1

PART I. FINANCIAL INFORMATION

Item 1.ITEM 1: Financial Statements

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

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(1)   In the opinion of management, the accompanying unaudited interim financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of April 1,September 30, 2007 and April 2,October 1, 2006, 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 quarternine months ended April 1,September 30, 2007 is a thirteenthirty-nine week period while the quarternine months ended April 2,October 1, 2006 is a fourteenforty week period. The quarters ended September 30, 2007 and October 1, 2006 were both thirteen week periods.  

The results of operations for the quarter ended April 1,September 30, 2007 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 31, 2006 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 31, 2006 with the exception of the accounting for uncertain tax positions and accounting for pension and postretirement plans. Effective January 1, 2007, the first day of fiscal 2007, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), which applies to all tax positions accounted for under Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". See footnote 6Note 5 for further information related to the adoption of this statement. In addition, effective January 1, 2007, the Company changed the measurement date of certain of its defined benefit pension plans and other postretirement plan from September 30 to its fiscal year- endyear-end date, pursuant to the requirements of Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans". See footnote 5Note 4 for further information related to the change in measurement dates.

Substantially all of the Company's inventories consist of finished goods.

Certain amounts in the 2006 consolidated financial statements have been reclassified to conform to the 2007 presentation.

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

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(2)   Net earnings (loss)Earnings per share data for the fiscal quarters and nine months ended April 1,September 30, 2007 and April 2,October 1, 2006 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)

Certain warrants containing a put feature that may be settled in cash or common stock arewere required to be accounted for as a liability at fair value. These warrants were repurchased by the Company in May of 2007. The Company iswas required to assess if these warrants, classified as a liability, havehad a more dilutive impact on earnings per share when treated as an equity contract. For the nine months ended September 30, 2007 and the quarter and nine months ended AprilOctober 1, 2007,2006, the warrants had a more dilutive impact on earnings per share assuming they were treated as a liability. Accordingly, the shares issuable under this contract are not included in the denominator and there is no adjustment to net earnings to exclude the expense included therein related to the fair market value adjustment. Since the Company had a net loss in the first quarter of 2006, these warrants were not included in the calculation of diluted earnings per share because to include them would have been antidilutive. Had these warrants been included in 2007 and 2006, they would have resulted in an additional 4,564 and 5,277 shares, respectively, being included in the diluted earnings per share calculation with a corresponding adjustment to add back the related expense of $7,920 and $3,330, respectively, to reported net earnings.

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

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

For the quarterquarters and nine months ended AprilSeptember 30, 2007 and October 1, 2007,2006, the effect of the Company's contingent convertible debt was dilutive and, accordingly, for the diluted earnings per share calculation, the numerator includes an adjustment to earnings to exclude the interest expense incurred for these debentures and the denominator includes an adjustment to include the shares issuable upon conversion. Since the Company had a net loss in the first quarter of 2006, the effect of the Company's contingent convertible debt would have been antidilutive for the first quarter of 2006. Had the Company not had a net loss in this period, 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 diluted earnings per share.

OptionsFor the quarters ended September 30, 2007 and October 1, 2006, options to acquire shares totaling 1,683 at April 1, 20073,791 and 21,263 at April 2, 2006,7,733, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive. OfFor the optionsnine-month periods ended September 30, 2007 and warrantsOctober 1, 2006, 3,110 and 12,273 options to acquire shares, totaling 21,263 at April 2, 2006, 18,342 would have been included inrespectively, were excluded from the calculation of diluted earnings per share had the Company not had a net loss in the first quartershare.

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

(Thousands of 2006. Assuming that these optionsDollars and warrants were included, under the treasury stock method, they would have resulted in an additional 2,167 shares being included in the diluted earnings per share calculation for the quarter ended April 2, 2006.Shares Except Per Share Data)
(Unaudited)

(3)  At April 1, 2007 and April 2, 2006, the Company had invested $15,000 and $147,675, respectively, in auction rate securities, which are recorded as short-term investments on the consolidated balance sheet. These securities are being accounted for as an available-for-sale security and are reflected at par value, which approximates fair value.

