
		Sept. 25,	Sept. 26,	Dec. 26,		April 2,	March 27,	Dec. 25,
Assets		2005	2004	2004		2006	2005	2005
		---------	---------	---------		---------	---------	---------
Current assets
Cash and cash equivalents	$	570,499	305,089	725,002	$	581,295	876,891	942,268
Short-term investments						147,675	-	-
Accounts receivable, less allowance
for doubtful accounts of $36,700,
$40,500 and $37,000		681,469	697,430	578,705
for doubtful accounts of $30,400,
$36,000 and $29,800						221,860	199,594	523,232
Inventories		330,779	317,120	194,780		213,183	232,660	179,398
Deferred income taxes		96,321	110,437	93,134		93,703	94,307	103,209
Prepaid expenses		99,386	147,985	126,601
Prepaid expenses and other current assets						122,127	138,828	82,088
		--------------	--------------	--------------		--------------	--------------	--------------
Total current assets		1,778,454	1,578,061	1,718,222		1,379,843	1,542,280	1,830,195

Property, plant and equipment, net		160,392	195,208	206,934		162,479	201,692	164,045
		--------------	--------------	--------------		--------------	--------------	--------------

Other assets
Goodwill		467,572	473,271	469,726		467,238	468,919	467,061
Other intangibles, less accumulated amortization					Other intangibles, less accumulated amortization
of $568,400, $482,500 and $489,200		635,166	664,452	637,929
of $604,295, $513,809 and $586,022						595,213	613,999	613,433
Other		230,056	211,246	207,849		292,006	200,853	226,409
		--------------	--------------	--------------		--------------	--------------	--------------
Total other assets		1,332,794	1,348,969	1,315,504		1,354,457	1,283,771	1,306,903
		--------------	--------------	--------------		--------------	--------------	--------------

Total assets	$	3,271,640	3,122,238	3,240,660	$	2,896,779	3,027,743	3,301,143
		========	========	========		========	========	========


				Sept. 25,		Sept. 26,		Dec. 26,			April 2,	March 27,	Dec. 25,
Liabilities and Shareholders' Equity	Liabilities and Shareholders' Equity			2005		2004		2004			2006	2005	2005
				---------		---------		---------			--------	--------	--------
Current liabilities	Current liabilities
Short-term borrowings	Short-term borrowings		$	13,854		16,356		17,959		$	10,289	16,159	14,676
Current portion of long-term debt	Current portion of long-term debt			354,809		1,356		324,124			-	356,619	32,770
Accounts payable	Accounts payable			179,031		188,831		167,585			102,792	112,715	152,468
Accrued liabilities	Accrued liabilities			649,744		635,465		638,943			526,383	505,593	710,812
				--------------		--------------		--------------			-------------	-------------	-------------
		Total current liabilities		1,197,438		842,008		1,148,611
Total current liabilities											639,464	991,086	910,726

Long-term debt, excluding current portion	Long-term debt, excluding current portion			246,480		632,411		302,698			494,871	266,242	495,619
Deferred liabilities	Deferred liabilities			157,097		146,169		149,627			139,794	151,229	171,322
				--------------		--------------		--------------			-------------	-------------	-------------
		Total liabilities		1,601,015		1,620,588		1,600,936
Total liabilities											1,274,129	1,408,557	1,577,667
				--------------		--------------		--------------			-------------	-------------	-------------
Shareholders' equity	Shareholders' equity
Preference stock of $2.50 par
	value. Authorized 5,000,000
	shares; none issued			-		-		-
Preference stock of $2.50 par value
Authorized 5,000,000 shares; none issued											-	-	-
Common stock of $.50 par value.	Common stock of $.50 par value.
	Authorized 600,000,000 shares;
	issued 209,694,630			104,847		104,847		104,847
Authorized 600,000,000 shares;
issued 209,694,630											104,847	104,847	104,847
Additional paid-in capital	Additional paid-in capital			361,767		383,849		380,745			354,376	374,587	358,199
Deferred compensation	Deferred compensation			(38	)	(248	)	(98	)		-	(65)	(24)
Retained earnings	Retained earnings			1,790,715		1,649,930		1,721,209			1,843,198	1,701,448	1,869,007
Accumulated other comprehensive earnings	Accumulated other comprehensive earnings			28,775		20,785		82,388			14,021	66,327	15,348
Treasury stock, at cost; 31,169,414 shares at
Treasury stock, at cost; 35,464,112 shares at
April 2, 2006, 31,476,112 at March 27,2005										April 2, 2006, 31,476,112 at March 27,2005
and 31,744,960 at December 25, 2005										and 31,744,960 at December 25, 2005	(693,792)	(627,958)	(623,901)
											-------------	-------------	-------------
Total shareholders' equity											1,622,650	1,619,186	1,723,476
	September 25, 2005, 32,720,445										-------------	-------------	-------------
	at September 26, 2004 and 32,379,369 at
Total liabilities and shareholders' equity										$	2,896,779	3,027,743	3,301,143
	December 26, 2004			(615,441	)	(657,513	)	(649,367	)		========	========	========
				--------------		--------------		--------------
		Total shareholders' equity		1,670,625		1,501,650		1,639,724
				--------------		--------------		--------------

		Total liabilities and shareholders' equity	$	3,271,640		3,122,238		3,240,660
				========		========		========

HASBRO, INC. AND SUBSIDIARIES	HASBRO, INC. AND SUBSIDIARIES											HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations	Consolidated Statements of Operations											Consolidated Statements of Operations
(Thousands of Dollars Except Per Share Data)	(Thousands of Dollars Except Per Share Data)											(Thousands of Dollars Except Per Share Data)
(Unaudited)	(Unaudited)											(Unaudited)
													Quarter Ended
													-------------------------------------------
													Fourteen	Thirteen
			Quarter Ended					Nine Months Ended					Weeks Ended	Weeks Ended
			--------------------					-------------------------					April 2, 2006	March 27, 2005
			Sept. 25, 2005 - --------			Sept. 26, 2004 - --------		Sept. 25, 2005 - --------		Sept. 26, 2004 - --------			----------------	---------------------
Net revenues	Net revenues		$	988,052		947,312		2,015,384		1,937,992		Net revenues	$ 468,181	454,944
Cost of sales	Cost of sales			444,775		423,458		835,516		817,531		Cost of sales	186,092	165,975
				------------		------------		-------------		-------------			------------	------------
Gross profit	Gross profit			543,277		523,854		1,179,868		1,120,461		Gross profit	282,089	288,969
				------------		------------		-------------		-------------			------------	------------
Expenses	Expenses											Expenses
Amortization												Amortization	18,252	24,755
Royalties												Royalties	25,990	40,872
Research and product development												Research and product development	38,164	31,041
Advertising												Advertising	54,854	54,190
Selling, distribution and administration												Selling, distribution and administration	146,955	136,571
	Amortization			28,167		16,888		79,852		47,881			------------	------------
	Royalties			66,539		65,087		158,206		131,747		Total expenses	284,215	287,429
	Research and product development			39,387		39,257		106,942		108,636			------------	------------
Operating profit (loss)												Operating profit (loss)	(2,126)	1,540
													------------	------------
Nonoperating (income) expense												Nonoperating (income) expense
Interest expense												Interest expense	7,126	7,731
Interest income												Interest income	(7,334)	(8,669)
Other expense, net												Other expense, net	3,535	5,703
	Advertising			118,845		129,403		238,009		243,751			------------	------------
	Selling, distribution and administration			162,061		151,179		439,921		429,005		Total nonoperating expense	3,327	4,765
				------------		-------------		-------------		--------------			------------	------------
Loss before income taxes												Loss before income taxes	(5,453)	(3,225)

Income taxes												Income taxes	(554)	488
													------------	------------
Net loss												Net loss	$ (4,899)	(3,713)
		Total expenses		414,999		401,814		1,022,930		961,020			=======	=======
				------------		-------------		-------------		--------------
Operating profit				128,278		122,040		156,938		159,441
				------------		-------------		-------------		--------------
Nonoperating (income) expense
Net loss per common share												Net loss per common share
	Interest expense			7,816		8,257		23,196		24,488		Basic and diluted	$ (.03)	(.02)
	Other (income) expense, net			(5,864	)	(5,513	)	(22,049	)	(15,606	)		=======	=======
Cash dividends declared per common share												Cash dividends declared per common share	$ .12	.09
				------------		-------------		-------------		--------------			=======	=======
		Total non-operating (income) expense		1,952		2,744		1,147		8,882
				------------		-------------		-------------		--------------
Earnings before income taxes				126,326		119,296		155,791		150,559
Income taxes				34,263		30,609		37,987		36,501
				------------		-------------		-------------		-------------
Net earnings			$	92,063		88,687		117,804		114,058
				=======		=======		=======		========

Net earnings per common share
Basic			$	.51		.50		.66		.65
				=======		=======		=======		=======
Diluted			$	.47		.43		.61		.52
				=======		=======		=======		=======
Cash dividends declared per
common share			$	.09		.06		.27		.18
				=======		=======		=======		=======
See accompanying condensed notes to consolidated financial statements.												See accompanying condensed notes to consolidated financial statements.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements

(1) In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of ~~September 25,~~April 2, 2006 and March 27, 2005, ~~and September 26, 2004,~~ and the results of its operations and cash flows for the periods then ended in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ from those estimates.

The ~~quarterly and year to date periods~~quarter ended ~~September 25,~~April 2, 2006 is a fourteen week period while the quarter ended March 27, 2005 ~~and September 26, 2004 are 13-week and 39-week periods, respectively.~~is a thirteen week period.

The results of operations for the ~~nine months~~quarter ended ~~September 25, 2005~~April 2, 2006 are not necessarily indicative of results to be expected for the full year.

These condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The Company filed audited financial statements for the year ended December ~~26, 2004~~25, 2005 in its annual report on Form 10-K, which includes all such information and disclosures, and accordingly, should be read in conjunction with the financial information included herein.

The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements for the fiscal year ended December 25, 2005 with the exception of the accounting for stock-based compensation. Effective December 26, ~~2004.~~ 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 amends Statement of Financial Accounting Standards No. 123, as amended by No. 148, and Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows". The Company adopted SFAS 123R under the modified prospective basis as defined in the statement. In 2006 the Company is recording stock option expense based on all unvested stock options as of the adoption date as well as all future stock-based compensation awards. See footnote 4 for further information related to the adopt ion of this statement.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
~~(Thousands of Dollars and Shares Except Per Share Data)~~
~~(Unaudited)~~

~~(2) Earnings per share data for the fiscal quarters and nine months ended September 25, 2005 and September 26, 2004 were computed as follows:~~

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Condensed Notes to Consolidated Financial Statements (continued)~~
(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

In December 2004 the Company adopted Emerging Issues Task Force ("EITF") Issue 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share", which states that the dilutive effect of contingent convertible debt instruments must be included in dilutive earnings(2) Net loss per share regardless of whether the triggering contingency has been satisfied. EITF Issue 04-8 requires application on a retroactive basis and restatement of prior period earnings per share, and was effective for periods ending after December 15, 2004. For the quarter and nine months ended September 25, 2005 and September 26, 2004, the effect of the assumed conversion was dilutive and accordingly,data for the ~~diluted earnings per share calculation, the numerator includes an adjustment to earnings for the interest expense incurred for these debentures~~fiscal quarters ended April 2, 2006 and ~~the denominator includes an adjustment for the shares issuable upon conversion.~~March 27, 2005 were computed as follows:

Certain warrants containing a put feature that may be settled in cash or common stock are required to be accounted for as a liability at fair value. The Company is required to assess if these warrants, classified as a liability, have a more dilutive impact on earnings per share when treated as an equity contract. ~~For~~Since the ~~quarters and nine months ended September 25, 2005 and September 26, 2004, the warrants~~Company had a ~~more dilutive impact on~~net loss in the first quarters of 2006 and 2005, these warrants, were not included in the calculation of diluted earnings per share ~~assuming~~because to include them would have been antidilutive. Had these warrants been included in 2006, they could have resulted in an additional 5,277 shares being included in the diluted earnings per share calculation with a corresponding adjustment to add back the related expense of $3,330 to reported net earnings.

Since the Company had a net loss in the first quarters of 2006 and 2005, the effect of the Company's contingent convertible debt was antidilutive for the first quarters of 2006 and 2005. Had the Company not had net losses in these periods, 11,574 shares would have been included in dilutive shares and interest expense, net of tax, of $1,066 would have been added back to net earnings to calculate earnings per share.

Options and warrants to acquire shares totaling 21,263 at April 2, 2006 and 21,706 at March 27, 2005, were ~~treated as~~excluded from the calculation of diluted earnings per share because to include them would have been antidilutive. Of the options and warrants to acquire shares totaling 21,263 at April 2, 2006 and 21,706 at March 27, 2005, 18,342 and 16,614 of these, respectively, would have been included in the calculation of diluted earnings per share had the Company not had a net loss in the first quarters of 2006 and 2005. Assuming that these options and warrants were included, under the treasury stock method, they would have resulted in an ~~equity contract. Accordingly, for~~additional 2,167 and 2,296 shares being included in the diluted earnings per share calculation for ~~these periods,~~ the ~~numerator includes~~quarters ended April 2, 2006 and March 27, 2005, respectively.

