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Article by DailyStocks_admin    (04-30-08 10:50 AM)

The Daily Magic Formula Stock for 04/30/2008 is Hasbro Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

We are a worldwide leader in children’s and family leisure time and entertainment products and services, including the design, manufacture and marketing of games and toys. Internationally and in the United States, our widely recognized core brands such as PLAYSKOOL, TRANSFORMERS, MY LITTLE PONY, LITTLEST PET SHOP, TONKA, SUPER SOAKER, MILTON BRADLEY, PARKER BROTHERS, TIGER and WIZARDS OF THE COAST provide what we believe are the highest quality play experiences in the world. Our offerings encompass a broad variety of games, including traditional board, card, hand-held electronic, trading card, roleplaying, plug and play and DVD games, as well as electronic learning aids and puzzles. Toy offerings include boys’ action figures, vehicles and playsets, girls’ toys, electronic toys, plush products, preschool toys and infant products, children’s consumer electronics, electronic interactive products, creative play and toy related specialty products. In addition, we license certain of our trademarks, characters and other property rights to third parties for use in connection with digital games, consumer promotions, and for the sale of non-competing toys and games and non-toy products.

Organizationally, our principal segments are North America and International. Both of these segments engage in the development, marketing and selling of various toy and game products as listed above. Our North American segment covers the United States, Canada and Mexico while the International segment primarily includes Europe, the Asia Pacific region and Latin and South America (excluding Mexico). Financial information with respect to our segments and geographic areas is included in note 15 to our financial statements, which are included in Item 8 of this Form 10-K.

In addition, our Global Operations segment is responsible for arranging product manufacturing and sourcing for the North American and International segments and our other segment out-licenses our intellectual property to third parties on a worldwide basis.

North America

The North American segment’s strategy in 2007 continued to be based on growing core brands through innovation and reinvention, introducing new initiatives driven by consumer and marketplace insights and leveraging opportunistic toy and game lines and licenses. Major 2007 brands and products included TRANSFORMERS, LITTLEST PET SHOP, MARVEL products, PLAYSKOOL, STAR WARS, NERF, MONOPOLY, FURREAL FRIENDS, MAGIC: THE GATHERING, PLAY-DOH, BABY ALIVE and MY LITTLE PONY. In the North American segment, our products are organized into the following categories: (i) games and puzzles; (ii) boys’ toys; (iii) girls’ toys; (iv) preschool toys; (v) tween toys; and (vi) other.

Our games and puzzles category includes several well known brands, including MILTON BRADLEY, PARKER BROTHERS, TIGER GAMES, AVALON HILL and WIZARDS OF THE COAST. The MILTON BRADLEY, PARKER BROTHERS, TIGER GAMES and AVALON HILL brand portfolios consist of a broad assortment of games for children, tweens, families and adults. Core game brands include MONOPOLY, BATTLESHIP, GAME OF LIFE, SCRABBLE, CHUTES AND LADDERS, CANDY LAND, TROUBLE, MOUSETRAP, OPERATION, HUNGRY HUNGRY HIPPOS, CONNECT FOUR, TWISTER, YAHTZEE, JENGA, SIMON, CLUE, SORRY!, RISK, BOGGLE and TRIVIAL PURSUIT, as well as a line of jigsaw puzzles for children and adults, including BIG BEN and CROXLEY, as well as the PUZZ-3D line. WIZARDS OF THE COAST offers a variety of trading card and roleplaying games, including MAGIC: THE GATHERING and DUNGEONS & DRAGONS. We seek to keep our core brands relevant through sustained marketing programs as well as by offering consumers new ways to experience them. In 2008, we will seek to continue to expand our core brand portfolio by introducing a PLAYSKOOL line of games that will leverage our existing preschool consumer insights. In addition, we will seek to continue to incorporate technology into our existing game brands to align with current consumer interests. In 2007, the Company introduced the MONOPOLY ELECTRONIC BANKING edition, which allowed for faster, more intense game play. In 2008, the Company plans to introduce a customizable version of TRIVIAL PURSUIT. In January of 2008, the Company acquired Cranium, Inc., which develops and markets a wide range of CRANIUM branded games and related products.

Our boys’ toys include a wide range of core brands such as G.I. JOE and TRANSFORMERS action figures and accessories as well as entertainment-based licensed products based on popular movie and television characters, such as STAR WARS and MARVEL toys and accessories. In the action figure area, a key part of our strategy focuses on the importance of reinforcing the storyline associated with these products through the use of media-based entertainment. In 2007, sales in our boys’ toys category benefited from major motion picture releases of SPIDER-MAN 3 in May of 2007 and TRANSFORMERS in July of 2007. In 2008, SPIDER-MAN and TRANSFORMERS products are expected to be supported by animated television series. The STAR WARS product line is expected to be supported in 2008 by the release of animated television programming as well as the release of an animated motion picture. In addition, we will be introducing products based on the expected major motion picture releases of IRONMAN and HULK, two properties available under our MARVEL license, and INDIANA JONES. In addition to marketing and developing action figures for traditional play, the Company also develops and markets products designed for collectors, which has been a key component of the success of the STAR WARS brand.

In our girls’ toys category, we seek to provide a traditional and wholesome play experience. Girls’ toys include LITTLEST PET SHOP, MY LITTLE PONY, FURREAL FRIENDS and BABY ALIVE brands. In 2008, we will seek to continue to grow and update the LITTLEST PET SHOP brand by introducing the VIRTUAL INTERACTIVE PET segment which includes a plush doll that will allow the consumer access to a website to digitally customize their pets as well as access to games and other features. We also plan to reintroduce a redesigned EASY-BAKE oven.

Our preschool toys category encompasses a range of products for infants and preschoolers in the various stages of development. Our preschool products include a portfolio of core brands marketed primarily under the PLAYSKOOL trademark. The PLAYSKOOL line includes such well-known products as MR. POTATO HEAD, WEEBLES, SIT ’N SPIN and GLOWORM, along with a successful line of infant toys including STEP START WALK N’ RIDE, 2-IN-1 TUMMY TIME GYM and BUSY BALL POPPER. Through our AGES & STAGES system, we seek to provide consumer friendly information that assists parents in understanding the developmental milestones their children will encounter as well as the role each PLAYSKOOL product can play in helping children to achieve these developmental milestones. In addition, our preschool category also includes the TONKA line of trucks and interactive toys and the PLAY-DOH brand.

Our tweens toys category generally markets products under the TIGER ELECTRONICS and NERF brands and seeks to target those children who have outgrown traditional toys. The age group targeted by this category is generally 8 to 12 years old. In recent years, we have used our consumer insights and electronic innovation to develop a strong line of products focusing on this target audience. Our major tweens toys product lines in 2007 included NERF, I-DOG and the POWER TOUR GUITAR. As demonstrated through our I-DOG product, an interactive pet that acts as an accessory to an MP3 player, we seek to draw on the popularity of electronic trends in our tween product offerings.

International

In addition to our business in the United States, Mexico and Canada, in 2007 we operated in more than 20 other countries, selling a representative range of the toy and game products marketed in the North American segment as discussed above, together with some items that are sold only internationally. The major geographic regions included in the International segment are Europe, Asia Pacific and Latin and South America. In addition to growing core brands and leveraging opportunistic toy lines and licenses, we seek to grow our international business by continuing to expand into Eastern Europe and emerging markets in Asia and Latin and South America. Key international brands for 2007 included TRANSFORMERS, LITTLEST PET SHOP, MONOPOLY, MARVEL, MY LITTLE PONY, and PLAYSKOOL.

Other Segments

In our Global Operations segment, we manufacture and source production of substantially all of our toy and game products. The Company owns and operates manufacturing facilities in East Longmeadow, Massachusetts and Waterford, Ireland. Sourcing of our other production is done through unrelated manufacturers in various Far East countries, principally China, using a Hong Kong based wholly-owned subsidiary operation for quality control and order coordination purposes. See “Manufacturing and Importing” below for more details concerning overseas manufacturing and sourcing.

