- Amended Annual Report (10-K/A)

Share Name	Share Symbol	Market	Type
Russ Berrie CO	NYSE:RUS	NYSE	Ordinary Share

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008


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)

1800 Valley Road, Wayne, New Jersey (Address of principal executive offices)		07470 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (201) 405-2400

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 þ

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 þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

The aggregate market value of the voting common equity held by non-affiliates of the Registrant computed by reference to the price of such stock at the close of business on June 30, 2008 was $98.0 million.

The number of shares outstanding of each of the Registrant’s classes of common stock, as of March 25, 2009, was as follows:


Class		Number of Shares

Common Stock, $0.10 stated value		21,500,135

Documents Incorporated by Reference

None.

TABLE OF CONTENTS


PART II
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9B OTHER INFORMATION
PART III
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Exhibit Index
Exhibit 10.42
Exhibit 23.2
Exhibit 31.3
Exhibit 31.4
Exhibit 32.3
Exhibit 32.4

EXPLANATORY NOTE

In its Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 31, 2009 (the “Original Filing”), Russ Berrie and Company, Inc. (the “Company”) provided certain of the information required by Items 10 through 14 of Part III of the Original Filing by incorporating by reference portions of the definitive proxy statement for the Company’s 2009 Annual Meeting of Shareholders, pursuant to General Instruction G to Form 10-K. The Company is filing this Amendment No. 1 on Form 10K/A (“Amendment No. 1”) solely (i) to timely provide such Part III information, (ii) to add new “check the box” text to the cover page, (iii) to add Item 9B to Part II thereof, (iv) to add Exhibit 10.42 and Exhibit 23.2, (v) to amend the section of the cover page captioned “Documents Incorporated by Reference” to read “None”, (vi) to correct certain inadvertent errors in Item 8 of Part II of the Original Filing (described below) and (vii) to re-file, without modification, Item 9A of Part II of the Original Filing as a result of the issuance of Exhibit 23.2. In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (“Rule 12b-15”), each Item of the Original Filing that is affected by this Amendment No. 1 has been amended and restated in its entirety. All other Items of the Original Filing are unaffected by this Amendment No. 1 and such Items have not been included in this Amendment No. 1. Except as otherwise noted, information included in this Amendment No. 1 is stated as of December 31, 2008 and does not reflect any subsequent information or events.

The errors described in clause (vi) of the preceding paragraph consist of the following:

•		In Note 3 of the Notes to Consolidated Financial Statements, under the section captioned “LaJobi”, the estimate of the amount of goodwill and intangible assets expected to be deductible for tax purposes referred to in the first sentence following the table of the final allocation of the purchase price should be $44.2 million, instead of $43.7 million;

•		In Note 3 of the Notes to Consolidated Financial Statements, under the section captioned “Pro Forma Information (Unaudited)”, under each of the line items captioned “Basic (loss) income per share” and “Diluted (loss) income per share” for the year ended December 31, 2007, the amount with respect to “Continuing operations” should be $0.43, instead of $0.31, and the amount with respect to “Discontinued operations” should be ($0.01), instead of $0.11;

•		In Note 4 of the Notes to Consolidated Financial Statements, under the caption “Condensed Financial Information”, with respect to the year ended December 31, 2007, the amount under “Provision (benefit) for income taxes” should read ($1,183), instead of ($3,665), and the amount under “Income (loss) from discontinued operations” should read ($187) instead of $2,316;

•		In Note 12 of the Notes to Consolidated Financial Statements, in the table setting forth the reconciliation of the provision (benefit) for income taxes on continuing operations for the year ended December 31, 2008, the amount with respect to the item captioned “Other, net” should read ($1,003) instead of ($1,033);

•		In Note 21 of the Notes to Consolidated Financial Statements, the amount of impairments to goodwill and intangibles referenced in the first sentence of the second paragraph should be $140.6 million, instead of $140.9 million; and in the immediately following table, in each case with respect to the quarter ended December 31, 2008, the amount with respect to “Income (loss) from discontinued operations” should read $1,496, instead of ($1,496), the amount with respect to “Income (loss) from continuing operations” in each of “Basic Earnings per Common Share” and “Diluted Earnings per Common Share” should be ($5.16) instead of ($5.20), and the amount with respect to “Net income (loss) per common share” in each of “Basic Earnings per Common Share” and “Diluted Earnings per Common Share” should be ($5.09) instead of ($5.13);

•		In Schedule II, a new footnote “(b)” has been added to clarify that the 2008 charges to expense relate to continuing operations.

As required by Rule 12b-15, new certifications of our principal executive officer and principal financial officer are being filed as exhibits to this Amendment No. 1.

PART II

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


	Page No.
1. Financial Statements:
Report of Independent Registered Public Accounting Firm		3
Consolidated Balance Sheets at December 31, 2008 and 2007		5
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006		6
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006		7
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		8
Notes to Consolidated Financial Statements		9

2. Financial Statement Schedules:
Schedule II—Valuation and Qualifying Accounts		43

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, 2008 and 2007, 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, 2008. 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, 2008, 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’s Annual 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. 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, 2008, 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, 6, 12 and 17 to the consolidated financial statements, the Company has changed its method of accounting for financial assets and liabilities in 2008 due to the adoption of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” changed its method of accounting for uncertain income tax positions in 2007 due to the adoption of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” and changed its method of accounting for share-based payments in 2006 due to the adoption of Statement of Financial Accounting Standards No. 123 (revised), “Share-based Payment.”

Russ Berrie and Company, Inc. acquired substantially all of the assets and assumed certain liabilities of LaJobi Industries, Inc., and the capital stock of CoCaLo, Inc. on April 2, 2008 and management excluded from its assessment of the effectiveness of Russ Berrie and Company, Inc.’s internal control over financial reporting as of December 31, 2008, LaJobi Industries, Inc.’s and CoCaLo Inc.’s internal control over financial reporting associated with total assets of $57.6 million and $17.0 million, respectively, and total revenues of $58.2 million and $15.8 million, respectively, included in the consolidated financial statements of Russ Berrie and Company, Inc. and subsidiaries as of and for the year ended December 31, 2008. Our audit of internal control over financial reporting of Russ Berrie and Company, Inc. also excluded an evaluation of the internal control over financial reporting of LaJobi Industries, Inc. and CoCaLo, Inc.

/s/ KPMG LLP

Short Hills, New Jersey
March 31, 2009

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007

(Dollars in Thousands, except per share amounts)


	2008			2007
Assets
Current assets:
Cash and cash equivalents	$	3,728		$	21,925
Accounts receivable—trade, less allowances of $4,285 in 2008 and $4,730 in 2007		39,509			62,103
Inventories, net		47,169			59,658
Prepaid expenses and other current assets		3,252			3,137
Income tax receivable		16			663
Deferred income taxes		940			1,619

Total current assets		94,614			149,105
Property, plant and equipment, net		4,466			13,093
Goodwill		—			120,777
Intangible assets		84,019			51,172
Restricted cash		—			916
Note receivable		15,300			—
Investment		4,500			—
Deferred income taxes		28,960			897
Other assets		3,575			4,163

Total assets	$	235,434		$	340,123


Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	14,933		$	11,500
Short-term debt		12,114			23,344
Accounts payable		23,546			20,411
Accrued expenses		13,249			28,848
Income taxes payable		5,726			1,869

Total current liabilities		69,568			85,972
Income taxes payable non-current		4,252			9,406
Deferred income taxes		—			3,736
Long-term debt, excluding current portion		75,765			32,000
Deferred royalty income-long-term		5,065			—
Other long-term liabilities		2,908			4,370

Total liabilities		157,558			135,484

Commitments and contingencies

Shareholders’ equity:
Common stock: $0.10 stated value per share; authorized 50,000,000 shares; issued 26,727,780 shares at December 31, 2008 and December 31, 2007, respectively		2,674			2,674
Additional paid-in capital		89,173			90,844
Retained earnings		88,672			200,228
Accumulated other comprehensive income		134			16,976
Treasury stock, at cost, 5,258,962 and 5,428,137 shares at December 31, 2008 and 2007, respectively		(102,777	)		(106,083	)

Total shareholders’ equity		77,876			204,639

Total liabilities and shareholders’ equity	$	235,434		$	340,123

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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(Dollars in Thousands, Except Per Share Data)


	2008			2007			2006
Net sales	$	229,194		$	163,066		$	147,100
Cost of sales		159,792			111,361			84,338

Gross profit		69,402			51,705			62,762
Selling, general and administrative expenses		51,457			34,790			28,685
Impairment of goodwill and intangibles		136,931			—			—

Total operating expenses		188,388			34,790			28,685

(Loss) income from continuing operations		(118,986	)		16,915			34,077

Other (expense) income:
Interest expense, including amortization and write-off of deferred financing costs		(9,655	)		(4,135	)		(9,798	)
Interest and investment income		78			211			150
Other, net		192			231			—

		(9,385	)		(3,693	)		(9,648	)


(Loss) income from continuing operations before income tax provision		(128,371	)		13,222			24,429
Income tax (benefit) provision		(29,031	)		4,127			10,363

(Loss) income from continuing operations		(99,340	)		9,095			14,066

Discontinued Operations:
Loss from discontinued operations		(17,268	)		(1,370	)		(28,067	)
Gain on disposition		905			—			—
Income tax provision (benefit) from discontinued operations		(4,147	)		(1,183	)		(4,565	)

(Loss) income from discontinued operations net of tax		(12,216	)		(187	)		(23,502	)


Net (loss) income	$	(111,556	)	$	8,908		$	(9,436	)


Basic (loss) earnings per share:
Continuing operations	$	(4.66	)	$	0.43		$	0.67
Discontinued operations		(0.57	)		(0.01	)		(1.12	)

	$	(5.23	)	$	0.42		$	(0.45	)


Diluted (loss) earnings per share:
Continuing operations	$	(4.66	)	$	0.43		$	0.67
Discontinued operations		(0.57	)		(0.01	)		(1.12	)

	$	(5.23	)	$	0.42		$	(0.45	)


Weighted Average Shares:
Basic		21,344,000			21,130,000			20,876,000

Diluted		21,344,000			21,215,000			20,906,000

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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(in Thousands)


														Accumulated
														Other
														Comprehensive
														Income/Loss
				Common										Foreign
				Stock		Common		Additional						Currency
				Shares		Stock		Paid-In			Retained			Translation			Treasury
	Total			Issued		Amount		Capital			Earnings			Adjustment			Stock
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 loss:
Net Income		8,908			—		—		—			8,908			—			—
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment		1,991			—		—		—			—			1,991			—

Comprehensive loss		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	)
Comprehensive loss:
Net loss		(111,556	)		—		—		—			(111,556	)		—			—
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment		(16,842	)		—		—		—			—			(16,842	)		—

Comprehensive loss		(128,398	)

Share transactions under stock plans (169,175 shares)		—			—		—		(3,306	)		—			—			3,306
Share-based compensation		1,635			—		—		1,635			—			—			—

Balance at December 31, 2008	$	77,876			26,728	$	2,674	$	89,173		$	88,672		$	134		$	(102,777	)

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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(Dollars in Thousands)


	2008			2007			2006
Cash flows from operating activities:
Net (loss) income	$	(111,556	)	$	8,908		$	(9,436	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		5,959			5,822			5,288
Impairment of goodwill and other intangibles		140,631			10,000			—
Amortization and write-off of deferred financing costs		886			655			3,146
Provision for accounts receivable allowance and other		17,189			11,420			8,927
Provision for note receivable allowance					940			—
Provision for inventory reserve		6,828			5,533			3,425
Deferred income taxes		(32,742	)		4,348			(7,212	)
Impairment on long term asset		7,041			—			—
Share-based compensation expense		1,635			186			202
Other		(462	)		136			591
Change in assets and liabilities, excluding the effects of acquisitions:
Restricted cash		(1	)		(2	)		(11	)
Accounts receivable		(6,368	)		(17,926	)		(11,017	)
Income tax receivable		209			2,819			(59	)
Inventories		(13,029	)		(15,807	)		5,552
Prepaid expenses and other current assets		(1,238	)		8,081			638
Other assets		(1,197	)		(666	)		700
Accounts payable		17,115			1,335			(2,993	)
Accrued expenses		(3,535	)		5,033			(2,146	)
Income taxes payable		(1,865	)		(3,521	)		10,787

Net cash provided by operating activities		25,500			27,294			6,382

Cash flows from investing activities:
Proceeds from sale of property, plant and equipment		—			—			2,577
Capital expenditures		(2,253	)		(4,239	)		(4,357	)
Sale of gift business cash		(5,156	)		—			—
Payment for purchase of LaJobi Industries, Inc.		(52,044	)		—			—
Payment for purchase of CoCaLo, Inc., net of cash acquired		(16,598	)		—			—
Payment of Kids Line, LLC earnout consideration		(3,622	)		(28,449	)		—
Other		(23	)		—			—

Net cash used in investing activities		(79,696	)		(32,688	)		(1,780	)

Cash flows from financing activities:
Proceeds from issuance of common stock		—			2,890			2,907
Issuance of long-term debt		100,000			20,000			60,000
Payments of long-term debt		(54,300	)		(9,000	)		(104,016	)
Net borrowings on revolving credit facility		(8,057	)		1,512			21,832
Capital leases		(308	)		—			—
Payment of deferred financing costs		(1,655	)		—			(3,009	)

Net cash provided by (used in) financing activities		35,680			15,402			(22,286	)
Effect of exchange rate changes on cash and cash equivalents		319			391			543

Net (decrease) increase in cash and cash equivalents		(18,197	)		10,399			(17,141	)
Cash and cash equivalents at beginning of year		21,925			11,526			28,667

Cash and cash equivalents at end of year	$	3,728		$	21,925		$	11,526

Cash paid during the year for:
Interest	$	6,254		$	4,206		$	5,692
Income taxes	$	828		$	1,500		$	2,679
Supplemental cash flow information:
Note payable CoCaLo purchase	$	1,439			—			—
Goodwill from Earnout Consideration		—		$	3,622			—
Equipment financed by capital lease obligations		—		$	455			—
Note receivable Gift business sale	$	15,300			—			—
Investment Gift business sale	$	4,500			—			—
Deferred royalty income Gift business sale	$	5,000			—			—

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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Note 1—Description of Business

Russ Berrie and Company, Inc. (“RB”) and its subsidiaries (the “Company”) is a leading designer, importer, marketer and distributor of infant and juvenile consumer products. The Company currently operates in one segment: its infant and juvenile segment.

On December 23, 2008, RB entered into, and consummated the transactions contemplated by, the Purchase Agreement dated as of December 23, 2008 (the “Purchase Agreement”) with The Russ Companies, Inc., a Delaware corporation (“Buyer”), for the sale of the capital stock of all of RB’s subsidiaries actively engaged in the gift business (the “Gift Business”), and substantially all of RB’s assets used in the Gift Business (the “Gift Sale”). As a result of the sale of the Gift Business, the Consolidated Statements of Operations have been restated to show the Gift Business as discontinued operations for the years ended December 31, 2008, 2007 and 2006. The December 31, 2008 Consolidated Balance Sheet does not include the Gift Business assets and liabilities, as a result of the consummation of the Gift Sale on December 23, 2008. The Consolidated Balance Sheet as of December 31, 2007 has not been restated to present the Gift Business within discontinued operations. The Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 have not been restated. The accompanying notes to Consolidated Financial Statements have been restated to reflect the discontinued operations presentation described above for the basic financial statements.

The Company’s continuing operations, which currently consist of Kids Line, LLC (“Kids Line”), Sassy, Inc. (“Sassy”), LaJobi, Inc., (“LaJobi”) and CoCaLo, Inc., (“CoCaLo”), each direct or indirect wholly-owned subsidiaries, design, manufacture through third parties and market products in a number of categories including, among others: infant bedding and related nursery accessories and décor (Kids Line and CoCaLo); nursery furniture and related products (LaJobi); and developmental toys and feeding, bath and baby care items with features that address the various stages of an infant’s early years (Sassy). The Company’s products are sold primarily to retailers in North America, the UK and Australia, including large, national retail accounts and independent retailers (including toy, specialty, food, drug, apparel and other retailers), and military post exchanges.

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 products are shipped and the customer takes ownership and assumes risk of loss, which is generally on the date of shipment, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed and determinable. The Company records reductions to revenue for estimated returns and customer allowances, price concessions or other incentive programs that are estimated using historical experience and current economic trends. Material differences may result in the amount and timing

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

of net sales for any period if management makes different judgments or uses different estimates.

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 period the related advertising campaign begins. All other advertising costs are charged to operations during the period in which they are incurred. Advertising costs for continuing operations for the years ended December 31, 2008, 2007 and 2006 amounted to $1.3 million, $0.6 million, and $0.2 million respectively.

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 their costs approximate fair 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. 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 a software 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 are removed from the respective accounts.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Restricted Cash

Restricted cash classified as a long-term asset on the accompanying balance sheet at December 31, 2007 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” (“SFAS No. 144”). 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 the estimated undiscounted future net 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 for the amount for which the carrying amount of the asset exceeds its fair value as determined by an estimate of discounted future cash flows.

Goodwill and Indefinite-life Intangible Assets

Goodwill represents the excess of costs over fair value of net 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, 2008, all of the Company’s indefinite life intangibles, relate to the trademarks acquired in the purchases of: Sassy, Inc. in 2002; Kids Line LLC in 2004; and LaJobi, Inc. and CoCaLo, Inc. in 2008. 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 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 unit’s 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. In the fourth quarter of 2008, the Company recorded an impairment charge, of $130.2 million related to goodwill (see Note 5 below for detail with respect to such impairment charge). There was no goodwill impairment in 2007 and 2006.

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 or the asset life may be finite. 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 various models to estimate the fair value. The Company recorded an aggregate non-cash impairment charge of approximately $10.4 million in the fourth quarter of 2008 consisting of the impairment of its Applause ^® trademark, in connection with the sale of the Gift Business, of $6.7 million which was recorded in Impairment of Goodwill and Intangibles, and the impairment of certain of its Infant & Juvenile indefinite-life intangible assets, of $3.7 million which was recorded in cost of sales (see Note 5 below for detail with respect to such impairment charges). Also during the fourth quarter, the Company determined that the Kids Line customer relationships should no longer have an indefinite life. 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 5 for details with respect to the breakdown of such impairment charges).

Discontinued Operations

On December 23, 2008, the Company completed the sale of its Gift Business. In accordance with SFAS No. 144, the

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Company has classified the results of its Gift Business operations as discontinued operations as described in Note 1. The results of discontinued operations, are reported as “Loss from discontinued operations”, and as a component of “Income tax provision (benefit) from discontinued operations” in the consolidated statements of operations for all periods presented. (See Note 4 below for detail with respect to the sale of Gift business.)

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 within shareholders’ equity. Gains and losses from foreign currency transactions are included in other, net in the consolidated statements of operations.

Accounting for Income Taxes

The Company establishes accruals for tax contingencies when, notwithstanding the reasonable belief that its tax return positions are fully supported, the Company believes that certain filing positions are likely to be challenged and moreover, that such filing positions may not be fully sustained. Prior to the adoption of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement of No. 109”, all uncertain income tax positions were accounted for under SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”). The Company adopted FIN 48, on January 1, 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. The Company continually evaluates its uncertain tax positions and will adjust such amounts in light of changing facts and circumstances in 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 period of resolution. The Company’s accruals for gross uncertain tax positions are presented in the consolidated balance sheet within income taxes payable for current items and income taxes payable, non-current for items not expected to be settled within 12 months of the balance sheet date.

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.

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 cash and cash equivalents, accounts receivable, inventory, prepaid and other current assets, accounts payable and accrued expenses reflected in the consolidated financial statements equals or approximates their fair values because of the short-term maturity of those instruments. 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. For details with respect to the fair values of notes payable, notes receivable and interest rate swap, See Notes 3 , 4 and 6 , respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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, 2008, 2007 and 2006, the Company had 1,941,379, 1,181,035 and 1,516,740 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 and 2006, or the loss the Company incurred from continuing operations in 2008.

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 2008, 2007 and 2006, 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, net on the consolidated statements of operations.

Share-Based Compensation

At December 31, 2008, 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.

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 No. 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.

The effect of the provisions of SFAS No. 123R on the Company’s 2008, 2007 and 2006 consolidated financial statements resulted in a charge to compensation expense of $1,635,000, $186,000 and $202,000 during 2008, 2007 and 2006, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Recently Issued Accounting Standards

In December 2007, SFAS No. 141R (revised 2007), “Business Combinations,” was issued. This statement requires an acquirer to recognize assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is evaluating the effect the adoption of this standard will have on any potential future acquisitions that may occur on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning January 1, 2009. The Company does not expect the adoption of this standard to have an impact on its consolidated financial statements.

In March 2008, SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” was issued. This statement requires enhanced disclosures about an entity’s derivative and hedging activities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and is effective for the Company’s fiscal year beginning January 1, 2009. The Company is evaluating the effect the adoption of this standard will have on its consolidated financial statements.

In April 2008, the FASB issued Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, requiring prospective application to intangible assets acquired after the effective date. The Company will be required to adopt the principles of FSP 142-3 with respect to intangible assets acquired on or after January 1, 2009. Due to the prospective application requirement, the Company is unable to determine what effect, if any, the adoption of FSP 142-3 will have on its consolidated financial position, results of operations and cash flows.

In June 2008, the FASB issued Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

128, “Earnings per Share.” Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for the Company in fiscal 2009. After the effective date of FSP EITF 03-6-1, all prior-period earnings per share data presented must be adjusted retrospectively. We do not expect EITF 03-6-1 to have a material effect on the Company’s results of operations and earnings per share.

In June 2008, the FASB ratified EITF Issue No. 08-3, “Accounting by Lessees for Nonrefundable Maintenance Deposits” (“EITF No. 08-3”). EITF No. 08-3 requires that all nonrefundable maintenance deposits be accounted for as a deposit with the deposit expensed or capitalized in accordance with the lessee’s maintenance accounting policy when the underlying maintenance is performed. Once it is determined that an amount on deposit is not probable of being used to fund future maintenance expense, it is to be recognized as additional expense at the time such determination is made. EITF No. 08-3 is effective beginning after January 1, 2009. The Company is currently evaluating the effect of adopting EITF No. 08-3 on its consolidated financial position, results of operations and cash flows.

Reclassifications

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

Note 3—Acquisitions

LaJobi

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

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

(a) Subject to paragraph (b) below, provided that the EBITDA of Seller’s business (the “Business”) (determined as provided in the Asset Agreement) has grown at a compound annual growth rate (“CAGR”) of not less than 4% during the period from January 1, 2008 through December 31, 2010 (the “Measurement Date”), as compared to the specified EBITDA of the Business for calendar year 2007, LaJobi will pay to Seller a percentage of the Agreed Enterprise Value of LaJobi as of the Measurement Date or Early Measurement Date (as defined in paragraph (b) below), as the case may be. The amount of such payment will range from zero to a maximum amount of $15.0 million (the “LaJobi Earnout Consideration”). The “Agreed Enterprise Value” will be the product of (i) the Business’s EBITDA during the twelve (12) months ending on the Measurement Date or Early Measurement, as the case may be, multiplied by (ii) an applicable multiple (ranging from 5 to 9) depending on the specified levels of CAGR achieved, subject to the $15.0 million cap described above.

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

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

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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

In accordance with the Asset Agreement, LaJobi entered into (i) a transitional services agreement with a Thailand affiliate of Seller, (see Note 14 for further information) and (ii) a three-year employment agreement with Lawrence Bivona as President of LaJobi. Mr. Bivona was formerly the President of Seller.

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

The Company allocated the purchase price for the Business to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over the fair value was recorded as goodwill.

The following table summarizes the final allocation of the purchase price for the Business based on an assessment of the fair values of the assets acquired and liabilities assumed at the date of the acquisition.


	At April 2, 2008
	(in thousands)
Assets acquired:
Current assets	$	14,556
Property, plant and equipment		243
Other assets		61
Goodwill		9,425
Customer relationships		12,700
Trademarks		18,700
Royalty agreements		2,758
Backlog		600

Total assets acquired		59,043
Liabilities assumed:
Accounts payable		2,391
Accrued expenses		2,156
Other long term liabilities		2,452

Net assets acquired	$	52,044

The aggregate amount of goodwill and intangible assets expected to be deductible for tax purposes is estimated to be $44.2 million. Goodwill of $9.4 million was originally allocated to the Company’s infant and juvenile segment for the Business. As part of its annual impairment testing of goodwill and intangible assets on December 31, 2008, however, the Company determined its goodwill and certain indefinite-life intangible assets were impaired. See Note 5 for detail with respect to this impairment charge.

The results of operations of the Business and the fair value of assets acquired and liabilities assumed are included in our consolidated financial statements beginning on the acquisition date. Pro forma information is presented below in combination with the Pro Forma information with respect to the acquisition of CoCaLo, Inc., which occurred on the same date as the acquisition of the Business.

CoCaLo

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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

The additional earnout payments provide for a potential payment ranging from zero to a maximum of $4.0 million, payable with respect to performance on three metrics — sales, gross profit and combined Kids Line and CoCaLo EBITDA (each as determined in accordance with the Stock Agreement) — 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 initial 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 initial target.

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

Any additional earnout payments will be recorded as additional goodwill when and if paid.

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

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

In accordance with the Stock Agreement, CoCaLo entered into a three-year employment agreement with Renee Pepys-Lowe to continue her employment as President.

The Company allocated the purchase price for CoCaLo to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value.

The following table summarizes the final allocation of the purchase price for CoCaLo based on an assessment of the fair values of the assets acquired and liabilities assumed at the date of the acquisition.


	At April 2, 2008
	(in thousands)
Current assets	$	9,272
Property, plant and equipment		164
Customer relationships		2,700
Trademarks		8,000
Backlog		100

Total assets acquired		20,236
Liabilities assumed		2,198

Net assets acquired	$	18,038

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

The excess value received of $422,000 above the purchase price was recorded in other long-term liabilities and will be recognized in the consolidated financial statements upon the settlement of the contingent purchase consideration as a reduction of goodwill or an extraordinary gain.

The aggregate amount of intangible assets expected to be deductible for tax purposes is estimated to be $10.8 million. As part of its annual impairment testing of goodwill and intangible assets on December 31, 2008, the Company determined its goodwill and certain indefinite-life intangible assets were impaired. See Note 5 for detail with respect to this impairment charge.

The results of operations of CoCaLo and the fair value of assets acquired and liabilities assumed are included in our consolidated financial statements beginning on the acquisition date. Pro forma information is presented below in combination with pro forma information with respect to the acquisition of the LaJobi Business, which occurred on the same date as the acquisition of CoCaLo.

Pro Forma Information (Unaudited)

The following unaudited pro forma consolidated results of operations of the Company for the years ended December 31, 2008 and December 31 , 2007 respectively, assumes the acquisitions of CoCaLo and LaJobi occurred as of January 1 of each period (in thousands).


	(Unaudited)
	Year Ended December 31,
	2008			2007
Net sales	$	251,696		$	236,536
Net (loss) income	$	(110,906	)	$	8,882

Basic (loss) income per share:
Continuing operations	$	(4.63	)	$	0.43
Discontinued operations		(0.57	)		(0.01	)

	$	(5.20	)	$	0.42


Diluted (loss) income per share:
Continuing operations	$	(4.63	)	$	0.43
Discontinued operations		(0.57	)		(0.01	)

	$	(5.20	)	$	0.42

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

Kids Line

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 “KL Earnout Consideration”). The total KL Earnout Consideration was $32.1 million, of which 90% ($28.5 million) was paid in December 2007, and $3.6 million was paid in January 2008. The amount of the KL Earnout Consideration was recorded as goodwill. The Company financed the KL Earnout Consideration by

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

drawing down upon a term loan reborrowing commitment and short-term borrowings under the bank facility applicable its infant and juvenile businesses (described in Note 9).

Note 4—Sale of Gift Business and Discontinued Operations

The aggregate purchase price payable by the Buyer for the Gift Business was: (i) 199 shares of the Common Stock, par value $0.001 per share, of the Buyer (the “Buyer Common Shares”), representing a 19.9% interest in the Buyer after consummation of the transaction that will be accounted for at cost, and (ii) a subordinated, secured promissory note issued by Buyer to us in the original principal amount of $19.0 million (the “Seller Note”). During the 90-day period following the fifth anniversary of the consummation of the sale of the Gift Business, RB will have the right to cause the Buyer to repurchase any Buyer Common Shares then owned by RB, at its assumed original value (which was $6.0 million for all Buyer Common Shares), as adjusted in the event that the number of Buyer Common Shares is adjusted, plus interest at an annual rate of 5%, compounded annually. The consideration received from the Gift Sale was recorded at fair value as of December 23, 2008 at approximately $19.8 million and was recorded as Note Receivable of $15.3 million and Investments of $4.5 million on the Company’s consolidated balance sheet. In addition, in connection with the sale of the Gift Business, our newly-formed, wholly-owned Delaware limited liability company (the “Licensor”) executed a license agreement (the “License Agreement”) with the Buyer. Pursuant to the License Agreement, the Buyer will pay the Licensor a fixed, annual royalty (the “Royalty”) equal to $1,150,000. The initial annual Royalty payment is due and payable in one lump sum on December 31, 2009. Thereafter, the Royalty will be paid quarterly at the close of each three-month period during the term. At any time during the term of the License Agreement, the Buyer shall have the option to purchase all of the intellectual property subject to the License Agreement, consisting generally of the Russ ^® and Applause ^® trademarks and trade names (the “Retained IP”) from the Licensor for $5.0 million, to the extent that at such time (i) the Seller Note shall have been paid in full (including all principal and accrued interest with respect thereto), and (ii) there shall be no continuing default under the License Agreement. If the Buyer does not purchase the Retained IP by December 23, 2013 (or nine months thereafter, if applicable), the Licensor will have the option to require the Buyer to purchase all of the Retained IP for $5.0 million. In connection therewith the Company recorded deferred royalty income of $5.0 million

The Company recognized a gain on the sale of the Gift Business of $0.9 million, reflecting the difference between the estimated fair value of the consideration received from the sale of the Gift Business and the carrying amount of the net assets exchanged based on the terms of the Purchase Agreement. In addition, as a result of the sale of the Gift Business, an impairment charge of the Applause ^® trademark of approximately $6.7 million, was recorded in impairment of goodwill and intangibles in continuing operations for the fourth quarter of 2008 (see Note 5). The results of operations of the Gift Business and any gain associated with the sale of the Gift Business are reported in discontinued operations in the consolidated statements of operations for all periods presented.

Condensed Financial Information

Condensed results of discontinued operations are as follows (in thousands):


	Year Ended December 31,
	2008			2007			2006
Sales	$	124,035		$	168,107		$	147,669
Loss before income taxes	$	(17,268	)	$	(1,370	)	$	(28,067	)
Gain on sale	$	905			—			—
Provision (benefit) for income taxes	$	(4,147	)	$	(1,183	)	$	(4,565	)
Income (loss) from discontinued operations	$	(12,216	)	$	(187	)	$	(23,502	)

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Note 5—Goodwill and Intangible Assets

The Company completed its annual goodwill assessment for its continuing operations as of December 31, 2008 in accordance with SFAS No. 142. The conclusion reached as a result of such testing was that the fair value of its continuing operations for which goodwill had been allocated, was below its carrying value, indicating such goodwill may be impaired. As a result of step two of the impairment testing, the Company recorded a goodwill impairment charge of $130.2 million to write-off all of its goodwill (which was determined to have no implied value).

In addition to the testing for impairment of goodwill under SFAS No. 142, the Company tests its indefinite-life intangibles annually on December 31, 2008. As a result of these tests, the Company recorded in cost of goods sold for the fourth quarter of 2008 an aggregate impairment charge of $3.7 million related to the tradenames of three infant and juvenile subsidiaries, including CoCaLo ($1.9 million), Sassy ($1.7 million) and LaJobi ($0.1 million). In addition, as a result of the Gift Sale, the Applause tradename was tested under the criteria, of SFAS No. 144, which resulted in an impairment charge to such tradename of $6.7 million, which charge was recorded in impairment of goodwill and intangibles in the fourth quarter of 2008.

Management’s determination of the fair value of its continuing operations incorporated multiple inputs including discounted cash flow calculations, the level of the Company’s own share price and assumptions that market participants would make in valuing such continuing operations. Other assumptions include levels of economic capital, future business growth, earnings projections, assets under management and the discount rate utilized. As part of the Company’s goodwill analysis, the Company compared the fair value of its continuing operations to the market capitalization of the Company using the December 31, 2008 common stock price. The impairment charge resulted in part from adverse equity and credit market conditions that caused a sustained decrease in current market multiples and the Company’s stock price, a decrease in valuations of U.S. public companies and corresponding increased costs of capital created by the weakness in the U.S. financial markets and decreases in cash flow forecasts for the markets in which the Company operates. The impairment charge will not result in any current or future cash expenditures.

Changes in the carrying amount of goodwill during the years ended December 31, 2008 and 2007 are as follows:


	(in thousands)
Goodwill at December 31, 2006	$	89,242
Net increase from Kids Line earnout		31,535

Goodwill at December 31, 2007		120,777
Increase from LaJobi acquisition		9,425
Other		(4	)
Impairment		(130,198	)

Goodwill at December 31, 2008	$	—

As of December 31, 2008 the components of intangible assets consist of the following (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006


	Weighted Average	December 31,		December 31,
	Amortization Period	2008		2007
Sassy trade name	Indefinite life	$	5,400	$	7,100
Applause trade name	5 years		911		7,646
Kids Line customer relationships	20 years		30,711		31,100
Kids Line trade name	Indefinite life		5,300		5,300
LaJobi trade name	Indefinite life		18,600		—
LaJobi customer relationships	20 years		12,224		—
LaJobi royalty agreements	5 years		2,146		—
CoCaLo trade name	Indefinite life		6,100		—
CoCaLo customer relationships	20 years		2,599		—
CoCaLo foreign trade name	Indefinite life		28		—
Other intangible assets	4.4 years		—		26

Total intangible assets		$	84,019	$	51,172

Aggregate amortization expense, was $2.3 million, $0.4 million and $26,000 in 2008, 2007 and 2006, respectively. Estimated amortization expense for each of the fiscal years ending December 31, 2009 to December 31, 2013 is $2.8 million annually.

Under SFAS No. 142, indefinite-lived intangible assets are no longer amortized but are reviewed for impairment and to determine if such assets should be amortized at least annually, and more frequently in the event of a triggering event indicating that an impairment may exist. In connection with this annual analysis as of December 31, 2008 and based upon current economic conditions and the impairment recorded on all of the Company’s goodwill, the Company determined that the Kids Line customer relationships should no longer have an indefinite life and, as such, will be amortized over a 20-year life. In connection with such determination, the Company recorded $389,000 of amortization expense for the three months and year ended December 31, 2008.

Sassy previously 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 of 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.

Note 6—Financial Instruments

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position SFAS No. 157-2, “Effective Date of FASB Statement No. 157”, which delayed the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. On January 1, 2008, the Company adopted SFAS No. 157 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. The Company does not have any non-financial assets and liabilities that are carried at fair value on a recurring basis in the financial statements. The expanded disclosures about fair value measurements for financial assets and liabilities on a recurring basis are presented in Note 6. The Company has not yet determined the impact that the adoption of SFAS No. 157 will have on its non-financial assets and liabilities which are not recognized on a recurring basis; however, the Company does not anticipate it will materially impact 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 adopted SFAS No. 159 effective January 1, 2008 and there was no impact on its consolidated financial position, results of operations and cash flows, resulting therefrom.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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

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

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

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

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

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s interest rate swap (See Note 9) as of December 31, 2008 (in thousands):


	December			Fair Value Measurements as of December 31, 2008
	31, 2008			Level 1		Level 2			Level 3
Interest rate swap	$	(2,073	)	$	—	$	(2,073	)	$	—

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

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

There have been no material changes to the Company’s valuation techniques during the year ended December 31, 2008 as compared to prior years.

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 currencies other than the United States dollar.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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, 2008, the Company had no forward contracts.

The Company had forward contracts to exchange United States dollars to Euros with notional amounts of approximately $2.8 million as of December 31, 2007, respectively. At December 31, 2007, an unrealized gain of $209,000 relating to forward contracts is included in accrued expenses in the Consolidated Balance Sheet.

Concentrations of Credit Risk

As part of its ongoing risk assessment 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 43.2%, 41.9% and 40.7% of the Company’s consolidated sales from continuing operations for 2008, 2007 and 2006, respectively, and Target accounted for approximately 11.6%, 13.3% and 13.8% of the Company’s consolidated sales from continuing operations for 2008, 2007 and 2006, respectively. The loss of any of these customers, or a significant reduction in the volume of business conducted with such customers, could have a material adverse impact on the Company. The Company does not normally require collateral or other security to support credit sales.

Note 7—Inventory Valuation

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, 2008 and 2007, the balance of the inventory reserve was approximately $2.5 million and $6.3 million, respectively.