(3) At April 2, 2006, the Company has invested $147,675 in auction rate securities, which are recorded as short-term investments on the consolidated balance sheet. These securities are being accounted for as an ~~adjustment~~available-for-sale security and are reflected at par value, which reflects fair value.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to ~~earnings~~Consolidated Financial Statements (continued)

(4) Hasbro has various stock incentive plans for employees and for non-employee members of the ~~income included therein related~~Board of Directors (collectively, the "plans") and has reserved 24,568 shares of its common stock for issuance upon exercise of options and the grant of other awards granted or to be granted under the plans. These options generally vest in equal annual amounts over three to five years. The plans provide that options be granted at exercise prices not less than fair market value ~~adjustment~~on the date the option is granted and options are adjusted for such changes as stock splits and stock dividends. Generally, options are exercisable for periods of no more than ten years after date of grant. Certain of the ~~denominator includes an adjustment~~plans permit the granting of awards in the form of stock options, stock appreciation rights, stock awards and cash awards in addition to options. Upon exercise in the case of stock options or grant in the case of restricted stoc k, shares are issued out of available treasury shares. Additionally, the Company has reserved 17,450 shares of its common stock for issuance upon exercise of outstanding warrants.

The Company on occasion will issue restricted stock and grant deferred restricted stock units to certain key employees. In the first quarter of 2006, the Company issued restricted stock of 20 shares. These shares or units are nontransferable and subject to forfeiture for periods prescribed by the Company. These awards are valued at the market value at the date of grant and are subsequently amortized over the periods during which the restrictions lapse, generally 3 years. Amortization of unearned compensation expense relating to the outstanding restricted stock and deferred restricted stock units of $42 and $33 was recorded in the first quarters of 2006 and 2005, respectively.

Prior to fiscal 2006, Hasbro used the intrinsic-value method of accounting for stock options granted to employees and non-employee members of the Board of Directors. Effective December 26, 2005, the first day of fiscal 2006, the Company adopted SFAS 123R under the modified prospective transition method as defined in the statement. Under this adoption method, the Company is recording stock option expense in 2006 based on all unvested stock options as of the adoption date and any stock option awards made subsequent to the adoption date. Stock-based compensation is recognized on a straight-line basis over the requisite service period of the award. In accordance with the modified prospective transition method, the Company's consolidated financial statements for prior years have not been restated to reflect, and do not include, the impact of SFAS 123R. Compensation expense related to stock options recognized under SFAS 123R for the ~~shares issuable~~three m onths ended April 2, 2006 was $6,220 and was recorded as follows:

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

Pro forma information for the first quarter ~~end.~~of 2005 regarding net earnings as required by SFAS No. 123, “Accounting for Stock-Based Compensation” determined as if the Company had accounted for its stock options under the fair value method is as follows:

Information with respect to stock options for the quarter ended April 2, 2006 is as follows:

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

Options and warrants to acquire shares totaling 2,929 at September 25, 2005 and 10,292 at September 26, 2004 were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive.

~~(3) Hasbro~~The Company uses the ~~intrinsic-value method~~Black-Scholes valuation model in determining fair value of ~~accounting for stock~~stock-based awards. The weighted average fair value of options granted ~~to employees. As required by~~in the ~~Company’s existing~~first quarter of 2006 and the fiscal year 2005 were $5.15 and $5.41, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the first quarter of 2006 and the fiscal year 2005, respectively: risk-free interest rates of 4.58% and 3.84%; expected dividend yields of 2.20% and 1.75% and expected volatility of approximately 29% in both periods. Expected volatility was based on a combination of historical and implied volatility of publicly traded stock ~~plans, stock options are granted at, or above,~~options. The weighted average assumptions used for expected option lives were approximately 5 years in both periods which was based on the vesting period and contractual term of the option as well as employee exercise history. The intrinsic value, which represents the difference between the fair market value on the date of exercise and the exercise price of the ~~Company’s stock, and, accordingly, no compensation expense is recognized for these grants~~option, of the 817 options exercised in the ~~consolidated statements~~first quarter of ~~operations. The~~2006 was $4,399.

In addition to the above, the Company ~~records~~currently has 17,450 warrants outstanding and exercisable at April 2, 2006, which have a weighted average exercise price, weighted average remaining life and intrinsic value at April 2, 2006 of $20.11, 12.11 years, and $30,707, respectively.

At April 2, 2006, the amount of total unrecognized compensation ~~expense~~cost related to ~~other stock-based awards, such as~~stock options is $21,181 and the weighted average period over which this will be expensed is 11.28 months. At April 2, 2006, the amount of total unrecognized compensation cost related to restricted stock ~~grants,~~is $409 and the weighted average period over the period the award vests, typically three years. Had compensation expense been recorded under the fair value method as set forth in the provisions of Statement of Financial Accounting Standards No. 123 for stock options awarded, the impact on the Company’s net earnings and net earnings per sharewhich this will be expensed is 18.01 months.

(5) Other comprehensive loss for the ~~fiscal~~ quarters ended April 2, 2006 and ~~nine months ended September 25,~~March 27, 2005 ~~and September 26, 2004 would have been:~~

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Condensed Notes to Consolidated Financial Statements (continued)~~
~~(Thousands of Dollars and Shares Except Per Share Data)~~
~~(Unaudited)~~

~~(4) Other comprehensive earnings (loss) for the quarter and nine months ended September 25, 2005 and September 26, 2004~~ consist of the following:

Reclassification adjustments from other comprehensive ~~earnings (loss)~~loss to net ~~earnings~~loss of ~~$(221)~~$(316) and ~~$2,129~~$2,216 for the ~~quarter~~quarters ended April 2, 2006 and ~~nine months ended September 25,~~March 27, 2005, ~~and $1,613 and $5,168 for the quarter and nine months ended September 26, 2004~~respectively, represent net (gains) losses on cash flow hedging derivatives for which the related transaction has impacted earnings and was reflected in ~~the statement~~cost of ~~operations. The (gains)~~sales. These losses on cash flow hedging derivatives for ~~the quarter and nine months ended September 25,~~ 2005 include gains on cash flows reclassified to earnings as the result of hedge ineffectiveness of ~~$(462) and $(516) for the respective periods. The (gains) losses on cash flow hedging derivatives for the quarter and nine months ended September 26, 2004 are net of losses on cash flows reclassified~~$31. There were no reclassifications to earnings as ~~the~~a result of hedge ineffectiveness in the first quarter of ~~$13 and $157, respectively.~~2006. The Company expects the remaining deferred ~~l oss~~gains on derivative hedging instruments at ~~September 25, 2005~~April 2, 2006 of ~~$3,018~~$2,946 in accumulated other comprehensive earnings to be reclassified to earnings ~~during~~within the ~~remainder of 2005 and in 2006.~~
next twelve months.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

~~(5)~~(6) The following table presents the components of the net periodic cost of the Company's defined benefit pension and other postretirement plans for the quarters ended April 2, 2006 and ~~nine months ended September 25, 2005 and September 26, 2004 are as follows:~~March 27, 2005.

	Quarter Ended
	--------------------

	Pension				Postretirement
	------------------				------------------		Pension		Postretirement
	Sept. 25, 2005		Sept. 26, 2004		Sept. 25, 2005	Sept. 26, 2004	2006	2005	2006	2005
	-------		-------		-------		-------	-------	-------	-------
Service cost	$ 2,971		2,641		144	151	$ 3,481	3,004	180	144
Interest cost	4,545		4,233		500	571	5,038	4,620	542	500
Expected return on assets	(4,690	)	(4,129	)	-		(5,774)	(4,762)	-	-
Net amortization and deferrals	886		764		88	134	1,259	910	122	87
	--------		--------		--------		--------	--------	--------	--------
Net periodic benefit cost	$ 3,712		3,509		732	856	$ 4,004	3,772	844	731
	=====		=====		=====		=====	=====	=====	=====

~~During fiscal 2005~~In the first quarter of 2006, the Company ~~has~~ made cash contributions to its pension plans of approximately ~~$11,163.~~$31,800, which are included in other operating activities on the Company's consolidated statement of cash flows. The Company expects to contribute approximately ~~$2,000~~$8,200 during the remainder of ~~fiscal 2005.~~
2006.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Condensed Notes to Consolidated Financial Statements (continued)~~
~~(Thousands of Dollars and Shares Except Per Share Data)~~
~~(Unaudited)~~

~~(6)~~ Hasbro is a worldwide leader in children’s and family leisure time and entertainment products and services, including the ~~design,~~development, manufacture and marketing of games and ~~toys. The Company's main reportable segments are U.S. Toys, Games, and International. The~~toys ranging from traditional to high-tech. In 2006 the Company ~~has one other segment, Operations, which meets the quantitative thresholds for reportable segments.~~

~~In the United States,~~restructured its business by combining the U.S. Toys and Games operations, previously reported as separate segments, with the Canadian and Mexican operations, previously managed as part of the International segment, into one segment, the North American segment. The International segment is comprised of operations in the European, Asia Pacific and Latin American regions. The Company's manufacturing facilities in East Longmeadow, Massachusetts and Waterford, Ireland, which were previously included in the Games and International segment, respectively, along with the Company's Far East sourcing operations are now managed as part of the Global Operations segment.

The North American segment includes the ~~design,~~development, marketing and selling of boys' action figures, vehicles and playsets, girls' toys, electronic toys and games, plush products, ~~children's consumer electronics,~~ preschool toys and infant products, ~~creative play products,~~ electronic interactive products, tween electronic ~~learning aids, and~~products, toy-related specialty ~~products. The Games segment includes the development, manufacturing, marketing and selling of~~products, traditional board games and puzzles, ~~DVD-based games, handheld electronic games, plug and play electronic~~DVD- based games, and trading card and role-playing ~~games.~~games within the United States, Canada and Mexico. Within the International segment, the Company develops, ~~manufactures,~~ markets and sells both toy and certain game products in ~~non-U.S. markets.~~non-North American markets, primarily the European, Asia Pacific, and Latin American regions. The Global Operations segment ~~sources~~is responsible for manufacturing and sourcing finished product for the majority of the Company's segments. The Company also has ~~other segments~~another segment that ~~primarily license~~licenses out certain toy and game properties. ~~These o ther segments do not meet the quantitative thresholds for reportable segments and have been combined for reporting purposes.~~

Segment performance is measured at the operating profit level. Included in Corporate and eliminations are ~~general~~certain corporate expenses, the elimination of intersegment transactions and certain assets benefiting more than one segment. Intersegment sales and transfers are reflected in management reports at amounts approximating cost. Certain shared costs are allocated to segments based upon foreign exchange rates fixed at the beginning of the year, with adjustment to actual foreign exchange rates included in Corporate and eliminations.

2005 segment data has been restated to reflect the 2006 segment structure. In 2006 the Company adopted SFAS 123R, which requires the Company to record expense related to stock options in its consolidated financial statements. Consistent with management's approach in evaluating segment results, 2005 segment operating profit (loss) has been adjusted to include stock-based compensation as disclosed under SFAS 123. The amount of 2005 stock option expense is subtracted from the total segment operating profit (loss) in order to reconcile to the operating profit (loss) in the consolidated financial statements.

With the exception of the treatment of stock-based compensation expense for 2005 management financial statements, the accounting policies of the segments are the same as those referenced in Note 1.

Results shown for the quarter ~~and nine months~~ are not necessarily representative of those ~~that~~which may be expected for the full year ~~2005,~~2006 nor were those of the ~~comparable 2004 periods~~2005 first quarter representative of those actually experienced for the full year ~~2004.~~2005. Similarly, such results are not necessarily ~~representative of~~ those which would be achieved were each segment an unaffiliated business enterprise.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Condensed Notes to Consolidated Financial Statements (continued)~~
~~(Thousands of Dollars and Shares Except Per Share Data)~~
~~(Unaudited)~~

Information by segment ~~and a reconciliation to reported amounts~~ for the ~~quarter~~quarters ended April 2, 2006 and ~~nine months ended September 25,~~March 27, 2005 ~~and September 26, 2004 are~~is as ~~follows.~~follows:

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Condensed Notes to Consolidated Financial Statements (continued)~~
~~(Thousands of Dollars and Shares Except Per Share Data)~~
~~(Unaudited)~~

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(a) The Global Operations segment derives substantially all of its revenues, and thus its operating results from intersegment activities.

(b) As noted in footnote 4, on December 26, 2005, the first day of fiscal 2006, the Company adopted SFAS 123R using the modified prospective method. Under this method, the Company recorded expense related to stock option compensation in 2006 related to unvested options as of that date as well as grants made in 2006. The Company did not restate any of the prior years. The Company has restated the operating profit (loss) of each of its segments for the first quarter of 2005 to reflect stock compensation for that period based on the Company's 2005 pro forma disclosure under SFAS 123. The above amount represents the reversal of the amount included in the segment disclosures to reconcile to the 2005 consolidated operating profit for the quarter ended March 27, 2005. The $5,574 of 2005 pro forma stock option expense was allocated to the segments as follows: $3,729 to North America, $1,042 to Inte rnational, $429 to Global Operations and $374 to Other Segment.

(c) Certain intangible assets, primarily goodwill, which benefit operating segments are reflected as Corporate assets for segment reporting purposes. These amounts have been allocated to the reporting unit which benefits from their use. In addition, allocations of certain expenses related to these assets to the individual operating segments are done prior to the start of the year based on budgeted amounts. Any difference between actual and budgeted amounts are reflected in the Corporate segment.

The following table presents consolidated net revenues by class of principal products for the quarters ended April 2, 2006 and ~~nine month periods ended September 25,~~March 27, 2005. Certain 2005 ~~and September 26, 2004. Certain 2004~~ amounts have been reclassified to conform to the current ~~year~~period presentation.

(7) In May 2005 the Company's Board of Directors authorized the repurchase of up to $350 million in common stock. Purchases of the Company's common stock may be made from time to time, subject to market conditions, and may be made in the open market or through privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization and the timing, actual number, and value of shares which are repurchased will depend on a number of factors, including the price of the Company's common stock. This authorization replaces all prior authorizations. In the third quarter and nine months ended September 25, 2005, the Company repurchased 1,168 and 1,528 shares, respectively, at an average price of $20.89 and $20.76, respectively. The total cost of these repurchases, including transaction costs, for the quarter and nine months ended September 25, 2005 was $24,436 and $31,777, respectively.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Condensed Notes to Consolidated Financial Statements (continued)~~
~~(Thousands of Dollars and Shares Except Per Share Data)~~
~~(Unaudited)~~

(8) On September 9, 2005, the Company purchased the assets and assumed certain liabilities of Wrebbit Inc., a Montreal-based creator and manufacturer of innovative puzzles. The purchase price was approximately $14,100, subject to adjustment. Based on a preliminary allocation of the purchase price, property rights related to acquired product lines of approximately $11,500 were recorded in connection with this acquisition. No goodwill was recorded as a result of this acquisition.

