SC 14D9

   1
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
 
                                 SCHEDULE 14D-9
 
               SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
            SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
                             ---------------------
 
                               GALOOB TOYS, INC.
                           (NAME OF SUBJECT COMPANY)
                             ---------------------
 
                               GALOOB TOYS, INC.
                       (NAME OF PERSON FILING STATEMENT)
 
                    COMMON STOCK, PAR VALUE $0.01 PER SHARE
                         (TITLE OF CLASS OF SECURITIES)
                             ---------------------
                                   364091108
                     (CUSIP NUMBER OF CLASS OF SECURITIES)
                             ---------------------
                            WILLIAM G. CATRON, ESQ.
                            EXECUTIVE VICE PRESIDENT
                              AND GENERAL COUNSEL
                               GALOOB TOYS, INC.
                              500 FORBES BOULEVARD
                         SOUTH SAN FRANCISCO, CA 94080
                                 (650) 952-1678
                 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
                AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS
                   ON BEHALF OF THE PERSON FILING STATEMENT)
                             ---------------------
                                WITH A COPY TO:
 
                           JEFFREY J. WEINBERG, ESQ.
                           WEIL, GOTSHAL & MANGES LLP
                                767 FIFTH AVENUE
                         NEW YORK, NEW YORK 10153-0119
                                 (212) 310-8000
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
   2
 
ITEM 1.  SECURITY AND SUBJECT COMPANY
 
     The name of the subject company is Galoob Toys, Inc., a Delaware
corporation (the "Company"). The address of the principal executive offices of
the Company is 500 Forbes Boulevard, South San Francisco, California 94080. The
title of the class of equity securities to which this Statement relates is
common stock, par value $0.01 per share, of the Company (including the
associated preferred stock purchase rights) (the "Shares").
 
ITEM 2.  TENDER OFFER OF THE BIDDER
 
     This Statement relates to a tender offer (the "Offer") by New HIAC II
Corp., a Delaware corporation ("Purchaser") and a wholly-owned subsidiary of
Hasbro, Inc., a Rhode Island corporation ("Parent"), disclosed in a Tender Offer
Statement on Schedule 14D-1, dated October 2, 1998 (the "Schedule 14D-1"), to
purchase all of the outstanding Shares at a purchase price of $12.00 per Share,
net to the seller in cash without interest (the consideration to be paid
pursuant to the Offer being, the "Offer Consideration"), on the terms and
subject to the conditions set forth in the Offer to Purchase, dated October 2,
1998 (the "Offer to Purchase"), and in the related Letter of Transmittal (which,
together with the Offer to Purchase, as amended and supplemented from time to
time, constitute the "Offer Documents").
 
     The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of September 27, 1998 (the "Merger Agreement"), among Parent, Purchaser and
the Company. See Item 3(b)(2) below for a description of the Merger Agreement, a
copy of which is filed as Exhibit A hereto and is incorporated herein by
reference. A copy of the press release issued by Parent on September 28, 1998 is
filed as Exhibit B hereto and is incorporated herein by reference.
 
     The Merger Agreement provides that after consummation of the Offer and the
satisfaction or waiver of the conditions set forth therein, Purchaser will be
merged with and into the Company (the "Merger") pursuant to the General
Corporation Law of the State of Delaware (the "DGCL"). As a result of the
Merger, the separate corporate existence of Purchaser will cease and the Company
will continue as the surviving corporation and a wholly-owned subsidiary of
Parent (the "Surviving Corporation"), and will continue to be governed by the
laws of the State of Delaware. At the effective time of the Merger (the
"Effective Time"), each Share then outstanding (other than Shares owned by
Parent, Purchaser, the Company or any subsidiary of Parent, Purchaser or the
Company, or those Shares held by stockholders who have properly exercised their
rights for appraisal of such Shares in accordance with Delaware law) will be
converted into the right to receive the Offer Consideration.
 
     The Offer to Purchase states that the address and principal executive
offices of Parent and Purchaser are 1027 Newport Avenue, Pawtucket, Rhode Island
02861 and the telephone number is (401) 431-8697.
 
ITEM 3.  IDENTITY AND BACKGROUND
 
   (a)    Name and Address of the Company.  The name and business address of the
          Company, which is the person filing this Statement, are as set forth
          in Item 1 above.
 
   (b)    Material Contacts, etc.  Except as set forth in this Item 3(b) or
          incorporated by reference herein, to the knowledge of the Company, as
          of the date hereof, there exists no material contract, agreement,
          arrangement or understanding and no actual or potential conflict of
          interest between the Company or its affiliates and: (1) the Company,
          its executive officers, directors or affiliates; or (2) Parent or
          Purchaser or their respective executive officers, directors or
          affiliates.
 
         (b)(1) Certain Contracts, Agreements, Arrangements or Understandings
         and any Actual or Potential Conflicts of Interests Between (A) the
         Company or its Affiliates and (B) the Executive Officers, Directors or
         Affiliates of the Company.
   3
 
Severance and Change in Control Agreements
 
     Effective as of November 17, 1997, the Company entered into a Severance and
Change in Control Agreement with Mark D. Goldman, President and Chief Executive
Officer of the Company (the "Goldman Severance Agreement"), which superseded and
terminated a previous Severance Agreement, dated as of October 27, 1994, between
the Company and Mr. Goldman. The Goldman Severance Agreement sets forth certain
benefits that are payable to Mr. Goldman if Mr. Goldman's employment is
terminated for various reasons, including termination by the Company (or its
successor) or by him of his employment either prior to or following a Change in
Control (as defined in the Goldman Severance Agreement; such definition would
include the change in control resulting from the consummation of the Offer and
the Merger) of the Company, as follows (the "Goldman Severance Payment"):
 
     (i)   If Mr. Goldman's employment is terminated other than for cause (as
        defined in the Goldman Severance Agreement) prior to a Change in
        Control, or if Mr. Goldman terminates his employment for good reason (as
        defined in the Goldman Severance Agreement; such definition includes the
        occurrence of a Change in Control) prior to a Change in Control, the
        Goldman Severance Agreement provides that the Company shall pay to Mr.
        Goldman a lump-sum payment equal to (a) three times Mr. Goldman's
        annualized current base compensation, (b) three times an amount equal to
        the largest dollar bonus paid (including any bonus amount that was
        deferred by Mr. Goldman) in the last five years, including the year in
        which Mr. Goldman's termination of employment occurs (the "Owed Bonus"),
        and (c) three times the annual car allowance in effect for Mr. Goldman
        at the time of employment termination and three times the annual
        insurance, maintenance and gasoline costs incurred for Mr. Goldman's
        vehicle during his last full year of employment with the Company. The
        Goldman Severance Agreement further states that the Company shall
        continue to provide Mr. Goldman with medical, health and insurance
        benefits for a period of three years from the date of Mr. Goldman's
        termination of employment.
 