Note 8—Property, Plant and Equipment

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


	December 31,
	2008			2007
Land	$	690		$	690
Buildings		2,150			2,120
Machinery and equipment		5,520			43,606
Furniture and fixtures		723			3,884
Leasehold improvements		912			10,716
Construction in progress		—			1,057

		9,995			62,073
Less: Accumulated depreciation and amortization		(5,529	)		(48,980	)

	$	4,466		$	13,093

Depreciation expense from continuing operations was approximately $0.8 million, $0.7 million and $0.8 million, for the years ended December 31, 2008, 2007 and 2006, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Note 9—Debt

Background

In December 2004, RB purchased all of the outstanding equity interests and warrants in Kids Line (the “KL Purchase”). The KL Purchase was originally financed with the proceeds of a $125.0 million term loan, which was subsequently replaced by a $105.0 million credit facility with LaSalle Bank as agent (the “2005 Credit Agreement”) and a Canadian credit facility. In order to reduce overall interest expense and gain increased flexibility with respect to the financial covenant structure of our 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 separate credit agreements for each of our infant and juvenile segment and domestic gift segment. In connection with the LaSalle Refinancing, all outstanding obligations under the 2005 Credit Agreement (approximately $76.5 million) were repaid using proceeds from the senior credit facility of the infant and juvenile segment executed in connection with the LaSalle Refinancing.

In connection with the purchases of LaJobi and CoCaLo (described in Note 3), the credit agreement applicable to our infant and juvenile segment was amended and restated to, among other things, increase the facilities available thereunder and permit such acquisitions (see Note 23 “Subsequent Events” below for a description of an amendment to such amended and restated credit facility executed as of March 20, 2009). In addition, in connection with the sale of our gift business (described in Note 4), the credit agreements applicable to our gift segment were terminated and all obligations thereunder were repaid.

Long-term debt at December 31, 2008 and 2007 consisted of the following (in thousands):


	December 31,
	2008		2007
Term Loan (Credit Agreement pertaining to infant and juvenile business)	$	89,200	$	43,500
Note Payable (CoCaLo purchase)		1,498		—

Total		90,698		43,500
Less current portion		14,933		11,500

Long-term debt	$	75,765	$	32,000

The aggregate maturities of long-term debt at December 31, 2008 are as follows (in thousands):


2009	$	14,933
2010		14,933
2011		14,934
2012		14,400
2013		31,600

Total	$	90,800

At December 31, 2008 and 2007, there was approximately $12.1 million and $15.5 million, respectively, borrowed under the New Revolving Loan (defined below), which is classified as short-term debt.

A. Our Credit Agreement

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

As of December 22, 2006, the Original Credit Agreement was amended (the “First Amendment”) to permit the repayment and subsequent reborrowing of up to $20 million under the Original Term Loan, which was intended to enable KL and Sassy to continue to utilize cash flows expected to be generated from operations to repay debt until the earnout consideration for the purchase of Kids Line (the “KL Earnout Consideration”) became due. Through draws on the Original Credit Agreement, KL and Sassy paid $28.5 million of the KL Earnout Consideration in December of 2007, and the remainder ($3.6 million) in January of 2008.

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

The following discussion pertains to the provisions of the Credit Agreement as in effect on December 31, 2008, but see Note 23, “Subsequent Events” below for a description of an amendment to the Credit Agreement executed as of March 20, 2009.

The commitments under the Credit Agreement as of December 31, 2008 originally consisted of (a) a $75.0 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 $100.0 million term loan facility (the “Term Loan”). The Borrowers drew down $31.0 million under the Revolving Loan and the entire $100 million available under the Term Loan on the Closing Date, in order to finance the acquisitions of LaJobi and CoCaLo, and pay related transaction expenses of such acquisitions and the Credit Agreement, and to reallocate the existing indebtedness among the bank syndicate. The scheduled maturity date was extended from March 14, 2011 to April 1, 2013 (subject to customary early termination provisions). As of December 31, 2008, the principal of the Term Loan was to be repaid, on a quarterly basis, at an annual rate of $14.4 million per year, commencing June 30, 2008 thru June 30, 2012 with $31.6 million due on April 1, 2013.

As of December 31, 2008, the loans under the Credit Agreement bore 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 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 ranged from 2.0% — 3.0% for LIBOR Loans and from 0.50% — 1.50% for Base Rate Loans.

The applicable interest rate margins as of December 31, 2008 were: 3.00% for LIBOR Loans and 1.50% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of December 31, 2008 were as follows:


	At December 31, 2008
	LIBOR Loans			Base Rate Loans
Revolving Loan		5.12	%		4.75	%
Term Loan		4.85	%		4.75	%

In connection with the Credit Agreement, the Borrowers paid the Agent and Lenders a closing fee of approximately $1.5 million, and the Company incurred $0.7 million of other third party costs. Of the aggregate fees and costs, $0.4 million was expensed to interest expense and the remainder was treated as deferred financing costs and will be recognized over the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

term of the respective types of indebtedness using the effective interest method. In connection with the Credit Agreement, the Company also wrote-off $0.3 million of unamortized deferred financing costs.

Pursuant to the Credit Agreement, the following fees were applicable as of December 31, 2008: an agency fee of $35,000 per annum, an annual non-use fee (payable monthly, in arrears, and upon termination of the relevant obligations) of 0.40% to 0.60% of the unused amounts under the Revolving Loan, an annual letter of credit fee (payable monthly, in arrears, and upon termination of the relevant obligations) for undrawn amounts with respect to each letter of credit based on the most recent quarter-end Total Debt to EBITDA Ratio ranging from 2.75% — 3.25% and other customary letter of credit administration fees. On August 13, 2008, the Credit Agreement was further amended (the “August Modification”) to clarify the definition of EBITDA as applied to, among other things, the Total Debt to EBITDA Ratio for the last three quarters of 2008. In addition, the Amended and Restated Pledge Agreement was further amended in order to, among other things, permit the creation of the licensor under the License Agreement with the buyer of the gift business, the transfer to RB of various inactive subsidiaries, and the transfer of the interest in the Shining Stars ^® website from US Gift to RB.

As of December 31, 2008, the Borrowers were required to make prepayments of the Term Loan upon the occurrence of certain transactions, including most asset sales or debt or equity issuances, and extraordinary receipts.

The Credit Agreement contains customary affirmative and negative covenants, as well as the following financial covenants as of December 31, 2008: (i) a minimum Fixed Charge Coverage Ratio, (ii) a maximum Total Debt to EBITDA Ratio and (iii) an annual capital expenditure limitation. Upon the occurrence of an event of default under the Credit Agreement, including a failure to remain in compliance with all applicable financial covenants, the lenders could elect to declare all amounts outstanding under the Credit Agreement to be immediately due and payable. If tested on such date, the Borrowers would have been non-compliant with the Total Debt to EBITDA Ratio on June 30, 2008. The August Modification, however, which clarified the definition of EBITDA (among other things, as it applies to such ratio for the last three quarters of 2008), was executed prior to any default with respect to such ratio. The Borrowers were in compliance with all applicable financial covenants in the Credit Agreement as of December 31, 2008. In addition, an event of default under our credit agreement could result in a cross-default under certain license agreements that we maintain.

The Credit Agreement contains significant limitations on the ability of the Borrowers to distribute cash to RB, which became a corporate holding company as part of the LaSalle Refinancing, 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. As of December 31, 2008, the Borrowers were not permitted (except in specified situations) to distribute cash to RB to pay RB’s overhead expenses unless: (i) before and after giving effect to such distribution, no event of default would exist and (ii) before and after giving effect to such distribution, Excess Revolving Loan Availability will equal or exceed $5.0 million; provided that the aggregate amount of such distributions cannot exceed $3.5 million per year. As of December 31, 2008, the Borrowers were not permitted to distribute cash to RB to permit RB to pay a dividend to its shareholders unless (i) the LaJobi Earnout Consideration and the CoCaLo Additional Earnout Payments have been paid in full, (ii) before and after giving effect to any such payment, (a) no default or event of default exists or would result therefrom, (b) Excess Revolving Loan Availability will equal or exceed $4.0 million, and (c) before and after giving effect to any such payment, the applicable financial covenants will be satisfied. Other restrictions on dividends and distributions are set forth in the Credit Agreement. See Note 23, “Subsequent Events” for a description of the limitations on distributions to and by RB contained in the amendment to the Credit Agreement effective as of March 20, 2009.

In addition, as of December 31, 2008, under the Credit Agreement:

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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

(v) The Borrowers are required to maintain in effect Hedge Agreements that protect against potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount of the New Term Loan. Pursuant to the requirement to maintain Hedge Agreements discussed above, on May 2, 2008, the Borrowers entered into an interest rate swap agreement with a notional amount of $70 million as a risk management tool to lock the interest cash outflows on the floating rate debt. However, because we did not meet the criteria for hedge accounting under SFAS No. 133 for this instrument, changes in the fair value of the interest rate swap will be remeasured through operations each period. Changes between its cost and its fair value as of December 31, 2008 resulted in an expense of approximately $2.1 million for the year ended December 31, 2008, and such amount is included in interest expense in the consolidated statement of operations.

The Revolving Loan Availability at December 31, 2008 was $36.9 million.

B. The Giftline Credit Agreement

On March 14, 2006, as amended on April 11, 2006, August 8, 2006, December 28, 2006 and August 7, 2007, Russ Berrie U.S. Gift Inc. (“U.S. Gift”) and other specified wholly-owned domestic subsidiaries of RB, entered into a credit agreement as borrowers, on a joint and several basis, with LaSalle Bank National Association, as issuing bank, LaSalle Business Credit, LLC as administrative agent, the lenders from time to time party thereto, and RB, as loan party representative (as amended, the “Giftline Credit Agreement”). Prior to its termination, the aggregate total commitment under the Giftline Credit Agreement was $25.0 million. Concurrently with the consummation of the sale of the Gift Business, all obligations under the Giftline Credit Agreement and the loan documents executed in connection therewith were terminated.

C. Canadian Credit Agreement

On June 28, 2005, our former Canadian subsidiary, Amram’s Distributing Ltd. (“Amrams”), executed a separate Credit Agreement (acknowledged by RB) with the financial institutions party thereto and LaSalle Business Credit, a division of ABN AMRO Bank, N.V., Canada Branch, a Canadian branch of a Netherlands bank, as issuing bank and administrative agent (the “Canadian Credit Agreement”), and related loan documents with respect to a maximum U.S. $10.0 million revolving loan (the “Canadian Revolving Loan”). RB executed an unsecured Guaranty (the “Canadian Guaranty”) 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, among other things (i) release RB from the Canadian Guaranty and (ii) provide for a maximum U.S. $5.0 million revolving loan. There were no borrowings under the Canadian Revolving Loan in 2008 or 2007. Concurrently with the consummation of the sale of the Gift Business, all obligations under the Canadian Credit Agreement and the loan documents executed in connection therewith were terminated.

D. Russ Berrie (UK) Limited Business Overdraft Facility

On March 19, 2007, Russ Berrie UK Limited entered into a Business Overdraft Facility (the “Facility”) with National Westminster Bank PLC and The Royal Bank of Scotland plc, acting as agent for the bank. As of the consummation of the sale of the Gift Business, Russ Berrie UK Limited is no longer a subsidiary of the Company.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Note 10—Accrued Expenses

Accrued expenses consist of the following (in thousands):


	December 31,
	2008		2007
Payroll and incentive compensation	$	3,366	$	7,854
Rebates		623		3,548
KL Earnout Consideration		—		3,622
Other(a)		9,260		13,824

Total	$	13,249	$	28,848


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

Note 11—Severance and Related Costs

During 2007, the Company recorded a charge of $2.9 million (for severance related to the departure of the Company’s former Chief Executive Officer), of which $2.1 million was paid in 2008 and $0.8 million will be paid in 2009.

Note 12—Income Taxes

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

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


	Years Ended December 31,
	2008			2007		2006
United States	$	(129,500	)	$	11,649	$	23,360
Foreign		1,129			1,573		1,069

	$	(128,371	)	$	13,222	$	24,429

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


	Years Ended December 31,
	2008			2007			2006
Current
Federal	$	(1,844	)	$	3,269		$	5,428
Foreign		555			651			344
State		612			1,157			1,186

	$	(677	)		5,077		$	6,958


Deferred
Federal		(23,845	)		(801	)		2,865
State		(4,509	)		(149	)		540

		(28,354	)		(950	)		3,405

	$	(29,031	)	$	4,127		$	10,363

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 2008, partially offset by foreign tax expense on profitable operations in Australia and state tax expense on profitable operations for LaJobi.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

In fiscal 2008, the Company recorded a federal and state deferred tax benefit of approximately $18.9 million related to the deferred tax asset associated with impairment of intangible assets relating to the Sassy, Applause, CoCaLo and LaJobi acquisitions. These deferred tax assets are indefinite in nature for accounting purposes 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 reduced its valuation allowance by approximately $1.8 million on its inventory reserves, bad debts, and other miscellaneous accruals as the Company anticipates taxable income in future years as a result of the sale of the gift business. In fiscal 2008, the Company decreased its federal deferred tax liability by approximately $1.4 million related to the unrepatriated earnings of its foreign subsidiaries as the result of the sale of the gift business.

A reconciliation of the provision (benefit) for income taxes on continuing operations with amounts computed at the statutory Federal rate of 35% is shown below (in thousands):


	Years Ended December 31,
	2008			2007			2006
Income tax provision (benefit) at U.S. Federal statutory rate	$	(44,930	)	$	4,628		$	8,550
State income tax, net of Federal tax benefit		(2,533	)		655			1,122
Foreign rate differences		160			101			(31	)
Change in valuation allowance affecting income tax expense		19,275			—			(33	)
Other, net		(1,003	)		(1,257	)		755

	$	(29,031	)	$	4,127		$	10,363

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,
	2008			2007
Assets (Liabilities)
Deferred tax assets:
Inventory	$	971		$	1,252
Accruals / reserves		563			2,344
Foreign tax credit carryforward		13,889			11,638
Charitable contributions carryforwards		191			1,042
Deferred gain on sale of building		—			863
State net operating loss carryforwards		1,288			2,317
Federal net operating loss carryforwards		—			—
Foreign net operating loss carryforwards		498			6,944
Intangible assets		40,416			2,591
Depreciation		11			866
Other		690			323

Gross deferred tax asset		58,517			30,180
Less: valuation allowance		(28,220	)		(17,865	)

Net deferred tax asset		30,297			12,315

Deferred tax liabilities:
Depreciation and amortization		—			(11,857	)
Receivable from sale of business		—			—
Unrepatriated earnings of foreign subsidiaries		(225	)		(1,632	)
Other		(172	)		(46	)

		(397	)		(13,535	)

Total net deferred tax asset (liability)	$	29,900		$	(1,220	)

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

At December 31, 2008 and 2007, the Company has provided total valuation allowances of $28.2 million and $17.9 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 increased by $10.3 million in 2008 primarily related to the impairment charge of approximately $21.5 million on the Kids Line, Sassy, LaJobi, CoCaLo and Applause intangible assets, an increase in valuation allowance of approximately $3.7 million related to FTC carryforwards, offset by a reduction in the valuation allowances of foreign NOL carryforwards related to the foreign operations of the gift businesses which were sold of approximately $6.4 million, a reduction of approximately $7.5 million on other tax deductible reserves as a result of the sale of the gift businesses, and a reduction of approximately $.9 million related to State NOL’s carryforwards.

The valuation allowance decreased by $4.2 million in 2007 primarily related to the utilization of the federal NOL of approximately $3.7 million and a decrease of approximately $2.6 million related to various tax reserves, offset by an increase in foreign NOL carryforwards of approximately $1.4 million and an increase to the FTC carryforward of approximately $0.7 million.

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, 2008 and 2007, the Company has recorded a deferred tax liability of $0.2 million and $1.6 million, respectively, related to the repatriation of its foreign subsidiaries’ undistributed earnings that are not treated as permanently reinvested due to the Company’s recent history of repatriation of these earnings. The liability decreased during 2008 due to the sale of the Gift Business. The Company has sufficient foreign tax credit carryforwards to offset this deferred tax liability.

The Company adopted FIN 48 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 did not make 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 did not anticipate would settle, or for which the statute of limitations would not close in the next twelve months, and the Company did not make 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


	(in thousands)
Balance at January 1, 2008	$	13,394
Increases related to prior year tax positions		0
Decreases related to prior year tax positions		0
Increases related to current year tax positions/settlements		0
Lapse of statues		(3,812	)

Balance at December 31, 2008	$	9,582

The above table includes interest and penalties of $0.1 million as of December 31, 2008, and interest and penalties of $0.6 million as of December 31, 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, 2008 are $0.2 million of unrecognized tax benefits that if recognized would impact the effective tax rate. Also included in the liability for unrecorded tax benefits as of December 31, 2008 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 at December 31, 2008 could decrease by approximately $5.3 million within the next twelve months as a result of the expiration of the statute of limitations.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

The Company files federal and state income tax returns in the United States, Australia, 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, 2008, a summary of the tax years that remain subject to examination in the Company’s major jurisdictions are:


United States—federal		2005 and forward
United States—states		2002 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 (loss) earnings per share is set forth below (in thousands):


	Years Ended December 31,
	2008		2007		2006
Weighted average common shares outstanding		21,344		21,130		20,876
Dilutive effect of common shares issuable		—		85		30

Weighted average common shares outstanding assuming dilution		21,344		21,215		20,906

As of December 31, 2008, 2007 and 2006, the Company had 1,941,379, 1,181,035 and 1,516,740 stock options outstanding, respectively, that were excluded from the computation of diluted EPS because they would be anti-dilutive due to their exercise price exceeding the average market price in 2007 and 2006, or the loss the Company incurred from continuing operations in 2008.

Note 14—Related Party Transactions

An executive officer of the Company, along with various family members, established L&J Industries, in Asia. The purpose of the entity is to provide quality control services to LaJobi for goods being shipped from Asian ports. The Company used this service commencing April 2008. For the year ended December 31, 2008, the Company incurred costs totaling approximately $674,000 related to the services provided, which costs were based on the actual, direct costs incurred by L&J Industries for such individuals plus 5%, which was recorded in cost of goods sold.

The same executive officer of the Company has utilized since April 2008 a portion of one of the Company’s warehouses to store and ship merchandise unrelated to the Company’s business. The employee reimburses the Company for expenses incurred in connection with this arrangement. For the year ended December 31, 2008, the Company received reimbursements totaling approximately $111,000, for the space and services provided, which was recorded in selling, general and administrative expense.

CoCaLo contracts for warehousing and distribution services from a company owned and managed by certain members of the family of an executive officer of the Company. From April through December 2008, CoCaLo paid approximately $1.5 million to such company for these services which was recorded in selling, general and administrative expense. In addition, CoCaLo rents certain office space from the same company at an annual rental cost of approximately $137,000, which was recorded in selling, general and administrative expense.

In addition, certain of our principal stockholders own significant equity stakes in certain customers of our Gift segment, which was sold in December 2008 and is presented as a discontinued operation (see Note 4). In particular:

(1) D. E. Shaw Laminar Portfolios, L.L.C. (“Laminar”) owns approximately 21% of the outstanding shares of the Company’s Common Stock, and an affiliate of Laminar owns a majority equity interest in FAO Schwarz (“FAO”), a customer of the Company with purchases of approximately $929,000 and $186,000 during the years ended December 31, 2008 and December 31, 2007, respectively. Ms. Krueger, a director of the Company and a Laminar designee to the

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Company’s Board, is a vice president of D. E. Shaw & Co., L.P. (“DES”), an affiliate and investment advisor of Laminar, and a director of FAO. Mr. Benaroya, the Chairman of the Board of the Company, is also the Chairman of the Board of FAO and is a consultant for DES.

(2) Investment entities and accounts managed and advised by Prentice Capital Management, L.P. (“Prentice”) own approximately 21% of the outstanding shares of the Company’s Common Stock, and Prentice indirectly owns a majority equity interest in KB Toys, Inc. (“KB”), a customer of the Company with purchases of approximately $49,000 and $918,000 during the years ended December 31, 2008 and December 31, 2007, respectively. Mr. Ciampi, a director of the Company and a Prentice designee to the Company’s Board, is a partner of Prentice and the Chairman of the Board of KB.

In connection with the sale of the Gift Business, the Company entered into a transition services agreement (the “TSA”), pursuant to which, for periods of time and consideration specified in the TSA, (i) a specified number of individuals employed by the Company subsequent to the Closing will be entitled to the continued use of the Company’s prior facility in Oakland, New Jersey (or a successor facility), (ii) Kids Line Australia Pty Ltd. will be permitted to continue to occupy the premises located in Banksmeadow, Australia, (iii) Kids Line UK Limited will be permitted to continue to occupy the premises located in the United Kingdom, (iv) certain historical financial and business records will be made available to the Company, (v) specified personnel will be made available to the Company to enable it to prepare various public filings and tax returns, (vi) specified personnel whose duties are primarily attributable to the Company’s infant and juvenile segment will be permitted to continue their employment arrangements, (vii) IT professionals will be made available to the Company on an as-needed basis, (viii) specified personnel will be made available to Buyer on as as-needed basis, and (ix) certain employee benefits will continue to be made available to specified employees remaining with the Company for specified periods.

Note 15—Leases

At December 31, 2008, the Company and its subsidiaries were obligated under operating lease agreements (principally for buildings and other leased facilities) for remaining lease terms ranging from three months to 8.6 years.

Rent expense for continuing operations for the years ended December 31, 2008, 2007 and 2006 amounted to approximately $2.4 million, $1.4 million and $1.2 million, respectively.

The approximate aggregate minimum future rental payments (excluding related party leases in Note 14) as of December 31, 2008 under operating leases are as follows (in thousands):


2009	$	2,025
2010		1,906
2011		1,930
2012		1,942
2013		2,012
Thereafter		3,441

Total	$	13,256

The Company has capital leases for equipment and software. The future payments under these capital leases are approximately $11,000 in 2009, $8,000 in 2010 and $2,000 in 2011.

Note 16—Stock Repurchase Program

In March 1990, the Board of Directors authorized RB to repurchase an aggregate of 7,000,000 shares of its common stock. As of December 31, 2008 and 2007, 5,643,284 shares had been repurchased pursuant to this program. During the twelve month periods ended December 31, 2008, 2007 and 2006, the Company did not repurchase any shares pursuant to this program or otherwise. During the years ended December 31, 2008, 2007 and 2006 the Company issued from treasury stock 169,175, 208,147 and 0 shares, respectively, that were purchased under the stock repurchase program in prior years.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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).

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, 2008, 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 2008, 2007 and 2006.

Equity Plans

As of December 31, 2008, the Company maintained the Russ Berrie and Company, Inc. Equity Incentive Plan (the “EI Plan”), which is a successor to the Company’s 2004 Option Plan (defined below), approved by the Company’s shareholders on July 10, 2008, and the Amended and Restated 2004 Employee Stock Purchase Plan (the “2004 ESPP”). As of December 31, 2008, the 2004 ESPP expired by its terms. The Company also continues to have options outstanding (although no further grants can be made) under certain equity plans that it previously maintained, including 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, (the “Predecessor Plans”), and the 2004 Stock Option, Restricted and Non-Restricted Stock Plan (the “2004 Option Plan”, and together with the Predecessor Plans and the EI Plan, the “Plans”). In addition, the Company may issue stock options outside of the Plans discussed above. As of December 31, 2008, there were 370,000 stock options outstanding that were granted outside the Plans. The exercise or measurement price for equity awards issued under the Plans or otherwise is generally equal to the closing price of the Company’s common stock on the New York Stock Exchange as of the date the award is granted. Generally, equity awards under the Plans (or otherwise) vest over a period ranging from one to five years from the grant date as provided in the award agreement governing the specific grant. Options and stock appreciation rights generally expire 10 years from the date of grant. Shares in respect of equity awards are issued from authorized shares reserved for such issuance or treasury shares.

The Board of Directors (the “Board”) adopted the EI Plan on June 3, 2008, subject to approval by its shareholders, which was obtained at the 2008 Annual Meeting of Shareholders held on July 10, 2008 (the “2008 Meeting”). The 2004 Option Plan was terminated as of the date of the 2008 Meeting, and no further awards under the 2004 Option Plan could be made thereafter. The EI Plan provides for awards in any one or a combination of: (a) Stock Options, (b) Stock Appreciation Rights, (c) Restricted Stock, (d) Stock Units, (e) Non-Restricted Stock, and/or (f) Dividend Equivalent Rights. Any award under the EI Plan may, as determined by the committee administering the EI Plan (the “Plan Committee”) in its sole discretion, constitute a “Performance-Based Award” (an award that qualifies for the performance-based compensation exemption of Section 162(m) of the Internal Revenue Code of 1986, as amended). All awards granted under the EI Plan will be evidenced by a written agreement between the Company and each participant (which need not be identical with respect to each grant or participant) that will provide the terms and conditions, not inconsistent with the requirements of the EI Plan, associated with such awards, as determined by the Plan Committee in its sole discretion. Award agreements must be executed by the Company and a participant in order for the award covered by such agreement to be effective. A total of 1,500,000 shares of Common Stock have been reserved for issuance under the EI Plan. In the event all or a portion of an award is forfeited, terminated or cancelled, expires, is settled for cash, or otherwise does not result in the issuance of all or a portion of the shares of Common Stock subject to the award in connection with the exercise or settlement of such award (“Unissued Shares”), such Unissued Shares will in each case again be available for awards under the EI Plan pursuant to a formula set forth in the EI Plan. The preceding sentence applies to any awards outstanding on July 10, 2008 under the 2004 Option Plan, up to a maximum of an additional 1,750,000 shares of Common Stock. In July 2008, options to purchase an aggregate of 105,000 shares of the Company’s Common Stock were granted to directors under the EI Plan; and in October 2008, 118,000 stock appreciation rights and 13,900 restricted stock units were issued to employees of the Company under the EI Plan. At December 31, 2008, 1,329,145 shares were available for issuance under the EI Plan.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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

Impact on Net Income

The components of share-based compensation expense follow:


	Years Ended December 31,
	2008		2007		2006
Stock option expense	$	810,000	$	37,000	$	89,000
Restricted stock expense		686,000		32,000		—
Restricted stock unit expense		4,000		—		—
SAR expense		—		—		—
ESPP expense		135,000		117,000		113,000

Total share-based payment expense	$	1,635,000	$	186,000	$	202,000

The Company records share-based compensation expense in the statements of operations within the same categories that payroll expense is recorded.

Stock Options

Stock options are rights to purchase the Company’s Common Stock in the future at a predetermined per share exercise price (generally the closing price for such stock on the New York Stock Exchange on the date of grant). Stock Options may be either: “Incentive Stock options” (stock options which comply with Section 422 of the Code), or Nonqualified Stock Options (stock options which are not Incentive Stock Options).

As of December 31, 2008, the total remaining unrecognized compensation cost related to non-vested stock options, net of forfeitures, was approximately $3.3 million, and is expected to be recognized over a weighted-average period of 3.7 years.

The fair value of options granted under stock option plans or otherwise is estimated on the date of grant using a Black-Scholes — Merton options pricing model using the assumptions discussed below. Expected volatilities are calculated based on the historical volatility of the Company’s stock. 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 option. The assumptions used to estimate the fair value of the stock options granted during the years ended December 31, 2008, 2007 and 2006 were as follows:


	Years Ended December 31,
	2008			2007			2006
Dividend yield		0.0	%		0.0	%		0.0	%
Risk-free interest rate		3.06	%		3.48	%		4.52	%
Volatility		40.5	%		39.0	%		36.5	%
Expected term (years)		5.0			4.4			4.7
Weighted-average fair value of options granted	$	4.53		$	6.00		$	5.77

Activity regarding outstanding options for 2008, 2007 and 2006 is as follows:

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006


	All Stock Options Outstanding
				Weighted Average
	Shares			Exercise Price
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			18.20
Options Granted		256,000			11.50
Options Forfeited/Cancelled		(90,038	)		18.42

Options Outstanding as of December 31, 2008		1,941,379			17.31


Option price range at December 31, 2008	$	7.28-$34.05
Options available for grant and reserved for future issuance at December 31, 2008 under the EI Plan		1,329,145

There was no aggregate intrinsic value on the unvested and vested outstanding options at December 31, 2008. 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, 2008 and the exercise price of each option. The intrinsic value of stock options exercised for the years ended December 31, 2008, 2007 and 2006, was $0, $1,022,000, and $567,000, respectively. The fair value of stock options vested for the years ended December 31, 2008, 2007 and 2006, was $2,066,008, $6,940,902 and $7,886,090, respectively.

The following table summarizes information about fixed-price stock options outstanding at December 31, 2008:


		Options Outstanding					Options Exercisable
		Number		Weighted Average	Weighted		Number		Weighted
		Outstanding		Remaining	Average		Exercisable		Average
Exercise Prices		at 12/31/08		Contractual Life	Exercise Price		at 12/31/08		Exercise Price
$	23.625		4,745	Less than 1 Year	$	23.625		4,745	$	23.625
	18.375		1,387	2 Years		18.375		1,387		18.375
	30.980		6,296	3 Years		30.980		6,296		30.980
	20.750		3,880	3 Years		20.750		3,880		20.750
	34.800		10,233	4 Years		34.800		10,233		34.800
	19.530		250,000	5 Years		19.530		250,000		19.530
	22.210		400,000	5 Years		22.210		400,000		22.210
	34.050		56,756	5 Years		34.050		56,756		34.050
	13.050		319,882	6 Years		13.050		319,882		13.050
	13.060		15,000	6 Years		13.060		15,000		13.060
	13.740		10,000	6 Years		13.740		10,000		13.740
	11.610		30,000	6 Years		11.610		30,000		11.610
	11.520		20,000	6 Years		11.520		20,000		11.520
	11.190		2,000	6 Years		11.190		2,000		11.190
	15.050		60,000	7 Years		15.050		24,000		15.050
	16.300		49,300	8 Years		16.300		—		16.300
	14.900		11,500	8 Years		14.900		3,500		14.900
	16.770		314,400	8 Years		16.770		74,863		16.770
	16.050		120,000	8 Years		16.050		36,000		16.050
	14.830		100,000	4 Years		14.830		—		14.830
	13.650		51,000	4.25 Years		13.650		—		13.650

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Options Outstanding

Options Exercisable

Number

Weighted Average

Weighted

Number

Weighted

Outstanding

Remaining

Average

Exercisable

Average

Exercise Prices

at 12/31/08

Contractual Life

Exercise Price

at 12/31/08

Exercise Price

7.280

105,000

4.5 Years

7.280

—

7.280

1,941,379

1,268,542

The weighted average remaining life of the outstanding options as of December 31, 2008, 2007 and 2006 is 5.9 years, 7.2 years and 7.5 years, respectively.

A summary of the Company’s non-vested stock options at December 31, 2008 and changes during 2008 is as follows:


				Weighted Average Grant
Non-vested stock options	Options			Date Fair Value
Non-vested at December 31, 2007		618,600		$	16.41
Granted		256,000		$	11.50
Vested		(126,363	)	$	16.35
Forfeited/cancelled		(75,400	)	$	16.62

Non-vested options at December 31, 2008		672,837		$	12.69

Restricted Stock

Restricted Stock is Common Stock that is subject to restrictions, including risks of forfeiture, determined by the Plan Committee in its sole discretion, for so long as such Common Stock remains subject to any such restrictions. A holder of restricted stock has all rights of a shareholder with respect to such stock, including the right to vote and to receive dividends thereon, except as otherwise provided in the award agreement relating to such award. Restricted Stock Awards are equity classified within the Consolidated Balance Sheets.

During the years ended December 31, 2008, 2007 and 2006, there were 7,900, 170,675 and 0 shares of restricted stock issued under the 2004 Option Plan, respectively. At December 31, 2008 and 2007, there were 168,300 and 170,675 shares of Restricted Stock outstanding. These restricted stock grants have vesting periods ranging from three to five years, with fair values (per share) at date of grant ranging from $13.65 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 for continuing operations of approximately $686,000 and $32,000 was made in 2008 and 2007, respectively. No charge to compensation expense was made in 2006.

As of December 31, 2008, the total remaining unrecognized compensation cost related to issuances of restricted stock was approximately $1.9 million, and is expected to be recognized over a weighted-average period of 3.0 years.

Restricted Stock Units

A Restricted Stock Unit (“RSU”) is a notional account representing a participant’s conditional right to receive at a future date one (1) share of Common Stock or its equivalent in value. Shares of Common Stock issued in settlement of an RSU may be issued with or without other consideration as determined by the Plan Committee in its sole discretion. RSUs may be settled in the sole discretion of the Plan Committee: (i) by the distribution of shares of Common Stock equal to the participant’s RSUs, (ii) by a lump sum payment of an amount in cash equal to the fair value of the shares of Common Stock which would otherwise be distributed to the participant, or (iii) by a combination of cash and Common Stock. The RSUs issued under the EI Plan during 2008 vest (and will be settled) ratably over a 5-year period commencing October 6, 2009 and are equity classified in the Consolidated Balance Sheets.

The fair value of each RSU grant is estimated on the grant date. For RSUs granted in 2008, the fair value is set using the closing price of the Company’s Common Stock on the New York Stock Exchange on the date of grant. Compensation expense for RSUs is recognized ratably over the vesting period, based upon the market price of the shares underlying the awards on the date of grant.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

The following table summarizes information about RSU transactions in 2008 (there were no issuances of RSUs prior to 2008, as the 2004 Option Plan did not contemplate such awards):


			Weighted
	Restricted		Average
	Stock		Grant-Date
	Units		Fair Value
Unvested at December 31, 2007		—		—
Granted		13,900	$	6.43
Vested		—		—
Forfeited/cancelled		—		—

Unvested at December 31, 2008		13,900	$	6.43

For the year ended December 31, 2008, there was $4,000 of share based compensation expense related to the granting of RSUs. As of December 31, 2008, there was approximately $81,000 of unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of 5.0 years.

Stock Appreciation Rights

A Stock Appreciation Right (a “SAR”) is a right to receive a payment in cash, Common Stock or a combination thereof, as determined by the Plan Committee, in an amount or value equal to the excess of: (i) the fair value, or other specified valuation (which may not exceed fair value), of a specified number of shares of Common Stock on the date the right is exercised, over (ii) the fair value or other specified amount (which may not be less than fair value) of such shares of Common Stock on the date the right is granted; provided , however, that if a SAR is granted in tandem with or in substitution for a stock option, the designated fair value for purposes of the foregoing clause (ii) will be the fair value on the date such stock option was granted. No SARs will be exercisable later than ten (10) years after the date of grant. The SARs issued under the EI Plan during 2008 vest ratably over a 5-year period commencing October 6, 2009 at an exercise price equal to the closing price of the Company’s Common Stock on the New York Stock Exchange on the date of grant, and until terminated earlier, expire on the tenth anniversary of the date of grant.

SARs are accounted for at fair value at the date of grant in the consolidated income statement, are generally amortized on an even basis over the vesting term, and are equity-classified in the consolidated balance sheets.

The following summarizes all SARs activity during 2008 (there were no issuances of SARs prior to 2008, as the 2004 Option Plan did not contemplate such awards):


			Weighted-Average Grant
	Shares		Date Value Per Share
Nonvested, January 1, 2008		—		—
Granted		118,000	$	6.43
Vested				—
Forfeited				—

Nonvested, December 31, 2008		118,000	$	6.43

For the year ended December 31, 2008, there was no compensation cost related to SARs, which as of December 31, 2008 have a weighted-average period of 5.0 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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

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 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, 2008, the 2004 ESPP had no shares reserved for future issuance. During the year ended December 31, 2008, there were 147 enrolled participants in the 2004 ESPP and 31,317 shares were issued. Compensation expense for continuing operations related to the ESPP for the years ended December 31, 2008, 2007 and 2006 was approximately $135,000, $117,000 and $113,000, respectively.


	Employee Stock Purchase Plan
	2008		2007		2006
Exercise Price	$	2.52	$	13.04	$	9.69
Shares Purchased		31,317		26,029		25,424

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


	Years Ended December 31,
	2008			2007			2006
Dividend yield		0.0	%		0.0	%		0.0	%
Risk-free interest rate		3.17	%		4.98	%		4.38	%
Volatility		34.4	%		36.7	%		50.04	%
Expected term (years)		1.0			1.0			1.0

Expected volatilities are calculated based on the historical volatility of the Company’s stock. 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 continuing operations for the years ended December 31, 2008, 2007 and 2006 was approximately $0.3 million, $0.8 million and $1.1 million, respectively.

Note 19 — Concentrations of Risk

During 2008, approximately 59% of the Company’s dollar volume of purchases was attributable to manufacturing in the People’s Republic of China (“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.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

In 2008, the supplier accounting for the greatest dollar volume of the Company’s purchases accounted for approximately 23% of such purchases and the five largest suppliers accounted for approximately 49% in the aggregate. The Company believes that there are many alternate manufacturers for the Company’s products and sources of raw materials.

See Note 6 above for information regarding dependence on certain large customers.

Note 20—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. Substantially all license agreements other than the MAM Agreement (which was terminated March 2008 effective December 2008), are for terms of two to four years 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 $12.9 million, of which approximately $7.6 million remained unpaid at December 31, 2008, substantially all of which is due prior to December 31, 2009. During the year ended 2008, the Company recorded charges to cost of sales of $0.1 million, against these royalty prepayments for amounts that management believed will not be realized. During the years ended 2007 and 2006, respectively, the Company did not record any charges against these royalty prepayments for amounts that management believed will not be realized. The Company’s total royalty expense from continuing operations for the years 2008, 2007 and 2006, including the aforementioned charges, was $5.2 million, $3.4 million and $1.5 million, respectively.