Through our other segment we generate revenue through the out-licensing worldwide of certain of our intellectual properties to third parties for promotional and merchandising uses in businesses which do not compete directly with our own product offerings. During 2007, our Hasbro Products Group out-licensed our brands primarily in apparel, publishing, home goods and electronics, and certain brands in the digital area. One of the primary goals of our licensing segment is to further expand our brands into the digital world through strategic licenses. As an example, in 2007 the Company entered into a long-term strategic licensing alliance with Electronic Arts Inc. (“EA”), which provides EA with the exclusive worldwide rights to create digital games for all platforms, including mobile phones, personal computers, and game consoles such as XBOX, PLAYSTATION and WII, based on most of our toy and game intellectual properties. The first games generated under this strategic alliance are expected to be introduced in 2008.

Other Information

To further extend our range of products in the various segments of our business, we sell our toy and game products directly to retailers, primarily on a direct import basis from the Far East. These sales are reflected in the revenue of the related segment where the customer resides.

Certain of our products are licensed to other companies for sale in selected countries where we do not otherwise have a direct business presence.

During the 2007 fiscal year, revenues generated from the sale of TRANSFORMERS products were approximately $482,000, which was 12.6% of our consolidated net revenues in 2007. During the 2005 fiscal year, revenues generated from the sale of STAR WARS products produced under our license with Lucas Licensing and Lucasfilm were approximately $494,000, which was 16% of our consolidated net revenues in 2005. No other line of products constituted 10% or more of our consolidated net revenues in 2007 or 2005. No individual line of products accounted for 10% or more of our consolidated net revenues during our 2006 fiscal year.

Working Capital Requirements

Our working capital needs are primarily financed through cash generated from operations and, when necessary, proceeds from our accounts receivable securitization program and short-term borrowings. Our borrowings and the use of our accounts receivable program generally reach peak levels during the fourth quarter of each year. This corresponds to the time of year when our receivables also generally reach peak levels as part of the production and shipment of product in preparation for the holiday shipping season. The strategy of retailers has been to make a higher percentage of their purchases of toy and game products within or close to the fourth quarter holiday consumer buying season, which includes Christmas. We expect that retailers will continue to follow this strategy. Our historical revenue pattern is one in which the second half of the year is more significant to our overall business than the first half and, within the second half of the year, the fourth quarter is more predominant. In 2007, the second half of the year accounted for approximately 66% of full year revenues with the third and fourth quarters accounting for 32% and 34% of full year revenues, respectively. In years where the Company has products tied to a major motion picture release, such as in 2007 with the mid-year releases of SPIDER-MAN 3 and TRANSFORMERS and in 2005 with the mid-year release of STAR WARS III: REVENGE OF THE SITH, this concentration is not as pronounced due to the higher level of sales that occur around and just prior to the time of the motion picture theatrical release.

The toy and game business is also characterized by customer order patterns which vary from year to year largely because of differences each year in the degree of consumer acceptance of product lines, product availability, marketing strategies and inventory policies of retailers, the dates of theatrical releases of major motion pictures for which we have product licenses, and changes in overall economic conditions. As a result, comparisons of our unshipped orders on any date with those at the same date in a prior year are not necessarily indicative of our sales for that year. Moreover, quick response inventory management practices result in fewer orders being placed significantly in advance of shipment and more orders being placed for immediate delivery. Retailers are timing their orders so that they are being filled by suppliers, such as us, closer to the time of purchase by consumers. Unshipped orders at January 27, 2008 and January 28, 2007 were approximately $149,000 and $192,000, respectively. It is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. The backlog of unshipped orders at any date in a given year can also be affected by programs that we may employ to incent customers to place orders and accept shipments early in the year. These programs follow general industry practices. The programs that we plan to employ to promote sales in 2008 are substantially the same as those we employed in 2007.

Historically, we commit to the majority of our inventory production and advertising and marketing expenditures for a given year prior to the peak third and fourth quarter retail selling season. Our accounts receivable increase during the third and fourth quarter as customers increase their purchases to meet expected consumer demand in the holiday season. Due to the concentrated timeframe of this selling period, payments for these accounts receivable are generally not due until later in the fourth quarter or early in the first quarter of the subsequent year. The timing difference between expenses paid and revenues collected sometimes makes it necessary for us to borrow varying amounts during the year. During 2007, we utilized cash from our operations, proceeds from our accounts receivable securitization program, and borrowings under our secured amended and restated revolving credit agreement as well as our uncommitted lines of credit to meet our cash flow requirements. In addition to the above sources of cash, in September 2007, we issued $350,000 of notes that are due in 2017 (the “Notes”). The proceeds from the Notes were primarily used to repay our short-term borrowings while the remainder of the proceeds were used for general corporate purposes.

Royalties, Research and Development

Our success is dependent on innovation through the continuing development of new products and the redesign of existing products for continued market acceptance. In 2007, 2006, and 2005, we spent $167,194, $171,358, and $150,586, respectively, on activities relating to the development, design and engineering of new products and their packaging (including products brought to us by independent designers) and on the improvement or modification of ongoing products. Much of this work is performed by our internal staff of designers, artists, model makers and engineers.

In addition to the design and development work performed by our own staff, we deal with a number of independent toy and game designers for whose designs and ideas we compete with other toy and game manufacturers. Rights to such designs and ideas, when acquired by us, are usually exclusive and the agreements require us to pay the designer a royalty on our net sales of the item. These designer royalty agreements, in some cases, also provide for advance royalties and minimum guarantees.

We also produce a number of toys and games under trademarks and copyrights utilizing the names or likenesses of characters from movies, television shows and other entertainment media, for whose rights we compete with other toy and game manufacturers. Licensing fees for these rights are generally paid as a royalty on our net sales of the item. Licenses for the use of characters are generally exclusive for specific products or product lines in specified territories. In many instances, advance royalties and minimum guarantees are required by these license agreements. In 2007, 2006, and 2005, we incurred $316,807, $169,731, and $247,283, respectively, of royalty expense. A portion of this expense relates to amounts paid in prior years as royalty advances. Our royalty expenses in any given year vary depending upon the timing of movie releases and other entertainment. Royalty expense in 2007 and 2005 was more significant in those years due to the release of SPIDER-MAN 3 and TRANSFORMERS in 2007 and STAR WARS EPISODE III: REVENGE OF THE SITH in 2005 and the corresponding increases in sales of the related products in those years.

Marketing and Sales

Our products are sold nationally and internationally to a broad spectrum of customers, including wholesalers, distributors, chain stores, discount stores, mail order houses, catalog stores, department stores and other traditional retailers, large and small, as well as internet-based “e-tailers.” Our own sales forces account for the majority of sales of our products. Remaining sales are generated by independent distributors who sell our products, for the most part, in areas of the world where we do not otherwise maintain a direct presence. While we have thousands of customers, including over 2,000 in the United States during 2007, there has been significant consolidation at the retail level over the last several years in our industry, which we expect to continue. As a result, the majority of our sales are to large chain stores, distributors and wholesalers. While the consolidation of customers provides us with certain benefits, such as potentially more efficient product distribution and other decreased costs of sales and distribution, this consolidation also creates additional risks to our business associated with a major customer having financial difficulties or reducing its business with us. In addition, customer concentration may decrease the prices we are able to obtain for some of our products and reduce the number of products we would otherwise be able to bring to market. During 2007, sales to our three largest customers, Wal-Mart Stores, Inc., Target Corporation and Toys “R” Us, Inc., represented 24%, 12% and 11%, respectively, of consolidated net revenues, and sales to our top five customers, including Wal-Mart, Target and Toys “R” Us, Inc., accounted for approximately 52% of our consolidated net revenues. In the North American segment, approximately 70% of the net revenues of the segment were derived from our top three customers.