     (ii)  If Mr. Goldman's employment is terminated by the Company other than
        for cause within twenty-four months following a Change in Control, or if
        Mr. Goldman terminates his employment for good reason within twenty-four
        months following a Change in Control, the Goldman Severance Agreement
        provides that the Company will pay to Mr. Goldman a lump-sum payment
        equal to (a) three times Mr. Goldman's annual base salary, (b) three
        times the Owed Bonus, (c) three times the annual car allowance in effect
        for Mr. Goldman at the time of his employment termination and three
        times the annual insurance, maintenance and gasoline costs incurred for
        Mr. Goldman's vehicle during his last full year of employment with the
        Company, and (d) the amount of $948,400 (the "Special Payment") and an
        additional lump-sum payment (the "Make-Whole Payment") in such an amount
        as necessary to pay any income tax and employment tax on the Special
        Payment and the Make-Whole Payment and as necessary to pay the value of
        the lost tax benefit caused by the loss of any tax deduction resulting
        from Mr. Goldman's receipt of the Special Payment or the Make-Whole
        Payment. The Goldman Severance Agreement further states that the Company
        shall continue to provide Mr. Goldman with medical, health and insurance
        benefits for a period of three years following the date of termination
        of Mr. Goldman's employment.
 
     (iii) If Mr. Goldman's Employment is terminated by the Company for cause,
        or if Mr. Goldman terminates his employment for any reason other than
        for good reason, the Goldman Severance Agreement provides that the
        Company must pay to Mr. Goldman (a) his unpaid compensation for services
        prior to termination, (b) the value of any accrued unused vacation pay
        to the date of termination and (c) any amounts owed to Mr. Goldman
        pursuant to any deferred compensation plan.
 
     The maximum Goldman Severance Payment that the Company would be required to
make under the Goldman Severance Agreement if such amount currently became
payable as a result of a Change in Control is approximately $6,245,275. In
addition, the Goldman Severance Agreement contains a "gross-up" provision which
provides that, to the extent that any severance payment is subject to certain
excise taxes imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended ("Section 4999"), the Company would make
 
                                        2
   4
 
an additional gross-up payment so that Mr. Goldman would retain an amount of the
severance payment equal to the amount he would have retained had there been no
such excise taxes. The Company has purchased a life insurance policy in the face
amount of $2,000,000 on the life of Mr. Goldman. The beneficiary of such
insurance policy is Mr. Goldman's wife.
 
     Each of William G. Catron, Gary J. Niles and Louis R. Novak (each an
"Executive Vice President" and collectively, the "Executive Vice Presidents")
entered into a Severance and Change in Control Agreement (the "EVP Severance and
Change in Control Agreements") with the Company, each dated as of January 1,
1997, as each was amended on August 13, 1997 and December 15, 1997. The EVP
Severance and Change in Control Agreements provide that if an Executive Vice
President's employment is terminated other than for cause or due to Disability
(each as defined in the EVP Severance and Change in Control Agreements), then
such Executive Vice President is entitled to continue to receive his salary and
certain benefits (excluding the continuation of any bonus, incentive or profit
sharing) for a period of twelve months after termination. The severance payments
are reduced in the event that an Executive Vice President commences regular
full-time employment elsewhere during such period. If there is a Change in
Control (for the purpose of this paragraph, as defined in the EVP Severance and
Change in Control Agreements; such definition would include the change in
control resulting from the consummation of the Offer and the Merger) and the
employment of an Executive Vice President is terminated voluntarily or
involuntarily (other than for death, Disability or cause) prior to the first
anniversary of such Change in Control, in lieu of the above-described severance
payments, each such Executive Vice President is entitled to receive a lump-sum
payment in an amount equal to three times such Executive Vice President's annual
salary and bonus (as described in the EVP Severance and Change in Control
Agreements), plus the continuation of certain benefits for a thirty-six month
period of time. If the employment of an Executive Vice President is terminated
involuntarily by the Company (other than for cause) during the twelve months
following the first anniversary of a Change in Control, then such Executive Vice
President is entitled to continue to receive his salary and benefits (excluding
the payment of any bonus) for a period of up to twenty-four months. Any payment
or benefit received pursuant to the EVP Severance and Change in Control
Agreements will be reduced to the extent that such payment or benefit would be
subject to excise taxes pursuant to Section 4999 occurring as a result of a
Change in Control. If the employment of all of the Executive Vice Presidents
were to be terminated as a result of a Change in Control, then the Executive
Vice Presidents would currently be entitled to receive approximately $5,373,469,
in the aggregate, under the EVP Severance and Change in Control Agreements.
 
     Ronald D. Hirschfeld entered into a Severance and Change in Control
Agreement with the Company that had the same terms described above for the EVP
Severance and Change and Control Agreements. On August 31, 1998, Mr. Hirschfeld
submitted his resignation as Executive Vice President of the Company. Mr.
Hirschfeld's resignation was not in connection with the transactions
contemplated by the Offer and the Merger. Mr. Hirschfeld's resignation
automatically terminated his Severance and Change in Control Agreement in
accordance with its terms.
 
     Roger J. Kowalsky entered into a Severance and Change in Control Agreement
with the Company that had the same terms described above for the EVP Severance
and Change in Control Agreements. Pursuant to an agreement, dated as of April
28, 1998, the Company and Mr. Kowalsky agreed to terminate Mr. Kowalsky's
Severance and Change in Control Agreement in connection with Mr. Kowalsky's
agreement to take on fewer responsibilities with the Company.
 