(4)   Other comprehensive earnings (loss) for the quarters and nine months ended April 1,September 30, 2007 and April 2,October 1, 2006 consist of the following:

In the first quarter of 2007, in accordance with SFAS No. 158, the Company changed its measurement date for certain of its defined benefit pension plans and its postretirement plan from September 30 to the Company's fiscal year-end date. As a result of this change, the assets and liabilities of these plans were remeasured as of December 31, 2006, the 2006 fiscal year end date of the Company. This remeasurement resulted in an adjustment to accumulated other comprehensive earnings of $7,779 during the first quarter of 2007.

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

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

The reclassification adjustment from other comprehensive earnings to net income of $(80)$1,966 for the quarternine months ended April 1,September 30, 2007 includes a realized gain of $(664) on the sale of available-for-sale securities. The remaining amount of reclassification adjustmentsadjustment from other comprehensive earnings to net incomeearnings of $584$2,898 for the quarternine months ended AprilOctober 1, 20072006 includes an impairment charge of $2,629 relating to an other than temporary decrease in the value of the Company's investment in Infogrames SA common stock. The reclassification adjustments for the quarters ended, and the remainder of the reclassification adjustments from other comprehensive loss for the quarternine months ended April 2,September 30, 2007 and October 1, 2006 of $(316) represent net (gains) losses on cash flow hedging derivatives for which the related transaction has impacted earnings and was reflected in cost of sales. TheseThe losses on cash flow hedging derivatives for the nine months ended September 30, 2007 include losses on cash flows reclassified to earnings as the result of hedge ineffectiveness of $13. There were no reclassifications$15. The losses on cash flow hedging derivatives for the quarter and nine months ended October 1, 2006 include losses reclassified to earnings as athe result of hedge ineffectiveness inof $14 and $11, respectively. At September 30, 2007, the first quarter of 2006. The Company expects the remaininghad recorded deferred gainslosses on derivative hedging instruments, at April 1, 2007net of $2,316tax, of $14,393 in accumulated other comprehensive earnings. These instruments hedge anticipated inventory purchases and other cross-border transactions through 2010. Of the amount included in accumulated other comprehensive earnings at September 30, 2007, the Company expects approximately $9,400 to be reclassified to earnings within the next twelve months.

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

(5) (4)   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 and nine months ended April 1,September 30, 2007 and April 2, 2006.October 1, 2006 are as follows:

HASBRO, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)

(Unaudited)

In accordance with SFAS No. 158, effective January 1, 2007, the Company elected to change the measurement date of certain of its defined benefit plans and the Company's other postretirement plan from September 30 to the CompanyCompany’s fiscal year-end date, which is December 30, for 2007. This change was required by SFAS No. 158 to be made no later than the end of the Company's 2008 fiscal year with early adoption permitted. As a result of this election, the assets and liabilities of these plans were remeasured as of December 31, 2006. The remeasurement of the assets and liabilities resulted in an increase in the projected benefit of $536 and an increase in fair value of plan assets of $10,872. The impact of this accounting change was a reduction of retained earnings of $2,143, an increase to accumulated other comprehensive earnings of $7,779, a decrease in long-term accrued pension expense of $3,619, an increase in prepaid pension expense of $5,482, and a decrease in long-term deferred tax assets of $3,465.

InDuring the first quarterthree quarters of fiscal 2007 the Company has made cash contributions to its pension plans of approximately $1,600, which are included in other operating activities on the Company's consolidated statement of cash flows.$4,800. The Company expects to contribute approximately $5,500$2,300 during the remainder of fiscal 2007.

Subsequent to September 30, 2007, the Company decided to freeze the accrual of benefits provided by certain of its U.S. defined benefit pension plans effective December 31, 2007. The Company will record a charge during the fourth quarter of 2007 related to the curtailment of plan benefits which is not expected to be material.