In connection with the sale of the Gift Business, RB and U.S. Gift sent a notice of termination with respect to the lease by RB (assigned to U.S. Gift) of a facility in South Brunswick, New Jersey. Although this lease has become the obligation of the Buyer (through its ownership of U.S. Gift), RB will remain obligated for the payments due thereunder (to the extent they are not paid by U.S. Gift) until the termination of such lease becomes effective (a maximum period of two years from the closing date of December 23, 2008, for a maximum potential obligation of approximately $2.7 million per year). No payments have been made by RB in connection with this obligation as of December 31, 2008, but there can be no assurance that payments will not be required of RB in the future.

The purchase agreement pertaining to the sale of the Gift Business contains various RB indemnification, reimbursement and similar obligations. In addition, RB may remain obligated with respect to certain contracts and other obligations that were not novated in connection with their transfer. No payments have been made by RB in connection with the foregoing as of December 31, 2008, but there can be no assurance that payments will not be required of RB in the future.

As of December 31, 2008 we have obligations under certain letters of credit that contingently require us to make payments to guaranteed parties aggregating $1.0 million upon the occurrence of specified events.

Pursuant to the Asset Agreement, the Company may be required to pay earnout consideration amounts (ranging from $0.0 to $15.0 million) in respect of the business of LaJobi; and pursuant to the Stock Agreement, the Company may be required to pay earnout consideration amounts (ranging from $0.0 to $4.0 million) in respect of the business of CoCaLo. See Note 3 for details with respect to all such potential earnout consideration amounts.

Note 21—Quarterly Financial Information (Unaudited)

The following quarterly financial data for the four quarters ended December 31, 2008 and 2007 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. Each of the quarters has been restated to present the operations of the Gift Segment as a discontinued operation.

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

The quarter ended December 31, 2008 includes impairments to goodwill and intangibles of $140.6 million. The quarter ended December 31, 2007 includes a $6.4 million impairment of the MAM Agreement. The quarter ended September 30, 2007 includes a $3.6 million impairment of the MAM Agreement.


	For Quarters Ended
2008	March 31			June 30			September 30		December 31
	(Dollars in Thousands, Except Per Share Data)
Net sales	$	41,612		$	62,231		$	69,803	$	55,548
Gross profit		15,155			20,203			22,830		11,214
Income (loss) from continuing operations		3,160			2,627			5,991		(111,118	)
Income (loss) from discontinued operations		(1,160	)		(14,766	)		2,214		1,496
Net income (loss)	$	2,000		$	(12,139	)	$	8,205	$	(109,622	)
Basic Earnings per Common Share:
Income (loss) from continuing operations	$	0.15		$	0.12		$	0.29	$	(5.16	)
Income (loss) from discontinued operations		(0.06	)		(0.69	)		0.10		0.07

Net income (loss) per common share	$	0.09		$	(0.57	)	$	0.39	$	(5.09	)


Diluted Earnings per Common Share:
Income (loss) from continuing operations	$	0.15		$	0.12		$	0.29	$	(5.16	)
Income (loss) from discontinued operations		(0.06	)		(0.69	)		0.10		0.07

Net income (loss) per common share	$	0.09		$	(0.57	)	$	0.39	$	(5.09	)


	For Quarters Ended
2007	March 31			June 30			September 30		December 31
	(Dollars in Thousands, Except Per Share Data)
Net sales	$	38,682		$	36,871		$	45,171	$	42,342
Gross profit		14,877			14,064			13,742		9,022
Income (loss) from continuing operations		3,351			2,524			3,595		(375	)
Loss from discontinued operations		(805	)		(2,159	)		10,712		(7,935	)
Net (loss) income	$	2,546		$	365		$	14,307	$	(8,310	)
Basic Earnings per Common Share:
Income (loss) from continuing operations	$	0.16		$	0.12		$	0.17	$	(0.02	)
Income (loss) from discontinued operations		(0.04	)		(0.10	)		0.51		(0.37	)

Net income (loss) per common share	$	0.12		$	0.02		$	0.68	$	(0.39	)


Diluted Earnings per Common Share:
Income (loss) from continuing operations	$	0.16		$	0.12		$	0.16	$	(0.02	)
(Loss) income from discontinued operations		(0.04	)		(0.10	)		0.51		(0.37	)

Net income (loss) per common share	$	0.12		$	0.02		$	0.67	$	(0.39	)

Note 22—Dividends

For the years ended December 31, 2008, December 31, 2007 and December 31, 2006, no cash dividends were paid.

See Note 9 and Note 23 for a discussion of dividend restrictions imposed by the Company’s senior bank facilities.

Note 23 — Subsequent Events

Amendment to New Credit Agreement

As of March 20, 2009, RB and the Borrowers entered into a Second Amendment to Credit Agreement with the

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

Lenders and the Agent (the “Second Amendment”).

The following constitute the material changes to the Credit Agreement effected by the Second Amendment:

(i) RB is now a guarantor under the Credit Agreement and each other Loan Document to which a Guarantor is a party.

(ii) The commitments now consist of: (a) a $50.0 million revolving credit facility, with a subfacility for letters of credit in an amount not to exceed $5.0 million, and (b) an $80.0 million term loan facility. Previously, the maximum revolving loan commitment was $75.0 million and the maximum term loan commitment was $100.0 million.

(iii) Prior to the Second Amendment, the Credit Agreement contained the following financial covenants: (a) a minimum Fixed Charge Coverage Ratio of 1.25:1.00, with a step-up to 1.35:1.00 at June 30, 2010; (b) a maximum Total Debt to EBITDA Ratio of 3.25:1.00, with a step-down to 3.00 at June 30, 2009 and 2.75:1.00 at December 31, 2010; and (c) an annual capital expenditure limitation. Pursuant to the Second Amendment, the minimum Fixed Charge Coverage Ratio of RB and its subsidiaries is 1.20:1.00 for the first two quarters of 2009, with a step down 1.15:1.00 for the third quarter of 2009 and a step up to 1.25:1.00 for the fourth quarter of 2009 and the first quarter of 2010 and 1.35:1.00 for each fiscal quarter thereafter. The maximum Total Debt to EBITDA Ratio of RB and its subsidiaries is now 4.00:1.00 for the first two quarters of 2009, with a step down to 3.75:1.00 for the third quarter of 2009, a step down to 3.50:1.00 for the fourth quarter of 2009, a step down to 3.25:1.00 for first three quarters of 2010 and, a step down to 2.75:1.00 for the fourth quarter of 2010 and each fiscal quarter thereafter.

(iv) The applicable interest rate margins (to be added to the applicable interest rate) under the New Credit Agreement previously ranged from 2.00% — 3.00% for LIBOR Loans and from 0.50% — 1.50% for Base Rate Loans, depending on the Total Debt to EBITDA Ratio. Pursuant to the Second Amendment, the margins now range from 2.0% — 4.25% for LIBOR Loans and from 1.0% — 3.25% for Base Rate Loans, based on a pricing grid set forth in the Second Amendment (until delivery of specified financial statements and compliance certificates with respect to the quarter ending September 30, 2009, the applicable margins will be a minimum of 4.00% for LIBOR Loans and 3.00% for Base Rate Loans).

(v) As a result of the Second Amendment, restrictions in the Credit Agreement on the activities of RB (requirement to act as a holding company, with all operations conducted through its subsidiaries) have been eliminated.

(vi) As a result of the Second Amendment, the Term Loan will be repaid in quarterly installments of $3.25 million on the last day of each fiscal quarter commencing with the quarter ended March 31, 2009 (prior thereto, the quarterly installments were in the amount of $3.6 million).

(vii) The Second Amendment added a new requirement that RB Trademark Holdco, LLC, a wholly-owned subsidiary of RB (“IP Sub”), make mandatory prepayments of 100% of any net cash proceeds of any asset sale.

(viii) The requirement that the Borrowers maintain an independent director has been eliminated.

(ix) Prior to the effectiveness of the Second Amendment, the Borrowers were not permitted (except in specified situations) to distribute cash to RB to pay RB’s overhead expenses unless: (i) before and after giving effect to such distribution, no Event of Default would exist and (ii) before and after giving effect to such distribution, Excess Revolving Loan Availability will equal or exceed $5.0 million; provided that the aggregate amount of such distributions could not exceed $3.5 million per year. Pursuant to the Second Amendment, all restrictions on the ability of the Borrowers to distribute cash to RB for the payment of RB’s overhead expenses have been eliminated; however , RB will not be permitted to pay a dividend to our shareholders unless (i) the LaJobi Earnout Consideration and the CoCaLo Additional Earnout Payments have been paid in full, (ii) before and after giving effect to any such dividend, (a) no default or event of default exists or would result therefrom, (b) Excess Revolving Loan Availability

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

will equal or exceed $4.0 million, and (c) before and after giving effect to any such payment, the applicable financial covenants will be satisfied, and (iii) the Total Debt to EBITDA Ratio for the two most recently completed fiscal quarters shall have been less than 2.00:1.00.

The following fees are now applicable to the New Credit Agreement: an agency fee of $35,000 per annum, a non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan, as well as other customary fees as are set forth in the New Credit Agreement, as amended.

In connection with the Second Amendment, RB paid aggregate amendment and arrangements fees of 1.25% of the revised commitments.

The Amended and Restated Pledge Agreement and the Amended and Restated Guaranty and Collateral Agreement, each, dated as of April 2, 2008 between RB and the Agent were further amended as of March 20, 2009, to provide, among other things, for a pledge to the Agent by RB of the membership interests in IP Sub.

In addition, RB executed a Joinder Agreement in favor of the Agent, to add RB as a party to the Amended and Restated Guaranty and Collateral Agreement, as amended to include substantially all of the existing and future assets and properties of RB (subject to specified exceptions) as security for the satisfaction of the obligations of all the Borrowers under the Credit Agreement, as amended, and the other related loan documents.

Financing costs associated with an amendment for revolver and term borrowings are subject to the provisions of EITF 96-19 and 98-14 to test for the change in the borrowing capacity. Based upon preliminary calculations, it is expected that the Company will record a non-cash charge to results of operations for deferred financing costs, as well as the financing costs incurred in connection with the Second Amendment in the quarter ending March 31, 2009.

Issuances of SARs

In February 2009, a total of 450,000 SARs were issued to various employees of the Company under the terms of the EI Plan. All such SARs vest ratably over a 5-year period, beginning on the first anniversary of the date of grant. In March 2009, the Company granted 114,943 fully vested SARs to its chief executive officer in lieu of a cash bonus for 2008 pursuant to his incentive compensation arrangements with the Company.

Effective January 30, 2009, Anthony Cappiello, previously Executive Vice President and Chief Administrative Officer and interim principal financial officer of the Company, left the employment of the Company. Mr. Cappiello is entitled to receive substantially the payments and other benefits that would be applicable to a termination by the Company without Cause under his employment agreement with the Company. The Company will record such charge during the quarter ending March 31, 2009.

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		Column F
	Balance at								Balance
	Beginning		Charged to				Sale of Gift		at End
Description	of Period		Expenses		Deductions*		Business (a)		of Period
Allowance for accounts receivable:
Year ended December 31, 2006	$	3,116	$	8,927	$	9,178	$	—	$	2,865
Year ended December 31, 2007		2,865		11,420		9,555		—		4,730
Year ended December 31, 2008		4,730	$	16,238		14,639		2,044		4,285

Allowance for inventory:
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
Year ended December 31, 2008		6,310		1,933		20		5,739		2,484


*		Principally account write-offs and allowance for accounts receivable

a)		- Reflects the sale of the Gift business.

b)		- 2008 charge to expenses relates to continuing operations.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

We maintain 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, 2008. 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, 2008.

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 recognizes that the Company’s internal control over financial reporting cannot prevent or detect all errors 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 Company acquired each of LaJobi Industries, Inc. (“LaJobi”) and CoCaLo, Inc. (“CoCaLo”) (collectively, the “acquired businesses”) on April 2, 2008, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, the acquired businesses’ internal control over financial reporting associated with LaJobi and CoCaLo total assets of $57.6 million and $17.0 million, respectively, and net sales of $58.2 million and $15.8 million, respectively, included in the Company’s consolidated financial statements as of and for the year ended December 31, 2008.

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, management evaluated the effectiveness, as of December 31, 2008, of the Company’s internal control over financial reporting, excluding the acquired businesses described in the preceding paragraph. 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 the Company’s internal control over financial reporting was effective as of December 31, 2008.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 has been audited by the Company’s independent registered public accounting firm, KPMG LLP, their report, which is included in Item 8 herein, expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. KPMG also excluded the acquired businesses in their evaluation of the effectiveness of the Company’s internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

Nowithstanding the acquisitions of LaJobi and CoCaLo and the sale of the gift business, 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 9B OTHER INFORMATION

Modifications to the IC Program

In recognition of the current economic environment, and in order to more closely align potential incentive compensation award amounts with overall corporate performance, the Committee has amended its IC Program for 2009 as described in detail in the section captioned “ Modifications to the IC Program ” in the Compensation Discussion and Analysis set forth below. See also “ Operation of the 2008 IC Program ” in the Compensation Discussion and Analysis set forth below for a description of other elements of the IC Program that were not modified for 2009.

The following tables set forth information with respect to potential awards for 2009 under the corporate component and the individual goals and objectives component of the modified IC Program for the named executive officers (other than Mr. Cappiello, whose employment with the Company ended January 30, 2009).

Corporate Component


					Potential
	Participant	App.			Award for		Potential Award		Potential Award
NEO	Group	%			Min. Target		for Target		for Max. Target

Bruce G. Crain	Corporate		75	%	$	61,875	$	309,375	$	536,250

Marc S. Goldfarb	Corporate		50	%	$	24,450	$	122,250	$	183,375

Fritz Hirsch	Sassy		50	%	$	29,250	$	146,250	$	219,375

Michael Levin	Kids Line		75	%	$	60,000	$	300,000	$	520,000

Individual Goals and Objectives Component*


							Potential
					Potential		Award for
					Award for Less		Between 80%				Potential
					than 80% of		and 90% of		Potential		Award for
					Corporate		Corporate		Award for		Max.
	Participant				Target		Target		Target		Target
NEO	Group	App. %			(A)		(B)		(C)		(D)

Bruce G. Crain	Corporate		75	%	$	0	$	25,781	$	103,125	$	178,750

Marc S. Goldfarb	Corporate		50	%	$	0	$	10,188	$	40,750	$	61,125

Fritz Hirsch	Sassy		50	%	$	0	$	12,188	$	48,750	$	73,125

Michael Levin	Kids Line		75	%		n/a		n/a		n/a		n/a


*		With respect to individual goals and objectives, participants will in 2009 have the opportunity to earn between 0% and 150% of the Part B Amount, subject to the following. Eligibility for any potential earnings under this component for all participants will be forfeited if 80% of the Target for the corporate component of the relevant participant group is not achieved; for performance of between 80% and 90% of Target for the corporate component of the relevant participant group, participants will be entitled to earn up to a maximum of 25% of the Part B Amount; and amounts between 100% and 150% of the Part B Amount are reserved for superior performance, or for exemplary performance on special initiatives beyond the participant’s daily responsibilities in the event in excess of 90% of the Target for the corporate component of the relevant participant group is achieved. For purposes of the table above, we have assumed that in: column “(A)”, 80% of the Target for the corporate component of the relevant participant group is not achieved; in column "(B)”, 90% of the Target for the corporate component of the relevant participant group has been achieved and 25% of the Part B Amount has been achieved; in column “(C)”, more than 90% of the Target for the corporate component of the relevant participant group has been achieved and 100% of the Part B Amount has been achieved; and in column “(D)”, more than 90% of the Target for the corporate component of the relevant participant group has been achieved and 150% of the Part B Amount has been achieved.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information relating to executive officers is included under the caption “Executive Officers of the Registrant” in Part I of the Original Filing.

DIRECTORS

As of August 9, 2006, investment entities and accounts managed and advised by Prentice Capital Management, L.P. (“Prentice”) purchased 4,399,733 shares of the Common Stock of the Company from The Russell Berrie Foundation (the “Foundation”), pursuant to a share purchase agreement with the Foundation. Also as of August 9, 2006, D. E. Shaw Laminar Portfolios, L.L.C. (“Laminar”) purchased 4,399,733 shares of Common Stock from the Foundation pursuant to a share purchase agreement with the Foundation. The total of 8,799,466 shares of Common Stock purchased by the Prentice entities and accounts and Laminar as described above (collectively, the “Purchases”), represent approximately 41% of the Company’s outstanding shares of Common Stock. The Company was not a party to either share purchase agreement nor did it receive any of the proceeds from the Purchases.

In connection with the Purchases, as of August 10, 2006, the Company entered into an Investors’ Rights Agreement (as amended, the “IRA”), with Prentice Capital Partners, LP, Prentice Capital Partners QP, LP, Prentice Capital Offshore, Ltd., GPC XLIII, LLC, S.A.C. Capital Associates, LLC, PEC I, LLC, Prentice Special Opportunities Master, L.P. and Prentice Special Opportunities, LP (collectively, the “Prentice Buyers”) and Laminar. Pursuant to the IRA, and subject to the limitations set forth therein, the Company has generally agreed, among other things, to nominate for election with respect to all stockholders meetings or consents concerning the election of members of the Board of Directors of the Company (the “Board”), two persons designated by Prentice (“Prentice Directors”), and two persons designated by Laminar (“Laminar Directors”), provided , that the number of Prentice Directors and Laminar Directors shall be decreased as set forth in the IRA if the number of shares of Common Stock held by Prentice or Laminar, as applicable, decreases to specified levels set forth therein; and provided further , that at any time that Prentice shall have the right to designate more than one Prentice Director, at least one of such designees shall be an Independent Director, and at any time that Laminar shall have the right to designate more than one Laminar Director, at least one of such designees shall be an Independent Director (defined generally as (i) “independent” for purposes of the governance rules of the New York Stock Exchange and (ii) “independent” under such rules if Prentice and Laminar were the listed company with respect to which independence is being determined). The Company has waived the requirement set forth in clause (ii) above for each of Laminar and Prentice. Messrs. Zimmerman and Ciampi are the current Prentice Directors; and Ms. Krueger and Mr. Schaefer are the current Laminar Directors.

The information set forth below concerning the current directors of the Company has been furnished by them to the Company. Age and other information is as of April 25, 2009.


			Director		Principal Occupation;
Name	Age		Since		Other Public Directorships*
Raphael Benaroya(4)		61		1993	Since April 22, 2009, Mr. Benaroya has been retained to perform an expanded role as Chairman of the Board. Since April 1, 2008, Mr. Benaroya has been acting as a consultant for D. E. Shaw & Co., L.P. (“DES”), which is an affiliate and investment advisor of Laminar, a private investment fund, relating to certain of Laminar’s portfolio companies (6). Prior thereto, Mr. Benaroya was Chairman of the Board, President and Chief Executive Officer of United Retail Group, Inc., which operates a chain of retail specialty stores, from 1989 until its sale in October 2007 to Redcats USA, a division of PPR, a French public company, and continued as President and Chief Executive Officer thereafter until March 2008. Mr. Benaroya is also Managing Director of American Licensing Group, L.P., a company specializing in consumer goods’ brand name licensing, and a member of the Board of Managers of Biltmore Capital, a privately-held financial company which invests in secured debt.
Mario Ciampi(1)(2)		48		2007	Mr. Ciampi is currently a partner of Prentice (6), a New York-based private investment firm. From October 2004 to May 2006, he served as President of Disney Store—North America, a division of The Children’s Place Retail Stores, Inc., a specialty retailer of children’s merchandise. From 1996 to September 2004, he served in various capacities for The Children’s Place, most recently as Senior Vice President—Operations. Mr. Ciampi was elected to the Board of the Company at the 2007 Annual Meeting of Shareholders. Mr. Ciampi is also a member of the Board of Directors of Bluefly, Inc., an Internet retailer of discounted designer apparel and accessories, and home products and accessories.


			Director		Principal Occupation;
Name	Age		Since		Other Public Directorships*
Bruce G. Crain(4)		48		2007	As of December 4, 2007, Mr. Crain became President and Chief Executive Officer of the Company. Also as of such date, pursuant to his employment agreement with the Company, Mr. Crain was duly elected to the Board (5). Since March 2007 until his appointment as President and CEO, Mr. Crain had provided consulting services to the Company, DES and Prentice. Previously, Mr. Crain served in various executive capacities for Blyth, Inc., a NYSE-listed multi-channel designer and marketer of home decor and gift products, from 1997 to September 2006, including Senior Vice President (Corporate) from 2002 to 2006, a member of the Chairman’s Office Executive Committee from 2004 to 2006, Group President of the worldwide Wholesale Group segment from 2004 to 2006, President of the Home Fragrance Group from 2002 to 2004 and President of the European Affiliate Group from 1999 to 2001.
Frederick J. Horowitz(1)(3)		45		2006	Since 2001, Mr. Horowitz has been the Chairman and CEO of A.P. Deauville, a value brand personal care company. Mr. Horowitz was elected to the Board of the Company on June 29, 2006.
Lauren Krueger(1)(4)		34		2006	Ms. Krueger joined the D. E. Shaw group in 2003, and since 2006, has served as a vice president in D. E. Shaw group’s credit-related opportunities unit, and a vice president of D. E. Shaw & Co., L.P., which is an affiliate and investment advisor of Laminar (6). Ms. Krueger was an associate in the restructuring group at Lazard Freres & Co. LLC, an investment bank, from 2002 to 2003. Ms. Krueger was elected to the Board of the Company on October 5, 2006. Ms. Krueger also served (until September 2008) as a director of The Parent Company, a commerce (toys, baby products and electronics), content and new media company for growing families, which is controlled by Laminar and ceased operations in 2009.
Salvatore M. Salibello(2)(3)		63		2006	Mr. Salibello founded Salibello & Broder LLP, a certified public accounting firm, in 1978, and is currently the firm’s managing partner. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. Mr. Salibello currently sits on the Board of Directors of three closed-end mutual funds (Gabelli Dividend and Income Trust Fund, Gabelli Global Utility and Income Trust, and Gabelli Global Gold Nat’l Rest. Inc. Trust). Mr. Salibello was elected to the Board of the Company on June 29, 2006.


			Director		Principal Occupation;
Name	Age		Since		Other Public Directorships*
John Schaefer(2)(3)		50		2008	From April 2007 to the present, Mr. Schaefer has been the owner and Managing Director of Lightning Management, LLC, an executive management services firm. From February 1998 through April 2007, Mr. Schaefer held various positions, including that of President and Chief Executive Officer (April 2005 — April 2007), President, Chief Operating Officer, Chief Financial Officer and Director (July 2004 to April 2005), and Chief Financial Officer (April 2001 — July 2004), with Cornerstone Brands, Inc., a family of catalog companies for the home, leisure and casual apparel, including Ballard Designs, Frontgate, Garnet Hill, Improvements, and Smith+Noble. Mr. Schaefer was also a director of The Parent Company (see above) from September 2007 until January 2009. Mr. Schaefer became a member of the Board of the Company on February 14, 2008.
Michael Zimmerman(4)		39		2006	Mr. Zimmerman founded Prentice (6) in May 2005 and has been its Chief Executive Officer since its inception. Prior thereto, he managed investments in the retail consumer sector for S.A.C. Capital, a Connecticut-based hedge fund, from 2002-2005. Mr. Zimmerman also serves as a director of The Wetseal, Inc., a national specialty retailer of contemporary apparel and accessory items. Mr. Zimmerman was elected to the Board of the Company on October 5, 2006.


(1)		Member of Compensation Committee of the Board.

(2)		Member of Nominating/Governance Committee of the Board.

(3)		Member of Audit Committee of the Board.

(4)		Member of the Executive Committee of the Board. Mr. Crain is an ex officio member of this committee.

(5)		In accordance with the employment agreement between the Company and Mr. Crain, Mr. Crain may terminate his employment with the Company for “good reason” for any failure to nominate him as a member of the Board during his employment under such agreement.

(6)		See “Security Ownership of Certain Beneficial Owners” table herein.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s officers and directors, and persons who own beneficially more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the SEC and the NYSE. Officers, directors and greater than ten percent shareholders are required to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on its review of the copies of such Section 16(a) forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that, during the fiscal year ended December 31, 2008, all filing requirements applicable to its officers, directors and greater than ten percent shareholders were complied with on a timely basis except that John Schaefer, a member of the Company’s Board of Directors (the “Board”), filed a late Form 4 on April 21, 2009 with respect to the grant of 15,000 options to him on July 10, 2008.

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 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.russberrieij.com, by clicking onto the words “Investor Relations” on the main menu, then clicking onto the words “Corporate Governance” on the next screen 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 1800 Valley Road, Wayne, New Jersey 07470, Attention: Secretary. 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 October 2, 2008.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

The “Committee” as used in this section refers to the Compensation Committee of the Board. “Named executive officers” or “NEOs” refer to the individuals set forth in the Summary Compensation table below, and the “CEO” refers to Bruce G. Crain, our President and Chief Executive Officer.

COMPENSATION PHILOSOPHY AND OVERVIEW

We feel that the overall compensation levels of our executives (including our NEOs) should be sufficiently competitive to attract talented leaders and motivate those leaders to achieve superior results. At the same time, however, we believe that compensation should be set at responsible levels, reflecting our continued focus on improving sales and margins, controlling costs and creating value for our shareholders. At the core of our compensation philosophy is our belief that compensation should be linked to performance. We believe that offering a competitive total compensation package to executives that incorporates a reward-for-performance philosophy helps achieve these objectives. As a result, a significant portion of the compensation of our executive officers is based upon achievement of corporate objectives and individual performance goals. We also believe that total compensation and accountability should generally increase with position and responsibility. Consistent with this view, opportunities under our incentive compensation program typically represent an increasing portion of total compensation as position and responsibility increase, as individuals with greater responsibility have greater ability to influence the Company’s achievement of targeted results and strategic initiatives. Similarly, equity-based awards generally represent a higher portion of total compensation for persons with higher levels of responsibility, making a significant portion of their total compensation dependent on long-term stock appreciation. Although grants of stock appreciation rights (“SARs”) and restricted stock units (RSUs) were made to specified officers in our infant and juvenile businesses, as well as to our Chief Accounting Officer (now interim CFO) in October of 2008, as a result of the factors described below, no equity awards were made to the NEOs in 2008 other than to our CEO on January 4, 2008, pursuant to the terms of his employment agreement. See “ Equity Awards ” below.

ELEMENTS OF 2008 EXECUTIVE COMPENSATION

The material elements of our 2008 executive compensation program were: (i) base salary; (ii) annual cash incentive compensation; and (iii) equity awards. As a result of the participation of the NEOs (other than Mr. Crain, whose equity awards were the result of the commencement of his employment with the Company) in the grant by the Company of stock options and restricted stock to specified executives on December 27, 2007, equity grants were not made to the NEOs in 2008, other than to Mr. Crain, on January 4, 2008, pursuant to the terms of his employment agreement. However, the Committee did grant SARs and RSUs in October of 2008 to specified officers who did not participate in such 2007 grants (See “ Equity Awards ” below). The NEOs (other than Mr. Cappiello, who left the employment of the Company as of January 30, 2009) were awarded SARs in February of 2009.

Although we fine-tune our compensation programs as conditions change, we believe it is important to maintain consistency in our compensation philosophy and approach. We recognize that value-creating performance by an executive or group of executives does not always translate immediately into appreciation in our stock price, particularly in periods of severe economic stress such as the one we are currently experiencing. Management and the Committee are aware of the impact the current economic crisis has had on our stock price, but the Committee intends to continue to reward management performance based on its belief that over time strong operating performance will be reflected through stock price appreciation. Despite the foregoing, however, we believe that it may be appropriate for certain components of compensation to decline during periods of economic stress, reduced earnings and significantly lower stock prices. As a result: (i) the Committee significantly reduced the size of our 2008 average incentive compensation awards from 2007 (50% of potential individual goals and objectives awards were forfeited

by all participants in accordance with the terms of the IC Program as a result of our failure to achieve a specified level of corporate performance), including by utilizing its discretion to further reduce individual goals and objectives awards for the NEOs; (ii) the Committee and our CEO agreed that in lieu of the cash amount deemed earned by Mr. Crain with respect to his incentive compensation arrangements for 2008, which amount was reduced by the Committee in light of Company performance and overall economic conditions, he would accept a grant of 114,943 immediately vested SARs, which were issued in March of 2009; (iii) base salaries were not increased in 2009 (at least for the first half of the year, at which time such determination may be reevaluated); (iv) the Company temporarily suspended its matching contributions under its 401(k) plan (at least for the first half of the year, at which time such determination may be reevaluated); and (v) with respect to our executive incentive compensation program for 2009, higher minimum corporate performance will need to be achieved to trigger entitlement to any award, a greater portion of potential awards will be geared towards corporate performance, and specified levels of corporate performance will need to be achieved in order to be eligible for specified award levels based on individual performance (See “ Modifications to the IC Program for 2009 ” below).

WHY WE CHOOSE TO PAY EACH ELEMENT

We provide cash compensation in the form of base salary and annual incentive compensation. The objective of base salary is to provide current compensation that reflects job responsibilities, value to the Company and individual performance, while maintaining market competitiveness.

The objective of cash incentive compensation is to assure that a significant portion of total compensation is based on a reward of superior performance with respect to specific objectives, initiatives and strategic goals. The opportunity for a more significant award increases when both the Company or a specific operating group and the executive achieve high levels of performance. Commencing in 2005, we initiated our Incentive Compensation Program for specified employees (the “IC Program”). The IC Program in 2008 provided designated employees of the Company and its subsidiaries with an opportunity to earn substantial cash remuneration beyond their base salary based on: (i) the attainment of specified operating objectives by the Company (or specified divisions thereof); and (ii) fulfillment of specified individual goals and objectives established for specified participants. The objectives of the IC Program are to, among other things: (1) more closely align participants’ interests with those of shareholders; (2) reward participants for contributing to the short and long-term growth of the business; (3) provide participants with a more meaningful role in the attainment of maximum compensation levels; (4) provide a competitive platform for compensation vis-à-vis the marketplace; and (5) serve as a recruitment and retention tool. Incentive compensation awards under the IC Program are based on specified percentages of base salary. The determination of such percentages is discussed below, and with respect to our named executive officers in 2008, ranged from a maximum potential payment of approximately 75% to 130% of base salary in the event that the maximum targets and the highest level of individual objectives and initiatives were achieved. See “Operation of the 2008 IC Program ” below for a detailed discussion of potential and actual cash incentive compensation awarded to the NEOs in 2008. Note that as a result of the sale of the Company’s gift business as of December 23, 2008, individuals who operated in our gift business prior to such sale were ineligible for bonuses under the IC Program during 2008.

Equity awards are used to provide our executives with upside opportunity with the improvement of the Company’s stock price and to provide incentives for retention, as such awards vest over time. In addition, we feel that stock option and SAR awards align the interests of our executives with those of our shareholders, support the Company’s pay-for-performance philosophy (e.g., all the value received by the recipient from a stock option or SAR is based on the growth of the stock price above the exercise price, and correspondingly, the recipient is both incentivized to perform in a manner designed to increase shareholder value and exposed to the risk of the effect of negative performance on the Company’s stock price), foster employee stock ownership, and focus the management team on increasing value for the shareholders. As a result, a substantial portion of most equity awards takes the form of stock options or SARs. In addition, stock options and SARs help to provide a balance to the Company’s overall compensation program, as the IC Program focuses on the achievement of annual performance targets, objectives and initiatives, whereas the vesting period of stock options and SARs generally encourages executive retention and creates incentive for increases in shareholder value over a longer term. We use restricted stock or RSU awards to help align the interests of executives with those of the stockholders, foster employee stock ownership, contribute to the focus of the management team on increasing value for the stockholders, and encourage executive retention (through a multi-year vesting period). Restricted stock or RSU awards typically also result in less share dilution than a comparable amount (in terms of value) or options or SARs. Note, however, that although equity grants were made to specified executives in 2008, no such awards were made to NEOs in 2008 other than to our CEO in accordance with the provisions of his employment agreement. See “ Equity Awards ” below. Equity awards were made to NEOs (other than Mr. Cappiello) in February of 2009.

HOW WE CHOOSE AMOUNTS FOR EACH ELEMENT OF OUR COMPENSATION PROGRAM

We structure the size of the various elements awarded to all of our executives (including the NEOs) by balancing the interests of shareholders with the competitive need to provide an attractive overall compensation program. Although we do not have an exact formula for allocating among the different elements of our executive compensation program, including the division between cash and non-cash compensation and short and long-term incentives, we do ensure that a significant percentage of any executive’s aggregate compensation package (including that of the NEOs) is contingent upon either Company or operating group results as well as individual behavior, as is more fully discussed below.

We believe that the various components of our compensation package together provide a strong link between compensation and performance on both the individual and Company level. We do not believe that compensation should be based on the short-term performance of our stock, whether favorable or unfavorable, because we feel that the price of our stock will, in the long-term, reflect our operating performance, and ultimately, the management of the Company by our executives. Similarly, as we constantly strive for improved Company performance, amounts realizable from compensation awarded or earned in the past are treated as one factor of many considered in setting other elements of compensation.

The particular amount of each element of our executives’ compensation (including that of the NEOs) for a particular year is determined by or with the approval of the Committee, which uses the following “considerations”, among others, in making such determinations: (i) the performance of the Company or the relevant operational group; (ii) the results of an annual executive assessment for each executive for the previous year; (iii) the anticipated difficulty of achieving stated goals and objectives in the coming year; (iv) the value of each executive’s unique skills and capabilities to support long-term performance of the Company; (v) the contribution of each executive as a member of the executive management team; (vi) the scope and relative complexity of the individual’s responsibilities; (vii) competitive market and industry information, including periodic reports on performance versus a peer group of companies; (viii) the recommendations of our compensation consultant, if any; (ix) the contributions of such executive beyond his or her immediate area of responsibility; and (x) internal pay equity. Certain of these considerations are given greater weight depending on the element of compensation under consideration, as is discussed with respect to each element below.

Although we do not put a premium on “benchmarking,” the Committee engaged James F. Reda and Associates, LLC (“REDA”) in 2007 to provide information and assist in the establishment of the overall compensation package for the Company’s NEOs and certain other key executives for 2007 and 2008. REDA was instructed to prepare an analysis of the cash compensation, short-term and long-term incentive compensation of such executives at peer companies comparable in size and industry to ours. The peer companies used in this analysis were: Blyth, Inc., Boyds Collection Ltd., Build-A-Bear Workshop, Inc., CSS Industries, Inc., Enesco Group, Inc., Lenox Group, Inc., Libbey Inc., Lifetime Brands, Inc., RC2 Corp., Vermont Teddy Bear Co., Inc., and Yankee Candle Co., Inc. These particular companies were chosen because they were in similar or related businesses or were similar in size to us at the time of REDA’s engagement (which was prior to the sale of our gift business). In connection with the preparation of such analysis, REDA spoke with members of the Committee, certain of our executive officers and other employees in our human resources and legal department to obtain historical data and insight into previous compensation practices. At the direction of the Committee, REDA also reviewed briefing materials prepared by management and advised the Committee on matters included in the materials, including the consistency of proposals with its compensation philosophy and comparisons to programs at the companies discussed above and comparisons to other broad-based market surveys. The Committee took REDA’s recommendations into consideration when setting executive compensation for fiscal 2008, although REDA’s recommendations constituted only one of the many factors considered by the Committee in its overall determination (discussed elsewhere herein). In addition, the Committee did not attempt to maintain a specific target percentile with respect to a specific list of benchmark companies, but instead used the analysis of peer group companies discussed above to determinate whether the Company’s compensation programs are generally competitive with that of others in similar industries. See “BENCHMARKING” below. The Committee also engaged REDA in 2009 to provide information with respect to equity compensation grants for 2009. REDA was instructed to prepare an analysis of recent trends with respect to long-term incentive compensation of executives in light of the recent downturn in equity markets. In particular, the Committee was concerned that, as a result of the decline in the Company’s stock price and the resultant decrease in the per share Black-Scholes value of share-based grants, equity compensation targeted to be consistent with prior grants to the Company’s executives (in terms of value) would result in significantly greater dilution to the Company’s stockholders. The Committee took REDA’s recommendations into consideration when determining the size of the February 2009 SAR grants. Based in part on the results of REDA’s analysis, such awards were similar to prior awards in terms of the number of shares underlying the grants, although the value associated with such grants was substantially less than in prior years.

In addition to the foregoing, in making decisions with respect to any element of an executive’s compensation, the Committee considers the total compensation that may be awarded to such individual. The goal of the Committee is to set aggregate compensation levels that are reasonable, when all elements of potential compensation are considered. To aid in this analysis, the Committee uses tally sheets for each executive officer detailing such officer’s base salary, annual cash incentive award opportunity and payout, equity-based compensation, perquisites and other benefits. The tally sheets also show holdings of the Company’s Common Stock by such executive, as well as amounts payable upon termination of employment under various circumstances, including: (i) normal and early retirement; (ii) death and disability; (iii) voluntary termination; (iv) involuntary (not for cause) termination; (v) termination for cause; and (vi) termination following a change in control. The 2008 tally sheet amounts differ from the amounts set forth in the Summary Compensation Table because, among other things: (i) base salary reflects current amounts, whereas the Summary Compensation Table reflects the base salary amount during the entire year (base salaries may have increased during the year); (ii) annual incentive cash compensation amounts include potential awards, while the Summary Compensation Table reflects the actual amount earned in 2008; and (iii) annual equity awards are valued at full grant date value instead of the amount required to be included in the Summary Compensation Table. The Committee uses these tally sheets to estimate the total annual compensation of our executives, to review, in one place, how a change in the amount of each compensation component affects each NEO’s total compensation, and to provide perspective on payouts under a range of termination scenarios.