     Kathleen R. McElwee entered into a Severance and Change in Control
Agreement (the "McElwee Severance and Change in Control Agreement") with the
Company, dated November 6, 1997, as amended on December 22, 1997. The McElwee
Severance and Change in Control Agreement provides that if Ms. McElwee's
employment is terminated other than for cause or due to Disability (each as
defined in the McElwee Severance and Change in Control Agreement) then Ms.
McElwee is entitled to continue to receive her salary and certain benefits
(excluding the continuation of any bonus, incentive or profit sharing) for a
period of nine months after termination. The severance payments are reduced in
the event that Ms. McElwee commences regular full-time employment elsewhere
during such period. If there is a Change in Control (for the purpose of this
paragraph, as defined in the McElwee Severance and Change in Control Agreement;
such definition would include the change in control resulting from the
consummation of the Offer
                                        3
   5
 
and the Merger) and the employment of Ms. McElwee is terminated voluntarily or
involuntarily (other than for death, Disability or cause) prior to the first
anniversary of such Change of Control, in lieu of the above-described severance
payments, Ms. McElwee is entitled to receive a lump sum payment in an amount
equal to one and one-half (1 1/2) times Ms. McElwee's annual salary and bonus
(as described in the McElwee Severance and Change in Control Agreement), plus
the continuation of certain benefits for an eighteen month period of time. Any
payment or benefit received pursuant to the McElwee Severance and Change in
Control Agreement will be reduced to the extent that such payment or benefit
would be subject to excise taxes pursuant to Section 4999 occurring as a result
of a Change in Control. If the employment of Ms. McElwee was to be terminated as
a result of a Change in Control, Ms. McElwee would currently be entitled to
receive approximately $468,067, in the aggregate.
 
     The Merger Agreement provides that Parent will cause the Surviving
Corporation to honor the obligations of the Company or any of its subsidiaries
under the provisions of all employment, consulting, termination, severance,
change in control and indemnification agreements between or among the Company or
any of its subsidiaries and any current or former officer, director, consultant
or employee of the Company or any of its subsidiaries.
 
Director Compensation
 
     Each director who was not a full-time employee of the Company is entitled
to receive an annual director's fee of $15,000 plus $500 for each meeting of the
Board of Directors or any committee thereof attended by such director. Each
director who was not a full-time employee of the Company received an option
immediately exercisable into 2,000 Shares on July 1, 1995 and has received an
option immediately exercisable into 2,000 Shares on January 1 of each year
thereafter through January 1, 1998. Each non-full-time employee director is
entitled to receive an option immediately exercisable into 2,000 Shares on
January 1 of each year after January 1, 1998 until such directors no longer
serve as directors of the Company. The exercise price of such options is equal
to the fair market value per Share (as determined by the closing price reported
on the New York Stock Exchange on the date of determination) on the date such
options are received. All directors are reimbursed by the Company for
out-of-pocket expenses incurred by them as directors of the Company.
 
     In addition to the aforementioned director compensation, prior to the
consummation of the Offer, the Company will pay to each of S. Lee Kling, Roger
J. Kowalsky, Andrew J. Cavanaugh and Scott R. Heldfond the sum of $40,000 as a
one-time payment for the extraordinary effort, services and consultation
rendered by each such individual, in his capacity as a Director of the Company,
in connection with the Company's efforts during 1998 to identify, analyze and
pursue a course of action designed to maximize the value of the Shares to the
Company's stockholders.
 
Stock Options
 
     The Company maintains the Amended and Restated 1984 Employee Stock Option
Plan, the 1994 Senior Management Stock Option Plan, the 1995 Non-Employee
Directors' Stock Option Plan and the 1996 Share Incentive Plan (each a "Stock
Option Plan" and collectively, the "Stock Option Plans"). Pursuant to the Merger
Agreement, immediately prior to the Effective Time, each then outstanding option
to purchase any Shares (in each case, an "Option") under each Stock Option Plan,
whether or not then exercisable, shall be cancelled by the Company and in
consideration of such cancellation and except to the extent that Parent or
Purchaser and the holder of any such Option otherwise agree, the Company (or, at
Parent's option, the Purchaser) shall pay to such holders of Options an amount
in respect thereof equal to the product of (a) the excess, if any, of the Offer
Consideration over the exercise price of each such Option and (b) the number of
Shares previously subject to the Option immediately prior to its cancellation
(such payment to be net of withholding taxes and without interest thereon).
 
     Pursuant to the Merger Agreement, the Company shall use its reasonable best
efforts to take all actions necessary and appropriate so that each Stock Option
Plan shall terminate and no holder of an Option under, or any participant in,
such Stock Option Plan shall have any right thereunder to acquire any capital
stock of the Company, Parent, Purchaser or the Surviving Corporation.
 
                                        4
   6
 
Employee Benefit Plans
 
     The Company currently maintains several benefit programs for its and its
subsidiaries' employees. Under the terms of the Merger Agreement, all employees
of the Company and its subsidiaries immediately prior to the consummation of the
Offer (other than officers of the Company who have written severance agreements
with the Company that were disclosed to Parent) shall be entitled to receive
through December 31, 1998 (except in the case of employees of Galco, which date
shall be the first day of the Chinese New Year (February 16, 1999) and not
December 31, 1998) health and welfare benefits, and qualified retirement
benefits, on terms that are not substantially less favorable, in the aggregate,
to those currently provided to employees of the Company and its subsidiaries
under the Company's existing plans. For purposes of eligibility to participate
in and vesting in all nonqualified benefit plans provided to employees of the
Surviving Corporation, such employees will be credited with their years of
service with the Company or any of its subsidiaries or with prior employers to
the extent service with prior employers is taken into account under the existing
plans of the Company.
 
Long Term Compensation Plan
 
     The Company currently maintains a Long Term Compensation Plan for its
executive management. The Long Term Compensation Plan provides financial rewards
for exceptional corporate performance that results in long term increases in the
Company's earnings. The payment of compensation pursuant to the Long Term
Compensation Plan is dependent on the Company's achieving certain cumulative
earnings per share goals for the period of July 1, 1996 through December 31,
1998. Achieving those specified goals enables members of the Company's executive
management to earn an award of up to three times their annual salary in effect
on July 1, 1996 (the "Targeted Award"). In addition, exceeding the maximum goal
by at least 50 percent enables executive management to earn an award equal to
125 percent of their Targeted Award. The maximum amount of compensation that any
member of executive management may receive pursuant to the Long Term
Compensation Plan is $1.875 million. Attainment of 100 percent of the goal will
result in a total payment in 1999 of approximately $6 million which would have
been accrued ratably over the performance period. Termination of employment with
the Company for any reason prior to January 1, 1999 will result in full
forfeiture of a participant's right to any payment under the Long Term
Compensation Plan, except in the event of a participant's death or disability
(in either such case, a pro rata payment shall be made, if appropriately earned)
or as otherwise determined by the Compensation Committee of the Board of
Directors. The Company does not anticipate that any payments will be due under
the Long Term Compensation Plan at the end of the performance period.
 
