The following discussion should be read in conjunction with the audited consolidated financial statements of the Company included in Part II Item 8 of this document.

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning the Company's expectations and beliefs. See Item 1A "Forward-Looking Information and Risk Factors That May Affect Future Results" for a discussion of other uncertainties, risks and assumptions associated with these statements.

Unless otherwise specifically indicated, all dollar or share amounts herein are expressed in thousands of dollars or shares, except for per share amounts.

Executive Summary

The Company earns revenue and generates cash through the sale of a variety of toy and game products, as well as through the out-licensing of rights for use of its properties in connection with non-competing products, including digital games, offered by third parties. The Company sells its products both within the United States and in a number of international markets. The Company's business is highly seasonal with a significant amount of revenues occurring in the second half of the year. In 2008, 2007 and 2006, the second half of the year accounted for 63%, 66% and 68% of the Company's net revenues, 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 entertainment properties, such as MARVEL and STAR WARS properties.

The Company's business is primarily separated into two business segments, U.S. and Canada and International. The U.S. and Canada segment develops, markets and sells both toy and game products in the U.S. and Canada. The International segment consists of the Company's European, Asia Pacific and Latin and South American marketing operations, including Mexico. In addition to these two primary segments, the Company's world-wide manufacturing and product sourcing operations are managed through its Global Operations segment. The Company's Other segment is responsible for the worldwide out-licensing of the Company's intellectual properties and works closely with the U.S. and Canada and International segments on the development and out-licensing of the Company's brands. Prior to 2008, the Company's Mexican operations were included with the U.S. and Canada in the North American segment. At the beginning of 2008 the Company reorganized the management and reporting structure of its operating segments and moved the Mexican operations into the International segment and the North American segment was renamed the U.S. and Canada segment. The management reorganization was the result of a realignment of the Company's commercial markets and reflects its objective to leverage its Mexican operations in connection with its growth strategy in Latin and South America.

The Company seeks to make its brands relevant in all areas important to its consumers. Brand awareness is amplified through immersive traditional play, digital applications, publishing and lifestyle licensing experiences presented for the consumers' enjoyment. 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. The Company's core brands represent Company-owned or Company-controlled brands, such as TRANSFORMERS, MY LITTLE PONY, LITTLEST PET SHOP, MONOPOLY, MAGIC: THE GATHERING, PLAYSKOOL, G.I. JOE, NERF and TONKA, which have been successful over the long term. The Company has a large portfolio of owned and controlled brands, which can be introduced in new formats and platforms over time. These brands may also be further extended by pairing a licensed concept with a core brand. By focusing on core brands, the Company is working to build a more consistent revenue stream and basis for future growth. During 2008 the Company had strong sales of core brand products, namely LITTLEST PET SHOP, TRANSFORMERS, PLAYSKOOL, MONOPOLY, NERF, MY LITTLE PONY, FURREAL FRIENDS and PLAY-DOH. This strategy of reimagining, reinventing and reigniting its brands has proved instrumental to achieving its overall growth objectives.

The Company also seeks to drive product-related revenues by increasing the visibility of its core brands through entertainment. As an example of this, in July of 2007, the TRANSFORMERS motion picture was released and the Company developed and marketed products based on the motion picture. As a result of pairing this core brand with this type of entertainment, both the movie and the product line benefited. The Company expects to continue this strategy and anticipates the theatrical releases of both TRANSFORMERS: REVENGE OF THE FALLEN and G.I. JOE: RISE OF COBRA motion pictures during 2009. In addition, the Company has entered into a six-year strategic relationship with Universal Pictures to produce at least four motion pictures based on certain of Hasbro's core brands. The first movie is expected to be released in 2010 or 2011, followed by anticipated releases of at least one movie per year thereafter.