As a general matter, if the Committee determines that the wealth accumulation of a particular executive and/or the potential payout resulting from the termination of his or her employment is excessive and/or unjustified, unless limited by contract, the Committee may use its discretion to adjust one or more elements of compensation for such executive. The Committee did not determine that any downward adjustments were required with respect to any NEO compensation packages or elements for 2008 as a result of wealth accumulation. However, see “ ELEMENTS OF 2008 EXECUTIVE COMPENSATION ” above for steps implemented in 2008 and 2009 in reaction to the current economic environment, reduced earnings and significantly lower stock prices.

In general, we choose base salaries that are competitive relative to similar positions at companies of comparable size, including at companies in our industry, in order to provide us with the ability to attract, retain and motivate employees with a proven record of performance. However, we do not “benchmark” base salaries (see “BENCHMARKING” below). Amounts attainable under our IC Program are meant to assure that a significant portion of total compensation is based on a reward of superior performance with respect to specific objectives, initiatives and strategic goals. Our general policy for allocating between long-term and currently paid compensation is to establish adequate base compensation to attract and retain personnel, while providing sufficient incentives to maximize long-term value for our shareholders. As discussed above, the Company weights compensation for the executives with more responsibility (including the NEOs) more toward variable, performance-based compensation elements than for less senior employees.

Based on the Summary Compensation Table below, 2008 compensation for the NEOs was allocated as follows:


Base Salary	57.0	%

Short-Term Incentives:	13.1	%

Long-Term Incentives*	25.7	%

Other	4.2	%


*		Reflects the amount recognized for financial statement reporting purposes for 2008 in accordance with FAS 123(R) with respect to issuances of equity awards to the individuals in the table. These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be realized by the NEOs. Represent amounts recognized from issuances in 2007 and, for Mr. Crain only, also includes amounts recognized with respect to 100,000 stock options issued in January 2008 pursuant to his employment agreement.

ONGOING PROCESS

Evaluation of executive performance and consideration of our business environment are year-round processes which culminate in the annual executive assessments discussed above. In addition to the involvement of the Committee in the determination of performance targets and objectives, meetings of the Committee or the full Board over the course of the year include reviews of financial reports on year-to-date performance versus budgeted performance and prior year performance, review of information on each executive’s stock ownership and equity award holdings and estimated grant-date values of equity awards and review of tally sheets setting forth the total compensation of the named executive officers.

ROLE OF MANAGEMENT

Senior management plays an important role in our executive compensation decision-making process, due to its direct involvement in and knowledge of the business goals, strategies, experiences and performance of the Company and its various operational units. With respect to our executive incentive compensation program (which is described in detail below), the Committee engages in active discussions with the CEO concerning: (i) who should participate in the program and at what levels; (ii) which performance metrics should be used in connection with different operational groups; and (iii) the determination of performance targets, as well as individual goals and initiatives for the coming year, where applicable, and whether and to what extent criteria for the previous year have been achieved. The CEO is advised by the other senior executives of the Company in recommending and determining the achievement of individual goals and initiatives for those executives that do not report directly to him. With respect to equity grants, the CEO makes recommendations to the Committee as to appropriate grant levels for executives. In making these recommendations, the CEO is advised by the other senior executives with respect to those executives that do not report directly to him. The Committee reviews the appropriateness of the recommendations of the CEO with respect to the foregoing and accepts or adjusts such recommendations in light of the “considerations” applicable to the relevant element of compensation (discussed with respect to each element below). In addition, the senior executives of the Company are involved in the compensation-setting process through: (i) their evaluation of employee performance used in connection with the annual executive assessments; and (ii) their recommendations to the CEO and/or Committee with respect to base salary adjustments. Senior executives also prepare meeting information for the Committee upon request.

ANALYSIS OF DECISIONS WITH RESPECT TO OUR 2008 COMPENSATION PROGRAM

Base Salaries

A minimum base salary for our CEO and Messrs. Cappiello and Levin was determined by each of their respective employment agreements. See the section captioned “Employment Agreements and Arrangements” following the Summary Compensation Table for a description of the material terms and considerations with respect to such employment agreements. The Committee annually reviews and approves base salary adjustments for the named executive officers as part of the annual executive assessments, and at the time of any promotion or other change in responsibilities. In this context, the Committee does not rely on predetermined formulas or a limited set of criteria, however, the following “considerations” factor most heavily in the determination of base salary adjustments: (i) the results of the executive assessment for such executive for the previous year; (ii) the value of such executive’s unique skills and capabilities to support long-term performance of the Company; (iii) competitive market and industry information, including a review of national and regional compensation surveys with respect to base salary increases for the year; (iv) the nature and responsibility of the executive’s position; (v) the importance of retaining the individual along with the competitiveness of the market for the individual’s talent and services; (vi) the recommendations of our compensation consultant, if any, (vii) general economic conditions; and (viii) the consumer price index increase for the applicable geographic region for the applicable year. In recognition of economic conditions prevailing during 2008, and our ongoing focus on cost-containment measures, increases of approximately 3.2% (or approximately a 20% discount to average increases provided to similarly situated executives, according to a composite of various broad-based surveys) were made to the base salaries of our NEOs for 2008 (other than Messrs. Crain and Levin, whose base salaries were determined by their respective employment agreements). See the “Summary Compensation Table” below for base salaries of our named executive officers during 2008. With respect to 2009, base salaries for virtually all executives (and all NEOs) were not increased from 2008, at least for the first half of 2009, at which time such determination may be reevaluated.

2008 Cash Incentive Compensation

The IC Program was in effect for 2008 and will be in effect for 2009 (modified as described below). All named executive officers participate in the IC Program. As Mr. Cappiello left the employment of the Company prior to the payment of amounts under the IC Program for 2008, he did not receive any amounts with respect thereto, other than amounts guaranteed pursuant to his employment agreement and paid quarterly in advance. As: (i) this amount was not tied to any performance measure; and (ii) Mr. Cappiello was not entitled to any payments in respect of the IC Program for 2008 resulting from the timing of his departure from the employment of the Company, this amount has been classified as a bonus. See “Employment Contracts and Arrangements” below.

Operation of the 2008 IC Program

General

Subject to certain specified exclusions set forth in the IC Program, participants consist of senior employees who work in specified operational groups of either the Company or its subsidiaries selected on an annual basis by the CEO in his sole discretion in consultation with the heads of business units and certain senior executives of his choice, in each case as approved by the Committee. Participants generally have the rank of vice president (or its functional equivalent at certain subsidiaries) or above, but titles are not determinative. The operational groups in 2008 consisted of: (i) corporate participants; (ii) Sassy participants; (iii) Kids Line participants; (iv) LaJobi participants; (v) CoCaLo participants; and (vi) gift participants. As a result of the sale of the Company’s gift business as of December 23, 2008, however, former gift participants did not receive any payments pursuant to the IC Program with respect to 2008.

Participants are eligible to participate in the IC Program at specified levels (expressed as a percentage of annual base salary). The percentage for each participant (such participant’s “Applicable Percentage”) was recommended for 2008 by Mr. Crain and approved by the Committee (in certain cases, including Messrs. Crain and Levin, the Applicable Percentage was determined pursuant to the relevant employment agreement). We believe the levels chosen are appropriate to ensure that a significant portion of all of our executives’ total compensation is contingent upon the achievement of specified corporate objectives, as well as individual performance goals.

Towards that end, the Applicable Percentages of all participants in the IC Program range from 20% to 75% of base salary. Unless a specified percentage is set forth in an employment agreement, approval of a participant’s Applicable Percentage is based primarily on the following “considerations”: (i) the results of the annual executive assessment for such executive for the previous year; (ii) the anticipated difficulty of achieving stated goals and objectives in the coming year; (iii) the value of such executive’s unique skills and capabilities to support long-term performance of the Company; (iv) the contribution of such executive as a member of the executive management team; (v) the contributions of such executive beyond his immediate area of responsibility; and (vi) the importance of retaining the individual along with the competitiveness of the market for the individual’s talent. NEOs, as a result of their higher responsibility levels and greater ability to impact Company performance, generally have Applicable Percentages in excess of those of less senior executives. During 2008, the Applicable Percentage and participant group for each named executive officer was as set forth in the table in paragraph (b) below.

Each participant’s annual base salary multiplied by such participant’s Applicable Percentage equals a number (the “IC Factor”) that is used to determine such participant’s total incentive compensation which may be earned for the relevant year. As is explained below, however, the maximum amount of compensation that can be earned under the IC Program is greater than the IC Factor in the event that “stretch” goals are achieved by the Company.

With respect to the 2008 IC Program, potential incentive compensation for most participants was comprised of two separate components: a corporate performance component and an individual goals and objectives component (however, Mr. Levin’s incentive compensation is based solely on corporate performance pursuant to the terms of his employment agreement). Basing a portion of awards on individual goals and objectives allows the Committee to play a more proactive role in identifying performance objectives beyond purely financial measures, including, for example, exceptional performance of an individual’s functional responsibilities as well as leadership, innovations, creativity, collaboration, growth initiatives and other activities that are critical to driving long-term value for shareholders. Each component may entitle a participant to earn a specified percentage of the IC Factor, as described below.

Establishing Corporate Objectives and Calculating the Corporate Component

Corporate objectives for each operational group consist of three separate levels of achievement (“Targets”) with respect to one or several specified measures of operating performance each year, such as operating income, EBITDA, etc. (the “Chosen Metric”). Both the Chosen Metric and the Targets required are recommended by the CEO on an annual basis and approved by the Committee. The Chosen Metric for all participant groups during 2008 (and until such time as it is changed) was EBITDA (either consolidated or that of a specified operating group, as applicable), which is defined for this purpose as net income before net interest expense, provision for income taxes, depreciation, amortization and other non-cash, special or non-recurring charges (as determined by the Company). The Committee believes EBITDA to be an appropriate metric by which to measure performance because it is a measure of cash flow that provides the flexibility needed to adjust for special circumstances that affect the Company from time to time and therefore provides an opportunity to measure performance from different periods in a more consistent manner. There is no requirement that the Targets be based on or refer to budgeted levels of operating performance, or to any other plan or projection with respect to the Company’s business, although the Targets are typically based on budgets for the relevant year. Targets are calculated to include a reserve to fund IC payments. We have not disclosed target levels for the corporate component of the IC Program because we believe such disclosure will cause competitive harm to the Company with regard to various short-term business strategies and goals. The Targets for 2008 with respect to continuing operations were set at amounts that exceeded 2007 results.

The Targets are based on consolidated Company performance for corporate participants. Targets for the corporate component for Sassy, Kids Line, LaJobi and CoCaLo participants are based on their respective EBITDAs. Targets with respect to the corporate component for gift participants (prior to the sale of the gift business as of December 23, 2008) were based on specified gift EBITDA.

For most participants (and all NEOs other than Mr. Levin) during 2008, 50% of such participant’s IC Factor was designated the “Part A Amount”. The Targets consisted of the following: (i) a specified minimum level of achievement in the Chosen Metric (the “Minimum Target”) required to earn an amount equal to 20% of a participant’s Part A Amount; (ii) a specified level of achievement in the Chosen Metric in excess of the Minimum Target (the “Target”) required to earn an amount equal to 100% of a participant’s Part A Amount; and (iii) a specified level of achievement in the Chosen Metric in excess of the Target (the “Maximum Target”) required to earn an amount equal to 200% of a Participant’s Part A Amount (or 100% of the IC Factor)(for Mr. Crain, achievement of the Maximum Target would entitle him to an amount equal to 65% of his annual base salary, or 173.3% of his Part A Amount). In general, the Minimum Target rewards achievement of a significant percentage of budgeted performance targets (80% of Target in 2008). Achievement of the Target generally represents a slight “stretch”, representing how the Company would perform if it achieved budgeted amounts, recognizing that the budgets are generally set at slightly optimistic levels, whereas the Maximum Target is designed to be a true “stretch” goal for the Company or the relevant operational group (ranging from approximately 115% to 120% of Target in 2008). From 2005 (the first year that the IC Program was in effect) through 2008, with respect to the corporate objectives, we achieved performance as follows: (i) for 2005, gift and Sassy participants did not achieve the Minimum Target and Kids Line participants reached the Target; (ii) for 2006, corporate and Kids Line participants achieved results in excess of the Target, worldwide gift participants reached the Minimum Target but not the Target, and Sassy participants did not reach the Minimum Target; (iii) for 2007, corporate participants and the two specified international gift participants reached the Minimum Target but not the Target, all other gift and Kids Line participants reached the Target, and Sassy participants did not reach the Minimum Target; and (iv) for 2008, all participant groups other than LaJobi did not reach the Minimum Target (Lajobi achieved approximately 105% of Target). The Maximum Target was not achieved by any participant group in any of these years. Generally, the Company seeks to maintain the relative difficulty of achieving the target levels from year to year. As a result of the elimination of the individual goals and objectives for Mr. Levin in 2008, he was eligible to earn 15% of his base salary in the event of achievement of the Minimum Target, 75% of his base salary in the event of achievement of the Target, and 130% of his base salary in the event of achievement of the Maximum Target.

Amounts earned for achievement of results between (i) the Minimum Target and the Target and (ii) the Target and the Maximum Target, are in each case determined by a straight-line interpolation. No amounts are paid for achievement of results in excess of the Maximum Target. No amounts are paid for achievement of results below the Minimum Target. The Chosen Metric may change from year to year, different measurements may be used for different operating groups within the same year, and the Targets are expected to change each year. In determining whether any of the Targets were achieved for the year, the Committee may exercise its judgment whether to reflect or exclude the impact of changes in accounting principles and extraordinary, unusual or infrequently occurring events reported in the Company’s public filings that it believes were not driven by the current performance or that otherwise had a distorting positive or negative impact relative to the performance of our executives. To the extent appropriate, the CEO or a participant’s direct supervisor, as applicable, also considers the nature and impact of unusual or extraordinary events in the context of ascertaining whether and to what extent the individual goals and objectives discussed below have been achieved. No such discretion was applied with respect to the NEOs in 2008, and as the Minimum Target was not achieved by corporate, Kids Line or Sassy participants, no amounts were awarded to NEOs in respect of this component of the IC Program for 2008.

The following table sets forth information with respect to potential and actual awards under the corporate performance component of the IC Program for the named executive officers during 2008:


					Potential		Potential
					Award		Award		Potential				% of
	Participant	App.			for Min.		for		Award for		Amt.		Base
NEO	Group	%			Target		Target		Max Target		Awarded		Salary

Bruce G. Crain	Corporate		75	%	$	41,250	$	206,250	$	357,500	$	0		0	%

Anthony Cappiello(1)(2)	Corporate		50	%	$	17,650	$	88,250	$	176,500	$	0		0	%

Marc S. Goldfarb(2)	Corporate		50	%	$	16,300	$	81,500	$	163,000	$	0		0	%

Fritz Hirsch	Sassy		50	%	$	19,550	$	97,750	$	195,500	$	0		0	%

Michael Levin	Kids Line		75	%	$	71,250	$	356,250	$	617,500	$	0		0	%


(1)		Mr. Cappiello was no longer employed by the Company at the time of payment of amounts earned under the IC Program for 2008. As a result, with the exception of $65,000 of his potential IC bonus, which was guaranteed and paid on a quarterly basis throughout 2008 pursuant to the terms of his employment arrangement (and which guaranteed amount is not allocated between corporate and individual objectives), Mr. Cappiello was not entitled to and did not receive any payment thereunder. As: (i) this amount was not tied to any performance measure; and (ii) Mr. Cappiello was not entitled to any payments in respect of the IC Program for 2008 resulting from the timing of his departure from the employment of the Company, this amount has been classified as a bonus and not as “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table.

(2)		Excludes an additional $140,000 awarded by the Committee under the Transaction Bonus Plan (described under “Other Elements of Compensation and Related Benefits” below) to each of Messrs. Goldfarb and Cappiello based on each of their substantial efforts with respect to the consummation of the sale of the Company’s gift business during 2008. Note that this bonus is reported for each of Messrs. Goldfarb and Cappiello in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

Calculating the Individual Goals and Objectives Component

The individual goals and objectives for each participant for each year are determined by the CEO in his sole discretion in the event that the CEO is the participant’s direct supervisor or, in the event that the CEO is not the direct supervisor of the participant, by the CEO in consultation with the participant’s direct supervisor (and by the Committee with respect to Mr. Crain), and may be modified mid-year. The individual goals and objectives are based primarily upon individual performance and activities within each participant’s primary areas of responsibility that the Company wishes to incentivize.

Each participant’s individual goals and objectives are evaluated by the participant’s direct supervisor, who recommends in his/her sole discretion whether and to what extent such goals and objectives have been achieved and what, if any, percentage of the IC Factor has been earned, as approved by the Committee. Subject to the forfeiture provision discussed below, each participant (other than Mr. Levin) could have earned between 0% and 50% of such participant’s IC Factor with respect to this component. Not all goals and objectives are given equal weight in such determination. The individual goals and objectives are intended to be difficult to achieve, representing exemplary performance in areas within and outside of each participant’s daily activities. The particular payout level awarded, if any, in each case will depend on the assessment of the applicable supervisor and the Committee as to the degree of achievement attained, and will account for the difficulty of the particular goal, the scope of responsibility of the applicable individual and the complexity of the required tasks. Mr. Crain’s individual goals and objectives are discussed under “ 2008 Incentive Compensation for Mr. Crain ” below.

Eligibility for 50% of the potential earnings under the individual goals and objectives component for all participants to whom this component relates (other than Mr. Crain) is forfeited if the relevant Minimum Target (for the corporate performance component) is not reached. This provision was added because, although the Company rewards superior individual behavior apart from corporate performance, it was deemed inappropriate to award individuals the maximum potential payout under this component of the IC Program in the event that a minimum level of corporate performance for the year was not achieved. As the Minimum Target was not reached in 2008 for any participant group other than LaJobi, this forfeiture provision was triggered for all participants other than LaJobi participants (including all NEOs) during 2008.

The following table sets forth information with respect to potential and actual awards under the individual goals and objectives portion of the IC Program for NEOs participating in the IC Program (other than Mr. Levin, whose IC Award potential for 2008 did not include an individual goals component):


			% of IC					% of
	Max. Amt.		Factor			Amt.		Base
NEO	Obtainable		Earned (1)			Awarded (1)		Salary

Bruce G. Crain	$	206,250		48.5	%	$	100,000		18.2	%

Anthony Cappiello (2)	$	88,250		0	%	$	0		N/A

Marc S. Goldfarb	$	81,500		36.8	%	$	30,000		9.2	%

Fritz Hirsch	$	97,750		0	%	$	0		N/A


(1)		Amounts deemed earned by the NEOs were reduced by the Committee in 2008 based upon Company performance and prevailing economic conditions. In addition, in lieu of a cash payment of such reduced amount to Mr. Crain, he was issued 114,943 immediately exercisable SARs in March of 2009.

(2)		Mr. Cappiello was no longer employed by the Company at the time of payment of amounts earned under the IC Program for 2008. As a result, with the exception of $65,000 of his potential IC bonus, which was guaranteed and paid on a quarterly basis throughout 2008 pursuant to the terms of his employment arrangement (and which guaranteed amount is not allocated between corporate and individual objectives), Mr. Cappiello was not entitled to and did not receive any payment thereunder. As: (i) this amount was not tied to any performance measure; and (ii) Mr. Cappiello was not entitled to any payments in respect of the IC Program for 2008 resulting from the timing of his departure from the employment of the Company, this amount has been classified as a bonus and not as “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table.

See the Summary Compensation Table for total amounts of incentive compensation earned by the named executive officers under the IC Program and otherwise during 2008.

Modifications to the IC Program for 2009

• For all participant groups during 2009, 75% of such participant’s IC Factor will be designated the “Part A Amount” for purposes of determining the portion of a participant’s potential IC Award to be based on the achievement of corporate objectives; and 25% of such participant’s IC Factor will be designated the “Part B Amount” for purposes of determining the portion of a participant’s potential IC Award to be based on individual goals and objectives (previously, 50% of a participant’s IC Factor constituted the Part A Amount and 50% of a participant’s IC Factor constituted the Part B Amount).

• The Minimum Target (below which no Part A Amount is earned) will be 90% of Target (previously it was 80% of Target); and the Maximum Target will be 115% of Target (previously it was between approximately 115% and 120% of Target), the achievement of which will result in a payment of 150% of a participant’s Part A Amount (previously achievement of the Maximum Target would have resulted in a payment of 200% of a participant’s Part A Amount).

• With respect to individual goals and objectives, participants will now have the opportunity to earn between 0% and 150% of the Part B Amount (previously, participants were limited to earning a maximum of 100% of the Part B Amount), with amounts between 100% and 150% of the Part B Amount reserved for superior performance, or for exemplary performance on special initiatives beyond the participant’s daily responsibilities; provided, however, that: (i) eligibility for any potential earnings under this component for all participants will be forfeited if 80% of the Target for the corporate component of the relevant participant group is not achieved (previously, 50% of the potential Part B Amount was forfeited if such Target was not achieved); and (ii) for performance of between 80% and 90% of Target for the corporate component of the relevant participant group, participants will be entitled to earn up to a maximum of 25% of the Part B Amount (previously, participants were entitled to earn up to 100% of the Part B Amount for corporate performance in excess of 80% of Target and up to 50% of the Part B Amount for corporate performance below 80% of Target).

2008 Incentive Compensation for Mr. Crain

In accordance with the employment arrangement between Mr. Crain and the Company, Mr. Crain is eligible for an annual cash incentive compensation opportunity in an amount not less than 75% of his base salary at target and 130% at maximum. Mr. Crain’s performance goals in respect of such incentive compensation opportunity, which are established by the Committee annually in consultation with Mr. Crain, will not be established at levels that are more difficult to achieve than for other bonus participants who have identical performance measures.

For 2008, the Compensation Committee determined that 50% of Mr. Crain’s incentive compensation opportunity for 2008 would be based upon achievement by the Company of specified consolidated EBITDA levels equivalent to those pertaining to corporate participants under the IC Program, and 50% would be based on achievement in three distinct categories of personal goals.

With respect to Mr. Crain’s corporate performance goals: (i) achievement of the Minimum Target would entitle Mr. Crain to earn an amount equal to 7.5% of his annual base salary; (ii) achievement of the Target would entitle Mr. Crain to earn an amount equal to 37.5% of his annual base salary; and (iii) achievement of the Maximum Target would entitle Mr. Crain to earn an amount equal to 65% of his annual base salary (or 20%, 100% and 173.3% of his Part A Amount, respectively). Other elements generally applicable to the corporate component of the IC Program are also applicable to Mr. Crain.

With respect to Mr. Crain’s personal goals, three different categories (each with a target and a maximum level of achievement) were created as follows: (i) structural/integration goals, which would entitle Mr. Crain to receive 18.75% of his annual base salary at the target level and 32.5% of annual base salary at the maximum level of achievement; (ii) organizational goals, which would entitle Mr. Crain to receive 9.375% of annual base salary at the target level and 16.25% of annual base salary at the maximum level of achievement, and (iii) strategic goals, which would entitle Mr. Crain to receive 9.375% of annual base salary at the target level and 16.25% of annual base salary at the maximum level of achievement. The Committee determined in its sole discretion Mr. Crain’s level of achievement of each of these personal goals during 2008. The particular payout level awarded, if any, in each case depended on the assessment of the Committee as to the degree of achievement attained, and accounted for the difficulty and complexity of the particular goal. No bonus would be payable for a particular category if the Committee determined that the target level of achievement for that category had not been achieved, and no amounts would be payable in excess of the maximum incentive compensation opportunity for that category. Failure to achieve the Minimum Target or any category of the three personal goals targets would not, however, preclude incentive compensation from being paid if targets for other categories are achieved. Although the Committee determined that Mr. Crain had largely achieved his personal goals, it exercised its discretion and reduced the amount awarded to Mr. Crain (and to the other NEOs) due to overall Company performance during 2008 and current economic conditions. In addition, the Committee and Mr. Crain agreed that in lieu of the reduced amount awarded, he would accept a grant of 114,943 immediately vested SARs, which were issued to him in March of 2009.

Potential amounts payable to Mr. Crain with respect to his incentive compensation program for 2008 were as follows:


	Target			Maximum

EBITDA	$	206,250.00	*	$	357,500

Structural/Integration	$	103,125.00		$	178,750

Organizational	$	51,562.50		$	89,375

Strategic	$	51,562.50		$	89,375


*		Achievement of the Minimum Target would have entitled Mr. Crain to a payment of $41,250. See “Employment Contracts and Arrangements” below.

Mr. Crain’s IC Program for 2009 will be subject to the same amendments as other participants.

Equity Awards

The specific amount of an equity grant to an executive depends on the individual’s position, scope of responsibility, ability to affect profits and shareholder value and the individual’s historic and recent performance, the value of equity awards in relation to other elements of total compensation, as well as the performance of the Company or the relevant operational group. Other than the Severance Policy and the 401K plans maintained by the Company and each of its subsidiaries (each discussed below), and similar plans for certain foreign subsidiaries until the sale of the gift business, we do not maintain any supplemental retirement plans for executives or other executive programs that reward tenure. We consider that equity awards and the resulting stock ownership are our method of providing for a substantial part of an executive’s retirement and wealth creation. Since equity awards are our primary contribution to an executive’s potential long-term wealth creation, we determine the size of the grants with that consideration in mind. We intend that our executives will share in the creation of value in the Company but will not have substantial guaranteed benefits at termination if value has not been created for stockholders.

As a result of the evolution of regulatory, tax and accounting treatment of equity incentive programs and because it is important to us to retain our executive officers and key employees, the Committee determined that it is desirable to utilize forms of equity awards in addition to stock options and restricted stock. As a result, the Committee granted SARs and RSUs to specified executives in October of 2008, who did not participate in the 2007 Grants discussed below. Of the total grants made in October of 2008, 25% of each award was in the form of RSUs and 75% of the award was SARs. The Company granted SARs because such instruments provide greater flexibility to the Company than options, as SARs may be settled in cash, stock or a combination of both, and were unavailable to the Company prior to the approval of its Equity Incentive Plan in July of 2008. The Company elected to include RSUs as a portion of the grants because such grants create less dilution to shareholders (fewer RSUs as compared to stock options or SARs need to be granted to achieve a specified value), retain their incentive characteristics regardless of movements in the price of the stock and are increasingly becoming a standard part of comprehensive equity awards at other companies with whom the Company may compete for talented executives. Such awards also provide flexibility similar to SARs. In making this determination, the Committee relied in part on the report of REDA, which recommended the award numbers eventually granted (using the 25%/75% split). The Committee felt that the amounts awarded represented a significant and appropriate level of long-term compensation for 2008 in light of the other elements of the 2008 executive compensation program. The specific percentages utilized were determined using a combination of factors, including market comparables provided by REDA, and the scope of each individual’s responsibilities and performance throughout the year.

As a result of the participation of the NEOs (other than Mr. Crain, whose equity awards were the result of the commencement of his employment with the Company) in the grant by the Company of stock options and restricted stock to specified executives on December 27, 2007 (the “2007 Grants”), equity grants were not made to the NEOs in 2008, other than to Mr. Crain, on January 4, 2008, pursuant to the terms of his employment agreement. In February of 2009, the NEOs other than Mr. Cappiello (whose employment previously terminated) received a grant of SARs.

See the “Outstanding Awards at Fiscal Year End” table and accompanying footnotes below for a description of the material terms and amounts of outstanding equity held as of December 31, 2008 by the named executive officers.

OTHER ELEMENTS OF COMPENSATION AND RELATED BENEFITS

Perquisites

We limit the perquisites that we make available to our executive officers. Executives are entitled to few benefits that are not otherwise available to all of our employees. The perquisites provided to executives other than the CEO (whose perquisites are described in the section captioned “Employment Agreements and Arrangements” below) during 2008 included a car allowance and no more than one week extra annual vacation time. The Company and its subsidiaries currently maintain separate health insurance plans, which are the same for all employees within a particular company. See the Summary Compensation Table below for a description of the perquisites provided to the CEO and the other named executive officers during 2008.

40l(k) Plan

The Company and each of its subsidiaries offer eligible employees the opportunity to participate in a retirement plan (the “401(k) Plans”) that is based on employees’ pretax salary deferrals with the Company and all but one of its subsidiaries providing matching contributions pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The Company, LaJobi and Sassy match a portion (either one-half of any amount up to 6%, or 100% of any amount up to 3%, of salary contributed) of the compensation deferred by each employee, and Kids Line contributes 3% (9% for Mr. Levin) of eligible salary pursuant to the safe harbor provisions of Section 401(k) of the Code. Matching contributions are fully vested after four years of employment at the rate of 25% per year of employment (after six years of employment for LaJobi). See the section captioned “Termination of Employment and Change in Control Arrangements” below for a more detailed description of the 401(k) Plans. See the Summary Compensation Table for amounts contributed by the Company to the named executive officers under the 401(k) Plans during 2008. The objective of these programs is to help provide financial security into retirement, and to reward and motivate tenure and recruit and retain talent in a competitive market. In light of current economic conditions, the Company temporarily suspended its matching contributions under its 401(k) plan (at least for the first half of 2009, at which time such determination may be reevaluated).

Employee Stock Purchase Plan

Under the Company’s Amended and Restated 2004 Employee Stock Purchase Plan (“ESPP”), eligible employees, including the NEOs, are provided the opportunity to purchase the Company’s common stock at 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. We feel that offering the opportunity to purchase our stock at a discount to our employees (including our executives) encourages the alignment of their interests with those of our stockholders. “Options” are granted to participants as of the first trading day of each 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 plan by authorizing a payroll deduction of up to 10% (in whole percentages) of his or her compensation. No participant shall have the right to purchase Company common stock under this plan that has a fair market value in excess of $25,000 in any 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. The ESPP expired by its terms as of December 31, 2008, and was succeeded by the 2009 Employee Stock Purchase Plan, a substantially similar plan for fiscal 2009 through 2013.

Transaction Bonus Plan

In April 2007, the Committee approved a bonus plan providing for the payment of cash bonuses to specified key executives of the Company upon the consummation of certain corporate transactions (as amended, the “Bonus Plan”), in order to motivate the most senior management of the Company to remain with the Company despite the uncertainty and dislocation that may arise out of certain significant corporate transactions not governed by the Company’s change in control plan, and to help eliminate from any decision-making process potential distractions caused by concerns over personal financial and employment security. In recognition of the significant contributions of Messrs. Goldfarb and Cappiello with respect to the Company’s achievement of the consummation of the sale of the gift business in December 2008, each of these individuals was awarded a transaction bonus under the Bonus Plan of $140,000.

POST-TERMINATION BENEFITS

Change-in-Control Plan (terminated as of February 24, 2009)

As is more fully described in the section captioned “Termination of Employment and Change in Control Arrangements” below, participants in the Company’s change in control plan during 2008 would have been entitled to specified benefits in the event of defined terminations in connection with a change in control. Under this plan, a change in control would have been generally deemed to have occurred: (A) where any person or group, other than specified individuals and entities, becomes the beneficial owner of 25% or more of the voting power of the Company; (B) as a result of specified events, a defined group of directors (including certain newly-elected directors) ceases to be a majority of the Board; (C) consummation of specified business combinations, sales of assets or recapitalizations or similar transactions involving the Company; or (D) approval by the shareholders of a plan of liquidation or dissolution of the Company. We adopted this plan because we deemed it reasonable to provide this benefit in order to help ensure the cooperation and continuity of management should any of the aforementioned events occur, and to help eliminate from any decision-making process potential distractions caused by concerns over personal financial and employment security. The elements of the change in control definition were chosen to cover a diverse range of circumstances where either the ownership or leadership of the Company changed to a degree sufficient in our view to warrant the provision of protections to participants whose employment was terminated by the Company in order to encourage participants to continue their employment through a change in control to ensure a smooth transition when and if required. See the “Potential Payments Upon Termination or Change in Control” table and subsequent narrative below for a description of the potential amounts payable pursuant to this plan to our named executive officers (other than the CEO, who is not a participant in this plan) under specified assumptions. However, as a result of the Board’s determination that this method of compensation was no longer warranted in the current environment, this plan was terminated as of February 24, 2009.

Severance Policy

The Company’s severance policy, applicable generally to employees who are domestic vice presidents or above and who are designated as participants in the plan by the Committee (other than the CEO, who is not a participant in this plan), described in further detail in the section captioned “Termination of Employment and Change in Control Arrangements” below, generally provides that in the event of a termination by the Company without cause, participants will be granted specified severance benefits. In addition, effective March 30, 2007, the severance policy specifies that in the event that the employment of eligible vice presidents is terminated in connection with the consummation of certain corporate transactions, the severance payments and benefits applicable to such terminated individual will be extended by an additional 4 months up to a maximum severance period of 12 months, and in the event that a participant is due payments and benefits under both the Severance Policy and the Change in Control Plan (while it remained in existence, as such plan was subsequently terminated), such participant would have received the greater of the benefits and payments, determined on an item-by-item basis. This trigger was deemed appropriate to provide a limited degree of income protection to our executives in the event of a termination of employment by the Company other than for cause. We feel that the amounts provided pursuant to this plan are appropriately based on years of service and are reasonable in the context of our total compensation program. See the “Potential Payments Upon Termination or Change in Control” table and subsequent narrative below for a description of the potential amounts payable pursuant to this plan as of the end of 2008 to participating named executive officers under specified assumptions.

CEO COMPENSATION

Mr. Crain

In determining the various components of Mr. Crain’s compensation package at the time of the commencement of his employment, the Committee reviewed a variety of factors it deemed appropriate, including, but not limited to, Mr. Crain’s prior responsibilities and experience, most current compensation, scope of the position, completion of the “ Special Considerations for 2006 ” described in the 2007 Proxy Statement, the current operational position of the Company, the recommendations of REDA as well as the Company’s then-current challenges and future plans. As a result of this analysis and negotiations between Mr. Crain and the Company, as of December 4, 2007, the Company entered into an employment agreement with Mr. Crain as President and Chief Executive Officer of the Company, at an annual base salary of $550,000 (which salary cannot be decreased during the term of his agreement). See “Internal Pay Equity” below.

In addition, pursuant to his employment agreement, and as further inducement to his joining the Company, the Company made specified equity grants to Mr. Crain, and agreed to provide Mr. Crain with specified incentive compensation opportunities and perquisites. See the section captioned “Employment Agreements and Arrangements” for a description of the material provisions of Mr. Crain’s employment agreement, including incentive compensation, equity grants, perquisites and post-termination benefits. See the Summary Compensation Table for a description of the elements of Mr. Crain’s compensation during 2008.

OTHER COMPENSATION POLICIES AND CONSIDERATIONS

Periodic Review

We periodically review each element of our compensation program described above to ensure that each such element continues to meet our stated objectives.

Internal Pay Equity

We believe that internal equity is one factor of many to be considered in establishing compensation for our executives. We have not established a policy regarding the ratio of total compensation of the CEO to that of the other executive officers, but do review compensation levels to ensure that appropriate equity exists. The difference between the Chief Executive Officer’s compensation and that of the other named executive officers reflects the significant difference in their relative responsibilities. The CEO’s responsibilities for management and oversight of all functions of an enterprise are significantly higher than those of other executive officers. As a result, the market pay level for our CEO is substantially higher than the market pay for other officer positions. We intend to continue to review internal compensation equity and may consider the adoption of a formal policy in the future if we deem such a policy to be appropriate.

Timing of Stock Option (and Other Equity) Grants

Our practices with respect to equity grants include the following:

(i) except for inducement awards to new executives, we plan stock option and other equity grant dates in advance of any actual grant (regarding usual grants, the timing of each grant is determined at least several weeks in advance to coincide with a scheduled meeting of the Board and the Committee);

(ii) except for inducement awards, the grant date for all awards is made an appropriate period in advance of or is deferred until after the Company has released earnings for the fiscal year or latest relevant fiscal quarter (with respect to inducement awards, such awards are usually made some period after the commencement of employment, typically between one and ninety days after announcement or commencement); grants are typically made to all employees receiving awards (other than inducement awards) at the same time;

(iii) the Company’s executives do not determine the grant date of equity awards;

(iv) the grant date of equity awards is generally the date of approval of the grants;

(v) the exercise price with respect to grants of stock options and SARs is the market closing price of the underlying common stock on the grant date;

(vi) if at the time of any planned equity grant date any member of the Board or senior executive is aware of material non-public information, we would not generally make the grant; and

(vii) regarding the grant process, the Committee does not delegate any related function, however, as is described above, the Committee receives significant input and recommendations from the CEO with respect to appropriate grant levels. See “Role of Management” above.