Indemnification of Directors and Officers
 
     The Company's Certificate of Incorporation provides that directors,
officers, employees and agents of the Company shall be indemnified to the
fullest extent authorized by the DGCL as in effect (or, to the extent
indemnification is broadened, as it may be amended), against any and all
expenses, liabilities and losses (including attorneys' fees, judgments,
penalties, fines, ERISA excise taxes and judgments, fines and amounts paid or to
be paid in settlement) from threatened, pending or completed actions, suits or
proceedings, whether civil, criminal, administrative or investigative. The
Certificate of Incorporation further provides that, to the extent permitted by
the DGCL, expenses so incurred by any such person in defending an action, suit
or proceeding shall, at his or her request, be paid by the Company in advance of
the final disposition of such action or proceeding. The Company has obtained
directors' and officers' liability and company reimbursement insurance which,
among other things, (i) provides for payment on behalf of its officers and
directors against loss as defined in the policy stemming from acts committed by
directors and officers in their capacity as such and (ii) provides for payment
on behalf of the Company against such loss but only when the Company shall be
required or permitted to indemnify directors or officers for such loss pursuant
to statutory or common law or pursuant to duly effective provisions of the
Company's Certificate of Incorporation or By-laws.
 
     The Merger Agreement provides that Parent, and after the Effective Time,
the Surviving Corporation, will indemnify, defend and hold harmless, each
present and former director, officer, employee and agent of the Company and its
subsidiaries against all losses, claims, damages, costs and expenses (including
reasonable
                                        5
   7
 
attorney's fees), liabilities or judgments or amounts of or in connection with
any threatened or actual claim, action, suit, proceeding or investigation based
on or arising out of the fact that such person is or was serving in such
person's capacity as a director, officer, employee or agent of the Company or
any of its subsidiaries, whether pertaining to any matter existing or occurring
prior to the Effective Time or any acts or omissions occurring or existing at or
prior to the Effective Time and whether asserted or claimed prior to, or at or
after, the Effective Time (the "Indemnified Liabilities"), including all
Indemnified Liabilities based on, or arising out of, or pertaining to the Merger
Agreement or the Offer, the Merger or other transactions contemplated by the
Merger Agreement, in each case to the fullest extent a corporation is permitted
under the DGCL and the Company's Certificate of Incorporation or By-Laws as in
effect on the date of the Merger Agreement. The Merger Agreement also provides
that the provisions with respect to indemnification set forth in the Certificate
of Incorporation and By-laws of the Surviving Corporation will not be amended
following the Effective Time in any manner that would materially and adversely
affect the rights thereunder of individuals who at any time prior to the
Effective Time were directors, officers, employees or agents of the Company in
respect of actions or omissions occurring at or prior to the Effective Time.
 
     The Merger Agreement further provides that, after the Effective Time,
Parent shall cause the Surviving Corporation to maintain in effect, for a period
of three (3) years from the Effective Time, directors' and officers' insurance
coverage, if available, covering those persons who are currently covered by the
Company's directors' and officers' liability insurance policy with respect to
acts prior to the Effective Time on terms (including the amounts of coverage and
the amounts of deductibles, if any) that are no less favorable to the terms now
applicable to them under the Company's current policies; provided, however, that
in no event shall Parent or the Surviving Corporation be required to expend in
excess of 150 percent of the annual premium currently paid by the Company for
such coverage; and provided further, that, if the premium for such coverage
exceeds such amount, Parent or the Surviving Corporation shall purchase a policy
with the greatest coverage available for such 150 percent of the annual premium.
 
   (b)(2) Certain Contracts, Agreements, Arrangements or Understandings and any
   Actual or Potential Conflicts of Interests Between (A) the Company or its
   Affiliates and (B) Parent and Purchaser and their Executive Officers,
   Directors or Affiliates.
 
Confidentiality Agreement
 
     Parent and the Company entered into a Confidentiality Agreement, dated as
of April 2, 1998 and amended as of June 23, 1998 (the "Confidentiallity
Agreement"), a copy of which is filed as Exhibit C to this Schedule 14D-9 and
incorporated herein by reference. Pursuant to the Confidentiality Agreement,
each party agrees, among other things, to keep confidential certain information
furnished to it by each other party in connection with the Offer and the Merger
and to use such information solely for the purpose of evaluating a business
transaction contemplated by the Offer and the Merger. Parent further agreed that
(i) for a period of one (1) year from the date of the Confidentiality Agreement,
Parent and its subsidiaries will not solicit to employ any of the officers or
employees of the Company, subject to certain exceptions, and (ii) through
December 31, 1999, Parent will not, subject to certain exceptions, (a) acquire
any securities or property of the Company, (b) propose to enter into any
business combination or purchase a material portion of the assets of the Company
other than a confidential proposal made to the Board of Directors of the Company
without any public disclosure by Parent (except as set forth in the Merger
Agreement), (c) participate in any solicitations of proxies, (d) participate in
a "group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934) with respect to any securities of the Company, (e) seek to control or
influence the management, Board of Directors or policies of the Company, (f)
disclose any intention, plan or arrangement inconsistent with the foregoing or
(g) advise, assist or encourage any other person in connection with any of the
foregoing.
 
Merger Agreement
 
     The following is a summary of the material provisions of the Merger
Agreement. This summary is not a complete description of the terms and
conditions of the Merger Agreement and is qualified in its entirety by reference
to the full text of the Merger Agreement, which is incorporated by reference and
a copy of which has
                                        6
   8
 
been filed as Exhibit A to this Schedule 14D-9. For purposes of this Item
3(b)(2), except as set forth herein with respect to certain terms, the meaning
of which may not be readily apparent, capitalized terms used and not otherwise
defined herein have the meanings given to such terms in the Merger Agreement.
 
     Representations and Warranties.  In the Merger Agreement, the Company has
made customary representations and warranties to Parent and Purchaser with
respect to, among other things, corporate organization, subsidiaries, capital
stock, options or other rights to acquire Shares, authority to enter into the
Merger Agreement, required consents, no conflicts between the Merger Agreement
and applicable laws and certain agreements to which the Company or its assets
may be subject, financial statements, filings with the Commission, disclosures
in proxy statement and tender offer documents, absence of certain changes or
events, litigation, absence of changes in benefit plans, employee benefit plans,
tax matters, no excess non-deductible payments, compliance with applicable laws,
environmental matters, intellectual property, owned and leased real property,
material contracts, labor and employment matters, product liability,
applicability of state takeover statutes, votes required to approve the Merger
Agreement, brokers' and finders' fees, receipt of the Financial Advisor Opinion,
Year 2000, Company Rights Agreement and absence of questionable payments.
 