We advertise many of our toy and game products extensively on television. Generally our advertising highlights selected items in our various product groups in a manner designed to promote the sale of not only the selected item, but also other items we offer in those product groups as well. We introduce many of our new products to major customers during the year prior to the year of introduction of such products for retail sale. In addition, we showcase many of our new products in New York City at the time of the American International Toy Fair in February, as well as at other international toy shows.

In 2007 we spent $434,742 on advertising, promotion and marketing programs compared to $368,996 in 2006 and $366,371 in 2005.

Manufacturing and Importing

During 2007 substantially all of our products were manufactured in third party facilities in the Far East, primarily China, as well as in our two owned facilities located in East Longmeadow, Massachusetts and Waterford, Ireland.

Most of our products are manufactured from basic raw materials such as plastic, paper and cardboard, although certain products also make use of electronic components. All of these materials are readily available but may be subject to significant fluctuations in price. We generally enter into agreements with suppliers at the beginning of a fiscal year that establish prices for that year. For this reason, we are generally insulated, in the short-term, from increases in the prices of raw materials. However, severe increases in the prices of any of these materials may require renegotiation with our suppliers during the year. Our manufacturing processes and those of our vendors include injection molding, blow molding, spray painting, printing, box making and assembly. We purchase most of the components and accessories used in our toys and certain of the components used in our games, as well as some finished items, from manufacturers in the United States and in other countries. However, the countries of the Far East, and particularly the People’s Republic of China, constitute the largest manufacturing center of toys in the world and the substantial majority of our toy products are manufactured in China. The 1996 implementation of the General Agreement on Tariffs and Trade reduced or eliminated customs duties on many of the products imported by us. We believe that the manufacturing capacity of our third party manufacturers, together with our own facilities, as well as the supply of components, accessories and completed products which we purchase from unaffiliated manufacturers, are adequate to meet the anticipated demand in 2008 for our products. Our reliance on designated external sources of manufacturing could be shifted, over a period of time, to alternative sources of supply for our products, should such changes be necessary or desirable. However, if we were to be prevented from obtaining products from a substantial number of our current Far East suppliers due to political, labor or other factors beyond our control, our operations and our ability to obtain products would be disrupted while alternative sources of product were secured. The imposition of trade sanctions by the United States or the European Union against a class of products imported by us from, or the loss of “normal trade relations” status by, the People’s Republic of China could significantly disrupt our operations and increase the cost of our products imported into the United States or Europe.

We purchase dies and molds from independent United States and international sources.

Competition

We are a worldwide leader in the design, manufacture and marketing of games and toys, but our business is highly competitive. We compete with several large toy and game companies in our product categories, as well as many smaller United States and international toy and game designers, manufacturers and marketers. Competition is based primarily on meeting consumer entertainment preferences and on the quality and play value of our products. To a lesser extent, competition is also based on product pricing.

In addition to contending with competition from other toy and game companies, in our business we must deal with the phenomena that many children have been moving away from traditional toys and games at a younger age. We refer to this as “children getting older younger.” As a result, our products not only compete with the offerings of other toy and game manufacturers, but we must compete, particularly in meeting the demands of older children, with the entertainment offerings of many other companies, such as makers of video games and consumer electronic products.

The volatility in consumer preferences with respect to family entertainment and low barriers to entry continually create new opportunities for existing competitors and start-ups to develop products which compete with our toy and game offerings.

Employees

At December 30, 2007, we employed approximately 5,900 persons worldwide, approximately 3,300 of whom were located in the United States.

CEO BACKGROUND

Basil L. Anderson

Vice Chairman, Staples, Inc. (office supply company) from 2001 until March 2006. Prior thereto, Executive Vice President — Finance and Chief Financial Officer of Campbell Soup Company (consumer products company) since 1996. Director of Becton, Dickinson and Company, CRA International, Inc., Moody’s Investors Service, Inc. and Staples, Inc.


Alan R. Batkin

Vice Chairman, Eton Park Capital Management, L.P. (global, multi-disciplinary investment firm) since 2007. Prior thereto, Vice Chairman, Kissinger Associates, Inc. (strategic consulting firm) from 1990 until 2007. Director of Diamond Offshore Drilling, Inc., Overseas Shipholding Group, Inc. and Cantel Medical Corp.

Frank J. Biondi, Jr.

Senior Managing Director, WaterView Advisors LLC (private equity fund specializing in media) since 1999. Director of Amgen, Inc., Cablevision Systems Corporation, The Bank of New York Mellon and Seagate Technology.

Kenneth A. Bronfin

President of Hearst Interactive Media (the interactive media division of diversified media company Hearst Corporation) since 2002. Prior thereto, Deputy Group Head of Hearst Interactive Media since 1996.

John M. Connors, Jr.

Chairman Emeritus of Hill, Holliday, Connors, Cosmopulos, Inc. (full-service advertising agency) since 2006. Chairman of Hill, Holliday, Connors, Cosmopulos, Inc. from 1995 until 2006, during which time Mr. Connors also served as President and Chief Executive Officer until 2003. Director of Covidien Ltd.

Michael W.O. Garrett

Served in a number of positions with Nestlé S.A. (international food and beverage company), most recently as Executive Vice President of Nestlé S.A. responsible for Asia, Africa, the Middle East and Oceania until 2005. Board member of the Nestlé company in India and non-executive director on the boards of Gottex Fund Management Holdings Ltd., Prudential PLC, UK and the Bobst Group in Switzerland.

E. Gordon Gee

President, The Ohio State University, since 2007. Prior thereto, Chancellor, Vanderbilt University since 2000. Director of Gaylord Entertainment Company, The Limited, Inc. and Massey Energy Company.

Brian Goldner

Chief Operating Officer of Hasbro since 2006. Prior thereto, President, U.S. Toys Segment from 2003 to 2006. Effective May 22, 2008, Alfred J. Verrecchia will retire as President and Chief Executive Officer of Hasbro and Mr. Goldner will succeed Mr. Verrecchia in these roles.

Jack M. Greenberg

Chairman of The Western Union Company (funds transfer company) since 2006. Chief Executive Officer of McDonald’s Corporation (restaurant franchiser) from August 1998 to December 2002. Chairman of the Board of McDonald’s Corporation from May 1999 until December 2002. Director of The Allstate Corporation, InnerWorkings, Inc., Manpower, Inc. and The Western Union Company.

Alan G. Hassenfeld

Chairman of the Board of Hasbro since 1989. Prior to May 2003, Chairman of the Board and Chief Executive Officer since 1999. Prior thereto, Chairman of the Board, President and Chief Executive Officer since 1989. Effective May 22, 2008, Alfred J. Verrecchia will become Chairman of the Board of Hasbro. Mr. Hassenfeld will remain on the Board as a director. Director of salesforce.com, inc.

Edward M. Philip

Managing General Partner, Highland Consumer Fund (consumer oriented private equity fund) since 2006. Prior thereto, President and Chief Executive Officer of Decision Matrix Group, Inc. (research and consulting firm) from May 2004 to November 2005. Prior thereto, Senior Vice President of Terra Networks, S.A. (global internet company) from October 2000 to January 2004.

Paula Stern

Chairwoman, The Stern Group, Inc. (international advisory firm in the areas of business and government strategy) since 1988. Director of Avon, Inc.