During June 2005 the Company reacquired the digital gaming rights for all its owned or controlled properties from Infogrames Entertainment SA (Infogrames) for $65 million. These rights were previously held by Infogrames on an exclusive basis as a result of a license agreement entered into during 2000 with an expiration date in 2016. The consideration paid to reacquire these rights, which represents fair value, is included as a component of other intangibles in the condensed consolidated balance sheet and will be amortized over a 10-year period. In addition, the Company and Infogrames entered into a new licensing agreement that provides Infogrames exclusive rights to DUNGEONS & DRAGONS and rights to nine other properties for a limited number of platforms. Under the agreement, Hasbro will receive royalty income on Infogrames sales.

(9) On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. The Act creates a one-time incentive for U.S. corporations to repatriate undistributed earnings from their international subsidiaries by providing an 85% dividends-received deduction for certain international earnings. The deduction is available to corporations during the tax year that includes October 22, 2004 or in the immediately subsequent tax year. The Company is in the process of evaluating whether it will repatriate international earnings under the provisions of the Act. The Company expects to complete its evaluation of the effects of the repatriation provision during the fourth quarter of 2005. The range of possible amounts the Company is considering for repatriation under this provision is between zero and $500,000. The related potential range of income tax under the law as curren tly written is between zero and approximately $40,000.

The Company earns revenue and generates cash through the sale of a variety of toy and game products. The Company sells these products both within the United States and in a number of international markets. ~~Most~~While many of the Company's products are ~~either internally developed~~based on brands the Company owns or controls, the Company also offers products which are licensed from outside inventors. ~~In addition~~The Company also licenses rights to produce products based on movie, television, music and other family entertainment properties, such as STAR WARS.

In January 2006 the Company announced that it had simplified and integrated its ~~own~~operating segment structure in order to better focus on consumer demands, better anticipate the needs of its retail customers, provide a more integrated toy and game marketing plan, place a greater company-wide focus on its core brands and thereby improve its overall business. The Company’s North American toy and games business is now managed under common leadership, providing a combined focus on developing, marketing, and selling products in the ~~Company also offers internally developed products tied~~U.S., Canada and Mexico. The International segment consists of the Company’s European, Asia Pacific and Latin American marketing operations. The Company’s world-wide manufacturing and product sourcing operations are managed through its Global Operations segment. The Hasbro Properties Group continues to ~~licensed movie~~be responsible for the world-wide licensing of the Company's intellectual properties a nd works closely with the North American and ~~television based entertainment~~International segments on the development and ~~other licensed properties.~~outlicensing of the Company's brands.

~~Developing~~ developing new and innovative ~~toy~~products which respond to market insights, and ~~game products, and~~

~~Increasing operating margins by~~ optimizing efficiencies within the ~~Company.~~

~~Management views the Company's principal product opportunities as falling into three general categories: core brands, innovative new products~~Company to reduce costs, increase operating profits and licensed entertainment-based products. Although licensed sales in 2005 represent a significant portion of net revenues due to the theatrical release of STAR WARS EPISODE III: REVENGE OF THE SITH, in the past four yearsstrengthen its balance sheet. While the Company has ~~actively~~ sought to ~~reduce its reliance on products based on theatrical properties~~achieve a more sustainable revenue base by developing and ~~to achieve more consistent performance by focusing greater resources on the development and growth of~~maintaining its core brands and ~~on developing innovative products. The Company intends to continue to offer products based~~avoiding reliance on licensed entertainment properties, ~~when it believes it is economically beneficial.~~ the Company continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and leverage its key strengths.

The Company's core brands represent Company-owned or Company–controlled brands, such as G.I. JOE, TRANSFORMERS, MY LITTLE PONY, MONOPOLY, MAGIC: THE GATHERING, PLAYSKOOL and TONKA, which have been successful for the Company ~~views as presenting potential to be 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. ~~While the volatility of consumer preferences and the high level of competition in the toy and game industry make it challenging to maintain the long-term success of product lines,~~These brands may also be further extended by pairing a licensed concept with a core-brand. By focusing on ~~its~~ core brands, the Company is working to build a more consistent revenue stream and basis for future growth.

In addition to its focus on core brands, the Company’s strategy also involves trying to meet ~~ever changing~~ever-changing consumer preferences by identifying and offering innovative products based on market ~~opportunities. In 2004 innovative~~opportunities and insights. Innovative electronic products include items such as I-DOG, VIDEONOW ~~COLOR were significant contributors to revenue for the Company. Product offerings for 2005 include the reintroduction of LITTLEST PET SHOP, FURBY, CHAT NOW~~XP, ZOOMBOX and ~~I-DOG as well as a variety of plug and play games.~~an enhanced, interactive FURBY. 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.

With the theatrical release of Lucasfilm's STAR WARS EPISODE III: REVENGE OF THE SITH in May 2005, and the subsequent holiday season DVD release, sales of product related to the Company’s strategic STAR WARS license were a significant contributor to 2005 revenues and have continued to be strong in the first quarter of 2006. Pairing this key licensed property with the Company's ability to design and produce action figures, role playing toys, and games, as well as the ability to launch an integrated marketing campaign to promote the product globally, was the key to this line's success. While sales of product related to this license performed well in the first quarter of 2006, they were lower than the first quarter of 2005 and are expected to decrease in 2006 since there is no movie release in 2006.

While the Company's strategy has continued to focus on growing its core brands and developing innovative, new products, the Company will continue to evaluate and enter into arrangements to license properties when the Company believes it is economically attractive. In the first quarter 2006, the Company announced that it had entered into a license with Marvel Entertainment, Inc. and Marvel Characters, Inc. (collectively "Marvel") to produce toys and games based on Marvel’s portfolio of characters. 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 items.

The Company's strategy in the last several years has also involved reducing fixed costs and increasing operating margins. With a strong balance sheet and having achieved its desired debt to capitalization ratio, the Company will continue to evaluate 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. Additionally, the Company has a remaining share repurchase authorization from its Board of Directors of $208,293 at April 2, 2006. The Company intends to continue repurchasing shares under this remaining authorization subject to market conditions.

The relationship between various components of the results of operations, stated as a percent of net revenues, is illustrated below for the first quarters of 2006 and 2005.

The first quarter of 2006 was a fourteen week period while the first quarter of 2005 was a thirteen week period. Net loss for the first quarter of 2006 was $(4,899) compared with a net loss of $(3,713) in the first quarter of 2005. Basic and diluted loss per share for the quarter were $(.03) in 2006 compared with $(.02) in 2005. 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" ("SFAS123R"), 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 relating to stock option awards that were unvested as of the date of adoption as well as all awards made after the date of ad option. The adoption of this statement resulted in total expense, net of tax, of $4,076 in the first quarter of 2006.

~~While~~Consolidated net revenues for the quarter ended April 2, 2006 increased 3% to $468,181 from $454,944 for the quarter ended March 27, 2005. Net revenues were negatively impacted by foreign currency translation in the amount of $8,700 as the result of a stronger U.S. dollar in 2006. Operating loss for the quarter ended April 2, 2006 was $(2,126) compared to an operating profit of $1,540 in 2005. The 2006 results are based on fourteen weeks of net revenues and expenses compared to thirteen weeks in 2005. Most of the Company's ~~strategy focuses on growing~~revenues and operating profit (loss) are derived from its ~~core brands~~two principal segments: the North American segment and the ~~development~~International segment, which are discussed in detail below.

The following table presents net revenues and operating profit (loss) data for the Company's two principal segments for the first quarter of ~~innovative, new products, the Company continues~~fiscal years 2006 and 2005. 2005 results have been reclassified to evaluate and enter into arrangements to license movie and television entertainment-based properties when the Company believes it is economically beneficial. In 2005 the STAR WARS license has been a significant contributorconform to the Company's new operating segment structure. The operating profit (loss) for 2005 for each of these segments have 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 footnote 7 to the consolidated financial statements for further details.

The North American segment's net revenues ~~driven~~for the quarter ended April 2, 2006 increased 7% to $310,304 from the same period in 2005. The increase is primarily due to increased shipments of LITTLEST PET SHOP products, as well as increased sales of certain core brands, including PLAYSKOOL, MAGIC: THE GATHERING, TRANSFORMERS, SUPER SOAKER and NERF and increased sales of traditional board games. These increases were partially offset by the anticipated decline in shipments of STAR WARS products as well as decreased sales of DUEL MASTERS products. The Company had significant sales of STAR WARS products in 2005 related to the May ~~19,~~ 2005 theatrical release of STAR WARS EPISODE III: REVENGE OF THE SITH. ~~Major theatrical entertainment-based licenses~~ and the subsequent DVD release in ~~2004 included DREAMWORKS' SHREK II, DISNEY'S THE INCREDIBLES,~~the fourth quarter of 2005. The Company expects significant declines in revenues from the sales of STAR WARS products for the fiscal year 2006 versus 2005.

The North American segment operating profit of $4,770 for the quarter ended April 2, 2006 compares to an operating profit of $4,637 for the quarter ended March 27, 2005. Decreases in royalty and amortization expenses as a result of the decrease in sales of STAR ~~WARS. While gross profits for~~WARS products were largely offset by increased product development and marketing expenses as well as slightly higher advertising expense. Gross profit remained consistent in 2006, despite the increase in sales, due to the product mix, primarily the result of lower sales of STAR WARS products. 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. In addition, expenses for the segment were negatively impacted by one extra week in the first quarter of 2006 versus 2005.

International segment net revenues decreased by 5% to $145,491 for the quarter ended April 2, 2006 from $153,088 for the quarter ended March 27, 2005. International net revenues were negatively impacted by currency translation of approximately $10,400, as the result of the stronger U.S. dollar. Excluding the unfavorable impact of foreign exchange, International net revenues increased 2% in local currency to $155,891. The increase in local currency revenue for the quarter was primarily the result of increased sales of BDAMAN and MONOPOLY products, as well as sales of FURBY products, which were reintroduced in the third quarter of fiscal 2005. These increases were mostly offset by decreased revenues from shipments of STAR WARS products and DUEL MASTERS and BEYBLADE products.

International segment operating loss was $8,323 for the quarter ended April 2, 2006 compared to a loss of $7,873 for the quarter ended March 27, 2005. Although revenues were negatively impacted by the stronger U.S. dollar, as noted above, operating expenses were also impacted, with a resulting net favorable impact to the International segment operating loss of approximately $1,000 for the quarter ended April 2, 2006. Absent the impact of foreign exchange rates, the increase in operating loss was primarily due to increased royalty expense with the decrease in royalties from lower sales of STAR WARS products being more than offset by higher sales of other licensed products. In addition, the operating loss was negatively impacted by increased product development expenses as the Company continues to invest in its core brands. These increased expenses were partially offset by decreased amortization expense as a result of lower STAR W ARS sales. In addition, expenses for the segment were negatively impacted by one extra week in the first quarter of 2006 versus 2005.

The Company's gross profit margin decreased to 60.3% for the quarter ended April 2, 2006 from 63.5% for the quarter ended March 27, 2005. This decrease was due to changes in product mix, primarily due to decreased sales of STAR WARS products which tend to have a higher gross margin as well as lower royalty income in the first quarter of 2006 compared to the first quarter of 2005. The Company anticipates lower gross margins in 2006 due to the significant STAR WARS product revenues recognized in 2005 in connection with the theatrical and DVD releases of STAR WARS EPISODE III: REVENGE OF THE ~~SITH are generally higher,~~SITH. However, the ~~increased~~Company also expects that the decrease in gross ~~margin is largely~~margins will be partially offset by decreased royalty ~~expenses incurred on~~expense relating to these sales as well as decreased amortization ~~expense~~ of related ~~property~~product rights.

In recent years the Company has also focused on reducing its fixed costs and increasing its operating margins. As part of this continuous process, in 2004, the Company reassessed the development process in its U.S. Toys segment, moving a greater amount of product development outside of the U.S., resulting in a streamlining of its U.S. Toys workforce. While the Company has made significant progress in this area over the last few years, it will continue to review its operations in order to determine areas where greater efficiency can be achieved.

The Company's recent strategy has also focused on achieving and maintaining a debt-to-capitalization ratio, defined as total debt, both short-term and long-term, as a percentage of total equity plus total debt, of 25-30%. From 2001 through 2004, as part of this strategy, the Company has repurchased or repaid approximately $547,000 in principal amount of long-term debt, primarily using cash from operations. The Company believes that the reduction in its debt-to-capitalization ratio has further strengthened its balance sheet and improved its liquidity by decreasing cash requirements to service outstanding debt, thereby increasing the ability of the Company to obtain additional financing should the need to do so arise. At September 25, 2005, the Company’s debt-to-capitalization ratio was approximately 27%, which compared to approximately 30% at September 26, 2004 and 28% at December 26, 2004. Due to the seasonal nature o f the business, the Company's debt-to-capitalization ratio normally peaks at the end of the third quarter, when its working capital requirements are greatest. It is the Company's intent to maintain its debt-to-capitalization ratio within the above stated target range.