     In the Merger Agreement, each of Parent and Purchaser has made customary
representations and warranties to the Company with respect to, among other
things, corporate organization, authority to enter into the Merger Agreement,
required consents, no conflicts between the Merger Agreement and the certificate
of incorporation and by-laws of Parent and Purchaser or laws applicable to
Parent or Purchaser, disclosures in proxy statement and tender offer documents,
prior activities by Purchaser, brokers' and finders' fees and financing.
 
     Conditions to the Merger.  The respective obligations of Parent and
Purchaser, on the one hand, and the Company, on the other hand, to effect the
Merger are subject to the satisfaction of each of the following conditions, any
and all of which may be waived in whole or in part by the Company, Parent or
Purchaser, as the case may be, to the extent permitted by applicable law: (i)
the Merger Agreement shall have been approved and adopted by the requisite vote
of the holders of Shares, if required by applicable law and the Certificate of
Incorporation, in order to consummate the Merger; (ii) any waiting period
applicable to the Merger under the HSR Act shall have expired or been
terminated; (iii) no statute, rule, regulation, order, decree or injunction
shall have been enacted, promulgated or issued by any governmental entity
precluding, restraining, enjoining or prohibiting consummation of the Merger;
and (iv) Parent, Purchaser or their affiliates shall have purchased Shares
pursuant to the Offer.
 
     The Company Board.  The Merger Agreement provides that promptly after (i)
the purchase of and payment for any Shares by Purchaser or any of its affiliates
pursuant to the Offer as a result of which Purchaser and its affiliates own
beneficially at least a majority of the then outstanding Shares and (ii)
compliance with Section 14(f) of the Exchange Act and Rule 14f-1 promulgated
thereunder, whichever shall occur later, Parent shall be entitled to designate
such number of directors, rounded up to the next whole number, on the Company's
Board of Directors as is equal to the product of the total number of directors
on such Board (giving effect to the increase in the size of such Board)
multiplied by the percentage that the number of Shares beneficially owned by
Purchaser (including Shares so accepted for payment) bears to the total number
of Shares then outstanding. In furtherance thereof, the Company shall, upon
request of Parent and in compliance with Section 14(f) of the Exchange Act and
Rule 14f-1 promulgated thereunder, use its best efforts promptly either to
increase the size of its Board of Directors or to secure the resignations of
such number of its incumbent directors, or both, as is necessary to enable such
designees of Parent to be so elected or appointed to the Company's Board of
Directors, and the Company shall take all actions available to the Company to
cause such designees of Parent to be so elected or appointed. At such time, the
Company shall, if requested by Parent, also take all action necessary to cause
Persons designated by Parent to constitute at least the same percentage (rounded
up to the next whole number) as is on the Company's Board of Directors of (i)
each committee of the Company's Board of Directors, (ii) each board of directors
(or similar body) of each Subsidiary of the Company and (iii) each committee (or
similar body) of each such board.
 
     The Merger Agreement provides that, notwithstanding the foregoing, the
parties thereto shall use their respective reasonable best efforts to ensure
that at least two of the members of the Board shall, at all times
 
                                        7
   9
 
prior to the Effective Time be, Continuing Directors. From and after the time,
if any, that Parent's designees constitute a majority of the Company Board, any
amendment or modification of the Merger Agreement, any amendment to the
Company's Certificate of Incorporation or By-Laws inconsistent with the Merger
Agreement, any termination of the Merger Agreement by the Company, any extension
of time for performance of any of the obligations of Parent or Purchaser under
the Merger Agreement, any waiver of any condition to the Company's obligations
under the Merger Agreement or any of the Company's rights under the Merger
Agreement or other action by the Company under the Merger Agreement may be
effected only by the action of a majority of the Continuing Directors of the
Company, which action shall be deemed to constitute the action of any committee
specifically designated by the Board of Directors of the Company to approve the
actions contemplated by the Merger Agreement and the Transactions and the full
Board of Directors of the Company; provided, that, if there shall be no
Continuing Directors, such actions may be effected by majority vote of the
entire Board of Directors of the Company, except that no such action shall amend
the terms of the Merger Agreement or modify the terms of the Offer or the Merger
in a manner materially adverse to the holders of Shares.
 
     Stockholders' Meeting.  If required by applicable Law in order to
consummate the Merger, the Company, acting through the Company Board, shall, in
accordance with applicable Law, its Certificate of Incorporation and By-laws:
(i) as promptly as practicable following the acceptance for payment and purchase
of Shares by Purchaser pursuant to the Offer, duly call, give notice of, convene
and hold a special meeting of its stockholders (the "Special Meeting") for the
purposes of considering and taking action upon the approval of the Merger and
the approval and adoption of the Merger Agreement; (ii) prepare and file with
the Commission a preliminary proxy or information statement relating to the
Merger and the Merger Agreement and (x) obtain and furnish the information
required to be included in the Proxy Statement (as defined below) and, after
consultation with Parent, respond promptly to any comments made by the
Commission with respect to the preliminary proxy or information statement and
cause a definitive proxy or information statement, including any amendment or
supplement thereto (the "Proxy Statement") to be mailed to its stockholders at
the earliest practicable date; provided that no amendment or supplement to the
Proxy Statement will be made by the Company without consultation with Parent and
its counsel and (y) use its reasonable best efforts to obtain the necessary
approvals of the Merger and the Merger Agreement by its stockholders; and (iii)
unless the Merger Agreement has been terminated in accordance with the
provisions of the section summarized under "Termination" below, subject to its
rights pursuant to the section summarized under "No Solicitation" below, include
in the Proxy Statement the recommendation of the Company Board that stockholders
of the Company vote in favor of the approval of the Merger and the approval and
adoption of the Merger Agreement. Parent has agreed to vote, or cause to be
voted, all of the Shares then owned by it, Purchaser or any of its other
subsidiaries in favor of the approval of the Merger and the approval and
adoption of the Merger Agreement.
 
     Options.  The Merger Agreement provides that immediately prior to the
Effective Time, each then outstanding Option, whether or not then vested or
exercisable, shall be cancelled by the Company and in consideration of such
cancellation and except to the extent that Parent or the Purchaser and the
holder of any such Option otherwise agree, the Company (or, at Parent's option,
the Purchaser) shall pay to such holders of Options an amount in respect thereof
equal to the product of (A) the excess, if any, of the Offer Price over the
exercise price of each such Option and (B) the number of Shares previously
subject to the Option immediately prior to its cancellation (such payment to be
net of withholding taxes and without interest).
 
