fax No.:  (310) 660-0120

with copies to:

Russ Berrie and Company, Inc.
111 Bauer Drive
Oakland, NJ  07436
Attention: General Counsel
Fax No.:  (201) 405-7377

Sidley Austin LLP
555 W. 5th Street, 40^th Floor
Los Angeles, CA 90013
Attention:  Moshe J. Kupietzky, Esq.
Fax No.:  (213) 896-6600

If to Seller, to:

If to Seller to:

Renee Pepys Lowe
72 Victoria
Newport Beach, CA  92660

with a copy to:

Peter J. Tennyson
Paul, Hastings, Janofsky & Walker, LLP
695 Town Center Drive, Suite 1700
Costa Mesa, CA  92626

Fax No.: (714) 979-1921

or to such other address as such party may indicate by a notice delivered to the other party hereto.

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10.4.       Successors and Assigns.

(a)           Following the Closing, either party may assign any of its rights hereunder, but no such assignment shall relieve it of its obligations hereunder.

(b)           This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns.  The successors and permitted assigns hereunder shall include, in the case of Buyer, any permitted assignee as well as the successors in interest to such permitted assignee (whether by merger, liquidation (including successive mergers or liquidations) or otherwise).  Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any Person other than the parties and successors and assigns permitted by this Section 10.4 any right, remedy or claim under or by reason of this Agreement.  Notwithstanding the foregoing, Buyer may assign all of its rights hereunder to any lender (or any agent for any such lender) providing financing to Buyer for collateral security purposes.

10.5.       Access to Records after Closing.  For a period of four years after the Closing Date, Seller and Seller’s representatives shall have reasonable access to all of the books and records of the Company transferred to Buyer hereunder to the extent that such access may reasonably be required by Seller in connection with matters relating to or affected by the operations of the Company prior to the Closing Date.  Such access shall be afforded by Buyer upon receipt of reasonable advance notice and during normal business hours.  Seller shall be solely responsible for any costs or expenses incurred by it pursuant to this Section 10.5.  If Buyer shall desire to dispose of any of such books and records prior to the expiration of such four-year period, Buyer shall, prior to such disposition, give Seller a reasonable opportunity, at Seller’s expense, to segregate and remove such books and records as Seller may select.

10.6.       Entire Agreement; Amendments.  This Agreement, the Exhibits, Appendices and Schedules referred to herein and all documents delivered pursuant hereto contain the entire understanding of the parties hereto with regard to the subject matter contained herein or therein, and supersede all prior agreements, understandings or letters of intent between or among any of the parties hereto, including the Confidentiality Agreement and the Letter of Intent.  This Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the parties hereto.

10.7.       Partial Invalidity.  Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable.

10.8.       Waivers.  Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof.  Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to any party, it is authorized in writing by an authorized representative of such party.  The failure

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of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision.  No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.

10.9.       Fees and Expenses.  Except as otherwise provided in this Section 10.9, each of the Parties hereto shall bear its own costs and expenses (including, without limitation, fees and disbursements of its counsel, accountants and other financial, legal, accounting or other advisors), incurred by it or its Affiliates in connection with the preparation, negotiation, execution, delivery and performance of this Agreement and each of the other documents and instruments executed in connection with or contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby.  For the avoidance of doubt, all Transaction Costs of the Seller shall be borne entirely by Seller.

10.10.     Execution in Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties hereto and delivered to each of Seller and Buyer.  Electronic or facsimile delivery of an executed counterpart of a signature page to this Agreement shall be as effective as delivery of a manually executed and original signature counterpart of this Agreement.

10.11.     Enforcement of Agreement.  In the event of an action at law or in equity between the parties hereto to enforce any of the provisions hereof, the unsuccessful party to such litigation or proceeding shall pay to the successful party all costs and expenses, including reasonable attorneys’ fees, incurred therein by such successful party on trial and appeal as adjudged by the court, and if such successful party or parties shall recover judgment in any such action or proceeding, such costs, expenses and attorneys’ fees may be included as part of such judgment.

10.12.     Further Assurances.  From time to time following the Closing, Seller shall execute and deliver, or cause to be executed and delivered, to Buyer such other instruments of conveyance and transfer as Buyer may reasonably request or as may be otherwise necessary to more effectively convey and transfer to Buyer the Shares, and, in the case of any licenses, certificates, approvals, authorizations, agreements, contracts, leases, easements and other commitments (a) which cannot be transferred or assigned effectively without the consent of third parties which consent has not been obtained prior to the Closing, to cooperate with Buyer at its request in endeavoring to obtain such consent promptly, and if any such consent is unobtainable, to use its best efforts to secure to Buyer the benefits thereof in some other manner, or (b) which are otherwise not transferable or assignable, to use its best efforts jointly with Buyer to secure to Buyer the benefits thereof in some other manner (including the exercise of the rights of Seller thereunder).  Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any license, certificate, approval, authorization, agreement, contract, lease, easement or other commitment if an attempted assignment thereof without the consent of a third party thereto would constitute a breach thereof.

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10.13.     Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws (as opposed to the conflicts of law provisions) of the State of California.

10.14.     Time is of the Essence.  With respect to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

10.15.     Submission to Jurisdiction.  Subject to Section 10.16, each of the parties hereto hereby irrevocably submits in any suit, action or proceeding arising out of or related to this Agreement or any of the transactions contemplated hereby to the jurisdiction of the United States District Court for the Central District of California and the jurisdiction of the Superior Court of the County of Los Angeles in the State of California and irrevocably waives any immunity from the jurisdiction of such courts and any claim of improper venue, forum non conveniens or any similar objection which it might otherwise be entitled to raise in any such suit, action or proceeding.