The Company has also taken some additional initiatives to increase shareholder value. In the first quarter of 2005 the Company increased its quarterly dividend from $0.06 per share to $0.09 per share. In addition, in May 2005, the Company announced the authorization by its Board of Directors to repurchase up to $350 million in common stock. Purchases under this plan are discretionary and the Company may suspend or discontinue the plan at any time. In the second and third quarters of 2005, the Company repurchased an aggregate of 1,528,300 shares at an average price of $20.76 under this authorization.

Consolidation in the toy and game industry and associated retail uncertainty has continued into 2005, and includes the recently completed sale of one of the Company's largest customers, Toys 'R Us. The Company's remaining customer base continues to become more concentrated. The Company's top three customers, Wal-Mart Stores, Inc., Toys 'R Us, Inc. and Target Corporation, accounted for approximately 46% of full year net revenues in 2004. These same three customers accounted for approximately 21%, 13%, and 12%, respectively, of net revenues for the nine months ended September 25, 2005, and 19%, 15%, and 10%, respectively, of net revenues for the nine months ended September 26, 2004. The consolidation of customers may provide certain benefits to the Company, such as potentially more efficient product distribution and other decreased costs of sales and distribution, including potential efficiencies related to SKU reductions. H owever, this consolidation also creates additional risks to the Company's business associated with a major customer having financial difficulties or reducing its business with the Company. In addition, increased customer concentration may decrease the prices the Company is able to obtain for some of its products. The Company believes that its strategy of seeking to produce sought after products, which provide value to both consumers and the Company's customers, will help protect the Company from any negative impact resulting from an environment of increasing retail consolidation.

The relationship between various components of the results of operations, stated as a percent of net revenues, is illustrated below for the fiscal quarters and nine months ended September 25, 2005 and September 26, 2004.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Management's Discussion and Analysis of Financial~~
~~Condition and Results of Operations (continued)~~

~~RESULTS OF OPERATIONS~~
~~- -----------------------------------------~~
Net earnings for the quarter and nine months ended September 25, 2005 were $92,063 and $117,804, respectively, compared with net earnings of $88,687 and $114,058 for the respective periods of 2004. Basic earnings per share for the quarter and nine months ended September 25, 2005 were $0.51 and $0.66 compared with basic earnings per share of $0.50 and $0.65 for the respective periods in 2004.

Diluted earnings per share were $0.47 and $0.61 for the quarter and nine months ended September 25, 2005, compared with diluted earnings per share of $0.43 and $0.52 for the respective periods in 2004. The 2004 earnings per share amounts have been restated due to the required adoption of EITF 04-08 in the fourth quarter of 2004.

Consolidated net revenues for the quarter ended September 25, 2005 increased 4% to $988,052 compared with $947,312 for the quarter ended September 26, 2004. For the nine months ended September 25, 2005, consolidated net revenues were $2,015,384 compared to $1,937,992 for the nine months ended September 26, 2004, an increase of 4%. For the quarter and nine months ended September 25, 2005, revenues were positively impacted by currency translation of approximately $5,900 and $22,000, respectively. Operating profit for the quarter ended September 25, 2005 was $128,278 compared to $122,040 in the third quarter of 2004. Operating profit for the 2005 nine-month period was $156,938 compared to an operating profit of $159,441 for the nine-month period of 2004. Most of the Company's revenues and operating earnings are derived from its three principal segments: U.S. Toys, Games and International. The following table pr esents net revenues and operating profit data for the Company's three principal segments for the quarter and nine months ending September 25, 2005 and September 26, 2004.

~~U.S. TOYS~~
U.S. Toys segment net revenues for the quarter ended September 25, 2005 increased 6% to $393,112 from $369,703 for the quarter ended September 26, 2004. Net revenues for the nine months ended September 25, 2005 increased 12% to $768,925 from $689,254 for the nine months ended September 26, 2004.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Management's Discussion and Analysis of Financial~~
~~Condition and Results of Operations (continued)~~

The increase for the quarter and nine months was primarily due to increased shipments of STAR WARS products as a result of the theatrical release of STAR WAR EPISODE III: REVENGE OF THE SITH. In addition, revenues were also positively impacted by sales of LITTLEST PET SHOP and the reintroduction of FURBY, as well as increased sales of NERF products. These increases were partially offset by decreased sales of VIDEONOW, FURREAL FRIENDS, BOOHBAH and BEYBLADE products. Revenues for the nine months ended September 25, 2005 were also negatively impacted by decreased sales of certain licensed products, primarily SHREK and POKEMON products, as well as decreased sales of PLAYSKOOL and G.I. JOE products.

The U.S. Toys segment had an operating profit of $33,967 for the quarter ended September 25, 2005 compared to an operating profit of $20,848 for the quarter ended September 26, 2004. For the nine months ended September 25, 2005, the U.S. Toys segment had an operating profit of $56,527 compared to an operating profit of $14,892 for the nine months ended September 26, 2004.

This increase in operating profit for the quarter primarily related to decreased advertising expense as well as increased gross profit. Increased gross profit was the result of the higher net revenues as well as a change in product mix, due to the increased sales of STAR WARS products which carry a higher gross margin. Advertising decreased due to the sales mix, as a greater percentage of current year sales were STAR WARS products, which do not require as much advertising as core brands. Increased royalties and amortization expense for the quarter as a result of the increased STAR WARS sales were partially offset by decreased royalty expense on other licensed products, including SHREK, DISNEY and BEYBLADE products. The increased operating profit for the nine-month period was the result of increased gross profit, which was partially offset by increased royalties and amortization, driven by the increased sales of STAR WARS products.

~~GAMES~~
Games segment net revenues increased by 7% to $252,927 for the quarter ended September 25, 2005 from $236,501 for the quarter ended September 26, 2004. Net revenues for the nine months ended September 25, 2005 decreased 6% to $494,863 from $525,701 for the nine months ended September 26, 2004. The increase for the quarter is due in part to increased sales of plug and play games such as STAR WARS LIGHT SABER, MX DIRT REBEL, DREAMLIFE and WILD ADVENTURE MINI-GOLF. The increase was also due to increased sales of board games including CANDY LAND and MONOPOLY, which partially offset decreased sales of TRIVIAL PURSUIT games. The decrease for the nine-month period primarily relates to lower revenues from trading card games, including sales of MAGIC: THE GATHERING and DUEL MASTERS products, as well as the decreased sales of TRIVIAL PURSUIT games. These decreases have been partially offset by the increased sales of plug and play games.

Games segment operating profit decreased slightly to $45,477 for the quarter ended September 25, 2005 from $46,418 for the quarter ended September 26, 2004. Operating profit for the nine months ended September 25, 2005 decreased to $60,125 from $94,713 for the nine months ended September 26, 2004. Increased gross margin for the quarter was offset by higher shipping costs. The decrease in operating margin for the nine-month period was principally the result of decreased gross profit as the result of the decline in sales, as well as changes in product mix. Trading cards sales, which have a higher gross margin than traditional board games and electronic games, have declined in the nine months ended September 25, 2005 and have been partially offset by higher sales of electronic games, which have lower gross margins than traditional board games or trading card games.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Management's Discussion and Analysis of Financial~~
~~Condition and Results of Operations (continued)~~

~~INTERNATIONAL~~
International segment net revenues remained consistent with the prior year revenues with a slight increase to $333,052 for the quarter ended September 25, 2005 from $331,554 for the quarter ended September 26, 2004. Net revenues for the nine months ended September 25, 2005 increased 4% to $721,179 from $691,480 for the nine months ended September 26, 2004. For the quarter and nine months ended September 25, 2005, International segment net revenues were positively impacted by currency translation of approximately $4,700 and $20,500, respectively, as the result of the weaker U.S. dollar. Excluding the favorable impact of foreign exchange, the decrease in local currency revenue for the quarter was primarily the result of decreases in BEYBLADE, VIDEONOW, DUEL MASTERS, FURREAL FRIENDS and ACTION MAN products, offsetting increased sales of STAR WARS products, the introduction of B'DAMAN and the reintroduction of FURBY products. The increase for the nine month period represents increased shipments of STAR WARS, FURBY, LITTLEST PET SHOP and B'DAMAN products partly offset by decreased sales of BEYBLADE, MAGIC: THE GATHERING, FURREAL FRIENDS, and ACTION MAN products, as well as decreases in other licensed products, primarily SHREK and DISNEY products.

The International segment had an operating profit of $44,993 for the quarter ended September 25, 2005, compared to an operating profit of $48,766 for the quarter ended September 26, 2004. Operating profit for the nine months ended September 25, 2005 decreased to $40,824 from $41,490 for the nine months ended September 26, 2004. Although revenues were positively impacted by the weaker U.S. dollar, as noted above, operating expenses were also impacted, with a resulting net favorable translation impact to International operating profit of approximately $700 for the quarter and an unfavorable translation impact of $400 for the nine months ended September 25, 2005. Absent the impact of foreign exchange rates, the decline in operating profit for the quarter was the result of higher royalty and amortization expense as a result of increased sales of STAR WARS products, which offset increased gross margins from higher revenues. The slight decrease in the nine-month period was the result of higher royalty, amort ization and advertising expense offsetting increased gross margins from the higher revenues.

~~GROSS PROFIT~~
~~- -----------------------~~
The Company's gross profit margin decreased to 55.0% for the quarter ended September 25, 2005 from 55.3% for the quarter ended September 26, 2004 while gross margin for the nine months ended September 25, 2005 increased to 58.5% from 57.8% in the comparable period of 2004. The decrease for the quarter reflects a change in product mix as increased sales of electronic toys and games, which have higher product costs, caused a decrease in overall gross margin. The decrease from this was partially offset by increased sales of STAR WARS products, which carry a higher gross margin. Gross profit margin for the nine months ended September 25, 2005 was also adversely effected by decreased sales of trading card games, which carry a high gross margin. Although the STAR WARS products carry a higher gross margin, the increased gross margin is largely offset by higher royalty and amortization expense associated with these products. The Company aggressively monitors its levels of inventory, attempting to avoid ~~unneces sary~~unnecessary expenditures of cash and potential charges related to obsolescence. The Company's failure to accurately predict and respond to consumer demand could result in overproduction of less popular items, which could result in higher obsolescence costs, causing a reduction in gross profit.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Management's Discussion and Analysis of Financial~~
~~Condition and Results of Operations (continued)~~

While estimates of future costs are included in the Company's pricing of its products, other factors, including foreign currency exchange rate fluctuations or a continued significant increase in the price of commodities such as oil based plastic resins, paper and cardboard, could have a negative impact on the Company's gross margins.

The Company's operating expenses, stated as percentages of net revenues, are illustrated below for the first quarters of fiscal years 2006 and ~~nine-month periods ended September 25, 2005 and September 26, 2004.~~2005.

	Quarter		Nine Months
	2005	2004	2005	2004	2006	2005
	-----------	----------	------------	----------	-------------	------------
Amortization	2.9%	1.8%	4.0%	2.5%	3.9%	5.5%
Royalties	6.7	6.9	7.8	6.8	5.6	9.0
Research and product development	4.0	4.1	5.3	5.6	8.2	6.8
Advertising	12.0	13.7	11.8	12.6	11.7	11.9
Selling, distribution and administration	16.4	16.0	21.8	22.1	31.4	30.0

~~For the quarter and nine-month period, amortization expense increased in dollars and as a percentage of net revenues.~~ Amortization expense ~~of $28,167, or 2.9% of net revenues~~decreased to $18,252 in the ~~third~~first quarter of ~~2005, compared with $16,888 or 1.8% of net revenues~~2006 from $24,755 in the ~~third~~first quarter of 2004. For the nine months ended September 25, 2005, amortization expense was $79,852, or 4.0% of net revenues compared with $47,881, or 2.5% of net revenues for the nine months ended September 26, 2004.2005. A portion of amortization expense relates to licensing rights and is based on expected sales of products related to those licensing rights. The ~~increase~~decrease in ~~2005 is primarily due~~amortization expense in the first quarter of 2006 relates to ~~increased~~decreased amortization of the product rights related to STAR WARS ~~property rights due to the increased~~as a result of decreased sales of STAR WARS ~~products~~products. The Company expects amortization expense to continue to be lower in ~~2005.~~2006 compared to 2005 due to the anticipated decrease in product revenue from STAR WARS products.

Royalty expense for the quarter ended ~~September 25, 2005 increased~~April 2, 2006 decreased to ~~$66,539,~~$25,990, or ~~6.7%~~5.6% of net revenues from ~~$65,087,~~$40,872, or ~~6.9%~~9.0% of net revenues in the ~~third~~first quarter of ~~2004. Royalty expense for~~2005. This decrease is primarily the ~~nine months ended September 25,~~result of decreased sales of entertainment based products, primarily related to STAR WARS. As noted above, the Company expects a lower level of royalties in 2006 compared to 2005 ~~increased to $158,206, or 7.8%~~as a result of ~~net revenues from $131,747, or 6.8% of net revenues for the nine months ended September 26, 2004. The increase~~an anticipated decrease in ~~royalty expense in dollars was primarily due to increased~~ sales of STAR WARS products. ~~For the quarter, this increase was partially offset by decreased sales of other licensed products, including BEYBLADE, SHREK and DISNEY products.~~

Research and product development expenses for the quarter ended September 25, 2005 remained consistent with the prior year at $39,387, or 4.0% of net revenues from $39,257 or 4.1% of net revenues for the quarter ended September 26, 2004. These expenses decreased slightly to $106,942 or 5.3% of net revenues for the nine months ended September 25, 2005 from $108,636 or 5.6% of net revenues for the nine months ended September 26, 2004. The decrease as a percentage of revenues is primarily due to the Company’s realignment of its product development in the fourth quarter of 2004 which resulted in a greater amount of U.S. Toys product development being moved outside of the U.S. and which resulted in a streamlining of the U.S. Toys workforce.