     The Merger Agreement provides that the Company shall use its reasonable
efforts to take all actions necessary and appropriate so that all stock option
or other equity based plans maintained with respect to the Shares ("Option
Plans"), shall terminate as of the Effective Time and the provisions in any
other Benefit Plan providing for the issuance, transfer or grant of any capital
stock of the Company or any interest in respect of any capital stock of the
Company shall be deleted as of the Effective Time, and the Company shall use its
best efforts to ensure that following the Effective Time no holder of an Option
or any participant in any Option Plan shall have any right thereunder to acquire
any capital stock of the Company, Parent, Purchaser or the Surviving
Corporation. In addition, the Company has agreed to use its reasonable best
efforts to obtain all necessary consents from, and mail any required notices to,
holders of Options and amend the terms of the applicable Option Plans, in each
case as is necessary to give effect to the foregoing.
 
                                        8
   10
 
     Interim Operations.  The Merger Agreement provides that after the date of
the Merger Agreement and prior to the time the designees of Parent have been
elected to or appointed to, and shall constitute a majority of, the Company
Board pursuant to the applicable provisions of the Merger Agreement (the
"Appointment Date"), and except (i) as expressly contemplated by the Merger
Agreement, (ii) as set forth in the applicable section of the disclosure
schedule thereto or (iii) as agreed in writing by Parent:
 
          (a) the Company shall and shall cause its Subsidiaries to carry on
     their respective businesses in the ordinary course;
 
          (b) the Company shall and shall cause its Subsidiaries to use all
     reasonable best efforts consistent with good business judgment to preserve
     intact their current business organizations, keep available the services of
     their current officers and key employees and preserve their relationships
     consistent with past practice with desirable customers, suppliers,
     licensors, licensees, distributors and others having business dealings with
     them;
 
          (c) neither the Company nor any of its Subsidiaries shall, directly or
     indirectly, amend its Certificate of Incorporation or By-laws or similar
     organizational documents;
 
          (d) Representatives of the Company and its Subsidiaries shall confer
     at such times as Parent may reasonably request with one or more
     representatives of Parent to report material operational matters and the
     general status of ongoing operations;
 
          (e) neither the Company nor any of its Subsidiaries shall: (i)(A)
     declare, set aside or pay any dividend or other distribution payable in
     cash, stock or property with respect to the Company's capital stock or that
     of its Subsidiaries, except that a wholly-owned Subsidiary of the Company
     may declare and pay a dividend or make advances to its parent or the
     Company or (B) redeem, purchase or otherwise acquire directly or indirectly
     any of the Company's capital stock or that of its Subsidiaries; (ii) issue,
     sell, pledge, dispose of or encumber any additional shares of, or
     securities convertible into or exchangeable for, or options, warrants,
     calls, commitments or rights of any kind to acquire, any shares of capital
     stock of any class of the Company or its Subsidiaries, other than Shares
     issued upon the exercise of Options outstanding on the date of the Merger
     Agreement in accordance with the Option Plans as in effect on the date of
     the Merger Agreement or additional warrants issued in accordance with the
     terms of the Warrants; or (iii) split, combine or reclassify the
     outstanding capital stock of the Company or of any of the Subsidiaries of
     the Company;
 
          (f) neither the Company nor any of its Subsidiaries shall enter into
     any agreement or arrangement with respect to the distribution of any of the
     Company's products;
 
          (g) neither the Company nor any of its Subsidiaries shall acquire or
     agree to acquire (A) by merging or consolidating with, or by purchasing a
     substantial portion of the assets of, or by any other manner, any business
     or any corporation, partnership, joint venture, association or other
     business organization or division thereof (including entities which are
     subsidiaries of the Company) or (B) any assets, including real estate,
     except purchases in the ordinary course of business consistent with past
     practice;
 
          (h) neither the Company nor any of its Subsidiaries shall make any new
     capital expenditure or expenditures in excess of $50,000 individually or
     $500,000 in the aggregate;
 
          (i) neither the Company nor any of its Subsidiaries shall, except in
     the ordinary course of business and except as otherwise permitted by the
     Merger Agreement, amend or terminate any Company Material Contract where
     such amendment or termination would have a Material Adverse Effect on the
     Company, or waive, release or assign any material rights or claims;
 
          (j) neither the Company nor any of its Subsidiaries shall transfer,
     lease, license, sell, mortgage, pledge, dispose of, or encumber any
     property or assets other than in the ordinary course of business and
     consistent with past practice;
 
                                        9
   11
 
          (k) neither the Company nor any of its Subsidiaries shall: (i) enter
     into any employment or severance agreement with or grant any severance or
     termination pay to any officer, director or key employee of the Company or
     any its Subsidiaries; or (ii) hire or agree to hire any new or additional
     key employees or officers;
 
          (l) neither the Company nor any of its Subsidiaries shall, except as
     required to comply with applicable Law or expressly provided in the Merger
     Agreement, (A) adopt, enter into, terminate, amend or increase the amount
     or accelerate the payment or vesting of any benefit or award or amount
     payable under any Benefit Plan or other arrangement for the current or
     future benefit or welfare of any director, officer or current or former
     employee, except to the extent necessary to coordinate any such Benefit
     Plans with the terms of the Merger Agreement, (B) increase in any manner
     the compensation or fringe benefits of, or pay any bonus to, any director,
     officer or employee provided that employees with annual compensation of
     $100,000 or less may receive increases of not more than 5.0% on the
     anniversary date of their employment in the ordinary course of business and
     consistent with past practice, (C) pay any benefit not provided for under,
     or contemplated by, any Benefit Plan, (D) grant any awards under any bonus,
     incentive, performance or other compensation plan or arrangement or Benefit
     Plan (including the grant of stock options, stock appreciation rights,
     stock-based or stock-related awards, performance units or restricted stock,
     or the removal of existing restrictions in any Benefit Plans or agreements
     or awards made thereunder) or (E) take any action to fund or in any other
     way secure the payment of compensation or benefits under any employee plan,
     agreement, contract or arrangement or Benefit Plan;
 
          (m) neither the Company nor any of its Subsidiaries shall: (i) incur
     or assume any long-term debt or, except in the ordinary course of business,
     incur or assume any short-term indebtedness in amounts not consistent with
     past practice; (ii) incur or modify any material indebtedness or other
     liability except as set forth on the applicable section of the disclosure
     schedule to the Merger Agreement; (iii) assume, guarantee, endorse or
     otherwise become liable or responsible (whether directly, contingently or
     otherwise) for the obligations of any other person, except in the ordinary
     course of business and consistent with past practice; (iv) make any loans,
     advances or capital contributions to, or investments in, any other person
     (other than to wholly owned Subsidiaries of the Company or customary loans
     or advances to employees in the ordinary course of business in accordance
     with past practice); or (v) settle any material claims other than in the
     ordinary course of business, in accordance with past practice and without
     admission of liability;
 