Alfred J. Verrecchia

President and Chief Executive Officer of Hasbro since May 2003. Prior thereto, President and Chief Operating Officer from 2001 to May 2003. Prior thereto, President, Chief Operating Officer and Chief Financial Officer from 2000 to 2001. Effective May 22, 2008, Alfred J. Verrecchia will retire as President and Chief Executive Officer of Hasbro and Mr. Goldner will succeed Mr. Verrecchia in these roles. Director of FM Global.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Summary

The Company earns revenue and generates cash through the sale of a variety of toy and game products, as well as through the out-licensing of its properties for use in connection with non-competing products offered by third parties. The Company sells its products both within the United States and in a number of international markets. The Company’s business is highly seasonal with a significant amount of revenues occurring in the second half of the year and within that half, the fourth quarter. In 2007, 66% of the Company’s net revenues were generated in the second half of the year with 34% of annual net revenues generated in the fourth quarter. In 2006 and 2005, percentages were 68% and 67% for the second half, respectively, and comparable at 35% for the fourth quarter. While many of the Company’s products are based on brands the Company owns or controls, the Company also offers products which are licensed from outside inventors. In addition, the Company licenses rights to produce products based on movie, television, music and other entertainment properties, such as MARVEL and STAR WARS properties.

The Company’s business is primarily separated into two business segments, North America and International. The North American segment develops, markets and sells both toy and game products in the U.S., Mexico and Canada. The International segment consists of the Company’s European, Asia Pacific and Latin America marketing operations. In addition to these two primary segments, the Company’s world-wide manufacturing and product sourcing operations are managed through its Global Operations segment. The Hasbro Products Group is responsible for the worldwide out-licensing of the Company’s intellectual properties and works closely with the North American and International segments on the development and out-licensing of the Company’s brands.

The Company’s focus remains on growing core owned and controlled brands, developing new and innovative products which respond to market insights and optimizing efficiencies within the Company to reduce costs, increase operating profits and strengthen its balance sheet. While the Company believes it has achieved a more sustainable revenue base by developing and maintaining its core brands and avoiding reliance on licensed entertainment properties, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and key strengths. In 2007, the Company had significant sales of products related to the Company’s license with Marvel Entertainment, Inc. and Marvel Characters, Inc. (collectively “Marvel”), primarily due to the theatrical release of SPIDERMAN-3 in May of 2007. Given the strength of its core brands, the Company may also seek to drive product-related revenues by increasing the visibility of its core brands through entertainment-based theatrical venues. As an example of this, in July of 2007, the TRANSFORMERS motion picture was released and the Company developed and marketed products based on the motion picture. As a result of pairing this core brand with this type of entertainment, both the movie and the product line benefited. Net revenues during 2007 related to the TRANSFORMERS line of products totaled approximately $482,000, or 12.6% of consolidated net revenues.

The Company’s core brands represent Company-owned or Company–controlled brands, such as TRANSFORMERS, MY LITTLE PONY, MONOPOLY, MAGIC: THE GATHERING, PLAYSKOOL, G.I. JOE and TONKA, which have been successful over the long term. The Company has a large portfolio of owned and controlled brands, which can be introduced in new formats and platforms over time. These brands may also be further extended by pairing a licensed concept with a core brand. By focusing on core brands, the Company is working to build a more consistent revenue stream and basis for future growth. In 2007 the Company had strong sales of core brand products, namely TRANSFORMERS, LITTLEST PET SHOP, MY LITTLE PONY, PLAYSKOOL, MONOPOLY, NERF, and PLAY-DOH.

In addition to its focus on core brands, the Company’s strategy also involves trying to meet ever-changing consumer preferences by identifying and offering innovative products based on market opportunities and insights. The Company believes its strategy of focusing on the development of its core brands and continuing to identify innovative new products will help to prevent the Company from being dependent on the success of any one product line.

While the Company’s strategy has continued to focus on growing its core brands and developing innovative new products, it will continue to evaluate and enter into arrangements to license properties when the Company believes it is economically attractive. In 2006, the Company entered into a license with Marvel to produce toys and games based on Marvel’s portfolio of characters. The Company had significant sales of products related to this license during 2007, primarily due to the theatrical release of SPIDER-MAN 3 in May of 2007. The Company has also incurred royalties on products based on the theatrical release of TRANSFORMERS in July 2007. While gross profits of theatrical entertainment-based products are generally higher than many of the Company’s other products, sales from these products also incur royalty expenses payable to the licensor. Such royalties reduce the impact of these higher gross margins. In certain instances, such as with Lucasfilm’s STAR WARS, the Company may also incur amortization expense on property right-based assets acquired from the licensor of such properties, further impacting profit made on these products.

The Company’s long-term strategy also focuses on extending its brands further into the digital world. As part of this strategy, in August 2007, the Company announced a multi-year strategic agreement with Electronic Arts Inc. (“EA”). The agreement gives EA the exclusive worldwide rights, subject to existing limitations on the Company’s rights and certain other exclusions, to create digital games for all platforms, such as mobile phones, gaming consoles and personal computers, based on a broad spectrum of the Company’s intellectual properties, including MONOPOLY, SCRABBLE, YAHTZEE, NERF, TONKA and LITTLEST PET SHOP. As part of this agreement, the Company has also obtained the rights to create toys and non-digital games based on EA’s intellectual properties. The first games under this agreement are expected to launch in 2008.

While the Company remains committed to investing in the growth of its business, it continues to be focused on reducing fixed costs through efficiencies and on profit improvement. Over the last 5 years the Company has improved its operating margin from 7.8% in 2002 to 13.5% in 2007. The Company reviews it operations on an ongoing basis and seeks to reduce its cost structure in an efficient manner. In 2006 the Company announced a reduction of its manufacturing activity in Ireland and transition of the manufacture of certain products to the Company’s suppliers in China, and recently the Company announced a restructuring of its games manufacturing facility in the U.S. that is also expected to result in work practice efficiencies and cost reductions. The Company is also investing to grow its business in emerging international markets and will continue to evaluate strategic alliances and acquisitions which may complement its current product offerings or allow it entry into an area which is adjacent to and complementary to the toy and game business. For example, in January of 2008, the Company acquired Cranium, Inc., which develops and markets a wide range of CRANIUM branded games and related products. In 2008, the Company expects to leverage revenue to offset the impact of these investments on its operating margins.

In recent years, the Company has been seeking to return excess cash to its shareholders through share repurchases and dividends. As part of this initiative, over the last three years, the Company’s Board of Directors (the “Board”) has adopted three repurchase authorizations with a cumulative authorized repurchase amount of $1,200,000. After fully exhausting the prior two authorizations, the third authorization was passed on August 2, 2007 for $500,000. During the third and fourth quarters of 2007, $390,399 of common stock was repurchased under this authorization. For the years ended 2007, 2006 and 2005, the Company invested $587,004, $456,744 and $48,030, respectively, in the repurchase of 20,795, 22,767 and 2,386 shares, respectively, in the open market. Also, in May of 2007, the Company paid $200,000 in cash to repurchase exercisable warrants to purchase 15,750 shares of the Company’s common stock. Subsequent to December 30, 2007, the Board approved an additional $500,000 share repurchase authorization. The Company intends to opportunistically repurchase shares in the future subject to market conditions. In addition, in February 2008, the Company announced an increase in its quarterly dividend to $0.20 per share. This was the fifth consecutive year that the Board has increased the dividend.

Results of Operations

The fiscal years ended December 30, 2007 and December 25, 2005 were fifty-two week periods while the fiscal year ended December 31, 2006 was a fifty-three week period.

Net earnings for the fiscal year ended December 30, 2007 were $333,003, or $1.97 per diluted share. This compares to net earnings for fiscal 2006 and 2005 of $230,055 and $212,075, or $1.29 and $1.09 per diluted share, respectively.

Net earnings includes non-operating (income) expense related to the change in fair value of certain warrants required to be classified as a liability of $44,370 in 2007, $31,770 in 2006, and $(2,080) in 2005. These warrants were repurchased during May 2007. Net earnings for 2007 also includes a favorable tax adjustment of $29,619, or $0.17 per diluted share, related to the recognition of certain previously unrecognized tax benefits.

Net earnings for 2005 include income tax expense of approximately $25,800 related to the Company’s repatriation of approximately $547,000 of foreign earnings in the fourth quarter of 2005 pursuant to the special incentive provided by the American Jobs Creation Act of 2004.