Investment in research and product development ~~costs~~ is an important component to the Company's strategy to grow core brands and to create new and innovative toy and game products. Research and product development expenses for the quarter ended April 2, 2006 increased to $38,164 or 8.2% of net revenues from $31,041 or 6.8% of net revenues for the quarter ended March 27, 2005. The increase reflects the increased technology of many of the Company's products as the Company continues to invest in new innovative electronic products. In addition, these expenses also increased due to one extra week in the first quarter of 2006 versus 2005.

Advertising expense remained consistent with the prior year. Advertising expense for the quarter ended April 2, 2006 was $54,854 or 11.7% of net revenues compared with $54,190 or 11.9% of net revenues for the quarter ended March 27, 2005.

For the quarter, advertising expense decreased to $118,845 or 12.0% of net revenues in 2005 from $129,403 or 13.7% of net revenues in 2004. For the nine months ended September 25, 2005, advertising expense decreased to $238,009 or 11.8% of net revenues from $243,751 or 12.6% of net revenues for the nine months ended September 26, 2004. The decrease in advertising in the quarter and nine-month periods was due to increased sales of STAR WARS products in 2005, which do not require the amount of advertising as the Company's internally developed products. The Company continues to focus on marketing as a means to increase and sustain awareness of its core brands, as well as to introduce new products.

~~For the quarter ended September 25, 2005, the~~The Company's selling, distribution and administration expenses for the quarter ended April 2, 2006 increased to ~~$162,061~~$146,955 or ~~16.4%~~31.4% of net revenues from ~~$151,179~~$136,571 or ~~16.0%~~30.0% of net revenues for the quarter ended ~~September 26, 2004. For~~March 27, 2006. Approximately $5,820 of this increase reflects the ~~nine months ended September 25, 2005, these expenses increased~~Company's adoption in ~~dollars~~2006 of SFAS 123R which requires the Company to ~~$439,921 from $429,005 in 2004, but decreased~~record expense related to any unvested stock options as ~~a percentage~~ of ~~net revenues to 21.8%~~the beginning of ~~net revenues in 2005, compared to 22.1% of net revenues in 2004.~~the year as well as any future stock option grants. The increase in ~~dollars for~~selling, distribution and administration expenses also relates to the additional week in the first quarter ~~primarily reflects increased warehousing costs as well as increased bonus accruals based on~~of 2006, which had fourteen weeks, compared to thirteen weeks in the ~~Company's performance.~~first quarter of 2005.

Interest expense for the ~~third~~first quarter of ~~2005~~2006 was ~~$7,816~~$7,126 compared with ~~$8,257~~$7,731 in the ~~third~~first quarter of ~~2004. For the nine months ended September 25, 2005,~~2005. Reductions in interest expense ~~decreased~~due to ~~$23,196 from $24,488 in 2004. For the quarter and nine months ended September 25, 2005, decreases resulting from~~ lower levels of debt in 2006 were partially offset by ~~increased interest expense as the result of~~ higher interest ~~rates. The decrease~~rates in interest expense as the result of lower levels of debt reflects the Company's strategy to reduce its long-term debt. In November 2005, the Company has $71,970 of 5.6% long-term debt coming due which it intends to repay using cash from operations.2006.

~~Other (income) expense, net, amounted to $(5,864) for the third quarter of 2005, which compares to ($5,513)~~Interest income for the quarter ended ~~September 26, 2004. For the nine-month periods, other (income) expense, net~~April 2, 2006 was ~~$(22,049) in 2005~~$7,334 compared to ~~$(15,606) in 2004. The increase in each of~~$8,669 for the ~~periods~~quarter ended March 27, 2005. Interest income for the quarter ended March 27, 2005 ~~is due to higher interest and dividend income as the result of the higher balances of invested cash. The nine-month period in 2005 also~~ includes ~~interest income of~~ $4,140 related to an IRS tax settlement. Excluding this one-time settlement, the increase in interest income in the first quarter of 2006 from the first quarter of 2005 represents higher returns on invested cash and short-term investments.

Other ~~income~~expense, net for the ~~third~~first quarter of 2006 was $3,535 compared with $5,703 for the first quarter of 2005. These amounts primarily consist of non-cash charges of $3,330 and ~~nine months ended September 25,~~$4,970 for 2006 and 2005, ~~includes non-cash income of $570 and $1,330,~~ respectively, related to the ~~decrease~~increase during these periods in the fair value of certain warrants required to be classified as a liability. ~~These amounts compare to non-cash income of $5,150 and $15,370 for the quarter and nine months ended September 26,2004, respectively.~~ These warrants are required to be adjusted to their fair value each quarter through earnings. The fair value of these warrants is primarily affected by the ~~Company's~~ stock price of the Company but is also affected by the Company's stock price volatility and dividends, ~~and the~~as well as risk-free interest rates. Assuming the Company's stock volatility and dividend payments, ~~and the~~as well as risk-free interest rates remain constant, the fair value of the warrants would increase and the Company would recognize a charge to earnings ifas the price of the Company's stock increases.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Management's Discussion and Analysis of Financial~~
~~Condition and Results of Operations (continued)~~

If the price of the Company's stock ~~decreases~~decre ases and the Company's stock volatility, dividend payments, and ~~the~~ risk-free interest rates remain constant, the fair value of the warrants will decrease and the Company will recognize income. Based on a hypothetical increase in the Company's stock price to ~~$21.00~~$22.00 per share at ~~September 25, 2005~~April 2, 2006 from its actual price of ~~$20.27 per~~$21.10 a share on that date, the Company would have recognized a non-cash charge ~~to earnings~~ of approximately ~~$4,450 and $3,700,~~$7,220 rather than the actual non-cash ~~income~~charge of ~~$570 and $1,330,~~$3,330 for the quarter ~~and nine months~~ ended ~~September 25, 2005, respectively,~~April 2, 2006, to ~~adjust~~reflect the change in the fair value of the warrants tofrom their fair ~~value.~~value of $123,860 at December 25, 2005. This fair value adjustment has no related tax impact.

INCOME TAXES
~~- -----------------------~~
~~Income tax expense as a percentage of pretax earnings in the third quarter of 2005 was 27.1%, and for the nine months was 24.4%, compared to 25.7% and 24.2% in the comparable periods of 2004.~~

Income tax ~~expense for the nine months ended September 25, 2005 has been reduced by approximately $4 million due to an Internal Revenue Service examination of tax years ended in December 2001 completed~~benefit in the ~~second~~first quarter of ~~2005.~~

~~Absent~~2006 was $554 on a pretax loss of $5,453, compared to tax expense of $488 on a pretax loss of $3,225 in the ~~effect~~first quarter of 2005. As noted above, the adjustment of certain warrants to their fair value ~~as described above, which~~ has no tax ~~effect, and, in~~effect. Absent the ~~case of~~warrant fair value adjustment, the ~~nine months tax rate, absent the $4 million tax adjustment described above, both the 2005 third~~2006 first quarter tax rate and the ~~nine months~~2005 first quarter tax rate would have been ~~27.2%.~~

26.1% and 28.0%, respectively. The income tax rate for the full year ~~2004~~2005 was ~~24.6% and, excluding the effect of~~31.8%. In addition to the adjustment of ~~the above~~certain warrants to their fair value, the 2005 full year tax rate was also impacted by the repatriation of foreign earnings pursuant to the special incentive provided by the American Jobs Creation Act of 2004 as well as a reduction of income tax expense of approximately $4,000 due primarily to the settlement of an Internal Revenue Service audit. Absent the effect of these items, the 2005 full year tax rate would have been ~~25.9%~~24.9%.

The increase ~~to 27.2% for~~in the ~~first nine months of 2005~~adjusted rate from ~~25.9% for~~ the full year ~~2004~~2005 of 24.9% to the first quarter of 2006 adjusted rate of 26.1% is primarily due to the expected increase in ~~operating profits~~earnings in jurisdictions with higher statutory tax rates.

The Company's revenue pattern continues to ~~the seasonal nature of its business, the Company expects~~show the second half of the year, and within that half, the fourth quarter, to be increasingly more significant to its overall business for the full year. The Company expects that this concentration will continue, particularly as more of its business shifts to larger customers with order patterns concentrated in the second half of the year. Although this concentration will not be as pronounced in 2005 as other years due to the volume of STAR WARS products sold in the first half in connection with the theatrical release of STAR WARS EPISODE III: REVENGE OF THE SITH in May of 2005, the Company still expects a significant amount of its sales to occur in the second half and within that half, the fourth quarter. In 2005, as a result of a change in customer buying patterns, the Company expects an increasing concentration of sales in its Games segment in the second half, and in particular, the fourth quarter. The concentration of sales in the second half of the year and, specifically, the fourth quarter increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, inventory levels, policies of retailers and ~~differences~~differen ces in overall economic conditions.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Management's Discussion and Analysis of Financial~~
~~Condition and Results of Operations (continued)~~

The strategy of larger mass market retailers has been to maintain lower inventories throughout the year and purchase a greater percentage of product within or close to the fourth quarter holiday consumer selling season, which includes Christmas. Quick response inventory management practices now being used result in more orders being placed for immediate delivery and fewer orders being placed well in advance of shipment. Consequently, unshipped orders on any date in a given year are not necessarily indicative of future sales. At ~~September 25,~~April 2, 2006 and March 27, 2005, ~~and September 26, 2004,~~ the Company's unshipped orders were approximately ~~$461,000~~$176,985 and ~~$491,000,~~$176,998, respectively.

To the extent that retailers do not sell as much of their year-end inventory purchases during ~~the~~this holiday selling season as they had anticipated, their demand for additional product earlier in the following fiscal year may be curtailed, thus negatively impacting the Company's revenues. In addition, the bankruptcy ~~restructuring,~~ or other lack of success of one of the Company's significant retailers could negatively impact the Company's future revenues.

Hasbro uses the intrinsic-value method of accounting for stock options granted to employees. As required by the Company's existing stock plans, stock options are granted at, or above, the fair market value of the Company's stock, and, accordingly, no compensation expense is recognized for these grants in the consolidated statement of operations. The Company records compensation expense related to other stock-based awards, such as restricted stock grants, over the period the award vests, typically three years. On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which amends SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS 95 “Statement of Cash Flows”. SFAS No. 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consol idated financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. In April 2005, the Securities and Exchange Commission delayed the implementation of SFAS 123(R) until the first fiscal year beginning after June 15, 2005. SFAS No. 123(R) will be effective for the Company as of December 26, 2005, the first day of the 2006 fiscal year. The Company may adopt SFAS 123(R) on a retrospective basis, which requires restatement of prior year financial statements or a prospective basis, which requires only recording amounts in fiscal periods subsequent to adoption. The Company has not yet determined the method of adoption of SFAS No. 123(R). Based on the current options outstanding, the Company's 2006 pretax expense for those options is expected to be between $16,000 and $17,000. This amount may increase if any options are granted in 2006.

On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. The Act creates a one-time incentive for U.S. corporations to repatriate undistributed earnings from their international subsidiaries by providing an 85% dividends-received deduction for certain international earnings. The deduction is available to corporations during the tax year that includes October 22, 2004 or in the immediately subsequent tax year. The Company is in the process of evaluating whether it will repatriate international earnings under the provisions of the Act. The Company expects to complete its evaluation of the effects of the repatriation provision during the fourth quarter. The range of possible amounts the Company is considering for repatriation under this provision is between zero and $500,000. The related potential range of income tax under the law as currently written is between zero and app roximately $40,000.

~~On September 9, 2005,~~In January 2006, the Company ~~purchased~~entered into a five-year license arrangement with Marvel to develop products based on certain Marvel properties for retail sales beginning January 1, 2007. The arrangement requires the ~~assets and assumed certain liabilities~~Company to make guaranteed minimum payments in the amount of ~~Wrebbit Inc., a Montreal-based developer and manufacturer of innovative puzzles. The purchase price, subject~~$215,000 with $105,000 paid in February 2006. Of the remaining payments, $70,000 is expected to ~~adjustment, was $14,109. Based on a preliminary allocation~~be paid in 2007 upon the release of the ~~purchase price, property rights~~motion picture SPIDER-MAN 3, $2,500 is expected to be paid in January 2008, $2,500 is expected to be paid in January 2009 and the remainder to be paid upon the release of the motion picture SPIDER-MAN 4, whose release date is yet to be determined. Certain of the future minimum guaranteed contractual royalty payments are contingent upon the theatrical release of the related ~~to acquired product lines of approximately $11,500 were recorded in connection with this acquisition. No goodwill was recorded as a result of this acquisition.~~entertainment property.

The Company has historically generated a significant amount of cash from operations. ~~The~~In 2005, the Company ~~funds~~funded its operations and liquidity needs primarily through cash flows from operations, ~~as well as utilizing,~~and, when needed, proceeds from its accounts receivable securitization program and borrowings under its secured and unsecured credit facilities. During ~~the remainder of 2005 and~~ 2006 the Company expects to continue to fund its working capital needs primarily through operations and, when needed, using proceeds from the accounts receivable securitization program and borrowings under its available lines of credit. ~~Unforeseen~~The Company believes that the funds available to it, including cash it expects to generate from operations, and funds available through the securitization program and other available lines of credit, are adequate to meet its needs for 2006. However, unforeseen circumstances in the toy or game industry, such as softness in the retail environment or ~~unanticipated~~unanticip ated changes in consumer preferences, could result in a significant decline in revenues and operating results offor the Company, which could result in the Company being in non-compliance with covenants under its revolving credit facility and/or receivable securitization program. ~~Non-complia nce~~Non-compliance with its debt covenants could result in the Company being unable to utilize borrowings under its revolving credit facility and other bank lines, a circumstance which potentially could occur when operating shortfalls would most ~~likely~~ require supplementary borrowings to enable the Company to continue to fund its operations. Also, non-compliance with covenants under its accounts receivable securitization program could result in the Company being unable to utilize this program. In addition, a significant deterioration in the business of a major U.S. customer could result in a decrease in eligible accounts receivable that would prevent the Company from being able to fully utilize its ~~receivables~~accounts receivable securitization program. The Company ~~has been and~~ expects to be in compliance with its borrowing and securitization financial covenants ~~during 2005.~~in 2006.