HASBRO, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

 (6)(5)On January 1, 2007, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), which applies to all tax positions accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". FIN 48 prescribes a two step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the financial statements. The second step determines the measurement of the tax position. FIN 48 also provides guidance on derecognition of such tax positions, classification, potential interest and penalties, accounting in interim periods and disclosure. The adoption of FIN 48 resulted in a $88,798 decrease in current liabilities, a $85,773 increase in long-term liabilities, a $5,333 increase to the lo ng-termlong-ter m deferred tax assets and a $8,358 increase to retained earnings.

At the date of adoption, the amount of unrecognized tax benefits, including potential accrued interest and penalties, amounted to $85,773. Substantially all of these amounts, if recognized, would decrease the effective tax rate in the period in which each of the benefits areis recognized. There have been no material changes in the amount of unrecognized tax benefits during the first quarter of 2007.

During the first quarter of 2007, the Company recognized $962$3,524 of potential interest and penalties, which are included as a component of income tax in the accompanying statement of operations.

HASBRO, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)

(Unaudited)

The Company and its subsidiaries file income tax returns in the United States and various state and international jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities in its major jurisdictions for years before 2002. In the normal course of business, the Company is regularly audited by U.S. federal, state and local and international tax authorities in various tax jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2004. With few exceptions, the Company is no longer subject to U.S. state or local and non-U.S. income tax examinations by tax authorities in its major jurisdictions for years before 2002. During the third quarter of 2007, due to the expiration of the statute of limitations on a recently completed examination related to the 2002 and 2003 U.S. federal income tax returns, the Company recognized $34,692 of previously unrecognized tax benefits and related reversal of interest, primarily related to the deductibility of certain expenses and tax treatment of certain subsid iary and other transactions.  Of this amount, $29,619 was recorded as a reduction of income tax expense, $2,932 was recorded as a reduction of deferred tax assets, and $2,141 was recorded as a decrease to other intangibles.   

The Company is also under income tax examination in Mexico and in several other state and foreign jurisdictions.  The ultimate resolution of these matters,examinations, including thosematters that may be resolved within the next twelve months, is not yet determinable.

During the quarter ended September 30, 2007, the Company designated $90,000 of current year international net earnings for investment in the U.S. The incremental income and withholding taxes on this amount, representing the difference between the U.S. tax rate and the tax rates in the applicable international jurisdictions, has been provided through an increase in the 2007 effective tax rate. The cumulative amount of remaining undistributed earnings of the Company's international subsidiaries remain held for indefinite reinvestment.

(7) (6) Hasbro is a worldwide leader in children’s and family leisure time and entertainment products and services, including the development, manufacture and marketing of games and toys ranging from traditional to high-tech.toys. The Company has three principal segments, North America, International and Global Operations.

The North American segment includes the development, marketing and selling of boys' action figures, vehicles and playsets, girls' toys, electronic toys and games, plush products,  preschool toys and infant products,  electronic interactive products, tween electronic products, toy-related specialty products, traditional board games and puzzles, DVD- based games,  and trading card and role-playing games within the United States, Canada and Mexico. Within the International segment, the Company develops, markets and sells both toy and certain game products in non-North American markets, primarily the European, Asia Pacific, and Latin American regions. The Global Operations segment is responsible for manufacturing and sourcing finished product for the majority of the Company's segments. The Company also has an other segmentssegment that primarily licenselicenses out certain toy and game properties.

HASBRO, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

Segment performance is measured at the operating profit level. Included in Corporate and eliminations are 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. The accounting policies of the segments are the same as those referenced in Note 1.

HASBRO, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

Results shown for the quarter and nine months are not necessarily representative of those which may be expected for the full year 2007 nor were those of the comparable 2006 first quarterperiods representative of those actually experienced for the full year 2006. Similarly, such results are not necessarily those which would be achieved were each segment an unaffiliated business enterprise.

Information by segment and a reconciliation to reported amounts for the quartersquarter and nine months ended April 1,September 30, 2007 and April 2,October 1, 2006 isare as follows:follows.

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

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(Unaudited)

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

(b)  Certain intangible assets, primarily goodwill, which benefit operating segments are reflected as Corporate assets for segment reporting purposes. These amounts haveThe amortization expense related to these assets has 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 differencedifferences between actual and budgeted amounts are reflected in the Corporate segment.

