Looks Forward to 2007 as a Repositioned Company Focusing on Higher Growth Categories

RC2 Corporation announced its results for the fourth quarter and year ended December 31, 2006. Income from continuing operations was $9.4 million or $0.44 per diluted share in the 2006 fourth quarter which includes a non-cash restructuring charge of approximately $9.3 million, net of estimated income tax benefits, or $0.43 per diluted share related to discontinued automotive collectible product lines. Income from continuing operations was $17.3 million or $0.80 per diluted share in the year ago fourth quarter. Income from continuing operations for the year ended December 31, 2006 was $43.8 million or $2.05 per diluted share ($2.47 per diluted share excluding the above mentioned non-cash restructuring charge) as compared to $52.7 million or $2.45 per diluted share for the year ended December 31, 2005. The results for the fourth quarter and year ended December 31, 2006 include approximately $0.8 million and $3.9 million respectively, in compensation expense for stock options which negatively impacted diluted earnings per share by $0.02 and $0.11, respectively. Results for 2005 do not include compensation expense for stock options. A summary of net income adjusted for certain items and a reconciliation of diluted earnings per share for 2005 and 2006 is provided in the attached tables.

Discontinued and Sold Product Lines

As previously announced, during December 2006, the Company made the decision to discontinue its Racing Champions®, JoyRide®, AMT and certain Ertl® die-cast and model kit automotive collectible product lines that on a combined basis generated $37.1 million in net sales in 2006 and $58.1 million in net sales in 2005. As a result of discontinuing certain of these product lines, the Company recorded in the fourth quarter a non-cash restructuring charge of approximately $14.5 million (approximately $9.3 million, net of estimated income tax benefits), or $0.43 and $0.42 per diluted share for the quarter and year ended December 31, 2006, respectively, to write-off undepreciated tooling costs and unamortized intangible assets and to provide inventory and royalty reserves. In 2005, the Company sold its W. Britain product line and discontinued other product lines that on a combined basis generated net sales of $0.3 million in 2006 and $4.7 million in 2005.

Discontinued Operations

Effective November 1, 2006, the Company sold all of the issued and outstanding capital stock of RC2 South, Inc., its collectible trading card business, and substantially all of the assets related to its die-cast sports collectible vehicle business. These sold businesses have been presented as discontinued operations. Accordingly, net sales of $14.1 million in 2006 and $11.7 million in 2005 and the related cost of sales and operating expenses have been excluded from operating income and from income from continuing operations. The loss from discontinued operations for the 2006 fourth quarter and year was ($0.53) and ($0.45) per diluted share, respectively.

Also, during the quarter, the Company reclassified its product categories and sales channels, to be more closely aligned with its strategic direction and organization structure. (See Supplemental Sales Reporting schedule).

Fourth Quarter Operating Results from Continuing Operations

Fourth quarter 2006 net sales increased slightly to $154.6 million compared with $153.9 million for the fourth quarter a year ago. Fourth quarter 2006 net sales, excluding $10.7 million in net sales from sold and discontinued product lines, increased 5% compared with fourth quarter 2005 net sales excluding $16.8 million in net sales from sold and discontinued product lines. This 5% fourth quarter net sales increase was attributable to increases in all three of our product categories (refer to the attached supplemental sales reporting schedule). Sales in the preschool products category increased by 5%, primarily driven by the Thomas & Friends, Bob the Builder, and John Deere preschool toy product lines. Sales in the infant & toddler products category also increased by 5%, primarily driven by The First Years’ Take & Toss® toddler self-feeding system and Soothie™ bottle system. Sales in the youth & adult products category increased by 3%, primarily driven by our John Deere older boys’ toy vehicles.

Gross margin in the 2006 fourth quarter decreased to 46.5% from 47.3% in the year ago fourth quarter. The 2006 fourth quarter gross margin reflects the impact of a less favorable product and distribution mix and higher product costs, especially in die-cast products, than that experienced in the fourth quarter of 2005. Selling, general and administrative expenses as a percentage of net sales decreased slightly to 27.2% in the fourth quarter of 2006 compared with 27.5% in the fourth quarter of 2005. Selling, general and administrative expenses for the 2006 fourth quarter include $0.8 million in compensation expense for stock options, while results for the 2005 fourth quarter do not include any compensation expense for stock options. Operating income decreased approximately 49% to $15.2 million or 9.8% of net sales from $30.1 million or 19.5% of net sales in the prior year fourth quarter. Operating income in the fourth quarter of 2006, excluding the non-cash fourth quarter restructuring charge of approximately $14.5 million, was $29.7 million or 19.2% of net sales. Operating income, on a comparable basis, in the prior year fourth quarter including $0.9 million of compensation expense for stock options and excluding $0.8 million for the write-off of undepreciated tooling related to discontinued product lines was $30.0 million or 19.5% of net sales. (Refer to the attached Reconciliation of Operating Income).

Year to Date Operating Results from Continuing Operations

Net sales for the 2006 year increased approximately 5% to $518.8 million from $492.8 million for 2005. Current year net sales excluding $37.4 million in net sales from sold and discontinued product lines increased 12% compared with 2005 net sales excluding $62.8 million in net sales from sold and discontinued product lines. This 12% net sales increase for the year was attributable to the increases in all three of our product categories. (Refer to the attached supplemental sales reporting schedule.) The preschool products category increased approximately 15% primarily attributable to the Thomas & Friends, Bob the Builder and John Deere preschool toy product lines. The infant & toddler products category increased approximately 10% primarily attributable to The First Years’ Take & Toss® toddler self-feeding system, Soothie™ bottle system and Learning Curve’s Lamaze infant toys. The youth & adult products category increased 6%, driven by John Deere older boys’ toy vehicles.