Because of ~~this~~the seasonality in the Company's cash flow, management believes that on an interim basis, rather than discussing only its cash flows, a better understanding of its liquidity and capital resources can be obtained through a discussion of the various balance sheet categories as well. Also, as several of the major categories, including cash and cash equivalents, short-term investments, accounts receivable, inventories and short-term borrowings, fluctuate significantly from quarter to quarter, again due to the seasonality of its business, management believes that a comparison to the comparable period in the prior year is generally more meaningful than a comparison to the prior quarter or prior year-end.

Cash flows utilized by operating activities were $4,564 for the nine months ended September 25, 2005 compared to $93,739 for the nine months ended September 26, 2004. Although net earnings for the nine months ended September 25, 2005 of $117,804 were consistent with net earnings $114,058 for the respective period in 2004, operating expenses in 2005 included an increased amount of non-cash expenses, such as amortization expense and utilization of prepaid royalties, which resulted in a decrease in cash utilized by operations in 2005. Partially offsetting the utilization of previously paid amounts was a $35,000 advance royalty payment made in connection with the release of STAR WARS EPISODE III: REVENGE OF THE SITH. Accounts receivable were $681,469 at September 25, 2005 compared to $697,430 at September 26, 2004. This decrease is primarily due to improved collections in the third quarter of 2005 as well as increased utilization of the s ecuritization facility. Days sales outstanding decreased to 62 days from 66 days in 2004.

Cash flows (utilized) provided by operating activities were $(75,239) and $159,642 for the first quarters of 2006 and 2005, respectively. Cash flows from operations in the first quarter of 2006 were negatively impacted by the royalty guarantee payment of $105,000 made to Marvel in connection with the new license agreement signed in the first quarter of 2006 and pension plan contributions of approximately $31,800. Of the $105,000 payment to Marvel, $82,700 was classified as long-term and is reflected in the consolidated statement of cash flows in other operating while the remainder was recorded to prepaid expenses and is reflected in the statement of cash flows as an increase in prepaid expenses. The decrease in cash flow provided by operating activities is also the result of higher non cash expenditures in 2005, including amortization expense, as a result of the increased sales of STAR WARS products as well as a utilization of prepaid royalty amounts related to increased sales of STAR WARS products.

Accounts receivable increased to $221,860 at April 2, 2006 from $199,594 at March 27, 2005 reflecting decreased usage of the Company's accounts receivable securitization facility partially offset by higher collections. Days sales outstanding were 43 days at April 2, 2006 compared to 39 days at March 27, 2005. In addition, approximately $4,700 relates to lower translation of international balances due to the currency impact of the stronger U.S. dollar.

Inventories decreased to $213,183 at April 2, 2006 from $232,660 at March 27, 2005. The 2005 inventory balance was higher partially due to lower than expected sales at the end of 2004. In addition, there were higher inventory levels in 2005 in anticipation of product shipments relating to the STAR WARS theatrical release in May 2005. In addition, approximately $3,800 of this decrease relates to lower translation of international balances due to the currency impact of the stronger U.S. dollar.

Prepaid expenses ~~were $99,386~~decreased to $122,127 at ~~September 25, 2005~~April 2, 2006 compared to ~~$147,985~~$138,828 at ~~September 26, 2004.~~March 27, 2005, primarily due to a decrease in current prepaid royalties. The decrease ~~largely resulted from the utilization of~~in prepaid royalties ~~primarily~~as a result of the higher sales of STAR WARS ~~royalties. Inventories increased~~products in 2005 was partially offset by an increase related to ~~$330,779~~the royalty advance paid to Marvel in the first quarter of 2006. Generally, when the Company enters into a licensing agreement for entertainment-based properties, an advance royalty payment is required at ~~September 25,~~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 has 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 operations in the upcoming twelve mo nths. In periods prior to a major movie release such as with STAR WARS in the first quarter of 2005, larger amounts will be reclassified from ~~$317,120 at September 26, 2004~~non-current to current in anticipation of higher sales induring the ~~fourth quarter of 2005.~~ periods surrounding the release.

Accounts payable and accrued expenses increased ~~slightly~~ to ~~$828,775~~$629,175 at ~~September 25,~~April 2, 2006 from $618,308 at March 27, 2005. This increase is primarily due to amounts not yet settled (paid) of $6,334 relating to common stock repurchases made at the end of the first quarter of 2006 under the May 19, 2005 ~~from $824,296 at September 26, 2004. Increased accrued income taxes as the result~~Board of ~~increased earnings in jurisdictions with higher rates were mostly offset by decreased accrued royalties reflecting decreases in sales of BEYBLADE and SHREK products.~~Directors $350,000 authorization.

Collectively, property, plant and equipment and other assets ~~decreased $50,991~~increased $31,473 from the comparable period in the prior year. The ~~decrease~~increase is ~~partially~~ due to a portion of the $105,000 royalty advance paid to Marvel in the first quarter of 2006, which has been classified as long-term based on the expected period of realization. This increase was partially offset by a decrease in property, plant and equipment resulting from the sale of the ~~Company's~~Company’s former manufacturing facility in Spain in the second quarter of 2005. ~~The decrease in~~In addition, other ~~intangibles~~intangible assets decreased primarily due to ~~$635,166 at September 25, 2005 from $664,452 at September 26, 2004 reflects~~the amortization of intangibles, including increased amortization expense of ~~the~~ STAR WARS property rights as the result of increased sales of related products. The effect of amortization was partially offset by the Company's reacquiring of its digital gaming rights for all of its owned or controlled properties that it had originally licensed to Infogrames Entertainment SA in connection with the sale of its interactive business in December 2000. The Company paid $65,000 in cash to reacquire these rights, which were recorded to other intangibles. Also, as noted above, the Company acquired the net assets of Wrebbit, Inc. in September 2005, which resulted in $11,500 of property rights being recorded. The increase in other long-term assets was the result of a royalty advance in the second quarter of 2005 of $35,000 in connection with the theatrical release of STAR WARS EPISODE III: REVENGE OF THE SITH. This advance was recorded to other long-term assets and was offset by reclassifications to prepaid expenses as the result of the higher utilization of these royalties resulting from the theatrical release.

In May 2005 the Company's Board of Directors authorized the repurchase of up to $350 million in common stock. Purchases of the Company's common stock may be made from time to time, subject to market conditions and may be on the open market or through privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization and the timing, actual number, and value of shares that are repurchased will depend on a number of factors, including the price of the Company's common stock. This authorization replaces all prior authorizations. In the third quarter of 2005 and the nine months ended September 25, 2005, the Company repurchased 1,168,300 and 1,528,300 shares, respectively, at an average price of $20.89 and $20.76, respectively. The total cost of these repurchases, including transaction costs, was $24,436 and $31,777, respectively.2005.

Net ~~borrowings (short-term~~cash (cash and cash equivalents less short-term borrowings, current portion of long-term debt, and long-term ~~debt less cash and cash equivalents)~~debt) decreased to ~~$44,644~~$76,135 at ~~September 25,~~April 2, 2006 from $237,871 at March 27, 2005. This decrease is due to the Company investing available cash in auction rate securities, which are classified as short-term investments on the balance sheet. At April 2, 2006, the Company had $147,675 invested in these securities. The decrease in net cash also reflects the Company's current share repurchase program which was approved by its Board of Directors in May 2005. Under this plan, the Company has repurchased 6,911 shares in the final three quarters of 2005 and the first quarter of 2006 at a total cost of $141,707.

Cash flows from ~~$345,034 at September 26, 2004. This reflects an~~investing activities were a net utilization of $159,365 in the first quarter of 2006 and $11,020 in the first quarter of 2005. The increase in ~~cash of $265,410 reflecting the Company's ability~~net utilization is due to ~~generate cash from operations. In addition,~~ the Company ~~utilized~~investing $147,675 of excess cash balances in auction rate securities in 2006, which offer a higher rate of return on a short-term basis.

Cash flows from financing activities were a net utilization of $126,607 in the ~~proceeds from~~first quarter of 2006 compared to net cash provided of $1,227 in the ~~sale~~first quarter of ~~certain facilities,~~2005. The increase in net utilization was due primarily ~~its former manufacturing facility~~to cash paid of $87,343 to repurchase shares of common stock in ~~Spain, to repay associated~~the first quarter of 2006 and repayments of long-term debt of $32,743 related to a contractual maturity. During the quarter, the Company repurchased 4,525 shares at a total cost of $93,677, of which $6,334 was included in ~~the amount of $21,242.~~accrued expenses related to repurchases that had not yet settled at April 2, 2006.

~~HASBRO, INC. AND SUBSIDIARIES~~
~~Management's Discussion and Analysis of Financial~~
~~Condition and Results of Operations (continued)~~

The Company has an amended and restated credit agreement, which provides it with an unsecured revolving credit facility of $350,000, maturing in March 2007. During the first quarter of 2005, the Company entered into an amendment of its bank agreement, which reduced the interest rate margin and commitment fees on certain borrowings, eliminated the provisions that, under some circumstances, provided lenders with security interests in certain of the Company's assets, and eliminated the $100,000 step down of available funds ($50,000 in both March and November 2005). The amendment also increased the Company's flexibility to raise dividends and repurchase common stock, provided it maintains a debt to capitalization ratio at or below 30%, and increased the Company's acquisition capacity from $100,000 to $400,000 per annum, cumulative. Under the credit agreement, the Company is not required to maintain compensating ~~balances.~~balances under the agreement. The amended and restated agreement ~~also~~ contains certain restrictive ~~c ovenants~~covenants setting forth minimum cash flow and coverage requirements, ~~maximum leverage,~~ and a number of other limitations, including ~~restrictions~~ with respect to capital expenditures, investments, acquisitions, share repurchases and ~~investments.The~~dividend payments. The Company was in compliance with all restrictive covenants as of and for the ~~nine months~~quarter ended ~~September 25, 2005.~~April 2, 2006. The Company had no borrowings outstanding under its committed revolving credit facility at ~~September 25, 2005.~~April 2, 2006. The Company also has other uncommitted lines from various banks, of which approximately ~~$33,186~~$25,705 was utilized at ~~September 25, 2005.~~April 2, 2006. Amounts available and unused under the committed line at ~~September 25, 2005~~April 2, 2006 were approximately $345,607. The Company believes that funds provided by operations and amounts available for borrowing from time to time under these lines of credit are adequate to meet its needs in the remainder of 2005 and 2006.$346,300.

The Company is party to ~~a three-year~~an accounts receivable securitization program ~~expiring in December 2006. Under this program,~~whereby the Company sells, on an ongoing basis, substantially all of its U.S. trade accounts receivable to a bankruptcy remote special purpose entity, Hasbro Receivables Funding, LLC ("HRF"). HRF is consolidated with the Company for financial reporting purposes. The securitization program then allows HRF to sell, on a revolving basis, an undivided interest of up to $250,000 in the eligible receivables it holds to certain bank conduits. The program provides the Company with a cost-effective source of working ~~capital and short-term financing.~~capital. Based on the amount of eligible accounts receivable as of ~~September 25, 2005,~~April 2, 2006, the Company had availability under this program to sell ~~approximately $157,051,~~$34,504, all of which was utilized.

The Company had letters of credit of approximately ~~$23,725~~$19,200 and purchase commitments of ~~$210,677~~$185,035 outstanding at ~~September 25, 2005.~~April 2, 2006. In February 2006, the Company amended its license arrangement with Marvel to add additional toy lines. As a result of this amendment, the guaranteed minimum payments of $205,000 previously disclosed in the Company's report on Form 10-K increased by $10,000, of which $5,000 was paid in February 2006, $2,500 is expected to be paid in January 2008 and $2,500 is expected to be paid in January 2009. In addition, the Company contributed approximately $31,800 to its pension plans in the first quarter of 2006 which was higher than the amount expected and disclosed in the Company's report on Form 10-K. The Company expects its contributions to its defined benefit pension plans in 2006 to be approximately $40,000. Other contractual obligations and commercial commitments, as detailed in the Company's annual report on Form 10-K for the year ended December ~~26, 2004,~~25, 2005, did not materially change outside of payments made in the normal course of ~~business with the exception of the repayment of the Spain long-term debt of $21,242 described above.~~business.

The Company has outstanding ~~$250,000~~$249,996 in principal amount of senior convertible debentures due 2021. The senior convertible debentures bear interest at 2.75%, subject to an upward adjustment in the rate, with the total rate not to exceed 11%, ~~commencing in December 2005~~ should the price of the Company's stock trade at or below $9.72 per share for 20 of 30 trading days preceding the fifth day prior to an interest payment date. This contingent interest feature represents a derivative instrument that is recorded on the balance sheet at its fair value, with changes in fair value recognized in the statement of operations. If the closing price of the Company's stock exceeds $23.76 for at least 20 trading days within the 30 consecutive trading day period ending on the last trading day of the calendar quarter, or upon other specified events, the debentures will be convertible at an initial conversion price of $21.60 in the next ~~cal endar~~calendar quarter. This ~~contingent~~continge nt conversion feature was not met in the ~~third~~first quarter of ~~2005.~~

2006. The holders of these debentures may put the notes back to Hasbro in ~~December 2005,~~ December 2011 and December 2016 at the original principal amount. At that time, the purchase price may be paid in cash, shares of common stock or a combination of the two, at the Company's discretion. While the Company's current intent is to settle in cash any puts exercised, there can be no guarantee that the Company will have the funds necessary to settle this obligation in cash. Due to this put option, these debentures are classified on the Company’s balance sheet in the current portion of long-term debt. Subsequent to December 1, 2005, any notes that the holders have not elected to put back to the Company will be reclassified to long-term debt.