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

The following table presents consolidated net revenues by class of principal products for the quarters and nine-month periods ended April 1,September 30, 2007 and April 2,October 1, 2006.

 (7)On May 9, 2007 the Company exercised its call option to repurchase all of the outstanding warrants for the Company's common stock held by Lucasfilm Ltd. and Lucas Licensing Ltd. (together "Lucas"). At the time of the call Lucas held exercisable warrants (the "Warrants") to purchase an aggregate of 15,750 shares of the Company's common stock. On May 24, 2007 the Company paid Lucas $200,000 in cash and closed the repurchase of all of the Warrants. The results for the nine months ended September 30, 2007 include a mark to market charge of $44,370 related to these warrants.

 (8)In July 2007, with the exception of rights to DUNGEONS & DRAGONS, the Company reacquired the remaining digital gaming rights for its owned or controlled properties held by Infogrames Entertainment SA (Infogrames).  The acquisition price of $19,000 included $18,000 in cash and $1,000 of non-cash consideration in the form of the return of 39 shares of preferred stock held by the Company in a subsidiary of Infogrames. These rights were previously held by Infogrames on an exclusive basis as a result of a license agreement. The consideration to reacquire these rights, which represents fair value, is included as a component of other intangible assets in the consolidated balance sheet and will be amortized over a period of approximately 5 years.

(9)In August 2007 certain warrants previously issued by the Company allowing for the purchase of 1,700 shares of the Company's common stock, with a weighted average exercise price of approximately $16.99, were exercised. The holder of the warrants elected to settle the warrants through a non-cash net share settlement, resulting in the issuance of approximately 779 shares. If the holder had not elected net share settlement, the Company would have received cash proceeds from the exercise totaling $28,888 and would have been required to issue 1,700 shares.

Item 2. Management's Discussion and Analysis of Financial Condition

and Results of Operations.

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of
Condensed Notes to Consolidated Financial

Condition and Results of Operations

Statements (continued)
(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

 (10)In September 2007 the Company issued $350,000 of Notes that are due in 2017 (the "Notes"). The Notes bear interest at a rate of 6.30%, which may be adjusted upward in the event that the Company's credit rating from Moody's Investor Services, Inc., Standard & Poor's Ratings Services or Fitch Ratings is decreased two levels below the Company’s credit ratings on the date of issuance of the Notes. On that date, the Company’s ratings from Moody’s Investor Services, Inc., Standard & Poor’s Ratings Services and Fitch Ratings were BBB, Baa2 and BBB, respectively. The interest rate adjustment is dependent on the degree of decrease of the Company’s ratings and could range from 0.25% to a maximum of 2%. The Company may redeem the Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effectiv e interest rate on applicable U.S. Treasury bills at the time of repurchase.

ITEM 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations

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

 (Thousands of Dollars and Shares Except Per Share Data)

This Quarterly Report on Form 10-Q, including the following section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements expressing management's current expectations, goals, objectives and similar matters. See Item 1A, in Part II of this report, for a discussion of factors which may cause the Company's actual results or experience to differ materially from these forward-looking statements. The Company undertakes no obligation to revise the forward-looking statements in this report after the date of the filing.

EXECUTIVE SUMMARY

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

The Company earns revenue and generates cashprimarily 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. The Company's business is highly seasonal with a significant amountmajority of revenues occurring in the second half of the year and, within that half, the fourth quarter. In 2006, 68% of the Company's net revenues were generated in the second half of the year with 35% of annual net revenues generated in the fourth quarter. In both 2005 and 2004, percentages were comparable at 67% and 35% for the second half and fourth quarter, respectively. While many of the Company's products are based on brands the Company owns or controls, the Company also offers products which are licensed from outside inventors. In addition, the Company licenses rights to produce products based on movie, television, music and other family entertainment properties, suc hsuch as MARVEL and STAR WARS.STA R WARS characters.