ACCOUNTING CONSIDERATIONS

The Committee considers the accounting and cash flow implications of various forms of executive compensation. In its consolidated financial statements, the Company records salaries and performance-based compensation in the amount paid or to be paid to the named executive officers. Accounting rules also require the Company to record an expense in its financial statements for equity awards, even though equity awards are not paid as cash to employees and may not vest or be earned by such employees. The accounting expense of equity awards to employees is calculated in accordance with Statement of Financial Accounting Standards No. 123R, “Share-based Payments” (“SFAS No. 123R”). Under SFAS No. 123R, stock-based compensation expense is measured at the grant date based on the fair value of the award. The Committee believes that the many advantages of equity compensation, as discussed above, more than compensate for the associated non-cash accounting expense required by SFAS No. 123R; however, the Committee considers the amount of this expense in determining the amount of equity compensation awards.

TAX CONSIDERATIONS

Section 162(m) of the U.S. Internal Revenue Code of 1986 generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to the CEO or any of the four other most highly-compensated officers. Performance-based compensation arrangements may qualify for an exemption from the deduction limit if they satisfy various requirements under Section 162(m). Although the Company considers the impact of this rule when developing and implementing its executive compensation programs, tax deductibility is not a primary objective of our compensation programs. In our view and the view of the Committee, meeting the compensation objectives set forth above is more important than the benefit of being able to deduct the compensation for tax purposes. Accordingly, the Company has not adopted a policy that all compensation must qualify as deductible under Section 162(m).

If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A of the U.S. Internal Revenue Code of 1986, and such benefits do not comply with Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the executive is subject to regular federal income tax, interest and an additional federal income tax of 20% of the benefit includible in income. Our plans that are subject to Section 409A are generally designed to comply with the requirements of such section so as to avoid possible adverse tax consequences that may result from noncompliance with Section 409A.

BENCHMARKING

We do not believe that it is appropriate to establish compensation levels primarily based on benchmarking. Therefore, we do not attempt to maintain a specific target percentile with respect to a specific list of benchmark companies in determining compensation for NEOs or other executives. Nevertheless, we do believe that information regarding pay practices at other companies is useful in two respects. First, we recognize that our compensation practices must be competitive in the marketplace. Second, this marketplace information is one of the “considerations” used by the Committee in assessing the reasonableness of compensation. Accordingly, the Committee reviews compensation levels for our named executive officers and other key executives against compensation levels at companies in our industry or industries similar to ours, and the Company does factor in the results of compensation surveys and the periodic recommendations of compensation consultants in establishing compensation for our NEOs and other key executives.

STOCK OWNERSHIP GUIDELINES

Although we encourage stock ownership in the Company by our executives and directors, we have not established a formal policy regarding such stock ownership. We may explore whether the adoption of such a policy in the future would be appropriate.

FINANCIAL RESTATEMENT

To the extent permitted by governing law, for awards for 2007 and beyond, the Committee has the sole and absolute authority to make retroactive adjustments to any cash or equity based incentive compensation paid to executive officers and certain other officers where the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement. Where applicable and appropriate, the Company will seek to recover any amount determined to have been inappropriately received by the individual executive.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included herein with management, and based on such review and discussions, the Compensation Committee recommended to the Board that such Compensation Discussion and Analysis be included in its Annual Report on Form 10-K for the year ended December 31, 2008, as amended, and the Proxy Statement for the 2009 Annual Meeting of Shareholders of the Company.

Russ Berrie and Company, Inc. Compensation Committee

Frederick Horowitz, Lauren Krueger and Mario Ciampi

April 24, 2009

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 2008, the following were members of the Compensation Committee: Messrs. Horowitz and Ciampi and Ms. Krueger. Mr. Ciampi, a partner of Prentice, is a Prentice Director, and Ms. Krueger, an executive officer of an affiliate of Laminar, is a Laminar Director. None of the foregoing individuals is or ever has been an officer or employee of the Company or any of its subsidiaries, and no “compensation committee interlocks” existed during 2008.

D. E. Shaw & Co., L.P. (“DES”), an affiliate and investment advisor of Laminar (which owns approximately 20.5% of the Company’s Common Stock) owns a majority equity interest in FAO Schwarz (“FAO”), a customer of the Company’s gift business prior to its sale as of December 23, 2008, with purchases of approximately $929,000 during the year ended December 31, 2008. Ms. Krueger, a director of the Company and a Laminar designee to the Company’s Board, is a vice president of DES and a director of FAO.

Summary Compensation Table

The following table sets forth compensation for the year ended December 31, 2008 awarded to, earned by, paid to or accrued for the benefit of the principal executive officer of the Company, the former interim principal financial officer of the Company, and the three most highly compensated executive officers of the Company during 2008 other than the foregoing, who were serving as executive officers on December 31, 2008 (collectively, the “named executive officers”, or the “NEOs”).


												Non-Equity
								Stock		Option		Incentive Plan			All other
Name and Principal			Salary			Bonus		Awards		Awards		Compensation			Compensation		Total
Position	Year		($) (1)			($) (3)		($)(4)		($)(5)		($)(6)			($)(7)		($)
Bruce Crain (A)		2008		550,000			n/a		327,624		220,531		100,000	(8)		22,409		1,220,564
President and CEO		2007		432,198	(2)		n/a		24,295		13,290		n/a			27,728		497,511
		2006		n/a			n/a		n/a		n/a		n/a			n/a		n/a

Anthony Cappiello (B)		2008		352,221			65,000		13,081		35,137		140,000			54,753		660,192
EVP, CAO; interim		2007		341,300			100,000		143		385		116,905			47,057		605,790
principal financial officer		2006		325,000			n/a		n/a		n/a		163,000			50,461		538,461

Marc S. Goldfarb		2008		325,080			n/a		12,074		32,505		170,000			24,073		563,732
SVP and General Counsel		2007		315,000			75,000		132		356		107,896			20,402		518,786
		2006		281,385			n/a		n/a		n/a		120,400			19,149		420,934

Fritz Hirsch President — Sassy (C)		2008		390,000			n/a		15,428		41,586		n/a			40,239		487,253

Michael Levin President and CEO — Kids Line (C)		2008		451,924			n/a		188,760		146,373		n/a			35,860		822,917


(A)		Mr. Crain became President and Chief Executive Officer of the Company as of December 4, 2007.

(B)		Mr. Cappiello assumed the role of principal financial officer on an interim basis effective November 13, 2007. Mr. Cappiello left the employment of the Company as of January 30, 2009.

(C)		Compensation for Mr. Hirsch and Mr. Levin is provided for 2008 only, as neither of them was a named executive officer prior thereto.

(1)		Messrs. Crain, Cappiello and Goldfarb each participated in the 2004 ESPP during 2008. In connection therewith, each authorized payroll deductions equal to an aggregate of $21,250 for such year in accordance with the terms of the 2004 ESPP, and each purchased an aggregate of 8,432 shares of Common Stock pursuant thereto as of December 31, 2008. Mr. Cappiello also participated in the 2004 ESPP during each of 2007 and 2006. In connection therewith, he authorized payroll deductions equal to an aggregate of $21,250 for each such year in accordance with the terms of the 2004 ESPP, and purchased an aggregate of 1,629 shares of Common Stock pursuant thereto as of December 31, 2007 and 2,192 shares of Common Stock as of December 29, 2006. See “ Employee Stock Purchase Plan ” under the section captioned “ Other Elements of Compensation and Related Benefits ” in the Compensation Discussion and Analysis for a description of the 2004 ESPP.


(2)		Prior to his employment as President and Chief Executive Officer of the Company, Mr. Crain had provided consulting services to the Company since March 2007 for consideration of $45,833.33 per month ($396,236 in the aggregate). Such consulting arrangement was terminated as of December 4, 2007.

(3)		With respect to Mr. Cappiello in 2008, represents the portion of his potential incentive compensation award (to be paid on a quarterly basis) that is guaranteed pursuant to the terms of his employment agreement with the Company. As: (i) this amount was not tied to any performance measure; and (ii) Mr. Cappiello was not entitled to any payments in respect of the IC Program for 2008 resulting from the timing of his departure from the employment of the Company, this amount has been classified as a bonus. With respect to Messrs. Cappiello and Goldfarb in 2007, represents $75,000 awarded at the discretion of the Committee to each of them based on such individuals’ substantial efforts in achieving the Company’s goals with respect to the ongoing restructuring efforts in the Company’s gift segment. In addition, as Mr. Cappiello assumed the position of interim principal financial officer upon the retirement of Mr. O’Reardon as of November 13, 2007, he received a special one-time bonus of $25,000 in connection therewith.

(4)		Reflects the dollar amount recognized for financial statement reporting purposes for the years shown in accordance with FAS 123(R) with respect to issuances of restricted stock to the individuals in the table. These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be realized by the NEOs. Amounts for 2008 represent amounts recognized from issuances in 2007. Assumptions used in determining the FAS 123(R) values for 2008 and 2007 can be found in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2008 (the “2008 10-K”) and December 31, 2007 (the “2007 10-K”), respectively, in footnote 17 to the Notes to Consolidated Financial Statements. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. No restricted stock or RSUs were awarded to NEOs during 2008.

(5)		Reflects the dollar amount recognized for financial statement reporting purposes for the years shown in accordance with FAS 123(R) with respect to the issuance of options to the individuals in the table. These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be realized by the NEOs. Amounts for 2008 also reflect amounts recognized from issuances in 2007. Assumptions used in determining the 123(R) values for issuances in 2008 and 2007 can be found in the 2008 10-K and the 2007 10-K, respectively, in footnote 17 to the Notes to Consolidated Financial Statements. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Other than the grant of 100,000 stock options to Mr. Crain in January of 2008 pursuant to his employment agreement and the SARs grant described in footnote 6 below, no options or SARs were granted to NEOs in or with respect to 2008. The grant date fair value of options awarded during 2008 is included in the “2008 Grants of Plan-Based Awards” table below.

(6)		For Mr. Crain in 2008, in lieu of a cash payment of $100,000 awarded to him under the individual goals and objective portion of his incentive compensation arrangements for 2008, Mr. Crain was issued 114,943 fully vested SARs (with an exercise price of $1.36 per SAR), which were issued to him on March 27, 2009. Although this issuance was made in March of 2009, as it was granted in lieu of cash amounts earned in 2008, it is included in the “2008 Grants of Plan-Based Awards” table below.

		With respect to Messrs. Cappiello and Goldfarb in 2008, includes $140,000 awarded to each of them under the Bonus Plan based on their substantial efforts in achieving the Company’s goals with respect to the sale of the Company’s gift segment. See Transaction Bonus Plan under the caption “OTHER ELEMENTS OF COMPENSATION AND RELATED BENEFITS” in the CD+A above. With respect to Mr. Goldfarb in 2008, and Messrs. Goldfarb and Cappiello in 2007 and 2006, also reflects payouts under the IC Program.


(7)		The perquisites and other personal benefits included within the “All Other Compensation” for 2008, 2007 and 2006 for each named executive officer are as follows:


									Income
									Recognized
									from
					Annual		Annual		Provision of
					Premium for		Premium		Group				Company
			Annual		Long-Term		for		Term		Extra		Contributions
			Car		Disability		Life		Life		week		to 401(k)
			Allowance		Insurance		Insurance		Insurance		vacation		Plan		Other
Name	Year		($)		($)(a)		($)(a)		($)(b)		($)(c)		($) (d)		($)(e)		Total($)
Bruce Crain		2008		n/a		3,911		1,000		21		10,577		6,900		n/a		22,409
		2007		n/a		n/a		n/a		n/a		881		n/a		26,847		27,728
		2006		n/a		n/a		n/a		n/a		n/a		n/a		n/a		n/a

Anthony Cappiello		2008		13,200		n/a		n/a		21		6,773		6,900		27,859		54,753
		2007		13,200		n/a		n/a		494		6,563		6,442		20,358		47,057
		2006		13,200		n/a		n/a		438		6,250		4,857		25,716		50,461

Marc Goldfarb		2008		13,200		n/a		n/a		21		6,252		4,600		n/a		24,073
		2007		13,200		n/a		n/a		183		6,312		707		n/a		20,402
		2006		13,200		n/a		n/a		180		5,769		—		n/a		19,149

Fritz Hirsch		2008		9,588		6,251		n/a		n/a		7,500		6,900		10,000		40,239

Michael Levin		2008		6,736		145		n/a		38		8,691		20,250		n/a		35,860


(a)		Represents the cost of life insurance and disability insurance coverage provided to Mr. Crain pursuant to Mr. Crain’s employment agreement with the Company, as well as the cost of long-term disability insurance for Messrs. Hirsch and Levin.

(b)		Such group term life insurance coverage is generally provided to all employees. Amounts represent the portion of the premium paid for amounts in excess of the limits for tax purposes.

(c)		Each NEO is entitled to three weeks of paid vacation, which in 2008, 2007 and 2006 represented a benefit of one additional week for each NEO (as compared to Company policy based on tenure; Messrs. Hirsch and Levin received vacation allowance consistent with the policies at Sassy and Kids Line, respectively, although one week more than Company policy).

(d)		Amounts represent the relevant employer’s match to contributions under the 401(k) Plans on the same basis as provided to all employees (except for Mr. Levin, who receives three times the safe harbor contribution for all Kids Line employees pursuant to the safe harbor provisions of the Code). Does not include investment gains or losses under the 401(k) Plans. Because the contributions to the 40l(k) Plans are not fixed, and because it is impossible to calculate future income, it is not currently possible to calculate an individual participant’s retirement benefits.

(e)		With respect to Mr. Crain in 2007, consists of reimbursement of $25,000 for legal fees incurred in connection with his employment and consulting agreements with the Company, and $1,847 for tax preparation and financial planning services, each reimbursed to Mr. Crain in accordance with the provisions of his employment agreement with the Company. See “Employment Agreements and Arrangements” below. With respect to Mr. Cappiello for 2008 and 2007, consists of a housing allowance in accordance with the terms of his employment agreement; and for Mr. Cappiello in 2006, consists of relocation expenses in connection with the commencement of his employment with the Company in July of 2005. With respect to Mr. Hirsch in 2008, represents reimbursements for legal fees incurred in connection with the negotiation of his employment agreement.

2008 Grants of Plan-Based Awards

The following table provides information with respect to non-equity incentive plan awards to the NEOs in 2008 as well as equity awards made to Mr. Crain during and with respect to 2008 (no other equity grants were made to NEOs during or with respect to 2008).

All Other

Stock

Option

Awards

Awards:

Estimated Possible(1) Payouts

Estimated Future Payouts

Number of

Exercise or

Grant Date

Under Non-Equity Incentive

Under Equity Incentive

Shares of

Securities

Base Price of

Fair Value of

Plan Awards

Plans Awards

Stock or

Underlying

Option/SAR

Grant

Threshold

Target

Max

Threshold

Target

Max

Units

Options

Awards

Name

Plan

Date

($)(2)

(#)

($/Sh)(6)

($)(7)

Bruce Crain(3)(4)

IC Program

—

41,250

412,500

715,000

1/04/08

100,000

14.83

574,000

3/27/09

114,943

1.36

100,000

Anthony Cappiello (4)(5)

IC Program

—

17,650

176,500

264,750

Bonus Plan

n/a

175,000

Marc Goldfarb (4)

IC Program

—

16,300

163,000

244,500

Bonus Plan

n/a

175,000

Fritz Hirsch

IC Program

—

71,250

195,500

293,250

Michael Levin

IC Program

—

19,550

356,250

617,500


(1)		The numbers in the table represent potential payouts under: (i) the IC Program for 2008 with respect to all NEOs; and (ii) the Bonus Plan (which terminated as of December 31, 2008) with respect to Messrs. Cappiello and Goldfarb. Actual amounts earned by each NEO during 2008 are disclosed in the Summary Compensation Table above.

(2)		As is described more fully in the Compensation Discussion and Analysis above, whereas actual threshold, targets and maximums exist for the corporate component of the IC Program for all NEOs, NEOs (other than Mr. Levin, whose incentive compensation opportunity was based entirely upon achievement by the Company of specified EBITDA levels for Kids Line) could have earned between 0% — 50% of their IC Factor with respect to the individual goals and objectives component of the IC Program. For purposes of this table, we have assumed that 20% of the Part A Amount (the threshold amount for such component) and 0% of the Part B Amount was earned in the “Threshold” column, 100% of each of the Part A Amount and Part B Amount was earned in the “Target” column, and 200% of the Part A Amount (173.3% of the Part A Amount for Messrs. Crain and Levin) and 100% of the Part B Amount was earned in the “Maximum” column (no amount above the Target is payable with respect to the individual goals and objectives component). With respect to Mr. Crain, the individual goals and objectives component was based on achievement in three distinct categories of personal goals (each with a target and a maximum level of achievement). For purposes of the table above, we have assumed equal levels of achievement as described above in all three categories. With respect to the Bonus Plan, amounts payable ranged from zero to $175,000 for each of Messrs. Goldfarb and Cappiello, based on the value of the consideration received in connection with the sale of the gift business.

(3)		Pursuant to the terms of his employment agreement, on January 4, 2008, Mr. Crain was awarded 100,000 stock options pursuant to the 2004 Plan, which vest ratably over a five-year period commencing one year after the commencement date of his employment, and will be generally exercisable for 10 years from such date. Further details of such grant can be found in the footnotes to the “2008 Outstanding Equity Awards at Fiscal Year End” table below. In addition, in lieu of a cash payment of $100,000 deemed earned by Mr. Crain pursuant to his incentive compensation arrangements with respect to the 2008 fiscal year, Mr. Crain was awarded 114, 943 immediately vested stock appreciation rights under the EI Plan, which may be settled in cash, common stock, or a combination of both, in the sole discretion of the Compensation Committee, and will be generally exercisable for 10 years from the date of grant. Although the SARs were issued in March of 2009, the incentive compensation to which the SARs relate was earned in 2008.

(4)		Messrs. Crain, Cappiello and Goldfarb each participated in the 2004 ESPP during 2008. In connection therewith, each authorized payroll deductions equal to an aggregate of $21,250 for such year in accordance with the terms of the 2004 ESPP, and each purchased an aggregate of 8,432 shares of Common Stock pursuant thereto as of December 31, 2008. Mr. Cappiello also participated in the 2004 ESPP during each of 2007 and 2006. In connection therewith, he authorized payroll deductions equal to an aggregate of $21,250 for each such year in accordance with the terms of the 2004 ESPP, and purchased an aggregate of 1,629 shares of Common Stock pursuant thereto as of December 31, 2007 and 2,192 shares of Common Stock as of December 29, 2006. See “ Employee Stock Purchase Plan ” under the section captioned “ Other Elements of Compensation and Related Benefits ” in the Compensation Discussion and Analysis for a description of the 2004 ESPP.


(5)		Pursuant to the terms of his employment agreement with the Company, Mr. Cappiello was guaranteed payment of $65,000 of his potential incentive compensation award annually (to be paid on a quarterly basis). As: (i) this amount was not tied to any performance measure; (ii) no amounts were deemed earned by Mr. Cappiello under the IC Program in 2008; and (iii) Mr. Cappiello was not entitled to any payments in respect of the IC Program for 2008 resulting from the timing of his departure from the employment of the Company, this amount has been classified as a bonus, and not as amounts earned under the IC Program.

(6)		The exercise price of the stock options is equal to the closing price of our Common Stock on the NYSE on the date of grant.

(7)		Amounts represent the grant date fair value of: (i) the grant of stock options during 2008 to Mr. Crain; and (ii) the grant of SARs to Mr. Crain in lieu of cash amounts deemed earned by Mr. Crain in respect of his incentive compensation arrangements for 2008, in each case computed in accordance with FAS 123(R). Assumptions used in determining the 123(R) values with respect to the stock option grant can be found in the 2008 10-K, in footnote 17 to the Notes to Consolidated Financial Statements. Assumptions with respect to determining the 123(R) values with respect to the SAR grant are as follows:


Dividend yield	0.0	%
Risk-free interest rate	1.80	%
Volatility	71.6	%
Expected term (years)	5.0
Fair value of SARs granted	1.36

Non-Equity Incentive Plan Awards

All awards listed as Non-Equity Incentive Plan Awards in the 2008 Grants of Plan-Based Awards table above represent payouts under the IC Program for 2008. The structure and operation of the IC Program is set forth in detail in the Compensation Discussion and Analysis under the section captioned “2008 Cash Incentive Compensation”.

Employment Contracts and Arrangements

Mr. Crain

As of December 4, 2007 (the “Commencement Date”), Mr. Crain entered into an agreement (the “Crain Agreement”) with the Company, with respect to his employment as President and Chief Executive Officer of the Company, at an annual base salary of $550,000. Mr. Crain’s base salary may not be decreased during the term of his employment with the Company, and is subject to annual increase in the discretion of the Compensation Committee (his current base salary remains unchanged). The Company has also agreed to nominate him as a member of the Board during the term of the Crain Agreement. Commencing in 2008, Mr. Crain became eligible for an annual cash incentive compensation opportunity in an amount not less than 75% of his base salary at target and 130% at maximum. Mr. Crain’s performance goals in respect of such incentive compensation opportunity, which are established by the Compensation Committee annually in consultation with Mr. Crain, may not be established at levels that are more difficult to achieve than for other IC Program participants who have identical performance measures. The Compensation Committee determined that 50% of Mr. Crain’s incentive compensation opportunity for 2008 would be based upon achievement by the Company of the consolidated EBITDA Targets, and 50% would be based on achievement in three distinct categories of personal goals. The EBITDA Targets were not achieved for 2008, and with respect to Mr. Crain’s personal goals, the Compensation Committee and Mr. Crain agreed that in lieu of amounts deemed earned by Mr. Crain for 2008, he would be awarded 114,943 immediately vested stock appreciation rights, issued in March of 2009 (See CD+A above under the caption “ 2008 Incentive Compensation for Mr. Crain”) .

Also pursuant to the Crain Agreement, on December 5, 2007, Mr. Crain was awarded 85,000 shares of restricted stock under the Company’s 2004 Stock Option, Restricted and Non-Restricted Stock Plan (the “2004 Plan”), which vest ratably over a four-year period commencing one year after the Commencement Date. In addition, on December 5, 2007, Mr. Crain was granted 100,000 stock options pursuant to the 2004 Plan. Of the foregoing, 80,000 of such options vest ratably over a five-year period commencing one year after the Commencement Date, and will be generally exercisable for 10 years from the Commencement Date. The remaining 20,000 of such options became fully vested on the six-month anniversary of the Commencement Date and are generally exercisable for 10 years from the Commencement Date. An additional 20,000 options were granted to Mr. Crain on December 5, 2007 outside of the 2004 Plan (due to grant limitations therein), which vest ratably over a five-year period commencing one year after the Commencement Date, and are generally exercisable for 10 years from the Commencement Date. Pursuant to the Crain Agreement, an additional 100,000 options were granted to Mr. Crain on January 4, 2008 under the 2004 Plan, which options vest ratably over a five-year period commencing one year after the Commencement Date and will be generally exercisable for 10 years from the Commencement Date. Each grant of options and restricted stock described above (collectively, the “Equity Awards”, and as to the options only, the “Options”) were made pursuant to an option agreement or a restricted stock agreement, as applicable. The exercise price of the Options is the closing price of the Company’s Common Stock on the New York Stock Exchange on the date of grant. Future equity grants are at the discretion of the Compensation Committee. Other than as described above, no additional equity grants were made to Mr. Crain in 2008.

Pursuant to the Crain Agreement, Mr. Crain is entitled to participate in the Company’s employee benefit plans and programs applicable to senior executives generally and on a basis no less favorable than those provided to other senior executives. In addition, Mr. Crain is entitled to life insurance coverage equal to 200% of his annual base salary (or the life insurance benefit under the Company’s life insurance program for senior executives if the latter would provide for a higher level of coverage), long-term disability benefits during the period of disability equal to 50% of his base salary (prior to offsets provided in the Company’s long-term disability plan) through the Company’s long-term disability plan and a supplemental disability program (the Company will use commercially reasonable best efforts to arrange for the provision of all or part of the supplemental disability benefit on a non-taxable basis to Mr. Crain), reimbursement for tax preparation and financial planning services not to exceed $5,000 annually, reimbursement for an annual physical examination and director’s and officer’s liability insurance coverage during the term of his employment and for six years thereafter in an annual amount equal to at least the greater of $5.0 million or the coverage provided to any other present or former senior executive or director of the Company. Mr. Crain was also entitled to reimbursement for his legal fees in connection with the Crain Agreement and the consulting arrangement he had with the Company prior to execution of the Crain Agreement, up to a maximum of $25,000, and outplacement services in the event of his termination without Cause or termination for Good Reason for a period of six months following such termination in an amount not to exceed $10,000. Mr. Crain is not a participant in the Company’s Severance Policy or Change in Control Plan (prior to its termination). Mr. Crain is entitled to three week’s vacation annually (one week more than he would be entitled to based on tenure). See footnote 7 of the “Summary Compensation Table” above for a description of perquisites received by Mr. Crain during 2008.

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), he will be entitled to receive his base salary earned through the date of termination, bonus amounts earned for any prior year and not yet paid, and other amounts and benefits, if any, provided under applicable Company programs and policies (collectively, the “Accrued Benefits”). In addition, the unvested portion of the Equity Awards will be cancelled or immediately forfeited, as applicable, and any unexercised, vested portion of the Options 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, Mr. Crain will be entitled to receive his base salary earned through the date of termination and for a period of six months thereafter, bonus amounts earned for any prior year and not yet paid, continued life insurance coverage (as set forth in the Crain Agreement) for a period of six months following the date of termination, coverage under the Company’s medical and dental, if any, programs during the twelve-month period following the date of termination, and in the event of termination without Cause only, the pro-rata portion of his bonus for the year in which the date of termination occurs based on actual performance for such year. Also in the event of any such termination, the Equity Awards will become immediately vested and/or non-forfeitable, as applicable, to the same extent as if Mr. Crain had completed an additional two years of service after the date of termination, and the Options 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 Disability (as defined in the Crain Agreement), he will be entitled to receive the Accrued Benefits, as well as the long-term disability benefit described above. If the employment of Mr. Crain is terminated as a result of his death, his estate will be entitled to receive the Accrued Benefits, and his designated beneficiary (or his estate in the absence of such designation) will be entitled to receive the life insurance benefit described above. In addition, in the event that the employment of Mr. Crain is terminated as a result of his death or Disability, he, his estate, or his designated beneficiary, as applicable, will be entitled to the pro-rata portion of the bonus for the year in which the date of termination occurs based on actual performance for such year, and the Equity Awards will become immediately vested and/or non-forfeitable, as applicable, to the same extent as if Mr. Crain had completed an additional two years of service after the date of termination, and the Options 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 Equity Awards will become immediately vested and/or non-forfeitable, as applicable, to the extent that such Equity Awards were scheduled to vest within three years of the date of such Change in Control, and the vesting dates of the Equity Awards that were 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, such Equity Awards that were 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.

The Crain Agreement includes a restriction against specified competitive activities during Mr. Crain’s employment by the Company and for a period of one year thereafter and a non-solicitation agreement for a period of two years.

If Mr. Crain determines that any amounts due to him under the Crain Agreement and any other plan or program of the Company constitute a “parachute payment,” as such term is defined in Section 280G(b)(2) of the Code, and the amount of the parachute payment, reduced by all federal, state and local taxes applicable thereto, including the excise tax imposed pursuant to Section 4999 of the Code, is less than the amount that he would receive if he were paid three times his “base amount,” as defined in Section 280G(b)(3) of the Code, less $1.00, reduced by all federal, state and local taxes applicable thereto, then at Mr. Crain’s request the Company shall reduce the aggregate of the amounts constituting the parachute payment to an amount that will equal three times his base amount less $1.00.

In the event of any termination of the employment of Mr. Crain, he is under no obligation to seek other employment, and there shall be no offset against any amounts due him on account of any remuneration attributable to any subsequent employment that he may obtain.

Mr. Cappiello (left the employment of the Company as of January 30, 2009)

On July 27, 2005, the Company entered into an employment agreement, effective August 1, 2005 with Anthony Cappiello, with respect to his employment as Executive Vice President and Chief Administrative Officer of the Company. In accordance with the terms of his agreement, Mr. Cappiello was entitled to an annual base salary of $325,000, which could not be reduced (his 2008 base salary was $353,000). Mr. Cappiello assumed the position of interim principal financial officer upon the retirement of Mr. O’Reardon as of November 13, 2007, and in connection therewith, received a special one-time bonus of $25,000. Mr. Cappiello was also entitled to participate in the IC Program with an Applicable Percentage of 50%. In addition, after 3 months of continuous employment, Mr. Cappiello was granted 50,000 stock options pursuant to the 2004 Plan. Future option grants were at the discretion of the Compensation Committee of the Board. No equity was issued to Mr. Cappiello in 2008, and as he left the employment of the Company prior to the payment date of amounts under the IC Program, no payments were due to him with respect thereto for 2008; however, as a result of a provision in his employment agreement guaranteeing the payment of $65,000 annually in respect of incentive compensation, this amount had been paid to Mr. Cappiello with respect to 2008. As: (i) this amount was not tied to any performance measure; and (ii) Mr. Cappiello was not entitled to any payments in respect of the IC Program for 2008 resulting from the timing of his departure from the employment of the Company, this amount has been classified as a bonus.

Pursuant to his agreement, Mr. Cappiello was also entitled to participate generally in all retirement, savings, welfare and other employee benefit plans and arrangements provided to other executive officers of the Company, and received a car allowance. Mr. Cappiello was entitled to three week’s annual vacation (one week more than he would be entitled to based on tenure). Mr. Cappiello was not a participant in the Company’s Severance Policy, but was a participant in the Company’s Change in Control Plan. In addition, Mr. Cappiello was entitled to an annual housing allowance, resulting in a reimbursement of $27,859 during 2008. His employment was “at will”.

In accordance with his agreement, in the event that Mr. Cappiello’s employment with the Company was terminated for any reason other than for cause, except in the case of a Change in Control in the Company, as defined in the Company’s Change in Control Plan (in which case severance would have been governed by the terms of such plan), he would be eligible to receive severance in accordance with the following schedule: (i) during the first 8 months following such termination, severance pay at the rate of 100% of his annual base salary in effect on the termination date (the “Termination Amount”), (ii) during the 9 ^th and 10 ^th months following such termination, severance pay at the rate of 75% of the Termination Amount, and (iii) during the 11 ^th and 12 ^th months following such termination, severance pay at the rate of 50% of the Termination Amount. All severance payments will be paid over the course of the severance period. During such severance period, Mr. Cappiello will be entitled to continue to participate in Company insurance plans (and will continue to receive his car allowance). All severance payments and benefits, however, will terminate if Mr. Cappiello obtains gainful employment during the severance period. In addition, the March 30, 2007 amendments to the Severance Policy are applicable to Mr. Cappiello (i.e., if triggered, Mr. Cappiello would be entitled to receive 100% of his annual base salary for a period of 12 months).

Mr. Cappiello left the employment of the Company as of January 30, 2009. As the March 30, 2007 amendments to the Severance Policy were triggered in connection with his termination, Mr. Cappiello will receive substantially the payments and other benefits applicable to a termination by the Company without Cause in such event as described above.

Mr. Goldfarb

On September 26, 2005, Marc S. Goldfarb was hired as Vice President, General Counsel and Secretary of the Company at an annual base salary of $260,000. In accordance with the terms of his current employment arrangement with the Company, Mr. Goldfarb serves as Senior Vice President and General Counsel of the Company (as of May 31, 2006) and during 2008, his annual base salary was $326,000. Pursuant to his current arrangement, Mr. Goldfarb is entitled to participate in the IC Program, with an Applicable Percentage of 50%. After 3 months of continuous employment, Mr. Goldfarb was granted 40,000 stock options pursuant to the 2004 Plan. Future option grants are at the discretion of the Compensation Committee. No equity was awarded to Mr. Goldfarb in 2008, although Mr. Goldfarb was awarded SARs in the February 2009 grant. His employment is “at will”.

Pursuant to his arrangement with the Company, Mr. Goldfarb is also entitled to participate generally in all retirement, savings, welfare and other employee benefit plans and arrangements provided to other executive officers of the Company, including the Company’s Severance Policy (with a guaranteed minimum of 8 months of severance thereunder), and receives a monthly car allowance. Mr. Goldfarb is also entitled to three weeks annual vacation (which, until September 2008, was one week more than he would be entitled to based on tenure). Mr. Goldfarb was a participant in the Change in Control Plan prior to its termination. In addition, the March 30, 2007 amendments to the Severance Policy are applicable to Mr. Goldfarb; i.e., in the event such amendments are triggered, Mr. Goldfarb will be entitled to receive payments and benefits under the Severance Policy for a period of 12 months following a qualified termination.

Mr. Levin

Mr. Levin, who joined the Company in December of 2004 upon the Company’s purchase of Kids Line, LLC, currently serves as President and Chief Executive Officer of Kids Line, LLC pursuant to an employment agreement dated March 12, 2008. As of January 1, 2008, his employment agreement provides for an annual base salary of $400,000, provided, that, at the discretion of the Compensation Committee, such base salary may be increased to $475,000 (such discretion was exercised during [most of] 2008 based upon Mr. Levin’s assumption of additional responsibilities during a sabbatical of another Kids Line officer. Mr. Levin is entitled to participate in the IC Program (based on Kids Line EBITDA with no individual component), with a potential compensation opportunity equal to 75% of his base salary at Target and 130% at the Maximum Target. The EBITDA Targets were not achieved for 2008, therefore, no incentive compensation amounts were paid to Mr. Levin for 2008. (See CD+A above under the section “ Establishing Corporate Objectives and Calculating the Corporate Component under the caption “ Operation of the 2008 IC Program " ) .

The term of his employment agreement is from January 1, 2008 through December 31, 2010, however, either party may elect, upon at least 180 days prior written notice, to terminate the agreement prior to the expiration of the term. The Company is entitled to terminate Mr. Levin at any time during this 180 day period, provided that Mr. Levin continues to receive his base salary and continues his participation in the IC program and all other benefits and perquisites for the remainder of such period. Except for the 180 day notice period, the Company has no severance obligation to Mr. Levin, irrespective of the reason for the termination, nor shall he have any mitigation duties or obligations. If his employment is terminated due to death or disability, any IC Award will be prorated based on the number of days that he was employed during the year based on actual performance through the remainder of the relevant year.

Mr. Levin is also eligible to participate in all benefit programs made generally available to executives of Kids Line, as the same may be modified from time to time. Further, throughout the period of his employment, Mr. Levin is entitled to the following perquisites: a monthly car allowance, a long-term disability insurance policy and four weeks’ annual vacation (one more week than he would otherwise be entitled to under Company policy, although such amount is consistent with Kids Line policy). See footnote 7 of the “Summary Compensation Table” above for a description of perquisites received by Mr. Levin during 2008.

Mr. Levin’s employment agreement contains a one-year post-employment non-solicitation provision with respect to specified activities and persons.

Equity grants are at the discretion of the Compensation Committee, and none were made to Mr. Levin in 2008, although Mr. Levin was awarded SARs in the February 2009 grant.

Mr. Hirsch

Mr. Hirsch serves as President of Sassy, Inc., pursuant to an employment agreement dated June 25, 2008, at an annual base salary of $390,000. The term of the agreement expires December 31, 2009. Mr. Hirsch is a participant in the IC Program, with an Applicable Percentage of 50% during 2008. Equity grants are at the discretion of the Compensation Committee. Mr. Hirsch was not granted equity in 2008, although Mr. Hirsch was awarded SARs in the February 2009 grant. Mr. Hirsch received no incentive compensation for 2008. (See CD+A above under the section “ Operation of the 2008 IC Program " )

Pursuant to his employment agreement, Mr. Hirsch is also entitled to participate in Sassy’s 401(k) plan (which provides for a match of up to 3% of salary contributed, which amount is fully vested after four years of employment at the rate of 25% per year of employment), life insurance, hospitalization, major medical and other employee benefit plans generally available to Sassy employees (to the extent they continue to be offered to eligible employees). Mr. Hirsch is also eligible for any new or enhanced employee benefit plans generally applicable to senior executives of Sassy that are approved by the Compensation Committee in the future. See footnote 7 of the “Summary Compensation Table” above for a description of perquisites received by Mr. Hirsch during 2008.

Mr. Hirsch receives a monthly car allowance, a disability insurance policy and is entitled to four weeks’ annual vacation (one more week than he would otherwise be entitled to under Company policy, although such amount is consistent with Sassy policy).

Mr. Hirsch is a participant in the Company’s Severance Policy, with a defined severance benefit period equal to the longer of (i) the period ending December 31, 2009 or (ii) the period ending twelve months from the date of termination, and further modified as follows: (x) should Mr. Hirsch obtain gainful employment during the severance period and that employment is at a base compensation rate less than his severance compensation rate, then he shall be entitled to the difference between those rates until the earlier of (A) the end of the severance period, and (B) his obtaining gainful employment at a base compensation rate that is not less than the severance compensation rate, (y) Mr. Hirsch will be entitled to the continuation of his company car benefit for the duration of the severance period, and (z) Mr. Hirsch will be entitled to the benefits of the Severance Policy in the event that he terminates his employment for “Good Reason,” provided, that requiring him to travel to Sassy’s Michigan office or other offices maintained by the Company (or other domestic or international travel incident to his employment) on a regular basis shall not be considered Good Reason; and provided, further, that changes in his reporting structure outside of the Sassy organization shall not trigger such definition. In the event that Sassy elects not to renew his employment agreement beyond its expiration date, such election will be deemed a termination without cause, entitling Mr. Hirsch to the severance benefits described above.