10.16.     Dispute Resolution.

(a)           The parties to this Agreement will make a good faith effort to informally mediate any dispute arising under this Agreement by means of negotiations between their authorized representatives, including the retention of a third party mediator if mutually agreed to by the parties.  Each party shall pay one-half of the expenses, if any, of mediation fees and costs.

(b)           Any dispute arising under this Agreement not resolved by informal mediation shall be submitted to binding, non-appealable arbitration, before an arbitrator appointed in accordance with the procedures of JAMS.  Such arbitration shall be held in Los Angeles County.  All of the arbitration rules of JAMS shall apply to such proceeding, except that the arbitrator shall limit discovery and other pre-hearing procedures to the maximum extent deemed appropriate so that the hearing can be held expeditiously, and judgment shall be rendered within thirty (30) days after the hearing is completed.  The arbitrator’s award shall be in writing and need not have any written opinion or other written support for the award.  The prevailing party, as determined by the arbitrator, shall be entitled to recover the costs incurred in the arbitration, including all reasonable legal fees and expenses, and all reasonable costs of experts and other consultants retained in connection with the proceeding.  Pending such award, each party shall pay one-half of the arbitration fees and costs.

(c)           Nothing in this Section 10.16 shall be deemed to limit or restrict the right of Buyer to obtain injunctive relief from a court pursuant to Section 9.9 hereof.

*              *              *

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written.

BUYER
I & J Holdco, Inc.
By:	/s/ Charles Ginn
Name:	Charles Ginn,
Title:	Chief Financial Officer and Secretary
SELLER
By:	/s/ Renee Pepys Lowe
	Renee Pepys Lowe
	an individual
By:	/s/ Stanley Lowe
	Stanley Lowe
	an individual

Signature Page

to

CoCaLo Stock Purchase Agreement

EX-21.1

Exhibit 21.1

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

COMPANY NAME	JURISDICTION OF ORGANIZATION
Russ Berrie and Company, Inc.	New Jersey
Infant and Juvenile Segment:
Kids Line, LLC	Delaware
Kids Line Australia Pty Ltd.	Victoria, Australia
Kids Line UK Limited	England
Sassy, Inc.	Illinois
I & J HoldCo, Inc.	Delaware
LaJobi, Inc. (acquisition vehicle)	Delaware
Gift Segment:
Russ Berrie U.S. Gift, Inc.	Delaware
Russ Berrie & Co. (West), Inc. (inactive)	California
Russ Berrie and Company Properties, Inc.	New Jersey
Russ Berrie and Company Investments, Inc.	New Jersey
BOA Done, Inc. (inactive)	West Virginia
Amram’s Distributing Ltd.	Canada
Russplus, Inc.	New Jersey
P/F Done, Inc. (inactive)	Pennsylvania
Fluf N’ Stuf, Inc. (inactive)	Pennsylvania
RBTACQ, Inc. (inactive)	Ohio
RBCACQ, Inc. (inactive)	California
Tri Russ International (Hong Kong) Limited	Hong Kong
Russ Consulting Service (Shenzhen) Co., Ltd.	People’s Republic of China
Russ Berrie (U.K.) Limited	England
Russ Berrie (Holdings) Limited (inactive)	England
Russ Berrie España, S.L.	Spain
Russ Berrie (Deutschland) GmbH (inactive)	Germany
Russ Berrie (Österreich) GmbH (inactive)	Austria

Russ Berrie France S.A.R.L. (inactive)	France
Russ Berrie (Benelux) B.V. (inactive)	Holland
Russ Berrie (Ireland) Limited	Ireland
Russ Australia Pty Limited	New South Wales, Australia

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Russ Berrie and Company, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 2-96238, 2-96239, 2-96240, 33-10779, 33-26161, 33-27406, 33-27897, 33-27898, 33-51823, 333-70081, 333-76248 and 333-111853) on Form S-8, of Russ Berrie and Company, Inc. and subsidiaries of our report dated April 1, 2008, with respect to the consolidated balance sheets of Russ Berrie and Company, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity and cash flows, for each of the years in the three-year period ended December 31, 2007, the related financial statement schedules, and the effectiveness of internal control over financial reporting as of December 31, 2007, which report appears in the December 31, 2007 Annual Report on Form 10-K of Russ Berrie and Company, Inc.

Our report with respect to the consolidated financial statements refers to the Company’s adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007 and Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” on January 1, 2006.

/s/ KPMG LLP

Short Hills, New Jersey

April 1, 2008

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Bruce G. Crain, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2007 of Russ Berrie and Company, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  April 1, 2008	/s/ BRUCE G. CRAIN
	Bruce G. Crain
	President and Chief Executive Officer

A signed original of this written statement has been provided to Russ Berrie and Company, Inc. and will be retained by Russ Berrie and Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Anthony Cappiello, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2007 of Russ Berrie and Company, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 1 , 2008	/s/ ANTHONY CAPPIELLO
	Anthony Cappiello
	Executive Vice President and Chief Administrative Officer (principal financial officer)

A signed original of this written statement has been provided to Russ Berrie and Company, Inc. and will be retained by Russ Berrie and Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Russ Berrie and Company, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce G. Crain, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

April 1, 2008

/s/ BRUCE G. CRAIN

Bruce G. Crain
President and
Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Russ Berrie and Company, Inc. and will be retained by Russ Berrie and Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Russ Berrie and Company, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Cappiello, Executive Vice President and Chief Administrative Officer (and principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 1, 2008

/s/ ANTHONY CAPPIELLO

Anthony Cappiello
Executive Vice President and Chief
Administrative Officer (principal financial
officer)

A signed original of this written statement required by Section 906 has been provided to Russ Berrie and Company, Inc. and will be retained by Russ Berrie and Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.