The Company’s North American toy and games business is managed under common leadership, providing a combined focus on developing, marketing, and selling products in the U.S., Canada and Mexico.  The International segment consists of the Company’s European, Asia Pacific and Latin AmericanAmerica marketing operations. The Company’s world-wide manufacturing and product sourcing operations are managed through its Global Operations segment. The Hasbro Products Group continues to beis responsible for the world-wide licensing of the Company's intellectual properties and works closely with the North American and International segments on the development and outlicensing of the Company's brands.

The Company’s focus remains on growing core owned and controlled brands, developing new and innovative products which respond to market insights, and optimizing efficiencies within the Company to reduce costs, increase operating profits and strengthen its balance sheet.  While the Company believes it has achieved a more sustainable revenue base by developing and maintaining its core brands, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and leverage its key strengths. In 2007 the Company expectshas had significant sales of products related to the Company's license with Marvel Entertainment, Inc. and Marvel Characters, Inc. (collectively "Marvel"), primarily due to the expected theatrical release of SPIDERMAN-3 in May of 2007. Given the strength of its core brands, the Company may also seek to drive product-related revenues by increasing the visibility of i tsits core brands through entertainment-basedentertai nment-based vehicles. As an example of this,The TRANSFORMERS motion picture, released in most markets in July of 2007, is an example of using entertainment to drive the TRANSFORMERS motion picture is expected to be released and the Company has developed products based on the motion picture that will be marketed in 2007.Company’s core brand revenues.

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial

Condition and Results of Operations (continued)

(Thousands of Dollars and Shares Except Per Share Data)

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, G.I. JOE and TONKA, which have been successful for the Company over the long term.  The Company has a large portfolio of owned and controlled brands, which can be introduced in new formats and platforms over time.  These brands may also be further extended by pairing a licensed conceptlicense with a core brand. By focusing on core brands, the Company is workingseeks to buildmaintain a more consistent revenue stream and basis for future growth. In the first quarterthree quarters of 2007 and the fiscal year 2006, the Company had strong sales of core brand products, including TRANSFORMERS, PLAYSKOOL, MY LITTLE PONY, LITTLEST PET SHOP, MONOPOLY, NERF, and PLAY-DOH.

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

While the Company's strategy has continued to focus on growing its core brands and developing innovative, new products, it will continue to evaluate and enter into arrangements to license properties when the Company believes it is economically attractive. In 2006 the Company entered into a license with Marvel to produce toys and games based on Marvel’s portfolio of characters.  The Company had significant sales of products related to this license induring the first quarter ofnine months ended September 30, 2007, primarily due to the expected theatrical release of SPIDER-MAN 3 in May of 2007. The Company willhas also incurincurred royalties on products based onrelating to the theatrical release of TRANSFORMERS in July 2007. While gross profits of theatrical entertainment-based products are generally higher than many of the Company's other products, sales from these products also incur royalty expenses payable to the licensor. Such royalties reduce the impact of these higherh igher gross mar gins.margins. In certain instances, such as with Lucasfilm's STAR WARS, the Company may also incur amortization expense on property right-based assets acquired from the licensor of such properties, further impacting profit made on these products.properties.

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

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial

Condition and Results of Operations (continued)

(Thousands of Dollars and Shares Except Per Share Data)

While the Company remains committed to investing in the growth of its business, it continues to be focused on reducing fixed costs through efficiencies and profit improvement. Over the last 5 years the Company has improved its operating margin from 7.8% in 2002 to 11.9% in 2006. In the fourth quarter of 2006, as part of its ongoing cost reduction efforts, the Company determined that it would reduce its manufacturing activity in Ireland and transition the manufacture of certain products to the Company's suppliers in China. The Company is also investing to grow its business in emerging international markets. With a strong balance sheet and having achieved a debt to capitalization ratio of between 25-30%, theThe Company will also continue to evaluate strategic alliances and acquisitions which may complement its current product offerings or allow it entry into an area which is adjacent to and complementary to the toy and game business. The C ompanyCompany expects to leverage revenue to offset the impact of thesepotential investments and maintain 2007 operating margin levels near those in 2006.