On December 26, 2005, the first day of fiscal 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which required that the Company measure all stock-based compensation awards using a fair value method and record such expense in its financial statements. The Company adopted this statement using the modified prospective method. Under this adoption method, the Company is recording expense related to stock option awards that were unvested as of the date of adoption as well as all awards made after the date of adoption. Accordingly, 2005 net earnings do not include expense related to stock options.

Consolidated net revenues for the year ended December 30, 2007 were $3,837,557 compared to $3,151,481 in 2006 and $3,087,627 in 2005. Most of the Company’s net revenues and operating profits were derived from its two principal segments: North America and International, which are discussed in detail below. Consolidated net revenues were positively impacted by foreign currency translation in the amount of $94,500 in 2007 and $27,800 in 2006 as the result of the overall weaker U.S. dollar in each of those years. The following table presents net revenues and operating profit data for the Company’s two principal segments for 2007, 2006 and 2005. The operating profit for 2005 for each of these segments has been adjusted to include the impact of expense related to stock options as disclosed under SFAS 123, consistent with the Company’s management reporting. See notes 1 and 15 to the consolidated financial statements for further details.

North America

North American segment net revenues for the year ended December 30, 2007 increased 15% to $2,460,016 from $2,130,290 in 2006. The impact of foreign currency translation on North American segment net revenues in 2007 was favorable, primarily due to the strength of the Mexican peso and Canadian dollar, and increased net revenues by approximately $4,800. The increase was due primarily to increased revenues in the boys’ toys category driven by sales of MARVEL and TRANSFORMERS products due to the theatrical releases of SPIDER-MAN 3 in May 2007 and TRANSFORMERS in July 2007. Although STAR WARS product sales declined in 2007 from 2006, sales of these products have continued to be a significant contributor to boys’ toys revenues in 2007. Revenues in the girls’ toys category increased as a result of higher sales of LITTLEST PET SHOP and FURREAL FRIENDS products as well as higher revenues from the BABY ALIVE line which was reintroduced in the second quarter of 2006. To a lesser extent, revenues in the girls’ toys category were positively impacted by increased shipments of MY LITTLE PONY products. Girls’ toys revenues were negatively impacted by decreased sales of EASY-BAKE oven products due to the recall of the product in July of 2007. Revenues from the preschool category were flat for 2007. Revenue from games and puzzles decreased slightly due to lower revenues from trading card and plug and play games partially offset by increased sales of traditional board games. Revenues from the tweens category decreased as a result of lower sales of electronic products such as VIDEONOW, ZOOMBOX and I-DOG partially offset by increased sales of NERF products. Revenues in 2007 were also positively impacted by increased sales of TOOTH TUNES.

North American operating profit increased to $318,737 in 2007 from $275,959 in 2006. Operating profit in 2007 was positively impacted by approximately $1,500 due to the translation of foreign currencies to the U.S. dollar. The increase in operating profit is primarily the result of higher gross profits resulting from the higher revenues discussed above. Although North American gross profit increased as a result of higher revenues, this increase in gross profit was negatively impacted by approximately $10,400 of charges recorded in the second quarter of 2007 related to the July 2007 EASY-BAKE oven recall. The increase in gross profit was also partially offset by higher royalty expense as the result of the increased sales of MARVEL and TRANSFORMERS movie-related products. Operating profit was also impacted by higher advertising expense as well as higher selling and distribution costs related to the increased sales volume. In addition, North American operating profit included increased investment spending in an online initiative of the Company’s Wizards of the Coast operation.

North American segment net revenues for the year ended December 31, 2006 increased 4% to $2,130,290 from $2,038,556 in 2005. The impact of foreign currency translation on North American segment net revenues in 2006 was favorable and increased net revenues by approximately $3,200. Anticipated decreased revenues of STAR WARS products were more than offset primarily by increased sales of LITTLEST PET SHOP, PLAYSKOOL, NERF, I-DOG and MONOPOLY products, as well as revenues from the successful reintroduction of BABY ALIVE. Revenues in 2006 were also positively impacted, to a lesser extent, by increased sales of PLAY-DOH and TRANSFORMERS products. STAR WARS revenues were significant in 2005 due to the theatrical and DVD releases of STAR WARS EPISODE III: REVENGE OF THE SITH and remained strong in 2006.

North American segment operating profit increased to $275,959 in 2006 from $165,676 in 2005. The increase in operating profit was primarily due to increased gross profit as a result of the increased sales in 2006 as well as decreases in royalty and amortization expense principally due to the decrease in sales of STAR WARS products. Operating profit for the North American segment was negatively impacted by higher research and product development costs due to higher investments in the PLAYSKOOL line and costs related to MARVEL products introduced in 2007. North American operating profit was negatively impacted in 2005 by a loss of approximately $23,000 in the electronic games category, which included charges associated with inventory obsolescence and customer allowances related to plug and play games.

International

International segment net revenues for the year ended December 30, 2007 increased by 33% to $1,278,589 from $959,319 in 2006. In 2007, net revenues were positively impacted by currency translation of approximately $88,500 as a result of a weaker U.S. dollar. Although international revenues increased in all categories, the largest increase in net revenues was in the boys’ toys category. As in the North American segment, this increase was driven by higher sales of TRANSFORMERS products resulting from the theatrical release of the TRANSFORMERS movie in most countries in July of 2007 and MARVEL products resulting from the theatrical release of SPIDER-MAN 3 in May of 2007. Increased revenues in the girls’ toys category were principally the result of increased sales of LITTLEST PET SHOP products, and to a lesser extent, MY LITTLE PONY products. Revenues in the preschool category were higher in 2007 based on increased sales of PLAYSKOOL products, partially due to strong revenues of IN THE NIGHT GARDEN in the United Kingdom. Revenues in the games and puzzles category increased primarily due to increased sales of MONOPOLY. Revenues from the tweens category increased primarily as a result of sales of the POWER TOUR GUITAR which was introduced in 2007.

International segment operating profit increased 75% to $158,846 in 2007 from $90,893 in 2006. Operating profit for the segment in 2007 was positively impacted by approximately $10,400 due to the translation of foreign currencies to the U.S. dollar. The remaining increase in operating profit is due to the higher revenues discussed above. The increased gross profit as a result of the higher revenues was partially offset by higher royalty expense due to higher sales of MARVEL and TRANSFORMERS products as well as higher advertising and selling, distribution and administration expenses.

International segment net revenues for the year ended December 31, 2006 decreased by 3% to $959,319 from $988,591 in 2005. In 2006 net revenues were positively impacted by currency translation by approximately $24,300 as a result of a weaker U.S. dollar. The decrease in net revenues was primarily the result of decreased sales of STAR WARS products in 2006 as well as decreased sales of FURBY and DUEL MASTERS products. These decreases were partially offset by increased revenues from LITTLEST PET SHOP, PLAYSKOOL and MONOPOLY products. To a lesser extent, 2006 net revenues were also positively impacted by increased sales of MY LITTLE PONY, TRANSFORMERS and PLAY-DOH products as well as the reintroduction of the BABY ALIVE doll.

International segment operating profit decreased 15% to $90,893 in 2006 from $106,435 in 2005. Operating profit for the segment in 2006 was positively impacted by approximately $4,900 due to the translation of foreign currencies to the U.S. dollar. The decrease in operating profit was the result of decreased gross profit primarily as a result of the decrease in net revenues, partially offset by decreases in royalties and amortization expense as a result of the decrease in sales of STAR WARS products.

Gross Profit

The Company’s gross profit margin increased to 58.9% for the year ended December 30, 2007 from 58.6% in 2006. This increase is due to changes in product mix, primarily the positive impact of higher sales of licensed products. Although licensed products generally carry a higher gross margin, the increased gross margin is largely offset by higher royalty expense associated with these products. Gross profit in 2007 was also negatively impacted by approximately $10,400 in charges related to the recall of the Company’s EASY-BAKE oven product and by a charge of approximately $10,000 related to a restructuring and related reduction in work force at the Company’s manufacturing facility in East Longmeadow, Massachusetts. This charge consisted primarily of severance costs.