Mr. Hirsch is subject to specified non-competition/non-solicitation provisions for the period during which he receives severance payments under his employment agreement. Mr. Hirsch was reimbursed $10,000 in legal fees in connection with the preparation of this agreement.

See the Summary Compensation Table above for information with respect to compensation received by the NEOs under their employment agreements and arrangements during 2008.

Termination of Employment and Change-In-Control Arrangements

(i) 40l(k) Plan

The Company offers eligible employees the opportunity to participate in a 401(k) Plan based on employees’ pretax salary deferrals with Company matching contributions. As a result of the Company’s historical acquisition strategy, the 401(k) Plan’s may differ among the Company and its subsidiaries. Participating employees may elect to contribute from 1% to 80% (but not in excess of the amount permitted by the Code, i.e., $15,500 in 2008, and $20,500 in 2008 for employees age 50 and older who elect to make catch-up contributions) of their compensation, on a pretax basis, to the 401(k) Plan. Because the 401(k) Plan is a qualified defined contribution plan, if certain highly compensated employees’ contributions exceed the amount prescribed by the Code, such contributions will be reduced or limited. In 2008, contributions of certain highly compensated employees of the Company were limited to an average of 6.29% of their eligible compensation (excluding elective catch-up contributions). Employees’ contributions are invested in one or more of several funds (as selected by each participating employee). The Company, LaJobi and Sassy match a portion (either one-half of any amount up to 6%, or 100% of any amount up to 3%, of salary contributed) of the compensation deferred by each employee, and Kids Line contributes 3% (9% for Mr. Levin) of eligible salary pursuant to the safe harbor provisions of Section 401(k) of the Code. Matching contributions are fully vested after four years of employment at the rate of 25% per year of employment (after six years of employment for LaJobi). Under certain circumstances, the 401(k) Plan permits participants to make withdrawals or receive loans from the 401(k) Plan prior to retirement age. In light of current economic conditions, the Company temporarily suspended its matching contributions under its 401(k) plan (at least for the first half of 2009, at which time such determination may be reevaluated).

(ii) Change in Control Plan

The Board adopted a Change in Control Severance Plan (the “Change in Control Plan”) effective January 29, 2003, as amended December 22, 2003, March 13, 2007 (to clarify a provision thereunder) and December 22, 2008. The Change in Control Plan was terminated by the Board on February 24, 2009, although such termination will not impair the rights of participants who experienced a Qualifying Termination prior to such termination.

Participants

Participants in the Change in Control Plan were those individuals from time to time designated by the Board or a duly authorized committee of the Board.

Benefits

If a participant’s employment with the Company was terminated by the Company without “Cause” (as defined in the Change in Control Plan) or by the participant for “Good Reason” (as defined in the Change in Control Plan) (each, a “Qualifying Termination”) during the period commencing six months prior to and ending two years after a Change in Control (defined in the Change in Control Plan generally to mean: (A) where any person or group, other than the Company, any of its subsidiaries, Ms. Berrie, Mr. Berrie’s lineal descendants, Mr. Berrie’s Estate, various specified trusts or other entities created by or at the direction of Mr. Berrie, any trust created pursuant to the terms of the instruments governing or creating such trusts or entities, any fiduciaries thereof or specified groups in which the foregoing are members, becomes the beneficial owner of 25% or more of the voting power of the Company, (B) as a result of specified events, a defined group of directors ceases to be a majority of the Board, (C) consummation of specified business combinations, sales of assets or recapitalizations or similar transactions involving the Company, or (D) approval by the shareholders of a plan of liquidation or dissolution of the Company), such participant would be paid the following “Severance Benefit”:

(i)

if the Qualifying Termination occurred during the six-month period preceding or the one-year period following the Change in Control (the “First Period”), an amount equal to 150% of the participant’s “Current Total Annual Compensation”; and

(ii)

if the Qualifying Termination occurred during the second year after the Change in Control (the “Second Period”), an amount equal to 75% of the participant’s Current Total Annual Compensation.

For purposes of the Change in Control Plan, “Current Total Annual Compensation” is the sum of the following amounts: (A) the greater of a participant’s highest rate of annual salary during the calendar year in which his employment terminated or such participant’s highest rate of annual salary during the calendar year immediately prior to the year of such termination; (B) the greater of a participant’s annual bonus compensation (prior to any bonus deferral election) earned in respect of each of the two most recent calendar years immediately preceding the calendar year in which the participant’s employment terminated; and (C) the amount of the Company’s contribution to the participant’s 401(k) account for the last full year prior to such termination.

Severance Benefits would be paid in one lump-sum payment within 30 business days after a participant’s employment with the Company terminated or the Change in Control occurred, whichever is later, or at such earlier time as required by applicable law.

A participant entitled to receive a Severance Benefit would also receive the following additional benefits:

(a) The Company would cause options to purchase Company stock (“Stock Options”) held by a participant that are not fully vested and exercisable on the date of the Qualifying Termination to:

(1)

if the Qualifying Termination occurs during the First Period, become fully vested and exercisable as of the date of such Qualifying Termination (or, if later, as of the date on which the Change in Control occurred); and

(2)

if the Qualifying Termination occurs during the Second Period, become fully vested and exercisable as of the date of such Qualifying Termination as to those Stock Options that would otherwise have vested within one year after the Qualifying Termination.

(b) The Company would cause unvested restricted shares of Company stock (the “Restricted Shares”) held by a participant on the date of the Qualifying Termination to:

(1)

if the Qualifying Termination occurs during the First Period, become fully vested as of the date of such Qualifying Termination (or, if later, as of the date on which the Change in Control occurred) as to those Restricted Shares for which the vesting restrictions would otherwise have lapsed within one year after the Qualifying Termination; and

(2)

if the Qualifying Termination occurs during the Second Period, become fully vested as of the date of such Qualifying Termination as to those Restricted Shares for which the vesting restrictions otherwise would have lapsed within six months after the Qualifying Termination.

(c) The Company would for a period of 18 months (in the case of a Qualifying Termination during the First Period) or one year (in the case of a Qualifying Termination during the Second Period) following the Qualifying Termination, continue to provide to the participant (i) use of an automobile or payment of an automobile allowance in an amount sufficient to compensate the participant to substantially the same extent as if the Company continued to provide the automobile and (ii) medical and other insurance benefits, in each case to the extent and on substantially the same basis as provided immediately prior to the Qualifying Termination.

Reduction of Payments

If a participant’s receipt of any payment and/or non-monetary benefit under the Change in Control Plan (including, without limitation, the accelerated vesting of Stock Options and/or Restricted Shares) (collectively, the “Plan Payments”) would have caused him or her to become subject to the excise tax imposed under Section 4999 of the Code (or any interest or penalties incurred by an affected Participant with respect to such excise tax), the Company would have reduced his or her Plan Payments to the extent necessary to avoid the application of such excise tax if (i) the required reduction did not exceed 10% of the aggregate amount of the Plan Payments and (ii) as a result of such reduction, the net benefits to the participant of the Plan Payments as so reduced (after payment of applicable income taxes) exceeded the net benefit to the participant of the Plan Payments without such reduction (after payment of applicable income taxes and excise taxes). If a reduction in Plan Payments to a participant in the amount permitted by clause (i) was insufficient to avoid the application of such excise tax, then such affected participant would have been entitled to receive an additional “gross-up” payment equal, on an after-tax basis, to the excise tax imposed upon the Plan Payment.

On terms specified in the Change in Control Plan, the Company reserves the right to contest any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a gross-up payment, and will control all proceedings taken in connection with any such contest.

Administration of the Change in Control Plan

The Change in Control Plan was administered by the Compensation Committee.

Amendment of the Plan

The Company reserved the right to amend, in whole or in part, any or all of the provisions of the Change in Control Plan by action of the Board at any time; provided, that, no such amendment could have reduced the benefits and payments due to any Participant in the event of a Qualifying Termination.

Successors

Any successor or assignee to all or substantially all the business or assets of the Company would have been required to perform the Company’s obligations under the Change in Control Plan in the same manner and to the same extent that the Company would have been required to perform if no such succession or assignment had taken place. Any payment or benefit to which a participant had become entitled under the Change in Control Plan that remained unpaid at the time of such participant’s death would have been paid to the estate of such Participant when it became due.

No Duty to Mitigate

No participant entitled to receive a Severance Benefit was required to seek other employment or to attempt in any way to reduce any amounts payable to him or her pursuant to the Change in Control Plan. Severance Benefits would not have been reduced by any compensation earned by the participant as a result of employment by another employer or otherwise.

Rights Under Other Plans, Policies, Practices and Agreements

The Change in Control Plan superseded any other change in control severance plans, policies and/or practices of the Company as to the participants, other than any individual executed agreement or arrangement between a single Participant and the Company in effect on January 1, 2003 or thereafter, which agreement specifically addresses payments or benefits made or provided upon termination of employment or in connection with a Change in Control (an “Additional Agreement”). If a participant was due benefits or payments under both an Additional Agreement and the Change in Control Plan and/or where the Change in Control Plan and the applicable Additional Agreement had inconsistent or conflicting terms and conditions, the participant would have received the greater of the benefits and payments, and the more favorable terms and conditions to him or her, under the Additional Agreement and the Change in Control Plan, determined on an item-by-item basis.

Code Section 409A

Notwithstanding the foregoing, all payments and benefits under the Change in Control Plan were to have been made in compliance with Section 409A.

(iii) Severance Policy

The Compensation Committee adopted an amendment (the “Amendment”) to the Company’s general severance policy (which previously allowed for a maximum of six week’s severance pay under specified circumstances), applicable in general only to employees who are domestic vice presidents or above and who are designated by the Committee as eligible participants in the plan (collectively, “DVPs”), effective February 11, 2003. This severance policy was further amended as of March 30, 2007, as described below, and on December 22, 2008 to address the provisions of Section 409A of the Code and to clarify the scope of the plan (as so amended, the “Severance Policy”).

Benefits

If a DVP’s employment with the Company is terminated by the Company without “Cause” (as defined in the Change in Control Plan), and not in connection with (i.e., occurring more than 6 months before or more than two years after) a Change in Control of the Company (as defined in the Change in Control Plan), such DVP will be paid “Severance Payments” ranging from a minimum amount equal to 4 months of such DVP’s base salary in effect on the date of termination, exclusive of any bonuses or commissions (“Current Salary”) to a maximum amount equal to 12 months of such DVP’s Current Salary, depending on the period of time that such DVP was employed by the Company at the time of such termination. The time period on which Severance Payments are based (i.e., 4 months of total employment, 6 months of total employment, etc.) shall be the “Severance Period”. Severance Payments will be paid over the course of the relevant Severance Period in accordance with the Company’s regular salary payment schedule (not in a lump sum), unless otherwise required by Section 409A of the Code (in which case payments will be made in the manner set forth in the Severance Policy). As of March 30, 2007, the Company amended the Severance Policy to specify that notwithstanding anything to the contrary therein, in the event that the employment of specified DVPs is terminated in connection with the consummation of certain corporate transactions, the severance payments and benefits applicable to such terminated DVP will be extended by an additional 4 months up to a maximum Severance Period of 12 months.

During the relevant Severance Period, the Company will continue to provide the terminated DVP with medical and other insurance benefits, in each case to the extent and on substantially the same basis (including relevant payroll deductions) as provided immediately prior to the termination (subject to provisions intended to address Section 409A of the Code). In addition, for a period of 60 days following the DVP’s termination, the Company will continue to provide to the DVP use of an automobile or an equivalent payment therefor.

Termination of Severance Payments

If the terminated DVP obtains gainful employment during the Severance Period, the Amendment provides that Severance Payments will terminate on the date that such new employment commences.

Amendment

The Company reserves the right to amend, in whole or in part, or terminate, the Severance Policy, provided that no amendment to the Severance Policy will become effective (as to a person covered thereby prior to such amendment) prior to the date which is six months from the date such amendment is approved by the Board or the Compensation Committee, and provided further that an amendment may become effective earlier if it will result in the avoidance of the excise tax and/or interest imposed under Section 409A of the Code without materially diminishing the economic benefit to a DVP.

General Release

As a condition to the receipt of any Severance Payments, each terminated DVP will be required to execute the Company’s form of General Release, which provides generally for the following: (i) an irrevocable release by the DVP of existing or future claims against the Company and specified related parties arising out of the performance of services to or on behalf of the Company by such DVP through the date of such release, (ii) an agreement by the DVP to keep all non-public information pertaining to the Company and specified parties confidential, (iii) an agreement by the DVP not to disparage the Company or specified related persons and (iv) an affirmation by the DVP of his/her obligations under or pursuant to any restrictive covenant (non-compete) agreements that such DVP signed with the Company. In the event that such release is not executed within 45 days of its delivery to the relevant DVP, such DVP will be entitled to only one week of severance pay for each year of service, with a maximum severance payment equal to six (6) weeks of severance pay, less any applicable withholdings, in addition to medical and dental insurance coverage (if enrolled therein on the date of termination of employment), paid by the Company, until the end of the month of termination. Thereafter, the DVP will be entitled to continue his/her medical and dental insurance coverage, at his/her expense, pursuant to the provisions of COBRA.

Rights Under Other Agreements

The Amendment supersedes any other agreement between the Company and a DVP that provides for lesser benefits with respect to the type of termination covered thereby in effect on the effective date of the Amendment or thereafter.

Equity Incentive Plan

The Board adopted the Russ Berrie and Company, Inc. Equity Incentive Plan (the “EI Plan”) on June 3, 2008, and the EI Plan was approved by the Company’s shareholders as of July 10, 2008. The EI Plan is a successor to the 2004 Plan (defined below), which terminated as of the date of such approval (although outstanding awards thereunder will continue to be covered by its terms).

Awards

The EI Plan provides for awards in any one or a combination of: (a) stock options, (b) SARs, (c) Restricted Stock, (d) RSUs, (e) non-restricted stock, and/or (f) dividend equivalent rights. Any award under the EI Plan may, as determined by the committee administering the EI Plan (the “Plan Committee”) in its sole discretion, constitute a “Performance-Based Award” (an award that qualifies for the performance-based compensation exemption of Section 162(m) of the Internal Revenue Code of 1986, as amended). All awards granted under the EI Plan will be evidenced by a written agreement between the Company and each participant (which need not be identical with respect to each grant or participant) that will provide the terms and conditions, not inconsistent with the requirements of the EI Plan, associated with such awards, as determined by the Plan Committee in its sole discretion. Award agreements must be executed by the Company and a participant in order for the award covered by such agreement to be effective.

Reserved Shares

A total of 1,500,000 shares of Common Stock have been reserved that may be subject to, delivered in connection with, and/or available for awards under the EI Plan, which will consist of authorized but unissued shares of Common Stock or shares of Common Stock held in treasury. Awards under the EI Plan are counted against the reserved shares as described in the EI Plan. In the event all or a portion of an award is forfeited, terminated or cancelled, expires, is settled for cash, or otherwise does not result in the issuance of all or a portion of the shares of Common Stock subject to the award in connection with the exercise or settlement of such award (“Unissued Shares”), such Unissued Shares will in each case again be available for awards under the EI Plan, as described therein. The preceding sentence will apply to any awards outstanding on the effective date of the EI Plan under the 2004 Plan (discussed below), up to a maximum of an additional 1,750,000 shares. Subject to the terms of the EI Plan, assumed or replacement awards in connection with the acquisition of any business by the Company or any of its subsidiaries shall be in addition to those available thereunder.

Participants

Participants are officers (including directors), non-employee (outside) directors, employees and specified consultants of the Company or any of its subsidiaries selected by the Plan Committee in its sole discretion to receive an award under the EI Plan. Incentive Stock Options may not be awarded to participants who are not employees of the Company.

Administration of the Plan

The Plan Committee must be a committee comprised of at least two (2) directors, each of whom shall be, to the extent applicable an “outside director” within the meaning of Section 162(m) of the Code. In the absence of a contrary appointment by the Board, the Plan Committee will be the Compensation Committee, except regarding awards to outside directors, with respect to whom the Board will act as the Plan Committee. The Plan Committee, subject to the limitations set forth in the EI Plan, has absolute discretion and authority: (i) to make and administer grants under the EI Plan (including to determine the form, amount and other terms and conditions of awards granted, and to waive, amend or modify conditions initially established for grants, including to accelerate vesting and to extend or limit the exercisability of grants, except as specifically restricted by the EI Plan), (ii) to determine when and to which individuals awards will be granted, (iii) to determine whether, to what extent and under what circumstances awards may be settled, paid or exercised in cash, Common Stock or other property, or canceled, forfeited or suspended, (iv) to determine the terms and provisions of any award agreement and any amendment of such award agreement, and (v) to establish, amend, waive and/or rescind any rules and regulations as it deems necessary for the proper administration of the EI Plan, including to make such determinations and interpretations and to take such actions in connection with the EI Plan and any awards granted thereunder as it deems necessary or advisable to carry out its purposes.

Grant Date

The grant date is the date designated by the Plan Committee as the date of an award under the EI Plan, which will not be earlier than the date the Plan Committee authorizes (by resolution or written action) the grant of such award, notwithstanding the date of any award agreement evidencing such award. In the absence of a designated date or fixed method of computing such date being specifically set forth in the Plan Committee’s resolution, then the date of grant will be the date of the Plan Committee’s resolution or action.

Limitations on Grants

Grants under the EI Plan can be made to any eligible individual at the discretion of the Plan Committee at any time. All grants of Stock Options are subject to a 350,000 shares per participant per plan year limit. In the case of Incentive Stock Options, the aggregate fair market value (as of the date of grant) of all shares of Common Stock underlying any grant of Incentive Stock Options, however made, that become exercisable by a participant during any calendar year may not exceed $100,000 (options granted in excess of this amount shall not be treated as Incentive Stock Options). Grants of Incentive Stock Options are subject to other restrictions set forth in the EI Plan.

Vesting, Term and Acceleration Provisions

Stock Options .

Each Stock Option will be subject to such terms and conditions, including vesting, as the Plan Committee may determine from time to time in its discretion, provided that no Stock Option shall be exercisable later than 10 years from the date of grant (5 years in the case of an Incentive Stock Options granted to a Ten-Percent Stockholder (as defined in the EI Plan)). Notwithstanding the foregoing, unless otherwise provided in the award agreement relating to such award, each Stock Option shall vest and become exercisable ratably over five years (20% per year), commencing on the first anniversary of the date of grant, and shall continue to be exercisable for a period of 10 years from the date of grant.

Unless otherwise provided in the award agreement governing such Stock Options or the Change in Control Plan (other than with respect to awards of Stock Options to outside directors, which is discussed in the following paragraph), (i) upon Disability (as defined in the EI Plan) or death, all unexercised options vest, and may be exercised for up to one year or the remaining term of the Stock Option, if earlier; and (ii) if a participant’s employment is terminated for any other reason, all unexercised Stock Options are cancelled as of the termination date; provided however, if a participant’s employment is terminated for reasons other than Cause (as defined in the EI Plan), vested unexercised Stock Options may be exercised within 90 days of termination, or the remaining term of the Stock Option, if earlier, and if a participant retires (as defined in the Company’s 401(k) plan), vested unexercised Stock Options may be exercised within 1 year of such retirement, or the remaining term of the Stock Option, if earlier. With respect to awards of Stock Options to outside directors, unless otherwise provided in the award agreement governing such Stock Options, in the event of the death or Disability (as defined in the EI Plan) of a participant while serving as a member of the Board, all unexercised options vest, and may be exercised for up to one year or the remaining term of the Stock Option, if earlier; if a participant ceases to serve as a member of the Board for any other reason, vested options shall be exercisable for a period of 90 days following termination, or the remaining term of the Stock Option, if earlier.

Stock Appreciation Rights . Each SAR will be subject to such terms and conditions, including vesting, as the Plan Committee determines in its sole discretion; provided, however, that if an SAR is granted in tandem with a Stock Option, the SAR will become exercisable and expire in the same manner as the corresponding Stock Option, unless otherwise determined by the Plan Committee, and provided further, that if an SAR is granted in tandem with an Incentive Stock Option, such SAR will be exercisable only if the Fair Market Value of a share of Common Stock on the date of exercise exceeds the exercise price of the related Incentive Stock Option. SARs will be exercisable at such time or times as shall be determined by the Plan Committee in its sole discretion; provided, however, that no SARs shall be exercisable later than ten (10) years after the date of grant. SARs shall terminate at such earlier times and upon such conditions or circumstances determined by the Plan Committee in its sole discretion.

Restricted Stock Awards . Awards of Restricted Stock may be subject to such restrictions, terms and conditions as the Plan Committee determines in its sole discretion, including a requirement of a cash or other payment therefore in whole or in part. Notwithstanding the foregoing, unless otherwise provided in the award agreement relating to the award of Restricted Stock, such awards will vest ratably over five years (20% per year), beginning on the first anniversary of the Date of Grant, and upon vesting, shall not be subject to any further restrictions. The Plan Committee may, in its sole discretion, accelerate the time at which any or all restrictions will lapse or remove any or all of such restrictions. Unless otherwise provided in an agreement governing the award or the Company’s Change in Control Plan (while it remains in existence), upon a participant’s termination of employment for any reason (not including an authorized leave of absence) all non-vested restricted stock is forfeited, except in the event of Disability (as defined in the EI Plan) or death, in which case all restrictions lapse as of the date of the relevant event.

Stock Units. Stock Units may be subject to such terms and conditions including, but not limited to, vesting, acceleration of vesting and forfeiture as the Plan Committee determines in its sole discretion.

Dividend Equivalent Rights . Dividend Equivalent Rights may be granted in tandem with another award or as a separate award. The terms and conditions applicable to each Dividend Equivalent Right, including vesting, risks of forfeiture and other restrictions, will be determined by the Plan Committee in its sole discretion. Amounts payable in respect of Dividend Equivalent Rights may be paid currently or withheld until the lapsing of any applicable restrictions thereon or until the vesting, exercise, payment, settlement or other lapse of restrictions on the award to which the Dividend Equivalent Rights relate.

Performance Based Awards

Any awards granted under the EI Plan may be granted in a manner such that the awards qualify for the performance-based compensation exemption of Section 162(m) of the Code.

Exercise Price

Each Stock Option granted under the EI Plan will have a per-share exercise price as the Plan Committee determines on the date of grant, but not less than 100% of the Fair Market Value of a share of Common Stock on the Date of Grant (or 110% of Fair Market Value in the case of a Ten Percent Stockholder).

Adjustments

In the event of changes in the outstanding Common Stock or in the capital structure of the Company by reason of a dissolution or liquidation of the Company, sale of all or substantially all of the assets of the Company, mergers, consolidations or combinations with or into any other entity if the Company is the surviving entity, stock or extraordinary dividends, stock splits, reverse stock splits, stock combinations, rights offerings, statutory share exchanges involving capital stock of the Company, reorganizations, recapitalizations, reclassifications, exchanges, spin-offs, dividends in kind, or other relevant changes in capitalization, awards granted under the EI Plan and any award agreements, the maximum number of shares of Common Stock deliverable under the EI Plan, and/or the maximum number of shares of Common Stock with respect to which Stock Options may be granted to or measured with respect to any one person under the EI Plan shall be subject to adjustment or substitution, as determined by the Plan Committee in its sole discretion, as to the number, price or kind of a share of Common Stock or other consideration subject to such awards, and any and all other matters deemed appropriate by the Plan Committee, including, without limitation, accelerating the vesting, settlement and/or exercise period pertaining to any award hereunder, or as otherwise determined by the Plan Committee to be equitable.

Outstanding awards and award agreements, and the maximum number of shares of Common Stock with respect to which Stock Options may be granted to or measured with respect to any one person during any period, shall be subject to adjustment or substitution, as determined by the Plan Committee in its sole discretion, as to the number, price or kind of a share of Common Stock or other consideration subject to such awards, and any and all other matters deemed appropriate by the Plan Committee, including, without limitation, accelerating the vesting, settlement and/or exercise period pertaining to any award hereunder, or as otherwise determined by the Plan Committee to be equitable, in the event of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, participants, or which otherwise warrants equitable adjustment in the sole discretion of the Plan Committee because it interferes with the intended operation of the Plan.

In connection with a Business Combination (as defined in the EI Plan), the Plan Committee, in its sole discretion, may provide for: (i) the continuation of the EI Plan and/or the assumption of the awards granted thereunder by a successor corporation (or a parent or subsidiary thereof), (ii) the substitution for such awards of new awards covering the stock of a successor corporation (or a parent or subsidiary thereof), with appropriate adjustments as to the number and kind of shares and exercise prices, (iii) upon 10 days’ advance notice from the Plan Committee to the affected participants, the acceleration of the vesting, settlement and/or exercise period pertaining to any award hereunder, or (iv) upon 10 days’ advance notice from the Plan Committee to the affected participants, (x) the cancellation of any outstanding awards that are then exercisable or vested and the payment to the holders thereof, in cash or stock, or any combination thereof, of the value of such awards based upon the price per share of stock received or to be received by other stockholders of the Company in connection with the Business Combination, and (y) the cancellation of any awards that are not then exercisable or vested. In the event of any continuation, assumption or substitution contemplated by the foregoing clauses, the EI Plan and/or such awards shall continue in the manner and under the terms so provided.

Transferability

Each award granted under the EI Plan (other than Non-Restricted Stock Awards and Restricted Stock Awards with respect to which all restrictions have lapsed) is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable, during a participant’s lifetime, only by such participant. Notwithstanding the foregoing, the Plan Committee in its sole discretion may permit the transferability of an award (other than an Incentive Stock Option) by a participant to a member of such participant’s immediate family or trusts for the benefit of such persons, or partnerships, corporations, limited liability companies or other entities owned solely by such persons, including trusts for such persons, subject to any restriction included in the grant of the award.

Tax Compliance . The EI Plan includes specific limitations on awards to ensure compliance with the provisions of Section 409A of the Code.

Rights of Holders of Restricted Stock

A holder of restricted stock has all rights of a shareholder with respect to such stock, including the right to vote and to receive dividends thereon, except as otherwise provided in the award agreement relating to such award.

Additional Limitations

The grant of any award under the EI Plan may also be subject to such other provisions as the Plan Committee in its sole discretion determines appropriate, including, without limitation, provisions for the forfeiture of, or restrictions on resale or other disposition of, Common Stock acquired under any form of award, provisions for the acceleration of exercisability or vesting of awards (subject to the provisions of the EI Plan), provisions to comply with federal and state securities laws, or conditions as to the participant’s employment in addition to those specifically provided for under the EI Plan. Participants may be required to comply with any timing or other restrictions with respect to the payment, settlement or exercise of an award, including a window-period limitation, as may be imposed in the sole discretion of the Plan Committee.

Amendment, Termination and Duration of the Plan

The Plan Committee may at any time: (i) amend, modify, terminate or suspend the EI Plan, and (ii) alter or amend any or all award agreements to the extent permitted by the EI Plan and applicable law. Amendments of the EI Plan are subject to the approval of the shareholders of the Company only as required by applicable law, regulation or stock exchange requirement. The EI Plan will remain in effect until all stock subject to it is distributed or all awards have expired or lapsed, whichever is latest to occur, or the EI Plan is earlier terminated by the Plan Committee. No awards may be granted under the EI Plan after the fifth anniversary of its effective date.

Indemnification. The EI Plan contains an indemnification provision for Plan Committee members.

2004 Stock Option, Restricted and Non-Restricted Stock Plan (the “2004 Plan”)

The 2004 Plan provided for awards of options to officers, directors and key employees designated by the Compensation Committee to purchase Common Stock of the Company (including options designated as incentive stock options under Section 422 of the Code, and options not so designated), restricted stock and non-restricted stock (outside directors may be awarded options only). A total of 2,750,000 shares of Common Stock were reserved for the grant of options and awards of Common Stock under the 2004 Plan for all eligible plan participants. No award may be granted under the 2004 Plan after July 10, 2008, the date the EI Plan became effective.

Acceleration of Vesting/Exercise Period

Subject to the following, options and restricted stock generally vest ratably over five years, commencing on the first anniversary of the date of grant. With respect to awards of options (other than awards to outside directors, which is discussed below), upon retirement (as defined in the Company’s 401(k) plan), Disability (as defined in the 2004 Plan) or death (either while employed or within the year after retirement), all unexercised options vest, and may be exercised for up to one year (unless provided otherwise in an option agreement evidencing the award) or the term of the unexpired option, if earlier; unless otherwise provided in an option agreement or the Company’s Change in Control Plan, (i) if a participant’s employment is terminated for reasons other than Cause (as defined in the 2004 Plan), vested unexercised options may be exercised within 30 days of termination, or the term of the unexpired option, if earlier, and (ii) if a participant’s employment is terminated for any other reason, all options are cancelled as of the termination date.

With respect to awards of options to outside directors, in the event of the death or Disability (as defined in the 2004 Plan) of a participant while serving as a member of the Board, all unexercised options vest, and may be exercised for up to one year (unless provided otherwise in an agreement evidencing the award) or the term of the unexpired option, if earlier; if a participant ceases to serve as a member of the Board for any other reason, vested options shall be exercisable for a period of 30 days following termination (unless otherwise provided in an agreement evidencing the award).

With respect to awards of restricted stock, unless otherwise provided in an agreement governing the award or the Company’s Change in Control Plan, all non-vested restricted stock is forfeited (at the time of termination) if the participant has not remained in the continuous employment of the Company for the period during which the restrictions are applicable, generally five years from the date of grant, except in the event of retirement, Disability (as defined in the 2004 Plan) or death, in which case all restrictions lapse as of the date of the relevant event.

Adjustments

In the event of any change in the outstanding Common Stock as a result of events specified in the 2004 Plan, the Committee may adjust the aggregate number of shares of Common Stock available for awards under the 2004 Plan, the exercise price of any options granted under the 2004 Plan, and any or all other matters deemed appropriate by the Committee, including, without limitation, accelerating the vesting and/or exercise period pertaining to any award thereunder.

For a more complete description of the 2004 Plan, see the Company’s Proxy Statement for its 2008 Annual Meeting of Shareholders.

2008 Outstanding Equity Awards at Fiscal Year End

The following table sets forth information with respect to outstanding equity awards for the NEOs as of December 31, 2008 (the table does not include equity grants made in 2009).


	Option Awards									Stock Awards
																		Equity
																	Equity	Incentive
							Equity										Incentive	Plan Awards:
							Incentive										Plan Awards:	Market or
							Plan Awards:										Number of	Payout Value
	Number of			Number of			Number of								Market Value		Unearned	of Unearned
	Securities			Securities			Securities					Number of			of Shares or		Shares, Units	Shares, Units
	Underlying			Underlying			Underlying					Shares of			Units of Stock		or Other	or Other
	Unexercised			Unexercised			Unexercised	Option		Option		Units of Stock			that have not		Rights that	Rights that
	Options (#)			Options (#)			Unearned	Exercise		Expiration		that have not			Vested		have not	have not
Name	Exercisable			Unexercisable			Options (#)	Price ($)		Date		Vested (#)			($)(5)		Vested(#)	Vested(#)
Bruce Crain		36,000	(1)		64,000	(1)			16.05		12/04/17
		4,000	(2)		16,000	(2)			16.05		12/04/17
		20,000	(3)		80,000	(3)			14.83		12/04/17
													63,750	(4)		189,338
Anthony Cappiello		10,000	(6)						13.74		11/01/15
		5,340	(7)		21,360	(7)			16.77		12/27/17
													3,120	(8)		9,266
Marc Goldfarb		20,000	(6)						11.52		12/26/15
		4,940	(7)		19,760	(7)			16.77		12/27/17
													2,880	(8)		8,554
Michael Levin		200,000	(9)						22.21		12/15/14
		30,033	(7)		60,067	(7)			16.77		12/27/17
													23,200	(8)		68,904
Fritz Hirsch		75,000	(10)						13.05		5/02/15
		6,320	(7)		25,280	(7)			16.77		12/27/17
													3,680	(8)		10,930


(1)		Pursuant to the terms of the Crain Agreement, on December 5, 2007, Mr. Crain was awarded 100,000 stock options pursuant to the 2004 Plan at an exercise price of $16.05. Of the foregoing, 80,000 of such options vest ratably over a five year period commencing December 4, 2008, and the remaining 20,000 of such options became fully vested on the six-month anniversary of the commencement date of his employment. All such options are generally exercisable for a period of 10 years from December 4, 2007. 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 all such options will be cancelled or immediately forfeited, as applicable, 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, such option will become immediately vested and/or non-forfeitable, as applicable, 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, such option will become immediately vested and/or non-forfeitable, as applicable, 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 portion of such option will become immediately vested and/or non-forfeitable, as applicable, to the extent that was scheduled to vest within three years of the date of such Change in Control, and the vesting dates of the option that were 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 such 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. The acceleration provisions described above are referred to as the “Crain Acceleration Provisions”.

(2)		Pursuant to the terms of the Crain Agreement, on December 5, 2007, Mr. Crain was awarded 20,000 stock options outside of the 2004 Plan (due to grant limitations therein) at an exercise price of $16.05. These options vest ratably over a five-year period, commencing on December 4, 2008, and are generally exercisable for 10 years from December 4, 2007. The Crain Acceleration Provisions apply to these options.

(3)		Pursuant to the terms of the Crain Agreement, on January 4, 2008, Mr. Crain was awarded 100,000 stock options under the 2004 Plan at an exercise price of $14.83. These options vest ratably over a five-year period, commencing on December 4, 2008, and are generally exercisable for 10 years from December 4, 2007. The Crain Acceleration Provisions apply to these options.

(4)		Pursuant to the terms of the Crain Agreement, on December 5, 2007, Mr. Crain was awarded 85,000 shares of restricted stock pursuant to the 2004 Plan, which vest ratably over a four-year period commencing December 4, 2008. The Crain Acceleration Provisions apply to this grant of restricted stock, but the words “become vested and exercisable” should be replaced by the words “become non-forfeitable”.

(5)		Calculated using the closing price of the Company’s Common Stock on December 31, 2008 of $2.97.

(6)		The referenced options were granted under the 2004 Plan 90 days following the commencement of employment of the relevant individual. Under the original grant terms, all of the referenced options vest and become exercisable ratably over five years (20% per year) commencing on the first anniversary of the date of grant, however, all such options were deemed vested as of December 28, 2005. In the event of retirement, disability or death of the option holder while in the employ of the Company or within one year after such date, all such unexercised options will be deemed vested and may be exercised for up to one year (or the exercise period, if shorter) after such event. If the option holder’s employment is terminated for any other reason, any unexercised options will be cancelled and deemed terminated immediately, except that if employment is terminated by the Company for other than “Cause” (as defined in the 2004 Plan), all unexercised options, to the extent vested, may be exercised within 30 days of the termination date (or the option period, if shorter). In the event of any change in the outstanding Common Stock, as specified in the plan, the committee administering the plan may adjust the aggregate number of shares available for awards under the plan, the exercise price of any options granted under the plan, and any or all other matters deemed appropriate by such committee, including, without limitation, accelerating the exercise period pertaining to any award thereunder. In connection with a Business Combination (as defined in the 2004 Plan), such committee, in its sole discretion, may provide for, among other things, the substitution for such awards of new awards covering the stock of a successor corporation (or a parent or subsidiary thereof), with appropriate adjustments as to the number and kind of shares and exercise prices, or the acceleration of the exercise period pertaining to any award. The foregoing provisions are referred to as the “Acceleration Provisions”. Other provisions governing the grants are set forth in the 2004 Plan (described in “2004 Stock Option, Restricted and Non-Restricted Stock Plan” above).


(7)		The referenced options were granted under the 2004 Plan on December 27, 2007 (total grant of: 26,700 options to Mr. Cappiello; 24,700 options to Mr. Goldfarb; 90,100 options to Mr. Levin; and 31,600 options to Mr. Hirsch), vest ratably over a five-year period (other than with respect to Mr. Levin, whose options vest over a three-year period) commencing December 27, 2008, and are generally exercisable for a period of 10 years from the date of grant. The Acceleration Provisions are applicable to these grants. Other provisions governing the grants are set forth in the 2004 Plan (described in “2004 Stock Option, Restricted and Non-Restricted Stock Plan” above). Mr. Cappiello left the employment of the Company as of January 30, 2009.

(8)		The restricted stock was granted under the 2004 Plan on December 27, 2007 (total grant of: 3,900 shares to Mr. Cappiello; 3,600 shares to Mr. Goldfarb; 34,800 shares to Mr. Levin; and 4,600 shares to Mr. Hirsch), and vests ratably over a five-year period (other than with respect to Mr. Levin, whose restricted stock vests over a three-year period) commencing December 27, 2008. All non-vested restricted stock is forfeited (at the time of termination) if the participant has not remained in the continuous employment of the Company for the period during which the restrictions are applicable, generally five years from the date of grant, except in the event of retirement, Disability (as defined in the 2004 Plan) or death, in which case all restrictions lapse as of the date of the relevant event. Other provisions governing the grants are set forth in the 2004 Plan (described in “2004 Stock Option, Restricted and Non-Restricted Stock Plan” above). Mr. Cappiello left the employment of the Company as of January 30, 2009.