While the Company believes it has achieved a more sustainable revenue base by developing and maintaining its core brands and avoiding reliance on licensed entertainment properties, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and key strengths. In 2008 and 2007, the Company had significant sales of products related to the Company's license with Marvel Characters B.V. ("Marvel"), primarily due to the theatrical releases of IRON MAN in May 2008, THE INCREDIBLE HULK in June 2008 and SPIDERMAN-3 in May 2007. In addition, the Company had significant sales in 2008 of products related to the movie release of STAR WARS:
CLONE WARS in August 2008 as well as sales from the movie release of INDIANA JONES AND THE KINGDOM OF THE CRYSTAL SKULL in May 2008. During 2009 the Company expects to continue to have a high level of revenues from entertainment-based licensed properties based on the expected major motion picture release of X-MEN ORIGINS: WOLVERINE as well as products related to television programming based on SPIDER-MAN and STAR WARS.

While gross profits of theatrical entertainment-based products are generally higher than many of the Company's other products, sales from these products including our owned or controlled brands based on a movie release also incur royalty expense. 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 profits earned on these products.

The Company's long-term strategy also focuses on extending its brands further into the digital world. As part of this strategy, the Company entered into a multi-year strategic agreement with Electronic Arts Inc. ("EA"). The agreement gives EA the exclusive worldwide rights, subject to existing limitations on the Company's rights and certain other exclusions, to create digital games for all platforms, such as mobile phones, gaming consoles and personal computers, based on a broad spectrum of the Company's intellectual properties, including MONOPOLY, SCRABBLE, YAHTZEE, NERF, TONKA, G.I. JOE and LITTLEST PET SHOP. The first major game releases under this agreement were released in 2008, with a full line expected in 2009.

While the Company remains committed to investing in the growth of its business, it also continues to be focused on reducing fixed costs through efficiencies and on profit improvement. Over the last 6 years the Company has improved its full year operating margin from 7.8% in 2002 to 12.3% in 2008. The Company reviews it operations on an ongoing basis and seeks to reduce its cost structure and promote efficiency. The Company is also investing to grow its business in emerging markets. In 2008, the Company expanded its operations in China, Brazil, Russia, Korea and the Czech Republic. In addition, the Company is seeking to grow its business in entertainment, digital gaming, and will continue to evaluate strategic alliances and acquisitions which may complement its current product offerings or allow it entry into an area which is adjacent to and complementary to the toy and game business. For example, in January of 2008, the Company acquired Cranium, Inc., a developer and marketer of CRANIUM branded games and related products. In the second quarter of 2008, the Company acquired the rights to TRIVIAL PURSUIT, a brand which the Company had previously licensed on a long-term basis. Ownership of the rights will allow the Company to further leverage the brand in different media.

In recent years, the Company has been seeking to return excess cash to its shareholders through share repurchases and dividends. As part of this initiative, over the last four years, the Company's Board of Directors

(the "Board") has adopted four share repurchase authorizations with a cumulative authorized repurchase amount of $1,700,000. After fully exhausting the prior three authorizations, the fourth authorization was approved on February 7, 2008 for $500,000. For the years ended 2008, 2007 and 2006, the Company spent $357,589, $587,004 and $456,744, respectively, to repurchase 11,736, 20,795 and 22,767 shares, respectively, in the open market. Also in 2007, the Company paid $200,000 in cash to repurchase exercisable warrants for 15,750 shares of the Company's common stock. The Company intends to, at its discretion, opportunistically repurchase shares in the future subject to market conditions. At December 28, 2008, the Company had $252,364 remaining under the February 2008 authorization.

After a very strong first nine months of 2008, the Company was negatively impacted during the fourth quarter of 2008 by both the strengthening of the U.S. dollar relative to foreign currencies as well as the broad based economic downturn that was experienced in most of the markets in which it operates. The Company worked with its retail customers to put certain promotional programs in place with the goal of both driving sales as well as managing inventory at retail given the weakening demand. Despite the impact of the economic conditions, the Company grew revenue in both the fourth quarter and for the full year absent the impact of foreign exchange rate changes in 2008.

Recent issues in the credit markets have not materially impacted the Company's liquidity. As of December 28, 2008 the Company had $630,390 in cash and had available capacity, if needed, under its revolving credit agreement. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its available lines of credit and accounts receivable securitization program are adequate to meet its working capital needs for 2009.

Summary

The components of the results of operations, stated as a percent of net
revenues, are illustrated below for each of the three fiscal years ended
December 28, 2008.