The gross margin for the year ended December 31, 2006 decreased to 46.9% as compared with 48.7% for 2005. The 2006 gross margin reflects the impact of a less favorable product and distribution mix and higher product costs, especially in die-cast products, than that experienced in 2005. Selling, general and administrative expenses as a percentage of net sales were 29.9% for 2006 as compared with 30.5% for 2005. Selling, general and administrative expenses for 2006 include approximately $3.9 million in compensation expense for stock options, while results for 2005 do not include any compensation expense for stock options. Operating income decreased to $72.2 million or 13.9% of net sales for the year ended December 31, 2006 as compared with $90.0 million or 18.3% of net sales for the year ended December 31, 2005. Operating income for 2006, excluding a non-cash fourth quarter restructuring charge of approximately $14.5 million, was $86.7 million or 16.7% of net sales. Operating income, on a comparable basis, in the prior year including $3.3 million of compensation expense for stock options and excluding $2.0 million in gain on a sale of assets and $0.8 million for the write-off of undepreciated tooling related to discontinued product lines was $85.6 million or 17.4% of net sales.

Balance Sheet Update

The Company has continued to generate strong operating cash flow and has reduced its debt by approximately $37 million and $60 million during the 2006 fourth quarter and full year, respectively. On December 31, 2006, the Company’s outstanding debt balance was $22 million and its year end cash balances exceeded $25 million.

Commentary

Curt Stoelting, CEO of RC2 commented, “2006 was a challenging year, but it also was a successful year in many regards. While we recorded over a 12% sales increase in our higher growth infant and toddler and preschool products categories, our overall sales and earnings per share growth were below expected levels. Profits were negatively impacted throughout 2006 by cost increases in zinc, which is a key component in die-cast products, as well as increasing costs in China. Faced with these margin pressures, our teams, nonetheless, did an excellent job of managing controllable costs and generating EBITDA of over $105 million in 2006. (Refer to the attached Calculation of EBITDA).

“Our fourth quarter sales performance, in particular, was not acceptable and management, with the Board’s approval, decided to move forward with plans to reposition the Company to focus on higher growth opportunities. We sold our sports trading card and die-cast sports collectible vehicles business and the decision was made to discontinue our automotive collectible product lines, which continued to experience significant sales declines throughout 2006.

“The Company will now intensify its focus on categories with sustainable, organic growth. We are increasing the allocation of resources and investment to our higher growth infant, toddler, preschool and youth products categories. We plan to continue our agricultural replica product lines and will continue to invest in our long-term relationship with John Deere. In addition, we remain excited about our strategy to reposition our Johnny Lightning® brand, targeting younger consumers.

“In 2007, we plan to launch a number of new product lines, with most of the introductions occurring in the second half of the year. Under our Johnny Lightning youth toy brand, we plan to bring to market Battle Wheels™ and V-Bot™, innovative high-action remote control products. In our Take Along from Learning Curve® preschool vehicle brand platform, we are introducing new products based on the very popular Nickelodeon children’s programming. We are also launching our new Play Town™ platform brand featuring both licensed and non-licensed preschool wooden figures, playsets and books. In our infant and toddler products category we are bringing to market new gear, care and play products from The First Years by Learning Curve® and expanding distribution for our already successful Take and Toss®, American Red Cross and Lamaze product lines marketed under our The First Years and Learning Curve brands.

“In order to support our new product launches and to build consumer awareness of our owned brands, we are planning new investment spending of approximately $9 million in 2007. We estimate that $5 million to $7 million of this amount will be expensed in 2007. This spending is focused on key strategic plan initiatives including on-line, digital and traditional consumer marketing and building and launching owned brands. We expect that these initiatives will partially benefit 2007 and provide higher growth opportunities in future years.”

Stoelting concluded, “Despite the lower than expected fourth quarter sales, in 2006 we increased our sales of continuing product lines by 12% and our comparative diluted EPS by 7% (see attached Reconciliation of Diluted Earnings per Share from Continuing Operations), reduced our debt by $60 million and increased the strength of our balance sheet. We also added to and broadened the experience base of our management team. Most importantly, we made decisions that reduce our reliance on collectible products.

“Looking forward, licensing, raw material and China cost increases will continue to impact our margins, especially on our die-cast products, in the first half of the year. However, where appropriate, we are increasing our selling prices in 2007. While many of these price increases will not take effect until the second half of the year, once fully implemented, we believe they will mitigate many of our cost increases. With our renewed emphasis on higher growth opportunities and our increased focus on key strategic initiatives, we are better positioned for growth in 2007 and the years beyond.”

Financial Outlook

Net sales for 2006 excluding sold and discontinued product lines totaled $481.4 million. From this base level of 2006 net sales, the Company expects sales growth in 2007. Overall sales increases are dependent on a number of factors including continued success and expansion of continuing product lines, successful introductions of new products and product lines and renewal of key licenses. Other key factors include seasonality, overall economic conditions including consumer retail spending and shifts in the timing of that spending and the timing and level of retailer orders.

The Company expects continued downward pressure on its gross margins through at least the first half of 2007, due primarily to the increased costs of its die-cast products and the timing of expected price increases. The Company also expects higher licensing costs in 2007 and higher levels of expense from investment spending in consumer marketing and in building and launching owned brands. The Company expects that seasonality will continue to be a significant factor and that sales and earnings increases are likely to occur in the second half of 2007.