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial

Condition and Results of Operations (continued)

(Thousands of Dollars and Shares Except Per Share Data)

In recent years, the Company has been seeking to return excess cash to its shareholders through share repurchaserepurchases and dividends. As part of this initiative, in July 2006,over the Company'slast three years, the Company’s Board of Directors (the "Board")has adopted three repurchase authorizations with a cumulative authorized repurchase amount of $1,200,000. After fully exhausting the repurchaseprior two authorizations, the most recent authorization was passed on August 2, 2007 for $500,000. During the third quarter of an additional $350,000 in2007, $259,450 of common stock after a previous authorization of $350,000 was exhausted in July 2006.repurchased under this authorization. For the quarter and nine months ended April 1,September 30, 2007, the Company invested $74,037$362,135 and $455,914, respectively, in the repurchase of 2,52912,929 and 16,130 shares of common stock, respectively, in the open market. AsAlso, in May of April 1, 2007, approximately $122,019 remains under this authorization.the Company paid $200,000 in cash to repurchase exercisable warrants to purchase 15,750 shares of the Company's common stock. In addition, in February 2007, thet he Company announced an increase in its May 2007 quarterly dividend to $0.16 per share. This is the fourth consecutive year that the Board of Directors has increased the quarterly dividend rate.

SUMMARY OF FINANCIAL PERFORMANCE

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The relationship between various components of the results of operations, stated as a percent of net revenues, is illustrated below for the firstfiscal quarters ofand nine months ended September 30, 2007 and October 1, 2006.  

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

(Thousands of Dollars and Shares Except Per Share Data)

RESULTS OF OPERATIONS

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

The first quarter ofnine-month period ended September 30, 2007 was a thirteenthirty-nine week period while the first quarter ofnine-month period ended October 1, 2006 was a fourteenforty week period. The quarters ended September 30, 2007 and October 1, 2006 were both thirteen week periods. Net earnings for the first quarter ofand nine months ended September 30, 2007 were $32,890$161,580 and $199,271, respectively, compared to awith net lossearnings of $99,584 and $121,773 for the first quarterrespective periods of 2006 of $(4,899).2006. Basic and diluted earnings per share for the first quarter ofand nine months ended September 30, 2007 were $.20$1.04 and $.19, respectively,$1.25 compared to awith basic and diluted lossearnings per share of $0.62 and $0.72 for the respective periods in 2006. Diluted earnings per share were $0.95 and $1.16 for the first quarter and nine months ended September 30, 2007, compared with diluted earnings per share of 2006$0.58 and $0.68 for the respective periods in 2006. The 2007 results for the quarter and nine months ended September 30, 2007 include a favorable tax adjustment of $(.03).$29,619, or $0.17 per diluted share, related to the realization of certain previously unrecognized tax benefits.

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial

Condition and Results of Operations (continued)

(Thousands of Dollars and Shares Except Per Share Data)

Consolidated net revenues for the quarter ended April 1,September 30, 2007 increased 34%18% to $625,267 from $468,181$1,223,038 compared to $1,039,138 for the quarter ended April 2,October 1, 2006. NetFor the nine months ended September 30, 2007, consolidated net revenues were $2,539,713 compared to $2,035,083 for the nine months ended October 1, 2006, an increase of 25%. Consolidated net revenues were positively impacted by foreign currency translation in the amount of $10,100$22,400 and $44,700 for the quarter and nine months ended September 30, 2007, respectively, as the result of athe weaker U.S. dollar in 2007. Operating profit for the quarter ended April 1,September 30, 2007 was $53,727$209,737 compared to an operating loss$165,197 in the third quarter of $(2,126) for the quarter ended April 2, 2006. Operating profit for the quarter ended April 1, 2007 nine-month period was not materially impacted by$319,241 compared to an operating profit of $183,670 for the weaker U.S. dollar. nine-month period of 2006.

Most of the Company's revenues and operating profit (loss) are derived from its two principal segments: the North American segment and the International segment, which are discussed in detail below.