          (n) neither the Company nor any of its Subsidiaries shall change any
     of the accounting principles used by it unless required by GAAP, the SEC or
     Law;
 
          (o) neither the Company nor any of its Subsidiaries shall make any tax
     election, amend any material tax return, make a claim for any material tax
     refund or settle or compromise any material tax liability (whether with
     respect to amount or timing);
 
          (p) neither the Company nor any of its Subsidiaries shall pay,
     discharge or satisfy any claims, liabilities or obligations (absolute,
     accrued, asserted or unasserted, contingent or otherwise), other than the
     payment, discharge or satisfaction of any such claims, liabilities or
     obligations in the ordinary course of business and consistent with past
     practice, of any such claims, liabilities or obligations which are
     reflected or reserved against in, or contemplated by, the consolidated
     financial statements (or the notes thereto) of the Company and its
     consolidated Subsidiaries; or except in the ordinary course of business
     consistent with past practice, waive the benefits of, or agree to modify in
     any manner, any confidentiality, standstill or similar agreement to which
     the Company or any of its Subsidiaries is a party;
 
          (q) neither the Company nor any of its Subsidiaries shall (by action
     or inaction) amend, renew, terminate or cause to be extended any lease,
     agreement or arrangement relating to any of the leased properties or enter
     into any lease, agreement or arrangement with respect to real property;
 
          (r) neither the Company nor any of its Subsidiaries will enter into an
     agreement, contract, commitment or arrangement to do any of the foregoing,
     or to authorize, recommend, propose or announce an intention to do any of
     the foregoing; and
 
                                       10
   12
 
          (s) neither the Company nor any of its Subsidiaries shall take any
     action that would result in (i) any of its representations and warranties
     that are qualified as to materiality becoming untrue, (ii) any of such
     representations and warranties that are not qualified as to materiality
     becoming untrue in any material respect or (iii) any of the conditions to
     the Offer, as set forth in the Merger Agreement, not being satisfied
     (subject to the Company's right to take action specifically permitted by
     the Merger Agreement).
 
     No Solicitation.  Pursuant to the Merger Agreement, the Company has agreed
that it shall not, nor shall it permit any of its Subsidiaries to, nor shall it
authorize (and shall use its best efforts not to permit) any officer, director
or employee of, or any investment banker, attorney or other advisor or
representative of, the Company or any of its subsidiaries to, (i) solicit or
initiate, or encourage, directly or indirectly, any inquires or the submission
of, any Takeover Proposal (as defined below), (ii) participate in any
discussions or negotiations regarding, or furnish to any Person any information
or data with respect to or access to the properties of, or take any other action
to knowingly facilitate the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Takeover Proposal or (iii) enter into any
agreement with respect to any Takeover Proposal or approve or resolve to approve
any Takeover Proposal; provided that nothing contained in the applicable
provisions of the Merger Agreement shall prohibit the Company or the Company
Board from (A) taking and disclosing to the Company's stockholders a position
with respect to a tender or exchange offer by a third party pursuant to Rules
14d-9 and 14e-2 promulgated under the Exchange Act, or (B) making such
disclosure to the Company's stockholders as, in the good faith judgment of the
Company Board, after receiving advice from outside counsel, is required under,
or is necessary to comply with, applicable Law, provided that the Company may
not, except as permitted by the following paragraph, withdraw or modify, or
propose to withdraw or modify, its position with respect to the Offer or the
Merger or approve or recommend, or propose to approve or recommend any Takeover
Proposal, or enter into any agreement with respect to any Takeover Proposal.
Upon execution of the Merger Agreement, the Company will immediately cease any
existing activities, discussions or negotiations with any parties conducted
prior to the date of the Merger Agreement with respect to any of the foregoing.
Notwithstanding the foregoing, prior to the time of acceptance of Shares for
payment pursuant to the Offer, the Company may withdraw or modify its
recommendation of the Offer, furnish information concerning its business,
properties or assets to any Person or group and may negotiate and participate in
discussions and negotiations with such Person or group concerning a Takeover
Proposal if: (x) such Person or group has submitted a Superior Proposal; and (y)
in the opinion of the Company Board such action is required to discharge the
Board's fiduciary duties to the Company's stockholders under applicable law,
determined only after receipt of advice from independent legal counsel to the
Company that the failure to provide such information or access or to engage in
such discussions or negotiations may cause the Company's Board to violate its
fiduciary duties to the Company's stockholders under applicable law. The Company
will promptly (but in no case later than 24 hours) notify Parent of the
existence of any proposal, discussion, negotiation or inquiry received by the
Company regarding any Takeover Proposal, and the Company will promptly
communicate to Parent the terms of any proposal, discussion, negotiation or
inquiry which it may receive regarding any Takeover Proposal (and will promptly
provide to Parent copies of any written materials received by the Company in
connection with such proposal, discussion, negotiation or inquiry) and the
identity of the party making such proposal or inquiry or engaging in such
discussion or negotiation. The Company will promptly provide to Parent any
non-public information concerning the Company provided to any other Person in
connection with any Takeover Proposal which was not previously provided to
Parent. The Company will keep Parent informed of the status and details of any
such Takeover Proposal and of any amendments or proposed amendments to any
Takeover Proposal and will promptly notify Parent (but in no case later than 24
hours) of any determination by the Company Board that a Superior Proposal has
been made.
 
     Pursuant to the Merger Agreement, except as set forth in this paragraph,
neither the Company Board nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Parent or
Purchaser, the approval or recommendation by the Company Board or any such
committee of the Offer, the Merger Agreement or the Merger, (ii) approve or
recommend, or propose to approve or recommend, any Takeover Proposal or (iii)
enter into any agreement with respect to any Takeover Proposal. Notwithstanding
the foregoing, subject to compliance with this paragraph prior to the time of
acceptance for payment of Shares pursuant to the Offer, the Company Board may
withdraw or modify its approval or
                                       11
   13
 