(9)		The referenced options were granted on December 15, 2004 (100,000 of such options under the 2004 Plan and 100,000 of such options outside of such plan, due to grant limitations therein), and vest ratably over a three-year period commencing December 15, 2005, however, all such options were deemed vested as of December 28, 2005. All such options are generally exercisable for a period of 10 years from the date of grant. If the employment of Mr. Levin is terminated by reason of his disability or death, any outstanding unexercised portion of the 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 is terminated for Cause or by Mr. Levin without Good Reason (each as defined in his employment agreement), any outstanding unexercised portion of the options will be cancelled and deemed terminated as of the date of his termination. If Mr. Levin’s employment is terminated without Cause or by Mr. Levin with Good Reason, any outstanding unexercised portion of the 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. Other provisions governing the grants are set forth in the 2004 Plan (described in “2004 Stock Option, Restricted and Non-Restricted Stock Plan” above).

(10)		The referenced options were granted under the 2004 Plan on May 2, 2005, vest ratably over a five-year period commencing May 5, 2006, however, all such options were deemed vested as of December 28, 2005, and are generally exercisable for a period of 10 years from the date of grant. The Acceleration Provisions are applicable to these grants. Other provisions governing the grants are set forth in the 2004 Plan (described in “2004 Stock Option, Restricted and Non-Restricted Stock Plan” above).

2008 Option Exercises and Stock Vested

The following table sets forth the number of shares of Company Common Stock acquired by NEOs during 2008 upon the exercise of options and the number of shares with respect to which restrictions on restricted stock held by NEOs lapsed as of December 31, 2008.

Option Awards

Stock Awards

Number of Shares

Acquired on

Value Realized

Acquired on

Value Realized

Name

Exercise (#)

on Exercise ($)

Vesting (#)

on Vesting ($)

Bruce Crain

n/a

21,250

32,725

Anthony Cappiello

n/a

780

2,449

Marc Goldfarb

n/a

720

2,261

Fritz Hirsch

n/a

920

2,889

Michael Levin

n/a

11,600

36,424


(1)		For all but Mr. Crain, aggregate dollar amount realized upon vesting computed using the closing price for the Company’s Common Stock on December 29, 2008 on the NYSE ($3.14), the next business day after the applicable vesting date of December 27, 2008. For Mr. Crain, aggregate dollar amount realized upon vesting computed using the closing price for the Company’s Common Stock on December 5, 2008 on the NYSE, the applicable vesting date ($1.54).

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Our named executive officers may receive compensation in connection with the termination of their employment. The nature and amount of such compensation depend on whether their employment terminates as a result of: (i) death; (ii) disability; (iii) retirement; (iv) termination by the Company without cause (either in connection with a Change in Control or not) or termination by the executive with good reason; or (v) termination by the Company for cause or termination by the executive without good reason. Estimates of the compensation that each of our named executive officers would be entitled to receive under each of these termination circumstances is described in the following tables, assuming that their employment terminated on December 31, 2008, the last business day of such year (note that the employment of Mr. Cappiello did not terminate until January 30, 2009, and the Change in Control Plan was terminated on February 24, 2009). In addition, the following tables do not reflect additional or alternate payments or benefits provided under individual employment agreements between the Company and each of Messrs. Crain, Cappiello and Levin, which are discussed separately below under the caption “Individual Termination/Change in Control Arrangements”. Further, the following tables do not include payments under the Company’s (or its subsidiaries’) 401k plans, or the Company’s life insurance or disability plans, as these plans are available to all salaried employees generally and do not discriminate in scope, terms or operation, in favor of our executive officers.

Any actual compensation received by our named executive officers in the circumstances set forth below may be different than we describe because many factors affect the amount of any compensation received. These factors include: the date of the executive’s termination of employment; the executive’s base salary at the time of termination; the Company’s stock price at the time of termination; and the executive’s age and service with the Company at the time of termination. In addition, although the Company has entered into individual agreements with certain of our named executive officers, in connection with a particular termination of employment the Company and the named executive officer may mutually agree on severance terms that vary from those provided in pre-existing agreements.

For a description of: (i) triggering events that provide for payments and benefits set forth in the following tables; (ii) payment schedules and duration with respect to such payments and benefits; and (iii) how appropriate payment and benefit levels are determined under such triggering events, please see the section captioned “Termination of Employment and Change in Control Arrangements” above, which set forth such matters in detail. The value of option acceleration is equal to the difference between the market price of the Company’s Common Stock on December 31, 2008 ($2.97) and the exercise price of the relevant options, multiplied by the number of options that would accelerate as a result of the triggering event. As the exercise prices of all outstanding options held by NEOs as of December 31, 2008 were in excess of this amount (as set forth in the “2008 Outstanding Equity Awards at Fiscal Year End” table above), no amounts are recognized in the tables below with respect to any option acceleration triggered by qualified terminations. The value of the restricted stock acceleration in the tables below is equal to the market price of the Company’s Common Stock on December 31, 2008 multiplied by the number of shares of restricted stock that become vested or non-forfeitable as a result of the triggering event.

Note that if an NEO is terminated with cause or by the NEO without good reason, such NEO will be entitled to the payment of amounts that have accrued at the time of termination, but have not been paid (other than payments under the IC program, for which a participant must be in the employ of the Company at the time of payment, which is typically in March following the year of determination).

Termination as a Result of a Change in Control Under
the Change in Control Plan*


	First Period								Second Period
			Acceleration								Acceleration
			of Vesting								of Vesting
NEO	Cash($)(1)		($)(2)		Other($)(4)		Total($)		Cash($)(1)		($)(2)(3)		Other($)(5)		($)Total
Anthony Cappiello		529,500		2,317		40,445		572,262		264,750		0		26,963		291,713
Marc Goldfarb		487,620		2,138		40,445		530,203		243,810		0		26,963		270,773
Fritz Hirsch		586,500		2,732		38,616		627,848		293,250		0		25,744		318,994


*		The Change in Control Plan was terminated on February 24, 2009. If a participant’s employment with the Company was terminated by the Company without “Cause” (as defined in the Change in Control Plan) or by the participant for “Good Reason” (as defined in the Change in Control Plan) (each, a “Qualifying Termination”) during the period commencing six months prior to and ending two years after a Change in Control (defined in the Change in Control Plan), the benefits under such plan apply. The definition of a “Change in Control” is generally described in the section captioned “Termination of Employment and Change in Control Arrangements” above. Neither Mr. Crain nor Mr. Levin participated in the Change in Control Plan.

(1)		If the Qualifying Termination occurs during the six-month period preceding or the one-year period following the Change in Control (the “First Period”), the participant is entitled to an amount equal to 150% of the participant’s “Current Total Annual Compensation”; and if the Qualifying Termination occurs during the second year after the Change in Control (the “Second Period”), the participant is entitled to an amount equal to 75% of the participant’s Current Total Annual Compensation. “Current Total Annual Compensation” is the sum of the following amounts: (A) the greater of a participant’s highest rate of annual salary during the calendar year in which his employment terminates or such participant’s highest rate of annual salary during the calendar year immediately prior to the year of such termination; (B) the greater of a participant’s annual bonus compensation earned in respect of each of the two most recent calendar years immediately preceding the calendar year in which the participant’s employment terminated; and (C) the amount of the employer’s contribution to the participant’s 401(k) account for the last full year prior to such termination.

(2)		Because the exercise price of all of the unvested options held by the NEOs as of December 31, 2008 ($16.77) exceeds the market price of the Company’s Common Stock on December 31, 2008 ($2.97), no value is attributable to the acceleration of stock options in either the First Period or the Second Period based on a triggering event occurring on December 31, 2008. As a result, the numbers shown in the table, if any, represent the value of the acceleration of the vesting of unvested restricted stock held by the NEOs in the table as of December 31, 2008.


(3)		As the outstanding unvested restricted stock held by the NEOs in the table was granted on December 27, 2007, and vests ratably over a 5-year period, commencing on December 27, 2008, the acceleration of the vesting period of such restricted stock during the Second Period would not result in the vesting of any of such restricted stock with respect to a termination on December 31, 2008, the assumed date of the triggering event for purposes of this table.

(4)		Represents cost to the Company for each of Messrs. Cappiello, Goldfarb and Hirsch: (i) to remain on the Company’s health and dental insurance plan ($20,645, $20,645 and $24,234, respectively), during the 18 months following the qualifying termination, and (ii) for car allowance and related reimbursements ($19,800, $19,800 and $14,382, respectively), for 18 months following the qualifying termination.

(5)		Represents cost to the Company for each of Messrs. Cappiello, Goldfarb, and Hirsch: (i) to remain on the Company’s health and dental insurance plan ($13,763, $13,763 and $16,156, respectively), during the 12 months following the qualifying termination, and (ii) for car allowance and related reimbursements ($13,200, $13,200 and $9,588, respectively), during the 12 months following the qualifying termination.

Termination as a Result of Retirement, Disability or Death*


	Option		Restricted Stock
NEO	Acceleration(1)		Acceleration		Total
Anthony Cappiello	$	0	$	9,266	$	9,266
Marc Goldfarb	$	0	$	8,554	$	8,554
Fritz Hirsch	$	0	$	10,930	$	10,930
Michael Levin	$	0	$	68,904	$	68,904


*		As described above, the table does not include disability compensation under the Company’s disability benefit plans, death benefits under the Company’s life insurance plans, or amounts payable under the Company’s or its subsidiaries’ 401k plans. NEOs are not otherwise entitled to compensation in the event of death, disability or retirement beyond compensation and benefits accrued at the time of such event and the accelerated vesting of equity awards under the agreements governing such awards (other than Mr. Crain, whose compensation in the event of death, disability or retirement is governed by the terms of his individual employment agreement with the Company). Generally, upon retirement (as defined in the Company’s or its subsidiaries’ 401(k) plan), Disability (as defined in the 2004 Plan) or death (either while employed or within the year after retirement), all unexercised options vest, and may be exercised for up to one year or the term of the unexpired option, if earlier, and all the restrictions on restricted stock lapse. As of December 31, 2008, no equity had been awarded to any NEO under the EI Plan.

(1)		Because the exercise price of all of the unvested options held by the NEOs in the table as of December 31, 2008 ($16.77) exceeds the market price of the Company’s Common Stock on December 31, 2008 ($2.97), no value is attributable to the acceleration of stock options based on a triggering event occurring on December 31, 2008.

Terminations Under the Severance Policy*


NEO	Cash		Other Benefits(1)		Total
Marc Goldfarb (2)	$	216,720	$	11,375	$	228,095
Fritz Hirsch (3)	$	391,000	$	16,156	$	407,156


*		If the employment of an NEO with the Company is terminated by the Company without “Cause” (as defined in the Change in Control Plan), such NEO is entitled to the benefits of the Severance Policy (other than Messrs. Crain, Cappiello, and Levin, whose individual employment agreements govern such terminations). In order to receive the payments and benefits provided by the Severance Policy, the participant must execute the Company’s General Release, described in “Severance Policy” under the section captioned “Termination of Employment and Change-In-Control Arrangements” above. In the event that an NEO is due payments and benefits under both the Severance Policy and the Change in Control Plan, such participant will receive the greater of the benefits and payments, determined on an item-by-item basis.


(1)		Represents cost to the Company for each of Messrs. Goldfarb and Hirsch: (i) to remain on the Company’s health and dental insurance plan ($9,175 and $16,155, respectively), during the applicable severance period, and (ii) for car allowance and related reimbursements ($2,200 and $1,598, respectively), for 60 days following termination in the case of Mr. Goldfarb and 12 months in the case of Mr. Hirsch.

(2)		Represents 8 month’s of severance under the Severance Policy, which is the minimum amount Mr. Goldfarb is entitled to pursuant to his employment arrangement with the Company. See “Employment Agreements and Arrangements” above. In addition, if the employment of Mr. Goldfarb is terminated in connection with the consummation of certain corporate transactions (but not in connection with a Change in Control), the severance payments and benefits applicable to him will be extended by an additional 4 months up to a maximum of 12 months.

(3)		Mr. Hirsch’s severance benefit period equals the longer of (i) the period ending December 31, 2009 or (ii) the period ending twelve months from the date of termination, and he is entitled to the continuation of his company car benefit for the duration of the severance period. In addition, Mr. Hirsch is entitled to the benefits of the Severance Policy in the event that he terminates his employment for “Good Reason,” modified as described under “Employment Agreements and Arrangements” above.

Individual Termination/Change in Control Arrangements

Mr. Crain

Assuming that an appropriate triggering event took place on December 31, 2008, Mr. Crain would have been entitled to the following payments and benefits pursuant to the Crain Agreement (Mr. Crain does not participate in the Company’s Change-in-Control Plan or Severance Policy), described in detail in the section captioned “Employment Contracts and Arrangements” above. The value of the option acceleration is equal to the difference between the market price of the Company’s Common Stock on December 31, 2008 ($2.97) and the exercise price of the relevant options multiplied by the number of options that would accelerate as a result of the termination. As the exercise prices of all outstanding options held by Mr. Crain as of December 31, 2008 were in excess of this amount, no amounts are recognized below with respect to any option acceleration triggered by qualified terminations. The value of the restricted stock acceleration is equal to the market price of the Company’s Common Stock on December 31, 2008 multiplied by the number of shares of restricted stock that become vested or non-forfeitable as a result of the termination. In addition to the total amounts set forth below, Mr. Crain is entitled to director’s and officer’s liability insurance coverage during the term of his employment and for six years thereafter in an annual amount equal to at least the greater of $5.0 million or the coverage provided to any other present or former senior executive or director of the Company. No incremental expense will be incurred to provide this benefit. The benefits described in the event of a Change of Control apply whether or not Mr. Crain is terminated as a result thereof. Note that SARs granted to Mr. Crain in 2009 would not be taken into account with respect to a deemed termination on December 31, 2008, and are therefore excluded from the following analysis.

A. Termination by the Company for Cause or by Mr. Crain without Good Reason (each as defined in the Crain Agreement): No additional benefit assuming base salary and bonus amounts earned for prior periods as of the date of termination had been paid. In addition, the unvested portion of the Equity Awards (defined under “Employment Contracts and Arrangements” above) will be cancelled or immediately forfeited, as applicable, and any unexercised, vested portion of the Options shall remain exercisable for the shorter of 90 days following the date of termination and the remainder of their term.

B. Termination by the Company without Cause or by Mr. Crain for Good Reason (each as defined in the Crain Agreement), assuming that all base salary and bonus amounts earned for prior periods as of the date of termination had been paid:

(i) $275,000, representing 100% of his annual base salary for a period of six months following termination, which amount shall be paid commencing on the first day of the month following the Termination Date and on the first day of each of the next five months thereafter, provided , however , that any payment(s) that would be made under such schedule after March 15 of the year following the termination Date shall instead be paid on March 1st of the year following the termination date;

(ii) $100,000 in respect of incentive compensation amounts (under the Crain Agreement, in the event of a termination without Cause only, he is entitled to the pro-rata portion of his bonus for the year in which the termination occurs based on actual performance for such year);

(iii) $510, representing the cost to the Company for continued life insurance coverage for Mr. Crain for a period of six months following termination;

(iv) $6,386, representing the cost to the Company for Mr. Crain to remain on the Company’s health and dental insurance plan through the first anniversary of his termination;

(v) $10,000, representing the maximum amount payable for outplacement services for a period of six months following termination; and

(vi) $126,225, representing restricted stock acceleration (as all options held by Mr. Crain on December 31, 2008 have exercise prices in excess of the market price of the Company’s Common Stock on such date, no amounts would have been recognized in respect of options acceleration caused by the triggering event);

for a total of $518,121.

C. Termination by the Company as a result of Disability (as defined in the Crain Agreement), assuming that all base salary and bonus amounts earned for prior periods as of the date of termination had been paid:

(i) $4,675,000, representing long-term disability benefits equal to 50% of Mr. Crain’s base salary for an assumed period of seventeen years (until Mr. Crain reaches retirement age).

(ii) $100,000 in respect of incentive compensation amounts (under the Crain Agreement, in the event of a termination as a result of Disability, he is entitled to the pro-rata portion of his bonus for the year in which the termination occurs based on actual performance for such year); and

(iii) $126,225, representing restricted stock acceleration (as all options held by Mr. Crain on December 31, 2008 have exercise prices in excess of the market price of the Company’s Common Stock on such date, no amounts would have been recognized in respect of options acceleration caused by the triggering event);

for a total of $4,901,225.

D. Termination by the Company as a result of death, assuming that all base salary and bonus amounts earned for prior periods as of the date of termination had been paid:

(i) $1,100,000 representing life insurance benefits equal to 200% of his base salary;

(ii) $100,000 in respect of incentive compensation amounts (under the Crain Agreement, in the event of a termination as a result of his death, he is entitled to the pro-rata portion of his bonus for the year in which the termination occurs based on actual performance for such year); and

for a total of $1,326,225.

E. Change of Control (as defined in the Crain Agreement), whether or not a termination of employment occurs: $189,338, representing restricted stock acceleration (as all options held by Mr. Crain on December 31, 2008 have exercise prices in excess of the market price of the Company’s Common Stock on such date, no amounts would have been recognized in respect of options acceleration caused by the triggering event).

F. Change of Control occurring within six months following a termination without Cause (in addition to the amounts and benefits described in Item “B” above for the termination without Cause): $63,113, representing additional restricted stock acceleration (as all options held by Mr. Crain on December 31, 2008 have exercise prices in excess of the market price of the Company’s Common Stock on such date, no amounts would have been recognized in respect of options acceleration caused by the triggering event).

If Mr. Crain determines that any amounts due to him under the Crain Agreement and any other plan or program of the Company constitute a “parachute payment,” as such term is defined in Section 280G(b) (2) of the Code, and the amount of the parachute payment, reduced by all federal, state and local taxes applicable thereto, including the excise tax imposed pursuant to Section 4999 of the Code, is less than the amount that he would receive if he were paid three times his “base amount,” as defined in Section 280G(b) (3) of the Code, less $1.00, reduced by all federal, state and local taxes applicable thereto, then at Mr. Crain’s request the Company will reduce the aggregate of the amounts constituting the parachute payment to an amount that will equal three times his base amount less $1.00.

All of the foregoing amounts are without interest if paid when due. In order to receive the foregoing payments, Mr. Crain and the Company must sign a mutual irrevocable release of existing or future claims against the other and specified affiliated parties arising out of the performance of services to or on behalf of the Company by Mr. Crain (other than claims with respect to specified sections of the employment agreement). Pursuant to the Crain Agreement, Mr. Crain has agreed that during his employment, and for one year thereafter, he will not directly or indirectly, engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, fiduciary, consultant or otherwise), with or without compensation, any business engaged in the manufacture, distribution, promotion, design, marketing, merchandising or sale of infant bedding and accessories, infant feeding utensils and bowls, pacifiers, bibs and bottles, infant developmental toys, soft toys and plush products or any other product providing more than 10% of the revenues of the Company for the prior fiscal year. In addition, for two years after his termination of employment, Mr. Crain will not, directly or indirectly, solicit the employment or retention of (or attempt, directly or indirectly, to solicit the employment or retention of or participate in or arrange the solicitation of the employment or retention of) any person who is to his knowledge then employed or retained by the Company, or by any of its subsidiaries or affiliates. Notwithstanding the foregoing, nothing shall prohibit Mr. Crain from (i) performing services, with or without compensation, for, or engaging or being interested in, any business or entity, that does not directly relate to business activities that compete directly and materially with a material business of the Company or its subsidiaries or (ii) acquiring or holding not more than five percent of any class of publicly-traded securities of any business. A business or entity that realized less than 20% of its revenues during its most recently completed fiscal year from sales of the aggregate of the following products shall not be deemed to compete directly and materially with a material business of the Company or its subsidiaries: infant bedding and accessories; infant feeding utensils and bowls, pacifiers, bibs and bottles, infant developmental toys, soft toys and plush products and any other product providing more than 10% of the revenues of the Company for the prior fiscal year. In addition, Mr. Crain has agreed that after his employment with the Company has terminated, he will refrain from any action that could reasonably be expected to harm the reputation or goodwill of the Company, its subsidiaries or affiliates. Mr. Crain has also agreed that during and after his employment, he will retain in the strictest confidence (subject to specified exceptions) all confidential information related to the Company and various affiliated and related parties. If Mr. Crain breaches the foregoing provisions and such breach is either (x) willful and not inconsequential or (y) in a material respect and not cured promptly after notice from the Company, he shall not thereafter be entitled to any payments or benefits under the Crain Agreement.

Mr. Cappiello

Assuming that Mr. Cappiello’s employment with the Company was terminated on December 31, 2008 for any reason other than cause, except in the case of his own voluntary resignation or in connection with a Change in Control in the Company (as defined in the Change in Control Plan, in which Mr. Cappiello is a participant), Mr. Cappiello would have been entitled to the following payments and benefits pursuant to his employment agreement with the Company, described in detail in “Employment Agreements and Arrangements” above.

A. $308,877, which is comprised of $29,417 for each of the first 8 months following such termination ($235,333); $22,063 for each of months 9 and 10 following such termination ($44,126); and $14,709 for each of months 11 and 12 following such termination ($29,418), paid in accordance with the provisions of the Severance Policy; and

B. $28,675, representing the cost to the Company (x) for Mr. Cappiello to remain on the Company’s health and dental insurance plan ($15,475) during the 12 months following the termination, and (y) for his car allowance ($13,200) for 12 months following the termination;

for a total of $337,552

In addition, if Mr. Cappiello’s employment was terminated as of December 31, 2008 in connection with the consummation of certain corporate transactions (but not in connection with a Change in Control), the severance payments and benefits applicable to Mr. Cappiello for the first eight months following his termination would have been extended for months 9 through 12 (an additional $44,124 in cash).

In order for Mr. Cappiello to receive the payments and benefits set forth above, he must execute the Company’s General Release, described under “Severance Policy” above.

The acceleration of equity awards in the event of Mr. Cappiello’s retirement, disability or death are set forth in the table captioned “Termination in the Event of Retirement, Disability or Death” above. No acceleration of equity awards is triggered by a termination without cause. Payments and benefits applicable to Mr. Cappiello in the event of a termination covered by the Change in Control Plan are set forth in the table captioned “Termination as a Result of a Change in Control Under the Change in Control Plan” above ($381,676).

Mr. Cappiello left the employment of the Company as of January 30, 2009. In connection therewith, he will receive the benefits pertaining to a termination without Cause in connection with the consummation of certain corporate transactions as described above.

Mr. Levin

Assuming that an appropriate triggering event took place on December 31, 2008, Mr. Levin would have been entitled to the following payments and benefits pursuant to his employment agreement with the Company (Mr. Levin does not participate in the Company’s Change-in-Control Plan or Severance Policy), described in detail in the section captioned “Employment Contracts and Arrangements” above.

Under the terms of Mr. Levin’s employment agreement, either party may elect, upon at least 180 days prior written notice, to terminate the agreement prior to the expiration of the term. The Company is entitled to terminate Mr. Levin at any time during this 180 day period, provided that Mr. Levin continues to receive his base salary and continues his participation in the IC program and all other benefits and perquisites for the remainder of such period. Except for the 180 day notice period, the Company has no severance obligation to Mr. Levin, irrespective of the reason for the termination, nor shall he have any mitigation duties or obligations. If his employment is terminated due to death or disability, any IC Award will be prorated based on the number of days that he was employed during the year based on actual performance through the remainder of the relevant year. As a result, in the event that that employment of Mr. Levin terminated on December 31, 2008 (i.e., the requisite notice was given 180 days beforehand), he would be entitled to; (i) no additional base salary, (ii) no amounts in respect of incentive compensation (he received no incentive compensation for 2008), and (iii) no further continuation of benefits. The acceleration of equity awards in the event of Mr. Levin’s retirement, disability or death are set forth in the table captioned “Termination in the Event of Retirement, Disability or Death” above. No acceleration of equity awards is triggered by a termination without cause.

In the event that the notice of termination was given to Mr. Levin on December 31, 2008, he would be entitled to the following benefits:

(i) $237,500, representing 100% of his annual base salary for a period of 180 days following notice of termination;

(ii) no incentive compensation amounts with respect to 2008 (based on actual performance for the year, no incentive compensation results were earned by Mr. Levin for 2008), and no incentive compensation amounts with respect to 2009 (a participant in the IC Program must be employed on the payment date of awards thereunder to be entitled to any payment, and, based on an assumed December 31, 2008 notice of termination, Mr. Levin would not be so employed with respect to payments pertaining to 2009);

(iii) $1,688, representing the cost to the Company for Mr. Levin to remain on the Company’s health and dental insurance plan 180 days following notice of termination; and

(iv) $17,930, representing the cost to maintain the other perquisites to which Mr. Levin is entitled for 180 days following notice of termination. See footnote 7 of the “Summary Compensation Table” above for a description of perquisites received by Mr. Crain during 2008;

for a total of $257,118

The acceleration of equity awards in the event of Mr. Levin’s retirement, disability or death are set forth in the table captioned “Termination in the Event of Retirement, Disability or Death” above. No acceleration of equity awards is triggered by a termination without cause.

2008 Director Compensation (1)

Change in

Pension Value

and

Fees

Non-Equity

Nonqualified

Earned or

Stock

Option

Incentive Plan

Deferred

All Other

Paid in

Awards

Awards(3)(4)(5)

Compensation

Total

Name

Cash ($)(2)

($)

Earnings ($)

($)

Raphael Benaroya

77,750

n/a

41,411

n/a

119,161

Mario Ciampi

58,500

n/a

24,101

n/a

82,601

Fred Horowitz

75,000

n/a

41,411

n/a

116,411

Lauren Krueger

65,750

(6)

n/a

24,101

n/a

89,851

Daniel Posner

10,000

(6)

n/a

(216)

n/a

9,784

Salvatore Salibello

65,750

n/a

41,411

n/a

107,161

John Schaefer

45,250

n/a

4,361

n/a

49,611

Michael Zimmerman

56,000

n/a

41,411

n/a

97,411


*		Represents the amount of compensation cost disclosed in 2007 in the 2007 Director Compensation Table, which such amount was deducted in the table above as a result of the forfeiture of stock options with respect to Mr. Posner’s resignation from the Board during 2008.

(1)		Mr. Schaefer became a director on February 14, 2008, filling the position vacated by Mr. Posner as a Laminar designee. Mr. Crain is not included in the table, as he received no additional compensation for his service as a director. Ms. Krueger disclaims beneficial ownership of the option awards pertaining to her service as director.

(2)		Reflects board retainer fees and board and committee attendance fees.


(3)		Reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ending December 31, 2008 in accordance with FAS 123(R). These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be realized by the directors. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. As Mr. Posner retired from the Board during 2008, all outstanding unexercised vested options held by him were cancelled 30 days following such event (3,000), and all unvested stock options held by him (12,000) were cancelled upon such retirement. Mr. Posner was not granted options in 2008. Amounts for 2008 include amounts recognized from issuances of options in prior years. Assumptions used in determining the 123(R) values for options issuances in 2008 and 2007 are described in footnote 17 to the Notes to Consolidated Financial Statements in the 2008 10-K or the 2007 10-K, respectively. Assumptions used in determining the FAS 123(R) values for issuances in 2006 can be found in the 2006 10-K, in footnote 18 to the Notes to Consolidated Financial Statements.

(4)		The full grant date fair value of each option award to non-employee directors in 2008, as calculated under FAS 123(R) for financial statement reporting purposes, is shown in the table below captioned “Director Option Values for 2008”. The accounting charge reported in the table above excludes a substantial portion of the fair value of such options to reflect that the vesting of such options occurs in future years; such charges also include amounts with respect to options awarded in prior years to reflect the fact that vesting occurs in 2008. The table below also sets forth the amount included in the “Option Awards” column in the table above with respect to prior-year grants and this year’s grant. Assumptions used in determining the 123(R) values for options issuances in 2008 and 2007 are described in footnote 17 to the Notes to Consolidated Financial Statements in the 2008 10-K or the 2007 10-K, respectively. Assumptions used in determining the FAS 123(R) values for issuances in 2006 can be found in the 2006 10-K, in footnote 18 to the Notes to Consolidated Financial Statements.

Director Option Values for 2008


	Grant Date Fair Value of		Amount Reported in 2008 Attributable to:
Director	2008 Awards		Prior-Year Awards			2008 Awards
Raphael Benaroya	$	7,080	$	37,050		$	4,361
Mario Ciampi	$	7,080	$	19,740		$	4,361
Fred Horowitz	$	7,080	$	37,050		$	4,361
Lauren Krueger	$	7,080	$	19,740		$	4,361
Daniel Posner*		n/a	$	(216	)*		n/a
Salvatore Salibello	$	7,080	$	37,050		$	4,361
John Schaefer	$	7,080	$	0		$	4,361
Michael Zimmerman	$	7,080	$	37,050		$	4,361


*		Represents the amount of compensation cost disclosed in 2007 in the 2007 Director Compensation Table, which such amount was deducted in the table above as a result of the forfeiture of stock options with respect to Mr. Posner, who retired from the Board during 2008.

Each non-employee director (other than Mr. Posner, who had previously resigned from the Board) received an option for 15,000 shares on July 10, 2008 at an exercise price of $7.28 per share, which vests ratably over a five-year period commencing July 10, 2009. Each of Messrs. Benaroya, Ciampi, Horowitz, Posner, Salibello and Zimmerman received an option for 15,000 shares on December 27, 2007 at an exercise price of $16.77 per share, which vests ratably over a five-year period commencing December 27, 2008. Each of Messrs. Benaroya, Horowitz, Salibello and Zimmerman received an option for 15,000 shares on November 1, 2006 at an exercise price of $15.05 per share, which vests ratably over a five-year period commencing November 1, 2007. Mr. Benaroya received an option for 15,000 shares on May 4, 2005 at an exercise price of $13.06 per share, which vested in full as of December 28, 2005.


(5)		Outstanding option awards at December 31, 2008 for each person who was a director in 2008 (other than Mr. Crain, who had 220,000 options outstanding and 85,000 shares of restricted stock outstanding on such date, as shown in the “2008 Outstanding Equity Awards at Fiscal Year End” table above) are as follows:


	Outstanding Option		Vested Portion of Outstanding
Name	Awards at 12/31/08		Option Awards at 12/31/08
Raphael Benaroya		60,000		24,000
Mario Ciampi		30,000		3,000
Fred Horowitz		45,000		9,000
Lauren Krueger		30,000		3,000
Daniel Posner		n/a		n/a
Salvatore Salibello		45,000		9,000
John Schaefer		15,000		-0-
Michael Zimmerman		45,000		9,000


(6)		Each individual waived director’s fees until October 1, 2007. Such fees were paid in each case directly to D. E. Shaw & Co., L.P.

Directors who are employees of the Company receive no additional compensation for services as a director (for this reason, Mr. Crain, who served as a director during 2008, is not included in the foregoing tables); however, all directors are reimbursed for out-of-pocket expenses incurred in connection therewith. In addition, the following compensation arrangements apply to each director who is not an officer or other employee of the Company (“Non-Employee Directors”): (i) an annual retainer for service as a director of $15,000; (ii) a fee for attendance at each Board meeting of $1,250, except that the Chairman of the Board, if any, receives $2,000 for each Board meeting attended; (iii) a fee for attendance at each Audit Committee meeting of $1,500, except that the Chairman of the Audit Committee receives $2,000 for each Audit Committee meeting attended; and (iv) a fee for attendance at each Board committee meeting, other than the Audit Committee, of $1,250, except that the Chairman of such committee receives $2,000 for each committee meeting attended. In addition, Non-Employee Directors are entitled to reimbursement of $2,000 per day for participation in any directors’ retreat attended during the year (there were none during 2008). Further, it is the current intention of the Board to grant to each Non-Employee Director, on the date of each Annual Meeting of Shareholders immediately following which such Non-Employee Director is serving on the Board, awards under the Company’s Equity Incentive Plan with an aggregate value on the date of grant consistent with the Board’s then-current policy, to the extent such awards are available for issuance under such plan.

Prior to the adoption of the Equity Incentive Plan as of July 10, 2008, Non-Employee Directors were eligible to receive non-qualified stock options under the Company’s 2004 Plan. See “Equity Incentive Plan” above for a description of the material terms of the EI Plan.

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

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth, as of April 25, 2009, the shares of Common Stock beneficially owned by each director and nominee for director of the Company, each named executive officer of the Company and by all directors and executive officers of the Company as a group. None of the shares of Common Stock beneficially owned by directors or nominees as set forth in the table below constitute directors’ qualifying shares nor have any of the shares set forth in the table below been pledged as security.


				Shares of
				Common Stock			Total Shares of
Name of Director, Officer	Shares of Common			Acquirable			Common Stock		Percentage of
or	Stock Beneficially			Within 60			Beneficially		Outstanding
Identity of Group	Owned(1)(14)			Days(2)(14)			Owned(14)		Common Stock
Raphael Benaroya		18,405	(3)		24,000	(4)		42,405			*
Anthony Cappiello(5)		11,404			15,340			26,744			*
Mario Ciampi		-0-			3,000	(6)		3,000			*
Bruce G. Crain(7)		93,432			60,000			153,432			*
Marc S. Goldfarb(8)		12,032			24,940			36,972			*
Fritz Hirsch(9)		4,600			81,320			85,920			*
Frederick Horowitz		-0-			9,000	(4)		9,000			*
Lauren Krueger		-0-			3,000	(10)		3,000			*
Michael Levin(11)		34,800			230,033			264,833		1.2	%
Salvatore Salibello		5,000			9,000	(4)		14,000			*
John Schaefer		-0-			-0-	(12)		-0-			*
Michael Zimmerman(13)		4,399,733			9,000	(4)		4,408,733		20.5	%
All directors and officers as a group (14) persons		4,584,006			455,493			5,039,499		23.0	%


*		Less than 1%.

(1)		Each individual has the sole power to vote and dispose of the shares of Common Stock set forth in the table, except as provided in footnote 13 below.

(2)		Consists of shares subject to stock options granted by the Company that are exercisable within 60 days of April 25, 2009.

(3)		Excludes 315 shares owned by Mr. Benaroya’s wife, of which Mr. Benaroya disclaims beneficial ownership.

(4)		Excludes 36,000 options not exercisable within 60 days of April 25, 2009.

(5)		Excludes 3,120 shares of restricted stock forfeited by Mr. Cappiello immediately following the termination of his employment with the Company as of January 30, 2009; all exercisable options set forth in the table will expire to the extent they are not exercised by May 1, 2009 (all other options held by Mr. Cappiello have been forfeited).

(6)		Excludes 27,000 options not exercisable within 60 days of April 25, 2009.


(7)		Includes 63,750 shares of restricted stock whose restrictions have not lapsed as of April 25, 2009, but with respect to which Mr. Crain has sole voting power; excludes 160,000 options not exercisable within 60 days of April 25, 2009; and excludes (i) 114,943 stock appreciation rights, which are all vested but may be settled, upon exercise, in shares of Common Stock, cash or a combination of both in the sole discretion of the Compensation Committee, and (ii) 150,000 stock appreciation rights that are not exercisable within 60 days of April 25, 2009, which, when vested and exercised, may be settled, upon exercise, in shares of Common Stock, cash or a combination of both in the sole discretion of the Compensation Committee, in either case not at the election of Mr. Crain.

(8)		Includes 2,880 shares of restricted stock whose restrictions have not lapsed as of April 25, 2009, but with respect to which Mr. Goldfarb has sole voting power; excludes 19,760 options not exercisable within 60 days of April 25, 2009; and excludes 50,000 stock appreciation rights that are not exercisable within 60 days of April 25, 2009, and which, when vested and exercised, may be settled, upon exercise, in shares of Common Stock, cash or a combination of both in the sole discretion of the Compensation Committee, and not at the election of Mr. Goldfarb.

(9)		Includes 3,680 shares of restricted stock whose restrictions have not lapsed as of April 25, 2009, but with respect to which Mr. Hirsch has sole voting power; excludes 25,280 options not exercisable within 60 days of April 25, 2009, and excludes 25,000 stock appreciation rights that are not exercisable within 60 days of April 25, 2009, which, when vested and exercised, may be settled, upon exercise, in shares of Common Stock, cash or a combination of both in the sole discretion of the Compensation Committee, and not at the election of Mr. Hirsch.

(10)		Excludes 27,000 options not exercisable within 60 days of April 25, 2009; pursuant to the director’s Form 4 filings, the director has disclaimed beneficial ownership of all options issued in her name, including those set forth in the table.

(11)		Includes 23,200 shares of restricted stock whose restrictions have not lapsed as of April 25, 2009, but with respect to which Mr. Levin has sole voting power; excludes 60,067 options not exercisable within 60 days of April 25, 2009, and excludes 100,000 stock appreciation rights that are not exercisable within 60 days of April 25, 2009, which, when vested and exercised, may be settled, upon exercise, in shares of Common Stock, cash or a combination of both in the sole discretion of the Compensation Committee, and not at the election of Mr. Levin.

(12)		Excludes 15,000 options not exercisable within 60 days of April 25, 2009.

(13)		See footnote (1) in the “Security Ownership of Certain Beneficial Owners” table set forth below.

