Hasbro (HAS)

U.S. Toys segment net revenues for the quarter ended March 27, 2005 increased 9% to $166,473 from the same period in 2004. The increase was primarily due to shipments of products related to STAR WARS EPISODE III: REVENGE OF THE SITH, which is scheduled for theatrical release on May 19, 2005.   The increase was partially offset by decreased shipments of TRANSFORMERS and PLAYSKOOL products, as well as the expected decrease in sales of BEYBLADE products.  During the remainder of 2005, the Company expects higher sales of STAR WARS related products as compared to last year, due to the theatrical release mentioned above.  Also having a positive effect on net revenues was the reintroduction of LITTLEST PET SHOP products.

U.S. Toys segment operating profit of $7,915 for the quarter ended March 27, 2005 compares to an operating profit of $1,035 for the quarter ended March 28, 2004. The increase in operating profit was primarily due to increased gross margin associated with both increased revenues and the change of mix of products sold in 2005, specifically STAR WARS products. The increase in gross margin due to STAR WARS was partially offset by higher royalties and higher amortization expense relating to the product rights associated with STAR WARS.  Sales of products related to entertainment-based properties, such as STAR WARS, typically carry a higher gross margin.  These products also carry a higher rate of royalties, and the resulting operating profit is generally not as high as it is for revenues derived from the sale of Company owned or Company-controlled brands.  The first quarter 2005 operating profit was also positively impacted by the Company's cost reduction initiatives, implemented in the fourth quarter of 2004.

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial

Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)

        U.S. Toys segment net revenues for the year ended December 26, 2004 decreased 10% to $952,923 from 2003. The results reflect an overall softness in the boys' toy business, as demonstrated primarily by decreased sales of BEYBLADE, and to a lesser extent, lower sales of

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TRANSFORMERS and G.I. JOE products. Decreased sales of PLAYSKOOL and ZOIDS products also contributed to the overall decrease in revenues. These decreases were partially offset by increased sales of VIDEONOW products, increased shipments of MY LITTLE PONY products, which were reintroduced in the third quarter of 2003, and revenues from the new product launch of LAZER TAG. Net revenues in 2004 were also positively impacted by increased shipments of STAR WARS products over 2003.

        The decrease in U.S. Toys' operating profit to $7,185 in 2004 from 2003, primarily relates to decreased gross profit as a result of the lower net revenues as well as a change in product mix, including the decline in sales of BEYBLADE products which carry a higher gross margin and increased sales of VIDEONOW hardware, which carry a lower gross margin. Competitive price pressures and customer sales allowances related to VIDEONOW also contributed to lower gross margin. To a lesser extent, the decrease relates to an increase in advertising expense, which is consistent with the Company's strategy to continue to focus on product promotions as a means to increase and sustain awareness of its core brands, as well as to introduce new products. U.S. Toys' 2004 operating profit was also impacted by charges of $6,900 associated with organizational and staffing changes made in December 2004. The decrease in operating profit was partially offset by decreased royalties, driven by lower sales of BEYBLADE products, as well as lower selling, distribution, and administration expenses as a result of a combination of lower sales activity and the Company's cost reduction initiatives.

        Net revenues in the U.S. Toys segment increased by 6% in 2003 over 2002 to $1,057,984. The increase was due primarily to strong sales of BEYBLADE and FURREAL FRIENDS products, which were introduced in the second half of 2002. In addition, revenue from sales of VIDEONOW, which was introduced in 2003, and MY LITTLE PONY, which was reintroduced in 2003, contributed to the increase in revenues. Revenues were also positively impacted by increased shipments of products related to certain core brands, such as TRANSFORMERS and PLAYSKOOL products. Sales of DISNEY products also increased as a result of the theatrical, video and DVD releases of FINDING NEMO and the DVD and video re-releases of THE LION KING in 2003. These increases were partially offset by the expected decrease in sales of STAR WARS products in a non-movie year, as well as decreased sales of BOB THE BUILDER, E-KARA, and ZOIDS products.

        The increase in operating profit from 2002 to 2003 was largely due to lower royalty and amortization expenses as the result of lower sales of entertainment-based products, primarily STAR WARS related products. STAR WARS property rights are amortized in proportion to expected remaining sales. In periods with higher sales of STAR WARS products, such as 2002, the resulting amortization expense will be higher. The decreases in royalty and amortization expense were partially offset by decreased gross profits due to a change in product mix. Although revenues increased in 2003, the 2002 product mix included higher sales of STAR WARS products, which have higher gross margins, while the 2003 product mix included increased sales of lower gross margin products, resulting in an overall decrease in gross profits. Operating profit in 2003 was also impacted by higher advertising expense reflecting the Company's increased focus on marketing to raise awareness of its core brands and to launch new products.