The Company’s gross profit margin was 58.6% for the year ended December 31, 2006 compared to 58.3% in 2005. The increase was due to increased revenues from certain core brand products that have higher gross margins, such as LITTLEST PET SHOP products and traditional board games, such as MONOPOLY. Gross profit in 2006 was negatively impacted by a charge of approximately $10,300 related to the Company’s decision to transfer certain manufacturing activities from its Ireland manufacturing facility to its suppliers in China. Gross margin in 2005 was also negatively impacted by inventory obsolescence and customer allowances on plug and play games.

Expenses

Amortization expense continued to decrease in 2007 to $67,716 from $78,934 in 2006 and $102,035 in 2005. A portion of amortization expense relates to licensing rights and is based on expected sales of products related to those licensing rights. The decrease in amortization expense in 2007 and 2006 primarily relates to decreased amortization of the product rights related to STAR WARS.

Royalty expense increased to $316,807 or 8.2% of net revenues in 2007 compared to $169,731 or 5.4% of net revenues in 2006. This increase is primarily due to increased sales of entertainment-based products, primarily MARVEL and TRANSFORMERS movie-related products due to the theatrical releases of SPIDER-MAN 3 and TRANSFORMERS in 2007. Royalty expense decreased to $169,731 or 5.4% of net revenues in 2006 compared to $247,283 or 8.0% of net revenues in 2005. This decrease primarily relates to the decrease in sales of STAR WARS products in 2006 from 2005.

Research and product development expense decreased in 2007 to $167,194 or 4.4% of net revenues from $171,358 or 5.4% of net revenues in 2006. This decrease reflects higher investments in the prior year, primarily related to the MARVEL product lines. Research and product development expense increased in 2006 to $171,358 or 5.4% of net revenues from $150,586 or 4.9% of net revenues in 2005. This increase was the result of development expenses related to the MARVEL line of products as well as increased investment in the PLAYSKOOL line.

Advertising expense increased in dollars to $434,742 in 2007 from $368,996 in 2006, but decreased as a percentage of revenues to 11.3% from 11.7% in 2006. The decrease as a percentage of revenues primarily relates to the mix of sales in 2007, which included increased sales of entertainment-based products, which require lower amounts of advertising and promotion. Revenues related to entertainment-based properties have increased in 2007 with the release of the SPIDER-MAN 3 and TRANSFORMERS movies. The increase in dollars is primarily due to continued investment in our PLAYSKOOL line as well as other core brands, and to a lesser extent, the impact of foreign exchange. Advertising expense in 2006 was $368,996 or 11.7% of net revenues which was consistent with the 2005 expense of $366,371 or 11.8% of net revenues.

Selling, distribution and administration expenses increased in dollars to $755,127 from $682,214 in 2006 but decreased as a percentage of revenues to 19.7% from 21.7% in 2006. The increase in dollars reflects higher variable selling and distribution costs resulting from higher revenues in 2007, as well as higher incentive compensation provisions, the impact of foreign currency, and general inflationary increases. The decrease as a percentage of revenues reflects the fixed nature of certain of these expenses. Selling, distribution and administration expenses were $682,214 or 21.7% of net revenues in 2006 compared to $624,560 or 20.2% in 2005. Approximately $20,000 of this increase related to the Company’s adoption of SFAS 123R in 2006 which required that the Company measure all stock-based compensation awards using a fair value method and record such expense in its financial statements. The remainder of the increase primarily related to increased sales and marketing expense in 2006 associated with the higher level of sales and increased bonus and incentive provisions due to the strong performance of the Company in 2006.

Interest Expense

Interest expense increased to $34,618 in 2007 from $27,521 in 2006. The increase in interest expense was primarily the result of higher average borrowings in 2007. In September 2007, the Company issued $350,000 of Notes that are due in 2017. The majority of the proceeds from the issuance of these Notes were used to repay short-term debt resulting from increased repurchases of common stock as well as the repurchase of the Lucas warrants for $200,000.

Interest expense decreased to $27,521 in 2006 from $30,537 in 2005. The decrease in interest expense mainly reflected the reduction in the Company’s long-term debt over that period. The Company repurchased or repaid principal amounts of long-term debt of $32,743 in 2006 and $93,303 in 2005.

Interest Income

Interest income was $29,973 in 2007 compared to $27,609 in 2006 and $24,157 in 2005. Interest income includes $5,200 in 2006 related to a long-term deposit that was refunded during 2006 and approximately $4,100 in 2005 related to an IRS settlement. The increase in interest income in 2007 primarily reflects higher average rates of return in 2007. To a lesser extent, the increase reflects higher average invested balances in 2007. During a portion of 2007 and 2006, the Company invested excess cash in auction rate securities, which generated a higher rate of return and contributed to the increases in interest income in 2007 and 2006. The Company had no investments in auction rate securities at December 30, 2007.

Other (Income) Expense, Net

Other (income) expense, net of $52,323 in 2007 compares to $34,977 in 2006 and $(6,772) in 2005. The major component of other (income) expense is non-cash (income) expense related to the change in fair value of certain warrants required to be classified as a liability. These warrants were required to be adjusted to their fair value each quarter through earnings. For 2007, 2006 and 2005, expense (income) related to the change in fair value of these warrants was $44,370, $31,770 and $(2,080), respectively. In May 2007, the Company exercised the call option on these warrants and repurchased the warrants for $200,000 in cash, which approximated fair value at that date. As these warrants have been repurchased there will be no further fair value adjustments.

In addition to the above, other (income) expense, net in 2006 also included $2,629 representing a write-down of the value of common stock of Infogrames, held by the Company as an available-for-sale investment. This write-down resulted from an other-than-temporary decline in the fair value of this investment.

Income Taxes

Income tax expense totaled 28.0% of pretax earnings in 2007 compared with 32.6% in 2006 and 31.8% in 2005. Income tax expense for 2007 is net of a benefit of $29,999 of discrete tax events, primarily relating to the recognition of previously unrecognized tax benefits. Income tax expense for 2006 includes a charge of approximately $7,800 of discrete tax events, primarily relating to the settlement of various tax exams in multiple jurisdictions. Income tax expense for 2005 includes a charge of approximately $25,800 related to the repatriation of $547,000 of foreign earnings pursuant to the special incentive provided by the American Jobs Creation Act of 2004. Income tax expense for 2005 was also reduced by approximately $4,000, due primarily to the settlement of an Internal Revenue Service examination of tax years ending in December 2001. Absent these items, potential interest and penalties in 2007 related to uncertain tax positions, and the effect of the adjustment of certain warrants to their fair value, which has no tax effect, the 2007 effective tax rate would have been 30.5% compared to 27.6% in 2006 and 24.9% in 2005. The increase in the adjusted rate to 30.5% in 2007 compared to 27.6% in 2006 primarily reflects the decision to repatriate a portion of 2007 international earnings to the U.S. The increase in the adjusted rate to 27.6% in 2006 from 24.9% in 2005 was the result of higher earnings in jurisdictions with higher statutory tax rates.

Liquidity and Capital Resources

The Company has historically generated a significant amount of cash from operations. In 2007, the Company primarily funded its operations and liquidity needs through cash flows from operations, and, when needed, proceeds from its accounts receivable securitization program and borrowings under its unsecured credit facilities. In September 2007 the Company issued $350,000 in principal amount of notes that are due in 2017 (the “Notes”). The proceeds from the sale of the Notes were primarily used to repay the Company’s short-term borrowings while the remainder of the proceeds were used for general corporate purposes. During 2008, the Company expects to continue to fund its working capital needs primarily through cash flows from operations and, when needed, using proceeds from its accounts receivable securitization program and borrowings under its available lines of credit. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its accounts receivable securitization program and other available lines of credit are adequate to meet its working capital needs for 2008.