The Company believes that cash from operations, including the securitization facility, and, if necessary, its line of credit, will allow the Company to meet these and other obligations listed. It is the Company's intent to continue to assess the desirability of using available cash from operations to reduce its outstanding long-term debt, as market conditions and the Company's revolving credit agreement and other sources of financing allow.

-------------------------------------------------------------------------------------------------

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company's reported financial results include sales allowances, inventory valuation, recoverability of goodwill and intangible assets, recoverability of royalty advances and commitments, ~~and~~ pension costs and ~~obligations.~~obligations and stock-based compensation.

Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue when the related revenue is recognized. Revenue from product sales is recognized upon passing of title to the customer, generally at the time of shipment. Revenue from product sales, less related sales allowances, is added to royalty revenue and reflected as net revenues in the consolidated statements of operations. The Company routinely commits to promotional sales allowance programs with customers. These allowances primarily relate to fixed programs, which the customer earns based on purchases of Company products during the year. Discounts are recorded as a reduction of related revenue at the time of sale. While many of the allowances are based on fixed amounts, certain of the allowances, such as the returns allowance, are based on market data, historical trends and information from customers and are therefo re subject to estimation.

Inventory is valued at the lower of cost or market. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value. Failure to accurately predict and respond to consumer demand could result in the Company ~~underproducing~~under producing popular items or overproducing less popular items. Management estimates are monitored on a quarterly basis and a further adjustment to reduce inventory to its net realizable value is recorded, as an increase to cost of sales, when deemed necessary under the lower of cost or market standard.

Goodwill and other intangible assets deemed to have indefinite lives are tested for impairment at least annually. If an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim test at that time. The impairment test begins by allocating goodwill and intangible assets to applicable reporting units. Goodwill is then tested using a ~~two-step~~two step process that begins with an estimation of the fair value of the reporting unit using an income approach, which looks to the present value of expected future cash flows.

The first step is a screen for potential impairment while the second step measures the amount of impairment if there is an indication from the first step that one exists. Intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value which is also calculated using an income approach. ~~Th e~~The Company's annual impairment test was performed in the fourth quarter of ~~2004~~2005 and no impairment was indicated. At ~~September 25, 2005,~~April 2, 2006, the Company has goodwill and intangible assets with indefinite lives of ~~$543,310~~$542,976 recorded on the balance sheet.

Intangible assets, other than those with indefinite lives, are reviewed for indications of impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability of the value of these intangible assets is measured by a comparison of the assets' carrying value to the estimated future undiscounted cash flows the asset is expected to generate. If such assets were considered to be impaired, the impairment would be measured by the amount by which the carrying value of the asset exceeds its fair value based on estimated future discounted cash flows. The estimation of future cash flows requires significant judgments and estimates with respect to future revenues related to the respective asset and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in a change in this assessment and result in an impairment charge. The estimation of discounted cash flows also requires the selection of an appropriate discount rate. The use of different assumptions would increase or decrease estimated discounted cash flows and could increase or decrease the related impairment charge.

Intangible assets covered under this policy were ~~$555,027~~$515,715 at ~~September 25, 2005.~~April 2, 2006. During the ~~third~~first quarter ~~and nine months ended September 25, 2005,~~of 2006, there were no impairment charges related to these intangible assets.

The recoverability of royalty advances and contractual obligations with respect to minimum guaranteed royalties is assessed by comparing the remaining minimum guaranty to the estimated future sales forecasts and related cash flow projections to be derived from the related product. If sales forecasts and related cash flows from the particular product do not support the recoverability of the remaining minimum guaranty or, if the Company decides to discontinue a product line with royalty advances or commitments, a charge to royalty expense to write-off the remaining minimum guaranty is required. The preparation of revenue forecasts and related cash flows for these products requires judgments and estimates. Actual revenues and related cash flows or changes in the assessment of anticipated revenues and cash flows related to these products could result in a change to the assessment of recoverability of remaining minimum gu aranteed royalties. At ~~September 25, 2005,~~April 2, 2006, the Company had ~~$151,046~~$222,885 of prepaid royalties, ~~$49,955~~$62,924 of which are included in prepaid expenses and other current assets and ~~$101,091,~~$159,961 which are included in other assets.

The Company, except for certain international subsidiaries, has pension plans covering substantially all of its full-time employees. Pension expense is based on actuarial computations of current and future benefits using estimates for expected return on assets, expected compensation increases, and applicable discount rates. The estimates for the Company's domestic plans are established for the upcoming year at the Company's measurement date of September 30. The Company estimates expected return on assets using a weighted average rate based on historical market data for the investment classes of assets held by the plan, the allocation of plan assets among those investment classes, and the current economic environment. Based on this information, the Company's estimate of expected return on plan assets for its domestic plans is 8.75% for ~~2005,~~2006, which is the same estimate used in ~~2004.~~2005. A decrease in the estimate used for expected return on plan assets would increase pension expense, while an increase in this estimate would decrease pension expense.

For the Company's domestic plans, a decrease of 1%.25% in the ~~2004~~2005 estimate of expected return on plan assets would have increased ~~2004~~2005 annual pension expense by approximately ~~$1,700.~~$470. Expected compensation increases are estimated using a combination of historical compensation increases with expected compensation increases in the Company's long-term business forecasts. Based on this analysis, the Company's estimate of expected long-term compensation increases for its domestic plans is 4.0% in ~~2005,~~2006, which is the same estimate used in ~~2004.~~2005. Increases in estimated compensation increases would result in higher pension expense while decreases would lower pension expense. Discount rates are selected based upon rates of return at the measurement date on high quality corporate bond investments currently available and expected to be available during the period to maturity of ~~the~~ pension benefits. Based on this ~~long-term~~long- term corporate bond ~~y ield~~yield at September 30, ~~2004,~~2005, the Company's measurement date for its pension assets and liabilities, the Company selected a discount rate for its domestic plans of 5.50% compared to a rate of 5.75% ~~for its 2005 expense.~~selected at September 30, 2004. Pension expense for the Company's domestic plans in ~~2004~~2005 was based on a discount rate of ~~6.0%~~5.75%. A decrease in the discount rate would result in greater pension expense while an increase in the discount rate would decrease pension expense. For the Company's domestic plans, a decrease of 1%.25% in the Company's ~~2004~~2005 discount rate would have increased ~~2004~~2005 annual pension expense and the projected benefit obligation by approximately ~~$3,180~~$995 and ~~$34,300,~~$11,110, respectively.

In accordance with Statement of Financial Accounting Standards No. 87, "Employers Accounting for Pensions", actual results that differ from the actuarial assumptions are accumulated and, if outside a certain corridor, amortized over future periods and, therefore generally affect recognized expense and the recorded obligation in future periods. ~~&nb sp;~~Assets in the plan are valued on the basis of their fair market value on the measurement date. In March 2006, the Financial Accounting Standards Board ("FASB") issued an exposure draft of a proposed FASB statement, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans", which would amend Statements of Financial Accounting Standards No. 87, 88, 106 and 132R. Under the proposed statement, the Company would recognize on its balance sheet actuarial gains and losses and prior service costs that have not yet been included in income as a reduction of equity through other comprehensive income and an increase to the accrued pension liability. In addition, the measurement date for plan assets and liabilities would be required to be the Company's fiscal year end. The proposed statement would be effective for the Company in the fourth quarter of 2006. Until a final statement is issued, the Company cannot estimate the effect that this change in accounting would have on its consolidated balance sheet or statement of operations.

The Company has stock-based employee compensation plans and plans for non-employee members of the Company's Board of Directors. Under these plans, the Company grants stock options at or above the fair market value of the Company's stock. On December 26, 2005, the first day of fiscal 2006, the Company adopted SFAS 123R, which requires the Company to measure all stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. The Company uses the Black-Scholes option pricing model to value the stock options that are granted under these plans. The Black-Scholes method includes four significant assumptions: (1) expected term of the option, (2) risk-free interest rate, (3) expected dividend yield, and (4) expected stock price volatility. For the Company's 2005 stock option grant, the weighted average expected term used was approximately 5 years. This amount is based on a review of employees' exercise history relating to stock options as well as the contractual term of the option. The weighted average risk-free interest rate used for 2005 stock option grants was 3.84%. This estimate was based on the interest rate available on U.S. treasury securities with durations that approximate the expected term of the option. For 2005 stock option grants, the weighted average expected dividend yield used was 1.75% which is based on the Company's current annual dividend amount divided by the stock price on the date of the grant. The weighted average expected stock price volatility used for 2005 stock option grants was 29%. This amount was estimated using a combination of historical price volatility over the most recent period approximating the expected term of the option and implied price volatility. Implied price volatility represents the volatility implied in publicly traded options on the Company's stock, which the Company believes represents the expected future volatility of the Company's stock price. The Company believes that since this is a market-based estimate, it can provide a better estimate of expected future volatility.

~~--------------------------------------------------~~-----------------------------------------------

The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates, primarily resulting from sourcing products priced in U.S. dollars, Hong Kong dollars and Euros while marketing those products in more than twenty currencies. Results of operations are more likely to be affected by changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound, Canadian dollar and Mexican peso and, to a lesser extent, currencies in Latin American and Asia Pacific countries.

~~To manage this exposure, the Company has hedged a portion of its estimated foreign currency transactions using forward foreign exchange contracts and purchased foreign currency options.~~

To manage this exposure, the Company has hedged a portion of its estimated foreign currency transactions using forward foreign exchange contracts and purchased foreign currency options. The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or short-term borrowing positions in currencies other than the U.S. dollar. The Company believes, however, that the on-going risk on the net exposure should not be material to its financial condition. In addition, the Company's revenues and costs have been, and will likely continue to be, affected by changes in foreign currency rates. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts. Other than as set forth above, the Company does not hedge foreign currency exposures. The Company reflects all derivatives at their fair value as an asset or liability on the balance sheet. The Company does not speculate in foreign currency ~~e xchange contracts.~~exchange contracts.The Company may also be indirectly impacted by changes in the Chinese Renminbi.

At ~~September 25, 2005,~~April 2, 2006, the Company had fixed rate long-term debt, including current portions and excluding fair value adjustments, of ~~$599,700.~~$494,983. Also at ~~September 25, 2005,~~April 2, 2006, the Company had fixed-for-floating interest rate swaps with notional amounts of ~~$150,000.~~$100,000. The interest rate swaps are designed to adjust the amount of the Company's debt subject to a fixed interest rate. The interest rate swaps are matched with specific long-term debt issues and are designated and effective as hedges of the change in the fair value of the associated debt. Changes in fair value of these contracts are wholly offset in earnings by changes in the fair value of long-term debt. At ~~September 25, 2005,~~April 2, 2006, these contracts had a fair value of ~~$1,589, with $1,493~~$(112), which was included in ~~other assets, and the remaining $96 included in prepaid expenses and other current assets,~~liabilities, with a corresponding fair value ~~adjustments~~adjustment to ~~increase~~decrease long-term ~~debt and cur rent portion of long-term debt, respectively.~~debt.

~~------------------------------------------------------------------------------~~

This Quarterly Report on Form 10-Q contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, concerning management's expectations, goals, objectives, and similar matters. These statements may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "intend," "look forward," "may," "planned," "potential," "should," "will," and "would" or any variations of words with similar meanings, and include statements regarding the Company's strategy, expected product releases, revenues and earnings. These forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual results or experience may differ materially from those expected or anticipated in the for ward-looking statements. Specific factors that might cause such a difference include, but are not limited to:

the Company's ability to manufacture, source and ship new and continuing products in a timely manner and customers' and consumers' acceptance of those products at prices that will be sufficient to profitably recover development, manufacturing, marketing, royalty and other costs of products;

economic and public health conditions, including factors which impact the retail market and retail demand or the Company's ability to manufacture and deliver products, higher fuel and commodity prices, higher transportation costs and potential transportation delays, currency fluctuations, government regulation and other conditions in the various markets in which the Company operates throughout the world;

the Company's ability to generate sales during the fourth quarter, particularly during the relatively brief holiday season, which is the period in which the Company derives a substantial portion of its revenues;

the inventory policies of retailers, including the concentration of the Company's revenues in the second half and fourth quarter of the year, together with the increased reliance by retailers on quick response inventory management techniques, which increases the risk of underproduction of popular items, overproduction of less popular items and failure to achieve tight and compressed shipping schedules;

~~work stoppages, slowdowns or strikes, which may impact the Company's ability to manufacture or deliver product;~~

concentration of manufacturing of many of the Company's products in the People's Republic of China and the associated impact to the Company of health conditions and other factors affecting social and economic activity in China or affecting the movement of people and products into and out of China, including, without limitation, the impact of tariffs or other trade restrictions being imposed upon goods manufactured in China and the impact of foreign currency exchange rates related to the Yuan;

an adverse change in purchasing policies or the bankruptcy or other lack of success of one or more of the Company's significant retailers comprising its relatively concentrated retail customer base, which could negatively impact the Company's revenues, operating margins, or bad debt exposure;

the impact of competition on revenues, margins and other aspects of the Company's business, including the ability to secure, maintain and renew popular licenses and the ability to attract and retain employees in a competitive environment;

~~the risk that anticipated benefits of acquisitions may not occur or be delayed or reduced in their realization;~~

the risk that the market appeal of the Company's licensed products will be less than expected or that the sales revenue generated by those products will be insufficient to cover the minimum guaranteed royalties;

~~the Company's ability to obtain and enforce intellectual property rights both in the United States and other worldwide territories;~~

~~the risk that any litigation or arbitration disputes or regulatory investigations could entail significant expense and result in significant fines or other harm to the Company's business;~~

~~the Company's ability to obtain external financing on terms acceptable to it in order to meet working capital needs;~~

~~the Company's ability to generate sufficient available cash flow to service its outstanding debt;~~

unforeseen circumstances, such as severe softness in or collapse of the retail environment that may result in a significant decline in revenues and operating results of the Company, thereby causing the Company to be in non-compliance with its debt covenants and the Company being unable to utilize borrowings under its revolving credit facility, a circumstance likely to occur when operating shortfalls would result in the Company being in the greatest need of such supplementary borrowings;

market conditions, third party actions or approvals, the impact of competition and other factors that could delay or increase the cost of implementation of the Company's consolidation programs, or alter the Company's actions and reduce actual results;

~~the risk that the Company may be subject to governmental sanctions for failure to comply with applicable regulations or to product liability suits relating to products it manufactures and distributes;~~

~~the risk that the Company's reported goodwill may become impaired, requiring the Company to take a charge against its income;~~

~~other risks and uncertainties as are or may be detailed from time to time in the Company's public announcements and filings with the SEC, such as filings on Forms 8-K, 10-Q and 10-K.~~

The Company undertakes no obligation to revise the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect events or circumstances occurring after the date of the filing of this report.