The following table presents net revenues and operating profit (loss) data for the Company's two principal segments for the first quarter of fiscal yearsquarters and nine months ending September 30, 2007 and October 1, 2006.

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

(Thousands of Dollars and Shares Except Per Share Data)

NORTH AMERICAN SEGMENT

The North American segment'ssegment net revenues for the quarter ended April 1,September 30, 2007 increased 36%10% to $421,084 as compared$822,703 from $745,476 for the quarter ended October 1, 2006.  Net revenues for the nine months ended September 30, 2007 increased 19% to $1,693,190 from $1,417,736 for the nine months ended October 1, 2006. The increase for both the quarter and nine-month period was primarily due to increased revenues in the boys' toys category driven by sales of MARVEL and TRANSFORMERS products due to the same periodtheatrical releases of SPIDER-MAN 3 in 2006. This increase primarily reflects shipments of MARVEL productsMay 2007 and increasedTRANSFORMERS in July 2007. Although STAR WARS product sales have declined in 2007 from 2006, sales of core brands. The Company had a large number of MARVEL shipments during the first quarter partially due to shipment ofthese products related to SPIDER-MAN 3, which is plannedhave continued to be releaseda significant contributor to boys' toys revenues in Maythe quarter and nine months ended September 30, 2007. Revenues in the girls' toys category increased for both the quarter and nine-month period as a result of 2007. The increase in revenues from core brand products primarily related to increasedhigher sales of LITTLEST PET SHOP NERF, PLAYSKOOL and DUNGEONS & DRAGONS products. Sales in the first quarter of 2007 were also positively impacted by sales of TOOTH TUNESFURREAL FRIENDS products and, to a lesser extent, higher revenues from the BABY ALIVE dolls. The Company expects sales of MARVEL products to continue to be strongALI VE line which was reintroduced in the second quarter of 2006. In addition, revenues in the girls’ toys category were positively impacted in the third quarter by increased shipments of MY LITTLE PONY products but negatively impacted by decreased sales of EASY-BAKE OVEN products due to the planned theatrical releaserecall of SPIDER-MAN 3the product in May.July of 2007. Revenues from the preschool category decreased in the third quarter of 2007 due to decreased sales of PLAY-DOH products, but were flat for the nine-month period ended September 30, 2007. Revenues from games and puzzles decreased for the quarter and nine-month period with decreased revenues from trading card and plug and play games partially offset by increased sales of traditional board games. Revenues from the tweens category decreased for the quarter and nine-month periods as a result of lower sales of electronic products such as VIDEONOW, ZOOMBOX and I-DOG partially offset by increased sales of NERF products.

The North American segment had an operating profit of $45,325$134,041 for the quarter ended AprilSeptember 30, 2007 compared to $111,581 for the quarter ended October 1, 2006. For the nine months ended September 30, 2007, compares tothe North American segment had an operating profit of $4,770$217,698 compared to $146,753 for the nine months ended October 1, 2006.  The increase in operating profit for the quarter ended April 2, 2006. The increased operating profit in 2007and nine-month periods was primarily related to increasedthe result of higher gross profits resulting from the higher revenues discussed above. Although North American gross profit increased as a result of the increased saleshigher revenues, this increase in gross profit for the nine-month period ended September 30, 2007 was negatively impacted by approximately $10,400 of charges recorded in the firstsecond quarter of 2007. 2007 related to the July 2007 EASY-BAKE OVEN recall.

The increase in gross profit for the quarter and nine-month periods was partlyalso partially offset by an increase inhigher royalty expenses, principally due toexpense as the result of the increased sales of MARVEL products inand TRANSFORMERS movie-related products. Operating profit for the first quarter of 2007. In addition, operating profitnine-month period ended September 30, 2007 was negativelyalso impacted by increasedhigher advertising expense inas well as higher selling and distribution costs related to the first quarter of 2007.increased sales volume.