At December 30, 2007, cash and cash equivalents, net of short-term borrowings, were $764,257 compared to $704,818 and $927,592 at December 30, 2006 and December 25, 2005, respectively. Hasbro generated $601,794, $320,647, and $496,624 of cash from its operating activities in 2007, 2006 and 2005, respectively. The higher cash flows from operations in 2007 compared to 2006 were primarily the result of increased earnings as well as the mix of products in 2007 net revenues. Net earnings in 2007 included increased non-cash royalty expenses primarily as a result of increased revenues from MARVEL products. The royalty expense related to revenues from MARVEL products in 2007 was paid in 2006. Similarly, the higher cash flows from operations in 2005 compared to 2006 was primarily due to the mix of products in 2005 net revenues. Net earnings in 2005 included increased non-cash royalty expenses primarily as a result of increased STAR WARS revenues. Increased royalty expense in 2005 related to revenues from STAR WARS products, most of which had been paid in prior years. In 2007, 2006 and 2005, operating cash flows were impacted by royalty advances paid of $70,000, $105,000 and $35,000 related to MARVEL in 2007 and 2006 and STAR WARS in 2005, respectively.

Accounts receivable increased to $654,789 at December 30, 2007 from $556,287 at December 31, 2006. The increase in accounts receivable is primarily the result of higher sales volume in 2007. Fourth quarter days sales outstanding remained consistent at 45 days in both 2007 and 2006 compared to 44 days in 2005. The increase in days sales outstanding from 2005 primarily reflects increases in international accounts receivable due to the weaker U.S. dollar in 2006 and 2007. The December 30, 2007 accounts receivable balance includes an increase of approximately $31,100 related to the currency impact of the weaker U.S. dollar. The Company has a revolving accounts receivable securitization facility whereby the Company is able to sell undivided fractional ownership interests in qualifying accounts receivable on an ongoing basis. At December 30, 2007 and December 31, 2006, there was $250,000 sold at each period-end under this program.

Inventories increased to $259,081 at December 30, 2007 from $203,337 at December 31, 2006. The increase in inventory reflects the growth of the Company’s business in 2007. In addition, inventories increased approximately $9,400 due to the weaker U.S. dollar in 2007. The increase in inventory to $203,337 at December 31, 2006 from $179,398 at December 25, 2005 represents higher levels of inventory at December 31, 2006 due to anticipated sales of MARVEL products in early 2007. In addition, inventories increased approximately $6,100 due to the weaker U.S. dollar in 2006.

Prepaid expenses and other current assets decreased to $199,912 at December 30, 2007 from $243,291 at December 31, 2006. This decrease is primarily due to utilization of MARVEL and Lucas royalty advances. Generally when the Company enters into a licensing agreement for entertainment-based properties, an advance royalty payment is required at the inception of the agreement. This payment is then recognized in the consolidated statement of operations as the related sales are made. With respect to the MARVEL and STAR WARS licenses, the Company had prepaid royalties recorded in both current and non-current assets. Each reporting period, the Company reflects as current prepaid assets the amount of royalties it expects to reflect in the statement of operations in the upcoming twelve months. The decrease in prepaid expenses and other current assets also reflects a decrease in deferred tax assets. Prepaid expenses and other current assets increased to $243,291 in 2006 from $185,297 in 2005. This increase was primarily due to a royalty advance paid to MARVEL in 2006, of which approximately $87,400 was recorded in prepaid expenses and $12,930 was shown in other assets at December 31, 2006.

Accounts payable and accrued expenses decreased to $742,122 at December 30, 2007 from $895,311 at December 31, 2006. The decrease is primarily due to the Company exercising its call option related to warrants required to be classified as a liability and repurchasing these warrants for $200,000 in cash in the second quarter of 2007. At December 30, 2006, these warrants had a fair value of $155,630. The decrease is also a result of the reclassification of the liabilities related to uncertain tax positions as a result of the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” at the beginning of 2007. These decreases were partially offset by increases in accrued royalties primarily due to the significant sales of TRANSFORMERS movie-related products, accrued advertising due to higher levels of advertising expense in the fourth quarter of 2007, as well as higher accounts payable due to higher levels of inventory and expenses as of December 30, 2007. Accounts payable and accrued expenses increased to $895,311 at December 31, 2006 from $863,280 at December 25, 2005. Of this increase, $31,770 related to the increase in fair value of the Lucas warrants that the Company was required to record as liabilities under SFAS 150. As a result of SFAS 150, the Company classified these warrants containing a put option as a current liability and adjusted the amount of this liability to its fair value on a periodic basis. Increases from higher accrued bonus and incentive payments as a result of the Company’s strong performance in 2006 were offset by decreases in other accrued amounts, principally accrued royalties.

Cash flows from investing activities were a net utilization of $112,465, $83,604, and $120,671 in 2007, 2006, and 2005, respectively. In July 2007, with the exception of rights to DUNGEONS & DRAGONS, the Company reacquired the remaining digital gaming rights for its owned or controlled properties held by Infogrames Entertainment SA (Infogrames). The acquisition price of $19,000 included $18,000 in cash and $1,000 of non-cash consideration in the form of the return of 39 shares of preferred stock held by the Company in a subsidiary of Infogrames. During 2005, the Company expended $65,000 to reacquire the digital gaming rights for certain of its owned or controlled properties from Infogrames. The rights repurchased in 2007 and 2005 were previously held by Infogrames on an exclusive basis as a result of a licensing agreement entered into during 2000. In addition, in 2005 the Company expended $14,179 to purchase the assets of Wrebbit Inc., a Montreal-based creator and manufacturer of innovative puzzles. The Company made no acquisitions in 2006. In 2005, the Company also had proceeds from the sales of property, plant and equipment of $33,083. These proceeds were primarily from the sale of the Company’s former manufacturing facility in Spain. During 2007, the Company expended approximately $92,000 on additions to its property, plant and equipment compared to $82,000 during 2006 and $71,000 during 2005. Of these amounts, 61% in 2007, 63% in 2006, and 61% in 2005 were for purchases of tools, dies and molds related to the Company’s products. In 2008, the Company expects capital expenditures to increase and be in the range of $100,000 to $115,000. During the three years ended December 30, 2007, depreciation and amortization of plant and equipment was $88,804, $67,773, and $78,097, respectively.

The Company commits to inventory production, advertising and marketing expenditures prior to the peak third and fourth quarter retail selling season. Accounts receivable increase during the third and fourth quarter as customers increase their purchases to meet expected consumer demand in the holiday season. Due to the concentrated timeframe of this selling period, payments for these accounts receivable are generally not due until the fourth quarter or early in the first quarter of the subsequent year. This timing difference between expenditures and cash collections on accounts receivable made it necessary for the Company to borrow varying amounts during the year. During 2007, 2006 and 2005, the Company primarily utilized cash from operations and its accounts receivable securitization program to fund its operations.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS
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The nine-month period ended September 30, 2007 was a thirty-nine week period while the nine-month period ended October 1, 2006 was a forty week period. The quarters ended September 30, 2007 and October 1, 2006 were both thirteen week periods. Net earnings for the quarter and nine months ended September 30, 2007 were $161,580 and $199,271, respectively, compared with net earnings of $99,584 and $121,773 for the respective periods of 2006. Basic earnings per share for the quarter and nine months ended September 30, 2007 were $1.04 and $1.25 compared with basic earnings per share of $0.62 and $0.72 for the respective periods in 2006. Diluted earnings per share were $0.95 and $1.16 for the quarter and nine months ended September 30, 2007, compared with diluted earnings per share of $0.58 and $0.68 for the respective periods in 2006. The 2007 results for the quarter and nine months ended September 30, 2007 include a favorable tax adjustment of $29,619, or $0.17 per diluted share, related to the realization of certain previously unrecognized tax benefits.