                                                    2008        2007        2006

        Net revenues                                 100.0 %     100.0 %     100.0 %
        Cost of sales                                 42.1        41.1        41.4

        Gross profit                                  57.9        58.9        58.6
        Amortization                                   1.9         1.8         2.5
        Royalties                                      7.8         8.2         5.4
        Research and product development               4.8         4.4         5.4
        Advertising                                   11.3        11.3        11.7
        Selling, distribution and administration      19.8        19.7        21.7

        Operating profit                              12.3        13.5        11.9
        Interest expense                               1.2         0.9         0.9
        Interest income                               (0.5 )      (0.8 )      (0.9 )
        Other (income) expense, net                    0.6         1.4         1.1

        Earnings before income taxes                  11.0        12.0        10.8
        Income taxes                                   3.4         3.3         3.5

        Net earnings                                   7.6 %       8.7 %       7.3 %

Results of Operations

The fiscal years ended December 28, 2008 and December 30, 2007 were fifty-two week periods while the fiscal year ended December 31, 2006 was a fifty-three week period.

Net earnings for the fiscal year ended December 28, 2008 were $306,766, or $2.00 per diluted share. This compares to net earnings for fiscal 2007 and 2006 of $333,003 and $230,055, or $1.97 and $1.29 per diluted share, respectively.

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

In January 2008 the Company acquired Cranium, Inc. ("Cranium"). The results of operations for 2008 include the operations of Cranium from the acquisition closing date of January 25, 2008.

Consolidated net revenues for the year ended December 28, 2008 were $4,021,520 compared to $3,837,557 in 2007 and $3,151,481 in 2006. Most of the Company's net revenues and operating profits were derived from its two principal segments: the U.S. and Canada segment and the International segment, which are discussed in detail below. Consolidated net revenues in 2008 were negatively impacted by foreign currency translation of approximately $10,300 as a result of the stronger U.S. dollar in 2008 as compared to 2007 while consolidated net revenues in 2007 were positively impacted by foreign currency translation in the amount of $94,500 as a result of the overall weaker U.S. dollar in that year.

The following table presents net revenues and operating profit data for the Company's two principal segments for 2008, 2007 and 2006. Results for 2007 and 2006 have been reclassified to conform to the Company's 2008 operating segment structure.

                                           %                             %
                           2008          Change          2007         Change         2006

     Net Revenues
     U.S. and Canada    $ 2,406,745            5 %    $ 2,293,742          15 %   $ 1,997,141
     International      $ 1,499,334            4 %    $ 1,444,863          32 %   $ 1,092,468
     Operating Profit
     U.S. and Canada    $   283,152           (2 )%   $   287,800          13 %   $   254,502
     International      $   165,186          (13 )%   $   189,783          69 %   $   112,350

U.S. and Canada

U.S. and Canada segment net revenues for the year ended December 28, 2008 increased 5% to $2,406,745 from $2,293,742 in 2007. The impact of foreign currency translation on U.S. and Canada segment net revenues in 2008 was unfavorable and decreased net revenues by approximately $3,100. The increase in net revenues in 2008 was primarily due to higher revenues in the boys' toys category, driven by increased sales of STAR WARS products and sales of INDIANA JONES products. Although revenues from TRANSFORMERS and MARVEL products decreased in 2008 compared to 2007, as a result of the significant sales recognized in the prior year due to the theatrical releases of TRANSFORMERS in July 2007 and SPIDER-MAN 3 in May 2007, these lines remained significant contributors to U.S. and Canada segment net revenues in 2008. The increase in segment net revenues for 2008 was also due to increased revenues in the games and puzzles category as a result of increased sales of DUEL MASTERS and TRIVIAL PURSUIT games and the impact of the acquisition of Cranium, partially offset by decreased revenues from plug and play games. Revenues from the tweens category also increased as a result of higher sales of NERF products, partially offset by decreased sales of POWER TOUR GUITAR, which is no longer in the Company's product line, as well as lower sales of I-DOG. Revenues from the preschool category increased slightly as higher sales of PLAYSKOOL products were partially offset by decreased sales of TONKA products. Revenues from the girls' toys category increased slightly primarily as a result of of the reintroduction of EASY-BAKE oven, partly offset by decreased revenues from MY LITTLE PONY, FURREAL FRIENDS, and LITTLEST PET SHOP. Although revenues from LITTLEST PET SHOP decreased slightly in 2008, sales of these products remained a significant contributor to U.S. and Canada segment net revenues in 2008. Revenues in 2008 were also negatively impacted by decreased sales of TOOTH TUNES.