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial

Condition and Results of Operations (continued)

(Thousands of Dollars and Shares Except Per Share Data)

INTERNATIONAL SEGMENT

International segment net revenues increased by 29%33% to $187,676$374,027 for the quarter ended April 1,September 30, 2007 from $145,491$280,421 for the quarter ended April 2,October 1, 2006. Net revenues for the nine months ended September 30, 2007 increased 36% to $789,347 from $579,156 for the nine months ended October 1, 2006. For the quarter and nine months ended September 30, 2007, International segment net revenues were positively impacted by currency translation of approximately $11,500,$21,700 and $44,900, respectively, as the result of the weaker U.S. dollar. Excluding the favorablepositive impact of foreign exchange, International net revenues increased 21% in local currency to $176,159. Thethe increase in local currency revenue for the quarter and nine-month period was primarily the result of shipmentsincreased product sales in the boys' toys category. As in the North American segment, this increase was driven by higher sales of MARVEL products resulting from the theatrical release of SPIDER-MAN 3 in May of 2007 and TRANSFORMERS products resulting from the theatrical release of the TRANSFORMERS movies in most countries in Ju ly of 2007. The increased revenues in the International segment were also due to increased revenues from girls' toys as the result of increased sales of LITTLEST PET SHOP products and to a lesser extent, MY LITTLE PONY products. Revenues in the preschool category increased based on increased sales of PLAYSKOOL products as well as strong revenues of IN THE NIGHT GARDEN product line, which was recently launched in the United Kingdom. Revenues in the games and puzzles category were flat for the quarter but increased for the nine-month period primarily due to increased sales of core brand products including LITTLEST PET SHOP, TRANSFORMERS, MY LITTLE PONY, PLAYSKOOL, MONOPOLYMONOPOLY. Revenues from the tweens category for the quarter and PLAY-DOH. These increasesnine-month periods ended September 30, 2007 were partially offset by decreased salesconsistent with the revenues from the corresponding periods of B-DAMAN products.the prior year.

The International segment had an operating loss was $(108)profit of $57,634 for the quarter ended April 1,September 30, 2007 compared to a loss of $(8,323)$43,202 for the quarter ended April 2,October 1, 2006. Although revenuesThe operating profit of $68,819 for the nine months ended September 30, 2007 compared to $26,786 for the nine months ended October 1, 2006. For the quarter and nine months ended September 30, 2007, International segment operating profits were positively impacted by currency translation of approximately $2,800 and $2,000 respectively, as the result of the weaker U.S. dollar, as noted above,dollar. The increase in operating expenses were also impacted, with a resulting net negative impact to the International segment operating loss of approximately $(674)profit for the quarter ended April 1, 2007. Absent the impact of foreign exchange rates, the decrease in operating lossand nine-month periods was primarily due to the higher revenues discussed above. The increased gross profit resulting fromas a result of the increase in sales in the first quarter of 2007 over the first quarter of 2006. The increase in gross profithigher revenues was partially offset by increasedhigher royalty expense in both the quarter and nine-month periods due to higher sales of MARVEL and TRANSFORMERS products as well as higher advertising and selling, distribution and administration expenses in the first quarter of 2007.both periods.

GROSS PROFIT

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The Company's gross profit margin increased to 61.1%57.4% for the quarter ended April 1,September 30, 2007 from 60.3%55.6% for the quarter ended April 2,October 1, 2006 while gross profit margin for the nine months ended September 30, 2007 increased to 59.1% from 57.8% in the comparable period of 2006. This increase was due to changes in product mix primarily within our games business.  The increase was also partially due to gross profits being positively impacted by higher sales of core brandlicensed products. Although licensed products ingenerally carry a higher gross margin, the first quarter of 2007.

The Company aggressively monitors its levels of inventory, attempting to avoid unnecessary expenditures of cash and potentialincreased gross margin is largely offset by higher royalty expense associated with these products. Gross profit for the nine-month period was also impacted by approximately $10,400 in charges related to obsolescence.  Thethe recall of the Company's failure to accurately predictEASY-BAKE OVEN product.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and respond to consumer demand could result in overproductionAnalysis of less popular items, which could result in higher obsolescence costs, causing a reduction in gross profit.  Financial
Condition and Results of Operations (continued)