Consolidated net revenues for the quarter ended September 30, 2007 increased 18% to $1,223,038 compared to $1,039,138 for the quarter ended October 1, 2006. For the nine months ended September 30, 2007, consolidated net revenues were $2,539,713 compared to $2,035,083 for the nine months ended October 1, 2006, an increase of 25%. Consolidated net revenues were positively impacted by foreign currency translation in the amount of $22,400 and $44,700 for the quarter and nine months ended September 30, 2007, respectively, as the result of the weaker U.S. dollar in 2007. Operating profit for the quarter ended September 30, 2007 was $209,737 compared to $165,197 in the third quarter of 2006. Operating profit for the 2007 nine-month period was $319,241 compared to an operating profit of $183,670 for the nine-month period of 2006.


Most of the Company's revenues and operating profit are derived from its two principal segments: the North American segment and the International segment, which are discussed in detail below. The following table presents net revenues and operating profit data for the Company's two principal segments for the quarters and nine months ending September 30, 2007 and October 1, 2006.

NORTH AMERICAN SEGMENT
The North American segment net revenues for the quarter ended September 30, 2007 increased 10% to $822,703 from $745,476 for the quarter ended October 1, 2006. Net revenues for the nine months ended September 30, 2007 increased 19% to $1,693,190 from $1,417,736 for the nine months ended October 1, 2006. The increase for both the quarter and nine-month period was primarily due to increased revenues in the boys' toys category driven by sales of MARVEL and TRANSFORMERS products due to the theatrical releases of SPIDER-MAN 3 in May 2007 and TRANSFORMERS in July 2007. Although STAR WARS product sales have declined in 2007 from 2006, sales of these products have continued to be a significant contributor to boys' toys revenues in the quarter and nine months ended September 30, 2007. Revenues in the girls' toys category increased for both the quarter and nine-month period as a result of higher sales of LITTLEST PET SHOP and FURREAL FRIENDS products and, to a lesser extent, higher revenues from the BABY ALIVE line which was reintroduced in the second quarter of 2006. In addition, revenues in the girls’ toys category were positively impacted in the third quarter by increased shipments of MY LITTLE PONY products but negatively impacted by decreased sales of EASY-BAKE OVEN products due to the recall of the product in July of 2007. Revenues from the preschool category decreased in the third quarter of 2007 due to decreased sales of PLAY-DOH products, but were flat for the nine-month period ended September 30, 2007. Revenues from games and puzzles decreased for the quarter and nine-month period with decreased revenues from trading card and plug and play games partially offset by increased sales of traditional board games. Revenues from the tweens category decreased for the quarter and nine-month periods as a result of lower sales of electronic products such as VIDEONOW, ZOOMBOX and I-DOG partially offset by increased sales of NERF products.


The North American segment had an operating profit of $134,041 for the quarter ended September 30, 2007 compared to $111,581 for the quarter ended October 1, 2006. For the nine months ended September 30, 2007, the North American segment had an operating profit of $217,698 compared to $146,753 for the nine months ended October 1, 2006. The increase in operating profit for the quarter and nine-month periods was primarily the result of higher gross profits resulting from the higher revenues discussed above. Although North American gross profit increased as a result of the higher revenues, this increase in gross profit for the nine-month period ended September 30, 2007 was negatively impacted by approximately $10,400 of charges recorded in the second quarter of 2007 related to the July 2007 EASY-BAKE OVEN recall.


The increase in gross profit for the quarter and nine-month periods was also partially offset by higher royalty expense as the result of the increased sales of MARVEL and TRANSFORMERS movie-related products. Operating profit for the nine-month period ended September 30, 2007 was also impacted by higher advertising expense as well as higher selling and distribution costs related to the increased sales volume.

INTERNATIONAL
International segment net revenues increased by 33% to $374,027 for the quarter ended September 30, 2007 from $280,421 for the quarter ended October 1, 2006. Net revenues for the nine months ended September 30, 2007 increased 36% to $789,347 from $579,156 for the nine months ended October 1, 2006. For the quarter and nine months ended September 30, 2007, International segment net revenues were positively impacted by currency translation of approximately $21,700 and $44,900, respectively, as the result of the weaker U.S. dollar. Excluding the positive impact of foreign exchange, the increase in local currency revenue for the quarter and nine-month period was primarily the result of increased product sales in the boys' toys category. As in the North American segment, this increase was driven by higher sales of MARVEL products resulting from the theatrical release of SPIDER-MAN 3 in May of 2007 and TRANSFORMERS products resulting from the theatrical release of the TRANSFORMERS movies in most countries in July of 2007. The increased revenues in the International segment were also due to increased revenues from girls' toys as the result of increased sales of LITTLEST PET SHOP products and to a lesser extent, MY LITTLE PONY products. Revenues in the preschool category increased based on increased sales of PLAYSKOOL products as well as strong revenues of IN THE NIGHT GARDEN product line, which was recently launched in the United Kingdom. Revenues in the games and puzzles category were flat for the quarter but increased for the nine-month period primarily due to increased sales of MONOPOLY. Revenues from the tweens category for the quarter and nine-month periods ended September 30, 2007 were consistent with the revenues from the corresponding periods of the prior year.


The International segment had an operating profit of $57,634 for the quarter ended September 30, 2007 compared to $43,202 for the quarter ended October 1, 2006. The operating profit of $68,819 for the nine months ended September 30, 2007 compared to $26,786 for the nine months ended October 1, 2006. For the quarter and nine months ended September 30, 2007, International segment operating profits were positively impacted by currency translation of approximately $2,800 and $2,000 respectively, as the result of the weaker U.S. dollar. The increase in operating profit for the quarter and nine-month periods was due to the higher revenues discussed above. The increased gross profit as a result of the higher revenues was partially offset by higher royalty expense in both the quarter and nine-month periods due to higher sales of MARVEL and TRANSFORMERS products as well as higher advertising and selling, distribution and administration expenses in both periods.


GROSS PROFIT
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The Company's gross profit margin increased to 57.4% for the quarter ended September 30, 2007 from 55.6% for the quarter ended October 1, 2006 while gross profit margin for the nine months ended September 30, 2007 increased to 59.1% from 57.8% in the comparable period of 2006. This increase was due to changes in product mix primarily due to gross profits being positively impacted by higher sales of licensed products. Although licensed products generally carry a higher gross margin, the increased gross margin is largely offset by higher royalty expense associated with these products. Gross profit for the nine-month period was also impacted by approximately $10,400 in charges related to the recall of the Company's EASY-BAKE OVEN product.

For the quarter and nine-month periods, amortization expense decreased in dollars and as a percentage of net revenues. Amortization expense of $17,990 or 1.5% of net revenues in the third quarter of 2007, compared with $20,504, or 2.0% of net revenues in the third quarter of 2006. For the nine months ended September 30, 2007, amortization expense was $53,522, or 2.1% of net revenues compared with $57,896, or 2.8% of net revenues for the nine months ended October 1, 2006. A portion of amortization expense relates to licensing rights and is based on expected sales of products related to those licensing rights. The decrease in amortization expense in the quarter and nine months ended September 30, 2007 relates to decreased amortization of the product rights related to STAR WARS.


Royalty expense for the quarter ended September 30, 2007 increased to $93,035, or 7.6% of net revenues from $51,350, or 4.9% of net revenues in the third quarter of 2006. Royalty expense for the nine months ended September 30, 2007 increased to $205,819, or 8.1% of net revenues from $107,540, or 5.3% of net revenues for the nine months ended October 1, 2006. The increase is primarily due to increased sales of entertainment-based products, primarily MARVEL and TRANSFORMERS movie-related products due to the theatrical releases of SPIDER-MAN 3 and TRANSFORMERS in 2007. As a result of these theatrical releases, the Company expects higher royalty expense in 2007 compared to 2006.

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