U.S. and Canada operating profit decreased to $283,152 in 2008 from $287,800 in 2007. Operating profit in 2008 was negatively impacted by approximately $1,100 due to the translation of foreign currencies to the U.S. dollar. U.S. and Canada segment gross profits increased in dollars but decreased as a percentage of net revenues in 2008 primarily as a result of the increased promotional programs implemented by the Company in the fourth quarter of 2008, including the provision of sales allowances and markdowns, to address the weak retail environment. The increase in gross profit in dollars was more than offset by increased product development and sales and marketing expenses related to investments the Company is making in both core brands and its digital initiative related to its Wizards of the Coast subsidiary; increased amortization as a result of the acquisition of Cranium and the purchase of intellectual property rights related to TRIVIAL PURSUIT; increased royalty expense; and increased shipping and distribution costs, reflecting higher sales volume and higher transportation costs.

U.S. and Canada segment net revenues for the year ended December 30, 2007 increased 15% to $2,293,742 from $1,997,141 in 2006. The impact of foreign currency translation on U.S. and Canada segment net revenues in 2007 was favorable, due to the strength of the Canadian dollar, and increased net revenues by approximately $4,500. The increase was due primarily to increased revenues in the boys' toys category driven by sales of MARVEL and TRANSFORMERS products due to the theatrical releases of SPIDER-MAN 3 in May 2007 and TRANSFORMERS in July 2007. Although STAR WARS product sales declined in 2007 from 2006, sales of these products were a significant contributor to boys' toys revenues in 2007. Revenues in the girls' toys category increased as a result of higher sales of LITTLEST PET SHOP and FURREAL FRIENDS products as well as higher revenues from the BABY ALIVE line which was reintroduced in the second quarter of 2006. To a lesser extent, revenues in the girls' toys category were positively impacted by increased shipments of MY LITTLE PONY products. Girls' toys revenues were negatively impacted by decreased sales of EASY-BAKE oven products due to the recall of the product in July of 2007. Revenues from the preschool category decreased slightly in 2007. Revenue from games and puzzles decreased slightly due to lower revenues from trading card and plug and play games partially offset by increased sales of traditional board games. Revenues from the tweens category decreased as a result of lower sales of electronic products such as VIDEONOW, ZOOMBOX and I-DOG partially offset by increased sales of NERF products. Revenues in 2007 were also positively impacted by increased sales of TOOTH TUNES.

U.S. and Canada operating profit increased to $287,800 in 2007 from $254,502 in 2006. Operating profit in 2007 was positively impacted by approximately $1,300 due to the translation of foreign currencies to the U.S. dollar. The increase in operating profit was primarily the result of higher gross profits resulting from the higher revenues discussed above. Although U.S. and Canada gross profit increased as a result of higher revenues, this increase in gross profit was negatively impacted by approximately $10,400 of charges recorded in the second quarter of 2007 related to the July 2007 EASY-BAKE oven recall. The increase in gross profit was also partially offset by higher royalty expense as the result of the increased sales of MARVEL and TRANSFORMERS movie-related products. Operating profit was also negatively impacted by higher advertising expense as well as higher selling and distribution costs related to the increased sales volume. In addition, U.S. and Canada operating profit included increased investment spending in an online initiative of the Company's Wizards of the Coast operation.