The information required by this item is included in Part I Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated herein by reference.

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness ~~o f~~of the design and operation of the Company's disclosure controls and procedures as of ~~September 25, 2005.~~April 2, 2006. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

There were no changes in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the quarter ended ~~September 25, 2005,~~April 2, 2006, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company's actual results or experience may differ materially from those expected or anticipated in the forward-looking statements. The Company has included, under Item 1A. of its Annual Report on Form 10-K, for the year ended December 25, 2005 (the "Annual Report"), a discussion of factors which may impact these forward-looking statements. In furtherance, and not in limitation, of the more detailed discussion set forth in the Annual Report, specific factors that might cause such a difference include, but are not limited to:

work stoppages, slowdowns or strikes, which may impact the Company's ability to manufacture or deliver product;

concentration of manufacturing of many of the Company's products in the People's Republic of China and the associated impact to the Company of health conditions and other factors affecting social and economic activity in China, affecting the movement of people and products into and out of China or affecting the exchange rates for the Chinese Renminbi, including, without limitation, the impact of tariffs or other trade restrictions being imposed upon goods manufactured in China;

the risk that anticipated benefits of acquisitions may not occur or be delayed or reduced in their realization;

the Company's ability to obtain and enforce intellectual property rights both in the United States and other worldwide territories;

the risk that any litigation or arbitration disputes or regulatory investigations could entail significant expense and result in significant fines or other harm to the Company's business;

the Company's ability to obtain external financing on terms acceptable to it in order to meet working capital needs;

the Company's ability to generate sufficient available cash flow to service its outstanding debt;

the risk that the Company may be subject to governmental sanctions for failure to comply with applicable regulations or to product liability suits relating to products it manufactures and distributes;

the risk that the Company's reported goodwill may become impaired, requiring the Company to take a charge against its income;

other risks and uncertainties as are or may be detailed from time to time in the Company's public announcements and filings with the SEC, such as filings on Forms 8-K, 10-Q and 10-K.

On May 19, 2005, the Company's Board of Directors authorized the repurchases of up to $350 million in common stock. This authorization replaced a prior authorization, dated December 6, 1999 of $500 million, which had $204.5 million remaining. Purchases of the Company's common stock may be made from time to time, subject to certain market conditions. These shares may be repurchased in the open market or through privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number, and value of the shares that are repurchased will depend on a number of factors, including the price of the Company's stock. The Company may suspend or discontinue the program at any time and there is no expiration date.

In February 2006, the Company repurchased 9,590 shares upon the exercise of a stock option, which were delivered by the award recipient as payment of the exercise price. These shares were repurchased at the market price on the date of the exercise of the stock option.

Rhode Island	05-0155090
(State of Incorporation)	(I.R.S. Employer Identification No.)

HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
	Quarter Ended
	-------------------------------------------
	Fourteen	Thirteen
	Weeks Ended	Weeks Ended
	April 2, 2006	March 27, 2005
	------------------	--------------------
Cash flows from operating activities
Net loss	$ (4,899)	$ (3,713)
Adjustments to reconcile net loss to net
cash (utilized) provided by operating activities:
Depreciation and amortization of plant and equipment	13,595	13,361
Other amortization	18,252	24,755
Change in fair value of liabilities potentially settleable
in common stock	3,330	4,970
Deferred income taxes	10,880	(2,214)
Stock-based compensation	6,262	33
Excess tax benefits from stock-based compensation	(1,448)	-
Change in operating assets and liabilities (other
than cash and cash equivalents):
Decrease in accounts receivable	306,515	370,893
Increase in inventories	(33,766)	(38,984)
Increase in prepaid expenses and other current assets	(28,631)	(6,157)
Decrease in accounts payable and accrued liabilities	(250,850)	(205,436)
Other, including long-term portion of royalty advances	(114,479)	2,134
	------------	------------
Net cash (utilized) provided by operating activities	(75,239)	159,642
	------------	------------
Cash flows from investing activities
Additions to property, plant and equipment	(11,613)	(11,783)
Proceeds from sale of property, plant and equipment	81	57
Purchases of short-term investments	(271,400)	-
Sales of short-term investments	123,725	-
Other	(158)	706
	------------	------------
Net cash utilized by investing activities	(159,365)	(11,020)
	------------	------------
Cash flows from financing activities
Repayments of borrowings with original maturities
of more than three months	(32,743)	(360)
Net repayments of other short-term borrowings	(4,214)	(1,164)
Purchases of common stock	(87,343)	-
Stock option transactions	12,276	13,398
Excess tax benefits from stock-based compensation	1,448	-
Dividends paid	(16,031)	(10,647)
	------------	------------
Net cash (utilized) provided by financing activities	(126,607)	1,227
	------------	------------
Effect of exchange rate changes on cash	238	2,040
	------------	------------
(Decrease) increase in cash and cash equivalents	(360,973)	151,889
Cash and cash equivalents at beginning of year	942,268	725,002
	------------	------------
Cash and cash equivalents at end of period	$581,295	$876,891
	=======	=======

HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 25, 2005 and September 26, 2004
(Thousands of Dollars)
(Unaudited)
						2005		2004
						-------		-------
Cash flows from operating activities
	Net earnings				$	117,804		114,058
	Adjustments to reconcile net earnings to net cash
	utilized by operating activities:
		Depreciation and amortization of plant and equipment				57,525		55,138
		Other amortization				79,852		47,881
		Loss on early extinguishment of debt				-		1,072
		Change in fair value of liabilities potentially settleable
		in common stock				(1,330	)	(15,370	)
		Deferred income taxes				(11,505	)	22,969
		Compensation earned under restricted stock programs				60		164
	Change in operating assets and liabilities (other
		than cash and cash equivalents):
		Increase in accounts receivable				(116,790	)	(78,432	)
		Increase in inventories				(139,504	)	(146,373	)
		Decrease (increase) in prepaid expenses and other current assets				44,972		(6,298	)
		Decrease in accounts payable and accrued liabilities				(4,818	)	(79,728	)
		Long-term advances and other				(30,830	)	(8,820	)
						------------		------------
				Net cash utilized by operating activities		(4,564	)	(93,739	)
						------------		------------
Cash flows from investing activities
		Additions to property, plant and equipment				(45,604	)	(55,265	)
		Investments and acquisitions				(79,109	)	(9,824	)
		Proceeds from sale of property, plant and equipment				32,950		4,333
		Other				91		805
						------------		------------
				Net cash utilized by investing activities		(91,672	)	(59,951	)
						------------		------------
Cash flows from financing activities
		Repurchases of and repayments of borrowings with original
			maturities of more than three months			(21,329	)	(50,385	)
		Net repayments of other short-term borrowings				(4,154	)	(6,803	)
		Purchase of common stock				(31,777	)	-
		Stock option transactions				41,529		21,249
		Dividends paid				(42,860	)	(26,467	)
						------------		------------
				Net cash utilized by financing activities		(58,591	)	(62,406	)
						------------		------------
Effect of exchange rate changes on cash						324		438
						------------		------------
				Decrease in cash and cash equivalents		(154,503	)	(215,658	)
Cash and cash equivalents at beginning of year						725,002		520,747
						------------		------------
				Cash and cash equivalents at end of period	$	570,499		305,089
						=======		=======

Reported net loss			$ (3,713)
Add:
Stock-based employee compensation expense included in reported net earnings, net of related tax effects			21
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(3,477)
			------------
Pro forma compensation expense, net of tax			(3,456)
			------------
Pro forma net loss			$ (7,169)
			=======

Reported net loss per share
Basic and diluted			$ (.02)
			=======
Pro forma net loss per share
Basic and diluted			$ (.04)
			=======

	Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	-------------	----------	----------------	--------------
Outstanding at beginning of year	20,443	$19.04
Granted	38	20.36
Exercised	(817)	15.31
Expired or canceled	(101)	18.86
	------------
Outstanding at end of quarter	19,563	19.20	5.60 years	$64,244
	=======
Exercisable at end of quarter	13,537	19.51	4.91 years	$48,633
	=======

HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 25, 2005 and September 26, 2004
(Thousands of Dollars)
(Unaudited)


		2005	2004
		-------	-------
Supplemental information
Cash paid during the period for:
Interest	$25,630		29,255
Income taxes	$12,903		30,623

See accompanying condensed notes to consolidated financial statements.

HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(Thousands of Dollars)
(Unaudited)


	Quarter Ended				Nine Months Ended
	------------------				------------------
	Sept. 25, 2005 - --------			Sept. 26, 2004 - --------	Sept. 25, 2005 - --------		Sept. 26, 2004 - --------
Net earnings	$	92,063		88,687	117,804		114,058
Other comprehensive earnings (loss)		(7,091	)	3,839	(53,613	)	(9,699	)
		----------		----------	----------		----------
Total comprehensive earnings	$	84,972		92,526	64,191		104,359
		======		======	======		======

See accompanying condensed notes to consolidated financial statements.

	2005		2004
	-----------------		-----------------
Quarter - ----------	Basic - -------	Diluted - ---------	Basic - --------	Diluted - ---------
Net earnings	$ 92,063	92,063	88,687	88,687
Effect of dilutive securities:
Change in fair value of liabilities
potentially settleable in common stock	-	(570)	-	(5,150)
Interest expense on contingent convertible
debentures due 2021	-	1,066	-	1,066
	------------	------------	------------	------------
Adjusted net earnings	$ 92,063	92,559	88,687	84,603
	=======	=======	=======	=======

Average shares outstanding	178,931	178,931	176,885	176,885
Effect of dilutive securities:
Liabilities potentially settleable in
common stock	-	5,243	-	5,918
Contingent convertible debentures
due 2021	-	11,574	-	11,574
Options and warrants	-	2,544	-	1,730
	------------	------------	------------	------------
Equivalent shares	178,931	198,292	176,885	196,107
	=======	=======	=======	=======

Net earnings per share	$ .51	.47	.50	.43
	=======	=======	=======	=======

	Quarter Ended April 2, 2006 -----------------
Cost of sales	$ 85
Research and product development	315
Selling, distribution and administration	5,820
	--------
	6,220
Income taxes	2,144
	--------
	$4,076
	=====

Reported net earnings per share
	Basic	$	.51	.50	.66	.65
			======	======	======	======
	Diluted	$	.47	.43	.61	.52
			======	======	======	======

Pro forma net earnings per share
	Basic	$	.49	.48	.60	.59
			======	======	======	======
	Diluted	$	.45	.41	.55	.47
			======	======	======	======

	2006	2005
	------	------
Foreign currency translation adjustments	$ 2,017	(23,755)
Changes in value of available-for-sale securities, net of tax	(2,442)	1,937
Gain (loss) on cash flow hedging activities, net of tax	(586)	3,541
Reclassifications to earnings, net of tax	(316)	2,216
	----------	----------
	$ (1,327)	(16,061)
	======	======

	Quarter Ended
	------------------
	September 25, 2005				September 26, 2004
	-----------------				-----------------
		External	Affiliate		External	Affiliate
Net revenues		-----------	----------		-----------	---------
U.S. Toys	$	393,112	217		369,703	958
Games		252,927	5,695		236,501	9,514
International		333,052	203		331,554	173
Operations (a)		211	425,909		1,100	352,902
Other segments		8,750	-		8,454	-
Corporate and eliminations		-	(432,024	)	-	(363,547	)
		------------	------------		------------	------------
	$	988,052	-		947,312	-
		=======	=======		=======	=======

	Nine Months Ended - -------------------------
	September 25, 2005 - -----------------				September 26, 2004 - -----------------
Net revenues	External - -----------		Affiliate - ----------		External - -----------	Affiliate - ----------
U.S. Toys	$	768,925	727		689,254	2,506
Games		494,863	15,895		525,701	23,094
International		721,179	978		691,480	878
Operations (a)		458	731,459		2,095	632,927
Other segments		29,959	-		29,462	-
Corporate and eliminations		-	(749,059	)	-	(659,405	)
		------------	------------		------------	------------
	$	2,015,384	-		1,937,992	-
		=======	=======		=======	=======

Total assets	Sept. 25, 2005 - -------			Sept. 26, 2004 - -------
U.S. Toys	$	1,094,091		969,238
Games		1,716,732		1,573,472
International		1,484,756		1,429,562
Operations		693,450		545,773
Other segments		109,584		171,217
Corporate and eliminations (b)		(1,826,973	)	(1,567,024	)
		--------------		--------------
	$	3,271,640		3,122,238
		========		========

	2006	2005	% Change
	-------------	-------------	-------------
Net Revenues
North American segment	$310,304	288,676	7%
International segment	145,491	153,088	(5%)

Operating Profit (Loss)
North American segment	$ 4,770	4,637	3%
International segment	(8,323)	(7,873)	(6%)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.