(14)		Information provided from public filings of the relevant individuals.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth, as of April 25, 2009, with respect to each person (including any group as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) who is known to the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock: (i) the name and address of such owner, (ii) the number of shares beneficially owned, and (iii) the percentage of the total number of shares of Common Stock outstanding so owned.


	Number of Shares			Percent of
Name and Address of Beneficial Owner	Beneficially Owned			Class*
Prentice Capital Management, LP		4,399,733	(1)		20.5	%
623 Fifth Avenue New York, NY 10022
Michael Zimmerman		4,408,733	(1)		20.5	%
c/o Prentice Capital Management, LP 623 Fifth Avenue New York, NY 10022
D. E. Shaw Laminar Portfolios, L.L.C.		4,402,733	(2)		20.5	%
120 West 45th Street, 39th Floor Tower 45 New York, NY 10036
Franklin Advisory Services, LLC		2,133,274	(3)		10.0	%
One Parker Plaza, 9th Floor Fort Lee, NJ 07024
Dimensional Fund Advisors LP		1,090,612	(4)		5.1	%
1299 Ocean Avenue Santa Monica, CA 90401
Barclays Global Investors, NA.		1,247,784	(5)		5.8	%
Barclays Global Fund Advisors 400 Howard Street San Francisco, CA 94105


*		Note that because the beneficial ownership of certain of the shares of Common Stock listed herein is shared by certain of such beneficial owners, as determined pursuant to the rules of the SEC, the percentages set forth in this table aggregate to a higher number than would be reflected without the listing of such shared ownership.

(1)		As reported in a Schedule 13D filed on August 14, 2006 (the “Prentice 13D”) by Prentice Capital Management, L.P. (“PCM”) and Michael Zimmerman as reporting persons and information provided to us by PCM and Mr. Zimmerman subsequent to such filing. PCM serves as investment manager to private investment funds and managed accounts (including Prentice Capital Partners, LP, Prentice Capital Partners QP, LP, Prentice Capital Offshore, Ltd., GPC XLIII, LLC, S.A.C. Capital Associates, LLC, PEC I, LLC, Prentice Special Opportunities Master, L.P., and Prentice Special Opportunities LP — referred to as the “Managed Entities”), and as such, has voting and dispositive authority over the shares beneficially owned by the Managed Entities, and may therefore be deemed to be the beneficial owner of such shares. Mr. Zimmerman is the managing member of (i) Prentice Management GP, LLC, the general partner of PCM, (ii) Prentice Capital GP, LLC, the general partner of certain investment funds and (iii) Prentice Capital GP II, LLC, the general partner of Prentice Capital GP II, LP, which is the general partner of certain other investment funds. As such, he may be deemed to control PCM and the Managed Entities, and may therefore also be deemed to be the beneficial owner of the shares beneficially owned by such Managed Entities. In addition, PCM and Mr. Zimmerman may be deemed to constitute a “group” within the meaning of Section 13(d)(3) of the Exchange Act, and have reported shared voting and dispositive power with respect to the shares beneficially owned by the Managed Entities, however, each of PCM and Mr. Zimmerman disclaims beneficial ownership of all such shares. In addition, Mr. Zimmerman was granted options to purchase 15,000 shares of Common Stock on each of November 1, 2006, December 27, 2007 and July 10, 2008 for his service as a director of the Company. Each such grant vests ratably over a 5-year period commencing on the first anniversary of the date of grant. As a result, the number of shares reported in the table as beneficially owned by Mr. Zimmerman includes options to purchase 9,000 shares of Common Stock which are currently vested.

100


(2)		As reported in a Schedule 13D (the “Laminar 13D”) filed on August 18, 2006 by D. E. Shaw Laminar Portfolios, L.L.C., a Delaware limited liability company (“Laminar”), D. E. Shaw & Co., L.P., a Delaware limited partnership (“DESCO LP”), D. E. Shaw & Co., L.L.C., a Delaware limited liability company (“DESCO LLC”), and David E. Shaw, and information provided to us by Laminar subsequent to such filing. Laminar has the power to vote or to direct the vote of (and the power to dispose or direct the disposition of) the shares listed in the table (“Subject Shares”). DESCO LP, as Laminar’s investment adviser, and DESCO LLC, as Laminar’s managing member, may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares. As managing member of DESCO LLC, D.E. Shaw & Co. II, Inc., a Delaware corporation (“DESCO II, Inc.”), may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares. As general partner of DESCO LP, D.E. Shaw & Co., Inc., a Delaware corporation (“DESCO, Inc.”), may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares. None of DESCO LP, DESCO LLC, DESCO, Inc., and DESCO II, Inc. owns any of the Subject Shares directly and each such entity disclaims beneficial ownership of the Subject Shares. David E. Shaw does not own any Subject Shares directly. By virtue of David E. Shaw’s position as president and sole shareholder of DESCO, Inc., which is the general partner of DESCO LP, and by virtue of David E. Shaw’s position as president and sole shareholder of DESCO II, Inc., which is the managing member of DESCO LLC, David E. Shaw may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares and, therefore, David E. Shaw may be deemed to be the indirect beneficial owner of the Subject Shares. David E. Shaw disclaims beneficial ownership of the Subject Shares. In addition, Lauren Krueger, a Vice President of an affiliate of Laminar, was granted options to purchase 15,000 shares of Common Stock on each of December 27, 2007 and July 10, 2008 for her service as a director of the Company. Each such grant vests ratably over a 5-year period commencing on the first anniversary of the date of grant. As a result, the number of shares reported in the table as beneficially owned by Laminar includes options to purchase 3,000 shares of Common Stock which are currently vested.

(3)		As reported on Amendment No. 7 to Schedule 13G filed by Franklin Resources, Inc. (“FRI”), Charles B. Johnson, Rupert H. Johnson, Jr. and Franklin Advisory Services, LLC (“FAS”) with the SEC on February 9, 2009 (the “Franklin 13G/A”). FAS has the sole power to vote or direct the vote with respect to 2,122,274 of the shares covered by the Franklin 13G/A, and the sole power to dispose or direct the disposition of all shares covered by the Franklin 13G/A (2,133,274 shares). The securities reported in the Franklin 13G/A are beneficially owned by one or more open or closed-end investment companies or other managed accounts that are investment management clients of investment managers that are direct and indirect subsidiaries (the “Investment Management Subsidiaries”) of FRI. The voting and investment powers held by Franklin Mutual Advisors, LLC (“FMA”), an indirect wholly-owned Investment Management Subsidiary, are exercised independently from FRI and all other Investment Management Subsidiaries, and are consequently reported separately therefrom. The Franklin 13G/A states that each of the Investment Management Subsidiaries, FRI, Charles B. Johnson and Rupert H. Johnson, Jr. (principal shareholders of FRI) may be deemed to be the beneficial owner of the securities covered by the Franklin 13G/A, but each of the foregoing disclaims any pecuniary interest in the securities covered by the Franklin 13G/A. In addition, Charles B. Johnson, Rupert H. Johnson, Jr., FRI, and its affiliates disclaim beneficial ownership of the securities covered by the 13G/A. Furthermore, the Franklin 13G/A states that FRI, Charles B. Johnson, Rupert H. Johnson, Jr., and each of the Investment Management Subsidiaries believe that they are not a “group” within the meaning of Rule 13d-5 under the Securities Exchange Act of 1934 and that they are not otherwise required to attribute to each other the beneficial ownership of the securities held by any of them or by any persons or entities for whom or for which FRI subsidiaries provide investment management services. The clients of the Investment Management Subsidiaries have the right to receive or power to direct the receipt of dividends from, as well as the proceeds from the sale of, the securities reported in the Franklin 13G/A.

101


(4)		As reported in Amendment No. 2 to Schedule 13G filed on February 9, 2009 by Dimensional Fund Advisors LP (the “Dimensional 13G/A”). Dimensional Fund Advisors LP (“Dimensional”), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts and accounts are the “Funds.” In its role as investment advisor or manager, Dimensional possesses investment and/or voting power over the securities described in the Dimensional 13G/A that are owned by the Funds, and may be deemed to be the beneficial owner of such securities. Dimensional has reported the sole power to vote or direct the vote with respect to 1,087,412 of the shares covered by the Dimensional 13G/A, and the sole power to dispose or direct the disposition of all shares covered by the Dimensional 13G/A (1,090,612 shares), however, all securities reported in the Dimensional 13G/A are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. The Funds have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities held in their respective accounts. To the knowledge of Dimensional, as reported in the Dimensional 13G/A, the interest of any one such Fund does not exceed 5% of the class of such securities.

(5)		As reported in a Schedule 13G filed on February 5, 2009 (the “Barclays 13G”) by the Barclays entities described below. Barclays Global Investors, NA (a bank) has the sole power to vote or direct the vote with respect to 387,051 of the shares covered by the report, and the sole power to dispose or direct the disposition with respect to 487,142 of the shares covered by the report; Barclays Global Fund Advisors (an investment advisor) has the sole power to vote or direct the vote with respect to 560,869 of the shares covered by the report, and the sole power to dispose or direct the disposition with respect to 749,581 of the shares covered by the report; and Barclays Global Investors, Ltd (a non-US institution) has the sole power to dispose or direct the disposition with respect to 11,061 of the shares covered by the report. In addition, Barclays Global Investors Japan Limited (a non-US institution), Barclays Global Investors Canada Limited (a non-US institution), Barclays Global Investors Australia Limited (a non-US institution), Barclays Global Investors (Deutschland) AG (a non-US institution), although they report no beneficial ownership, are reporting persons under the Barclays 13G. The Barclays 13G states that the shares reported are held in trust accounts for the economic benefit of the beneficiaries of those accounts.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

TRANSACTIONS WITH RELATED PERSONS

Transactions with Related Persons

Lawrence Bivona, an executive officer of the Company, along with members of his family, established L&J Industries, in Asia. This entity provides quality control services to LaJobi for goods being shipped from Asian ports. The Company has used this service since April 2008. For the year ended December 31, 2008, the Company incurred costs totaling approximately $674,000 related to the services provided, which costs were based on the actual, direct costs incurred by L&J Industries for such individuals plus 5%.

Mr. Bivona has also utilized since April 2008 a portion of one of the Company’s warehouses to store and ship merchandise unrelated to the Company’s business. Mr. Bivona reimburses the Company for expenses incurred in connection with this arrangement. For the year ended December 31, 2008, the Company received reimbursements totaling approximately $111,000, for the space and services provided.

CoCaLo contracts for warehousing and distribution services from a company owned by the estate of the father of Renee Pepys Lowe, an executive officer of the Company, which company is also managed by certain other members of her family and is the employer of Ms. Pepys Lowe’s spouse. From April through December 2008, CoCaLo paid approximately $1.5 million to such company for these services. In addition, CoCaLo rents certain office space from the same company at an annual rental cost of approximately $137,000.

102

As of August 10, 2006, the Company entered into the IRA with the Prentice Buyers and Laminar, pursuant to which the Company has, subject to specified limitations, agreed to nominate for election with respect to all stockholders meetings or consents concerning the election of members of the Board, two Prentice Directors and two Laminar Directors. The current Prentice Directors are Messrs. Ciampi and Zimmerman. Mr. Ciampi is a partner of Prentice and Mr. Zimmerman is the Managing Member of the general partner of Prentice and the CEO of Prentice. The current Laminar Directors are Mr. Schaefer and Ms. Krueger. Mr. Schaefer was a director of an affiliate of Laminar during 2008 until February 2009, and Ms. Krueger is an executive officer of an affiliate of Laminar. The Company has also granted certain registration rights to the Prentice and Laminar. See the Company’s Current Report on Form 8-K dated August 14, 2006, with respect to further details regarding the IRA.

In addition, D. E. Shaw & Co., L.P. (“DES”), an affiliate and investment advisor of Laminar (which owns approximately 20.5% of the outstanding shares of the Company’s Common Stock), owns a majority equity interest in FAO Schwarz (“FAO”), a customer of the Company’s gift segment prior to its sale as of December 23, 2008, with purchases of approximately $929,000 during the year ended December 31, 2008. Ms. Krueger, a director of the Company and a Laminar designee to the Company’s Board, is a vice president of DES and a director of FAO. Mr. Benaroya, the Chairman of the Board of the Company, is also a consultant for DES and was, until February 2009, the Chairman of the Board of FAO.

The purchase agreement governing the purchase of Kids Line, LLC in 2004 included the payment of contingent consideration (the “KL Earnout Consideration”) to various persons, including Mr. Levin, an executive officer of the Company, his sister and his father. To secure the obligations of Kids Line and Sassy to pay the KL Earnout Consideration, Kids Line and Sassy granted a subordinated lien on substantially all of their assets, on a joint and several basis, and the Company granted a subordinated lien on the equity interests of each of them to the payees thereof. As has been previously reported, a substantial portion of the KL Earnout Consideration was paid in 2007, and the remaining portion ($3.6 million) was paid in January of 2008. As a result of the payment in full of the KL Earnout Consideration, all subordinated security interests and liens were released as of February 29, 2008.

On April 22, 2009, Mr. Benaroya was retained by the Company to perform an expanded role as Chairman of the Board. In connection therewith, Mr. Benaroya will assist the Company in the development, review and implementation of strategic initiatives. It is not intended that Mr. Benaroya be involved in day-to-day operations. In connection with this position, Mr. Benaroya will be paid $35,000 a month, which amount will be in lieu of regular director and committee fees. This arrangement may be terminated by either party on one week’s prior written notice (the fee for the month of termination will be pro rated to the effective date of the notice). Mr. Benaroya will also be paid a per diem consulting fee at the same rate as above for similar work performed from April 1, 2009 through the execution of this agreement.

Review and Approval of Transactions with Related Persons

The Audit Committee of the Board is responsible for assisting the Board in fulfilling its oversight responsibilities by, among other things, monitoring any transactions between related persons (including, but not limited to, officers, directors, and principal stockholders) and the Company or its subsidiaries (other than normal and usual compensation arrangements). This obligation is set forth in writing in our Audit Committee Charter. In order to fulfill this obligation, the Audit Committee reviews with the Board any such proposed transactions involving such related persons and/or their immediate family members for the Board’s consideration and ultimate approval. Related party transactions which are ongoing are subject to ongoing review by the Audit Committee to determine whether it is in our best interest and our shareholders best interest to continue, modify or terminate the related party transaction. No director may participate in the approval of a related party transaction with respect to which he or she is a related party.

To identify related person transactions, each year, we require our directors and officers to complete Questionnaires identifying any transactions with us in which such persons or their family members have an interest. The Audit Committee or the Board reviews all related person transactions due to the potential for a conflict of interest. A conflict of interest occurs when a person’s private interest interferes in any way (or even appears to interfere) with the interests of the Company as a whole. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively.

103

In considering the approval of any proposed transaction with a related person, the Board considers a variety of factors, including, but not limited to:

	•		whether the terms of such transaction are consistent with those that could be obtained from third-parties;

	•		whether the Company would receive a benefit from proceeding with a related person that would otherwise be unavailable (in terms of knowledge of the Company, for example);

•

the nature of the related person’s interest in the transaction;

•

the material terms of the transaction, including, without limitation, the amount and the type of transaction;

•

whether the transaction would impair the judgment of a director or executive officer to act in the best interests of the Company;

•

whether the transaction would compromise the independence of a director in accordance with independence standards applicable to the Company and such director;

•

the materiality of the transaction to the related person and any entity with which such related person is affiliated;

•

the materiality of the transaction to the Company; and

•

any other factors deemed appropriate by the Board.

The Board has reviewed and approved all of the transactions discussed in this section.

We expect our directors, officers and employees to act and make decisions that are in our best interests and encourage them to avoid situations which present a conflict between our interests and their own personal interests. In addition, we are prohibited from extending personal loans to, or guaranteeing the personal obligations of, any director or officer. A copy of our current Code of Business Conduct and Ethics is available on our website.

Independence Determinations

The Board of Directors of the Company (the “Board”) undertakes a review of director independence each year, and conducted such a review in March 2009 (the “March Review”). During the March Review, the Board considered transactions and relationships between (i) each then-director, entities with which such director is affiliated and/or any member of such director’s immediate family and (ii) the Company and its subsidiaries and affiliates. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that such director is “independent” in accordance with applicable rules and regulations of the New York Stock Exchange (the “NYSE”), applicable law, and the rules and regulations of the SEC. The Board based its determinations primarily on a review of the responses of such persons to questions regarding employment and compensation history, affiliations and family and other relationships between the Company, the directors, and entities with which such directors are affiliated, discussions and analyses with respect to the foregoing, and the recommendations of the Nominating/Governance Committee.

As a result of the March Review and similar reviews conducted prior thereto and thereafter (in the case of Mr. Benaroya), the Board affirmatively determined that all persons who served as directors of the Company during any part of the 2008 calendar year, and current directors, were and are “independent” for purposes of Section 303A of the Listed Company Manual of the NYSE, with the exception of Mr. Crain and as of April 22, 2009, Mr. Benaroya. Each current member of the Company’s Compensation Committee, Nominating/Governance Committee and Audit Committee is independent is accordance with such standards as well (Mr. Benaroya resigned from the Nominating/Governance Committee as of the date of his appointment as Executive Chairman of the Board). Mr. Crain is not independent as a result of his employment as President and CEO of the Company. Mr. Benaroya is not independent as of April 22, 2009, as a result of his expanded role as Chairman of the Board.

104

In determining that each of the other directors and nominees is or was (for the period that such individual was a director) independent, in addition to confirming that none of the automatic disqualifications required by the NYSE are (or were) applicable to such directors, the Board also affirmatively determined that each such person has (or had) no direct or indirect material relationship with the Company or its subsidiaries. In making these determinations, the NYSE has noted that as its concern is independence from management, it does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding. Note also that as the Purchases were consummated in August of 2006, relationships with the Foundation and/or other Berrie entities were relevant in 2008 only for the NYSE automatic disqualifications (which in certain instances have a 3-year “look back” period). As stated above, none of the automatic disqualifications were applicable to any individuals who were directors during 2008 or any current nominees. Certain directors and nominees have relationships with other directors and/or stockholders of the Company and the Company from time to time has relationships with entities with which certain of such persons are affiliated. All such relationships were considered by the Board in making its independence determinations, whether or not expressly prohibited by the NYSE.

The Board’s specific determinations with respect to “material relationships” for each individual who was a director at any time during 2008 (for such period that such individual was a director, as applicable) and all nominees, are set forth below.

Mr. Benaroya (current director) : The following analysis pertains to the period prior to April 22, 2009 (the date Mr. Benaroya was deemed not independent as a result of his expanded role as Chairman of the Board).

Relevant Facts: Since April 1, 2008, Mr. Benaroya has been acting as a consultant for D. E. Shaw & Co., L.P. (“DES”), which is an affiliate and investment advisor of Laminar. DES owns a majority equity interest in FAO Schwarz (“FAO”), a customer of the Company’s gift business prior to its sale as of December 23, 2008 (the “Gift Sale”), and Mr. Benaroya served as the Chairman of the Board of FAO until February 2009. In addition, Mr. Benaroya was the Chairman, President and CEO of United Retail Group, Inc. (“United Retail”) until its sale in October of 2007, continuing as President and Chief Executive Officer thereof until March 2008. United Retail is an occasional customer of the Company.

Determination: As Mr. Benaroya’s relationship with DES does not constitute a relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group), he has no direct material relationship with the Company based on his consultancy. As a consultant to an affiliate of Laminar, which owns approximately 20.5% of the Company’s outstanding stock and is a party to the IRA, however, he may be deemed to have an indirect relationship with the Company. As the NYSE does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding, the Board determined that Mr. Benaroya’s position with DES did not affect its determination that he is independent. In addition, as Mr. Benaroya is merely a consultant of DES, the Board determined that DES’s relationship with FAO should not be attributed to Mr. Benaroya as an indirect material relationship with the Company. Based on the fact that Mr. Benaroya is a director of FAO, and not a shareholder, partner or officer thereof, the Board also determined that this indirect relationship with the Company is not material. In its analysis, the Board noted that as of the consummation of the Gift Sale, any relationship with FAO became entirely immaterial.

Due to the insignificant amount of Company inventory purchased by United Retail, this relationship was deemed immaterial.

Mr. Ciampi (current director, Prentice designee) : Relevant Facts: Mr. Ciampi is a partner of Prentice. Prentice owned a majority interest in KB Toys, Inc. (“KB”), which is currently in liquidation. KB was a customer of the Company’s gift business prior the Gift Sale, and Mr. Ciampi is the Chairman of the Board of KB. In addition, Mr. Ciampi is a member of the Board of Directors of The Russ Companies, Inc. (“TRC”), the buyer of the Company’s gift business, as a designee of the Company. The Company owns 19.9% of the common stock of TRC, licenses certain intellectual property to TRC, and is the payee under a note from TRC.

105

Determination: Mr. Ciampi’s relationship with Prentice does not constitute a direct relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group). As a partner of Prentice, which owns approximately 20.5% of the Company’s outstanding stock and is a party to the IRA, he may be deemed to have an indirect relationship with the Company, but as the NYSE does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding, the Board determined that Mr. Ciampi’s position with Prentice did not affect its determination that he is independent. In addition, as a result of the small amount of business conducted with KB during 2008, the Board determined that Prentice’s ownership of KB should not be attributed to Mr. Ciampi as an indirect material relationship with the Company. Based on the fact that Mr. Ciampi is a director of KB, and not a shareholder, partner or officer thereof, the Board also determined that this indirect relationship with the Company is not material. In its analysis, the Board noted that as of the consummation of the Gift Sale, any relationship with KB became entirely immaterial. Finally, Mr. Ciampi’s relationship with TRC does not constitute a direct relationship with the Company or its consolidated subsidiaries. Based on the fact that Mr. Ciampi is a director of TRC at the request of the Company, and not a shareholder, partner or officer thereof, the Board also determined that this indirect relationship with the Company is not material.

Mr. Horowitz (current director) : As Mr. Horowitz has no direct or indirect relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group), he was deemed independent.

Ms. Krueger (current director; Laminar designee) : Relevant Facts: Ms. Krueger is a vice president of D. E. Shaw group’s credit-related opportunities unit and a vice president of DES. DES owns a majority equity interest in FAO and a majority equity interest in The Boyd’s Collection, Ltd. ("Boyds"), each a customer of the Company’s gift business prior to the Gift Sale, and Ms. Krueger is a member of the Board of Directors of Boyds and was, until February 2009, a member of the Board of Directors of FAO.

Determination: Ms. Krueger’s relationship with the D.E. Shaw entities does not constitute a direct relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group). As an officer of an affiliate of Laminar, which owns approximately 20.5% of the Company’s outstanding stock and is a party to the IRA, she may be deemed to have an indirect relationship with the Company, but as the NYSE does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding, the Board determined that Ms. Krueger’s position with the D.E. Shaw entities did not affect its determination that she is independent. In addition, the Board determined that (i) DES’s relationship with FAO should not be attributed to Ms. Krueger as an indirect material relationship with the Company, and (ii) her prior position as a director does not constitute an indirect material relationship. A similar analysis applied to Boyds. In its analyses, the Board noted that as of the consummation of the Gift Sale, any relationship with FAO and/or Boyds became entirely immaterial.

Mr. Posner (director until February 14, 2008) : Relevant Facts: Mr. Posner is a managing director of DES, and an employee of D. E. Shaw & Co., the sole managing member of Laminar, while he was a director of the Company. Mr. Posner also served on the Board of Directors of FAO and Boyds during the time he served on the Company’s Board.

Determination: Mr. Posner’s relationship with the D. E. Shaw entities did not constitute a direct relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group). As an officer of an affiliate of Laminar, which owns approximately 20.5% of the Company’s outstanding stock and is a party to the IRA, he may have been deemed to have an indirect relationship with the Company, but as the NYSE does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding, the Board determined that Mr. Posner’s position with the D. E. Shaw entities did not affect its determination that he was independent. The Board determined that (i) DES’s relationship with FAO and Boyds should not be attributed to Mr. Posner as an indirect material relationship with the Company, and (ii) his position as a director did not constitute an indirect material relationship.

Mr. Salibello (current director) : As Mr. Salibello has no direct or indirect relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group), he was deemed independent.

Mr. Schaefer (current director; Laminar designee) : Relevant Facts: Mr. Schaefer served on the board of directors of a company controlled by Laminar during 2008.

Determination: As his relationship with the affiliate of Laminar is not a relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group), he has no direct relationship with the Company. In addition, as only a director of an affiliate of Laminar, he was deemed independent.

106

Mr. Zimmerman (current director; Prentice designee) : Relevant Facts: Mr. Zimmerman is the Managing Member of the general partner of Prentice and the Chief Executive Officer of Prentice. Prentice owned a majority interest in KB, which is currently in liquidation. KB was a customer of the Company’s gift business prior the Gift Sale. According to the Prentice Schedule 13D (defined in footnote (1) to the “Security Ownership of Certain Beneficial Owners” chart herein), Mr. Zimmerman may be deemed to be the beneficial owner of the shares of Common Stock purchased by the Prentice Buyers (although he disclaims beneficial ownership of such shares).

Determination: Mr. Zimmerman’s relationship with Prentice does not constitute a direct relationship with the Company or its subsidiaries (and the Company has no parents in a consolidated group). As an executive officer of Prentice, which owns approximately 20.5% of the Company’s outstanding stock and is a party to the IRA, he may be deemed to have an indirect relationship with the Company, but as the NYSE does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding, the Board determined that Mr. Zimmerman’s position with Prentice did not affect its determination that he is independent. In addition, as a result of the small amount of business conducted with KB during 2008, the Board determined that Prentice’s ownership of KB should not be attributed to Mr. Zimmerman as an indirect material relationship with the Company.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

The aggregate fees billed by KPMG LLP (“KPMG”), the Company’s independent registered public accounting firm, for professional services rendered for the audit of the Company’s annual financial statements for the fiscal year ended December 31, 2008 (including services related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended December 31, 2008, and certifications, and services that are normally provided in connection with statutory and regulatory filings for such fiscal year were $1,509,000. The aggregate fees billed by KPMG for professional services rendered for the audit of the Company’s annual financial statements for the fiscal year ended December 31, 2007 (including services related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and an agreed-upon procedures letter required in connection with the Company’s senior lender, and the reviews of the financial statements included in the Company’s Forms 10-Q for the fiscal year ended December 31, 2007, and services that are normally provided in connection with statutory and regulatory filings for such fiscal year) were $1,373,000.

AUDIT-RELATED FEES

The aggregate fees billed by KPMG for assurance and related services that are reasonably related to the performance of the audit of the Company’s financial statements that are not already reported above under the caption “Audit Fees” totaled $46,000 for the fiscal year ended December 31, 2008, which fees were billed for an employee benefit plan audit, and $100,300 for the fiscal year ended December 31, 2007, which fees were billed for employee benefit plan audits and agreed-upon procedures in connection with the Kids Line earnout consideration.

TAX FEES

The aggregate fees billed by KPMG for professional services for tax advisory services, which included a transfer pricing study, totaled $59,900 for the fiscal year ended December 31, 2008, and totaled $260,100 for tax compliance and advisory services, including transfer pricing studies for the fiscal year ended December 31, 2007.

ALL OTHER FEES

Other than as set forth above under the captions “Audit Fees,” “Audit-Related Fees,” and “Tax Fees,” there were no other services rendered or fees billed by KPMG for the fiscal year ended December 31, 2008 or for the fiscal year ended December 31, 2007.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

Under its charter, the Audit Committee has the sole authority to retain and replace the Company’s independent registered public accounting firm, and to approve, in advance, all audit engagement fees and terms, as well as all non-audit engagements permitted by law with the independent registered public accounting firm. Each of the individual engagements for the services described above under the captions “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” for the fiscal years ended December 31, 2008 and 2007 were approved by the Audit Committee in advance of the engagement of KPMG for any such services in accordance with the provisions of Regulation S-X Rule 2-01(c)(7)(i)(A).

107

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, 2008 and 2007
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the years December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements

2. Financial Statement Schedules:

Schedule II—Valuation and Qualifying Accounts—Years Ended December 31, 2008, 2007 and 2006

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)


	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.(1)

	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.(2)

	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.(3)

	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)

	2.5			Purchase Agreement, dated as of December 23, 2008, among Russ Berrie and Company, Inc. and The Russ Companies, Inc. 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.(4)

	3.1			(a) Restated Certificate of Incorporation of the Registrant and amendment thereto.(5)

	(b)			Certificate of Amendment to Restated Certificate of Incorporation of the Company filed April 30, 1987.(6)

	3.2			Second and Amended and Restated By-Laws of the Registrant.(7)

	4.1			Form of Common Stock Certificate.(8)

108


	4.2			Amended and Restated Credit Agreement, dated as of April 2, 2008, among Russ Berrie and Company, Inc., Kids Line, LLC, Sassy, Inc., I & J Holdco, Inc., LaJobi, Inc., CoCaLo, Inc. (via a Joinder Agreement), the financial institutions party thereto or their assignees (the “Lenders”), LaSalle Bank National Association, as Administrative Agent for the Lenders and as Fronting Bank, Sovereign Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation Agent and Banc of America Securities LLC as Lead Arranger.(9)

	4.3			Amended and Restated Guaranty and Collateral Agreement, dated as of April 2, 2008, entered into among Kids Line, LLC, Sassy, Inc., I&J Holdco, Inc., LaJobi Inc. and CoCaLo, Inc. (via a Joinder Agreement) in favor of LaSalle Bank National Association, as Administrative Agent.(9)

	4.4			First Amendment to Credit Agreement, dated as of August 13, 2008, among Kids Line, LLC, Sassy, Inc., LaJobi, Inc., I&J Holdco, Inc., CoCaLo, Inc., Russ Berrie and Company, Inc., the lenders party thereto and LaSalle Bank National Association.(10)

	4.5			Second Amendment to Amended and Restated Credit Agreement, dated as of March 20, 2009, among Russ Berrie and Company, Inc., Kids Line, LLC, Sassy, Inc., I&J Holdco, Inc., LaJobi, Inc. and CoCaLo, Inc., the financial institutions party thereto or their assignees (the “Lenders”), and Bank of America, N.A., successor by merger to LaSalle Bank National Association, as Administrative Agent for the Lenders.(11)

	4.6			First Amendment to Amended and Restated Pledge Agreement and Amended and Restated Guaranty and Collateral Agreement, dated as of March 20, 2009, among Russ Berrie and Company Inc., and Bank of America, N.A., successor by merger to LaSalle Bank National Association, as Administrative Agent. (11)

	4.7			Joinder Agreement, dated as of March 20, 2009, by Russ Berrie and Company, Inc., in favor of Bank of America, N.A., successor by merger to LaSalle Bank National Association, as Administrative Agent.(11)

	10.1			Lease Agreement, dated April 1, 1981, between Tri-State Realty and Investment Company and Russ Berrie and Company, Inc.(12)

	10.2			Lease, dated December 28, 1983, between Russell Berrie and Russ Berrie and Company, Inc.(12)

	10.3			Russ Berrie and Company, Inc. 2004 Stock Option Plan, Restricted and Non-Restricted Stock Plan.*(13)

	10.4			Russ Berrie and Company, Inc. 2004 Employee Stock Purchase Plan.*(13)

	10.5			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.(14)

	10.6			Second Amendment to lease dated November 18, 2003 by and between Russ Berrie and Company, Inc. and Estate of Russell Berrie.(14)

	10.7			Amendment to Russ Berrie and Company, Inc. Change In Control Severance Plan.*(14)

	10.8			Agreement dated as of April 9, 2004 between Russ Berrie and Company, Inc. and Andrew R. Gatto.*(15)

	10.9			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.*(16)

	10.10			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.*(16)

	10.11			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.(17)

	10.12			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.(17)

109


	10.13			Form of Stock Option Agreement with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan.*(18)

	10.14			Form of Stock Option Agreement for Non-Employee Directors with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan.*(18)

	10.15			Form of Restricted Stock Agreement with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan.*(18)

	10.16			Stock Option Agreement dated March 24, 2005 between Russ Berrie and Company, Inc. and Joanne Levin.*(18)

	10.17			Stock Option Agreement dated March 24, 2005 between Russ Berrie and Company, Inc. and Michael Levin.*(18)

	10.18			Incentive Compensation Program adopted on March 11, 2005.*(19)

	10.19			Employment Agreement dated July 27, 2005, effective August 1, 2005, between Russ Berrie and Company, Inc. and Mr. Anthony Cappiello.*(20)

	10.20			Employment Agreement dated September 26, 2005, between Russ Berrie and Company, Inc. and Marc S. Goldfarb.*(21)

	10.21			Amended and Restated 2004 Employee Stock Purchase Plan effective January 3, 2006.*(22)

	10.22			Investor Rights Agreement, dated as of August 10, 2006, among the Company and the investors listed on the signature pages thereto.(23)

	10.23			Amended and Restated VP Severance Policy for Domestic Vice Presidents (and Above).*(24)

	10.24			Employment Agreement, dated as of December 4, 2007, between the Company and Bruce G. Crain.*(25)

	10.25			Bruce G. Crain Incentive Compensation Letter.*(10)

	10.26			Stockholders Agreement, dated as of December 23, 2008, among Russ Berrie and Company, Inc., The Russ Companies, Inc. and Encore Investors II, Inc.(4)

	10.27			License Agreement, dated as of December 23, 2008, among RB Trademark Holdco, LLC and The Russ Companies, Inc.(4)

	10.28			Licensor Agreement, dated as of December 23, 2008, among RB Trademark Holdco, LLC, Wells Fargo Bank, National Association, and The Russ Companies, Inc.(4)

	10.29			Transition Services Agreement, dated as of December 23, 2008, between Russ Berrie and Company, Inc. and The Russ Companies, Inc.(4)

	10.30			Secured Promissory Note, dated December 23, 2008, in the original principal amount of $19.0 million from The Russ Companies, Inc. for the benefit of Russ Berrie and Company, Inc.(4)

	10.31			Guaranty, dated as of December 23, 2008, among The Encore Group, Inc., the other guarantors specified therein and Russ Berrie and Company, Inc.(4)

	10.32			Subordinated Security Agreement, dated as of December 23, 2008, among The Russ Companies, Inc., The Encore Group, Inc., the other parties specified therein and Russ Berrie and Company, Inc.(4)

	10.33			Intercreditor Agreement, dated as of December 23, 2008, between Russ Berrie and Company, Inc. and Wells Fargo Bank, National Association, and acknowledged by The Russ Companies, Inc.(4)

	10.34			Amended and Restated Change in Control Severance Plan.*(4)

	10.35			Second Amended and Restated VP Severance Policy for Domestic Vice Presidents (and Above).*(27)

110


	10.36			Equity Incentive Plan.*(26)

	10.37			2009 Employee Stock Purchase Plan.*(26)

	10.38			Employment Agreement, dated as of March 12, 2008, between Russ Berrie and Company, Inc. and Michael Levin.*(27)

	10.39			Employment Agreement, dated as of April 2, 2008, between LaJobi, Inc. and Lawrence Bivona.*(27)

	10.40			Employment Agreement, dated as of April 2, 2008, between CoCaLo, Inc. and Renee Pepys Lowe.*(27)

	10.41			Employment Agreement, dated as of June 25, 2008, between Sassy, Inc. and Fritz Hirsch.*(27)

	10.42			Retention Letter, dated as of April 22, 2009, between the Compensation Committee of the Board of Directors and Mr. Benaroya.*

	21.1			List of Subsidiaries(27)

	23.1			Consent of Independent Registered Public Accounting Firm(27)

	23.2			Consent of Independent Registered Public Accounting Firm

	31.1			Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002(27)

	31.2			Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002(27)

	31.3			Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002

	31.4			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(27)

	32.2			Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002(27)

	32.3			Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002

	32.4			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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

(2)		Incorporated by reference to Current Report on Form 8-K filed on December 22, 2004.

(3)		Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2007.

(4)		Incorporated by reference to Current Report on Form 8-K filed on December 29, 2008.

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

(6)		Incorporated by reference to Registration Statement No. 33-51823 on Form S-8 filed on January 6, 1994.

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

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

111


(9)		Incorporated by reference to Current Report on Form 8-K filed on April 8, 2008.

(10)		Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

(11)		Incorporated by reference to Current Report on Form 8-K filed on March 23, 2009.

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

(13)		Incorporated by reference to the Company’s definitive Proxy Statement filed on April 4, 2003.

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

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

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

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

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

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

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

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

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

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

(24)		Incorporated by reference to Current Report on Form 8-K filed on July 17, 2007.

(25)		Incorporated by reference to Current Report on Form 8-K filed on December 7, 2007.

(26)		Incorporated by reference to the Company’s definitive Proxy Statement filed on June 13, 2008.

(27)		Incorporated by reference to the Original Filing.

112

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 30, 2009	By:	/s/ GUY A. PAGLINCO
Date		Guy A. Paglinco
		Vice President — Chief Accounting Officer and Interim Chief Financial Officer (principal financial officer)

113

EXHIBIT INDEX


Exhibit
Numbers
	10.42	Retention Letter, dated as of April 22, 2009, between the Compensation Committee of the Board of Directors and Mr. Benaroya.*
	23.2	Consent of Independent Registered Public Accounting Firm
	31.3	Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002
	31.4	Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002
	32.3	Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002
	32.4	Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002


*		Represents a compensatory plan or arrangement.

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