International

International segment net revenues for the year ended December 28, 2008 increased by 4% to $1,499,334 from $1,444,863 in 2007. In 2008 net revenues were negatively impacted by currency translation of approximately $7,400 as a result of a stronger U.S. dollar. The increase in net revenues was primarily the result of increased product sales in the girls' toys and preschool categories primarily relating to LITTLEST PET SHOP in the girls' toys category and PLAYSKOOL, which includes IN THE NIGHT GARDEN products, in the preschool category. Net revenues in the games and puzzles category decreased primarily as a result of decreased revenues from MAGIC: THE GATHERING product, TRIVIAL PURSUIT products and MONOPOLY products. Net revenues in the boys' toys category decreased primarily as a result of decreased sales of MARVEL and TRANSFORMERS products, however, both product lines continued to be significant contributors to International segment net revenues in 2008. Decreased net revenues in the boys' toys category were

partially offset by increased sales of STAR WARS and sales of INDIANA JONES products. Net revenues in the tweens category decreased primarily as a result of decreased revenues from POWER TOUR GUITAR, which is no longer in the Company's product line, and I-DOG, partially offset by increased sales of NERF products.

International segment operating profit decreased 13% to $165,186 in 2008 from $189,783 in 2007. Operating profit for the International segment in 2008 was negatively impacted by approximately $4,400 due to the translation of foreign currencies to the U.S. dollar. The decrease in International segment operating profit also reflects promotional programs implemented by the Company in the fourth quarter of 2008 in response to weakened retail conditions; increased advertising expense; and increased investments in emerging markets; partially offset by lower royalty expense as a result of lower sales of entertainment-based products. In addition, International segment operating profit in 2008 was positively impacted by the recognition of a pension surplus in the United Kingdom.

International segment net revenues for the year ended December 30, 2007 increased by 32% to $1,444,863 from $1,092,468 in 2006. In 2007, net revenues were positively impacted by currency translation of approximately $88,800 as a result of a weaker U.S. dollar. The increase in net revenues was primarily the result of increased net revenues in the boys' toys category. As in the U.S. and Canada segment, this increase was driven by higher sales of TRANSFORMERS products resulting from the theatrical release of the TRANSFORMERS movie in most countries in July of 2007 and MARVEL products resulting from the theatrical release of SPIDER-MAN 3 in May of 2007. Increased revenues in the girls' toys category were principally the result of increased sales of LITTLEST PET SHOP products, and to a lesser extent, MY LITTLE PONY and BABY ALIVE products. Revenues in the preschool category were higher in 2007 based on increased sales of PLAYSKOOL products, partially due to strong revenues of IN THE NIGHT GARDEN in the United Kingdom. Revenues in the games and puzzles category increased primarily due to increased sales of MONOPOLY. Revenues from the tweens category increased primarily as a result of sales of the POWER TOUR GUITAR which was introduced in 2007.

International segment operating profit increased 69% to $189,783 in 2007 from $112,350 in 2006. Operating profit for the segment in 2007 was positively impacted by approximately $10,600 due to the translation of foreign currencies to the U.S. dollar. The remaining increase in operating profit was due to the higher revenues discussed above. The increased gross profit as a result of the higher revenues was partially offset by higher royalty expense due to higher sales of MARVEL and TRANSFORMERS products as well as higher advertising and selling, distribution and administration expenses.

Gross Profit

The Company's gross profit margin decreased to 57.9% for the year ended December 28, 2008 from 58.9% in 2007. The decrease is primarily due to incremental promotional programs, including sales allowances and markdowns, implemented in the fourth quarter of 2008 as a result of the weak retail environment, as well as changes in product mix. Decreases in gross profit as the result of input cost inflation were partially offset by cost savings initiatives and an increase in pricing of certain of the Company's products. The Company currently does not expect to have similar incremental promotional programs in 2009.

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

Expenses

The Company's operating expenses, stated as percentages of net revenues, are
illustrated below for the three fiscal years ended December 28, 2008:


                                                     2008       2007       2006

         Amortization                                  1.9 %      1.8 %      2.5 %
         Royalties                                     7.8        8.2        5.4
         Research and product development              4.8        4.4        5.4
         Advertising                                  11.3       11.3       11.7
         Selling, distribution and administration     19.8       19.7       21.7

Amortization expense increased to $78,265 or 1.9% of net revenues in 2008 compared to $67,716 or 1.8% of net revenues in 2007. The increase is primarily the result of the acquisition of Cranium, Inc. in January 2008 and the purchase of the intellectual property rights related to TRIVIAL PURSUIT in the second . . .