recommendation of the Offer, the Merger Agreement or the Merger, approve or
recommend a Superior Proposal, or enter into an agreement with respect to a
Superior Proposal, in each case at any time after the third business day
following Parent's receipt of written notice from the Company advising Parent
that the Company Board has received a Superior Proposal which it intends to
accept, specifying the material terms and conditions of such Superior Proposal
and identifying the person making such Superior Proposal, but only if the
Company shall have caused its financial and legal advisors to negotiate with
Parent to make such adjustments to the terms and conditions of the Merger
Agreement as would enable the Company to proceed with the Transactions on such
adjusted terms. The term "Takeover Proposal" means any bona fide proposal or
offer, whether in writing or otherwise, from any Person other than Parent,
Purchaser or any affiliates thereof (a "Third Party") to acquire beneficial
ownership (as defined under Rule 13(d) of the Exchange Act) of all or a material
portion of the assets of the Company and its Subsidiaries on a consolidated
basis or 30% or more of any class of equity securities of the Company pursuant
to a merger, consolidation or other business combination, sale of shares of
capital stock, sale of assets, tender offer, exchange offer or similar
transaction with respect to the Company, including any single or related
multi-step transaction or series of related transactions, which is structured to
permit such Third Party to acquire beneficial ownership of any material portion
of the assets of or 30% or more of the equity interest in the Company. The term
"Superior Proposal" means an unsolicited Takeover Proposal on terms which the
Company Board determines in good faith to be more favorable to the Company's
stockholders than the Offer and the Merger (based on advice from the Company's
independent financial advisor that the value of the consideration provided for
in such proposal is superior to the value of the consideration provided for in
the Offer and the Merger), for which financing, to the extent required, is then
committed or which, in the good faith reasonable judgment of the Company Board,
based on advice from the Company's independent financial advisor, is reasonably
capable of being financed by such Third Party and which, in the good faith
reasonable judgement of the Company Board is reasonably likely to be consummated
within a period of time not materially longer in duration than the period of
time reasonably believed to be necessary to consummate the Offer and the Merger.
 
     Termination.  The Merger Agreement may be terminated and the Merger
contemplated therein may be abandoned at any time prior to the Effective Time,
whether before or after approval of matters presented in connection with the
Merger by the stockholders of the Company:
 
          (a) By the mutual written consent of Parent and the Company; provided,
     however, that if Parent shall have a majority of the directors pursuant to
     the applicable provisions of the Merger Agreement, such consent of the
     Company may only be given if approved by the Continuing Directors.
 
          (b) By either of Parent or the Company if (i) a statute, rule or
     executive order shall have been enacted, entered or promulgated prohibiting
     the Transactions on the terms contemplated by the Merger Agreement or (ii)
     any governmental entity shall have issued an order, decree or ruling or
     taken any other action (which order, decree, ruling or other action the
     parties to the Merger Agreement shall use their reasonable efforts to
     lift), in each case permanently restraining, enjoining or otherwise
     prohibiting the Transactions contemplated by the Merger Agreement and such
     order, decree, ruling or other action shall have become final and
     non-appealable.
 
          (c) By either of Parent or the Company if the Effective Time shall not
     have occurred on or before March 31, 1999, provided, however, that if the
     Effective Time shall not have occurred by such date solely as a result of
     the failure of the condition summarized in clause (iii) under the heading
     "Conditions to the Merger" above by reason of the entry of a preliminary
     injunction, the Merger Agreement may not be terminated pursuant to this
     paragraph (c) until June 30, 1999; provided, further, that the party
     seeking to terminate the Merger Agreement pursuant to this paragraph (c)
     shall not have breached in any material respect its obligations under the
     Merger Agreement in any manner that shall have been the cause of, or
     resulted in, the failure to consummate the Merger on or before such date;
 
          (d) By the Company: (i) if the Company has entered into an agreement
     with respect to a Superior Proposal or has approved or recommended a
     Superior Proposal in accordance with the applicable provisions of the
     Merger Agreement, provided the Company has complied with all provisions
     thereof, including the notice provisions therein, and that it
     simultaneously terminates the Merger Agreement and
 
                                       12
   14
 
     makes simultaneous payment to the Parent of the Termination Fee; or (ii) if
     Parent or Purchaser shall have terminated the Offer or the Offer expires
     without Parent or Purchaser, as the case may be, purchasing any Shares
     pursuant thereto; provided that the Company may not terminate the Merger
     Agreement pursuant to this clause (d)(ii) if the Company is in material
     breach of the Merger Agreement; or (iii) if Parent, Purchaser or any of
     their affiliates shall have failed to commence the Offer on or prior to
     five business days following the date of the initial public announcement of
     the Offer, provided, that the Company may not terminate the Merger
     Agreement pursuant to this clause (d) (iii) if the Company is in material
     breach of the Merger Agreement; or (iv) if there shall be a material breach
     by either Parent or Purchaser of any of its representations, warranties,
     covenants or agreements contained in the Merger Agreement, except where
     such breach does not have a material adverse effect on the ability of
     Parent or Purchaser to consummate the Offer or the Merger.
 
          (e) By Parent or Purchaser: (i) (A) if prior to the purchase of the
     Shares pursuant to the Offer, the Company Board shall have withdrawn, or
     modified or changed in a manner adverse to Parent or Purchaser its approval
     or recommendation of the Offer, the Merger Agreement or the Merger or shall
     have recommended or approved a Takeover Proposal, or (B) there shall have
     been a material breach of any provision of the section of the Merger
     Agreement summarized under "No Solicitation" above, Parent shall have given
     at least five (5) days' written notice of such breach and such breach shall
     not have been cured within such five (5) day period; or (ii) if due to an
     occurrence that if occurring after the commencement of the Offer would
     result in a failure to satisfy any of the conditions set forth in Section
     14 below, Parent or Purchaser shall have terminated the Offer without
     Parent or Purchaser purchasing any Shares thereunder, provided that Parent
     or Purchaser may not terminate the Merger Agreement pursuant to this clause
     (e) (ii) if Parent or Purchaser is in material breach of the Merger
     Agreement; or (iii) if, due to an occurrence that if occurring after the
     commencement of the Offer would result in a failure to satisfy any of the
     conditions set forth in the Section 14 below, Parent, Purchaser or any of
     their affiliates shall have failed to commence the Offer on or prior to
     five (5) business days following the date of the initial public
     announcement of the Offer; provided that Parent or Purchaser may not
     terminate the Merger Agreement pursuant to this clause (e)(iii) if Parent
     or Purchaser is in material breach of the Merger Agreement; or (iv) if any
     Person or "group" (as defined in Section 13(d)(3) of the Exchange Act),
     other than Parent, Purchaser or their affiliates or any group of which any
     of them is a member, shall have acquired beneficial ownership (as
     determined pursuant to Rule 13d-3 promulgated under the Exchange Act) of
     30% or more of the Shares; or (v) if there shall be a breach by the Company
     of any of its representations, warranties, covenants or agreements
     contained in the Merger Agreement and such breach (without giving effect to
     any limitation as to "knowledge," "materiality" or "material adverse
     effect" set forth therein) individually, or together with any other
     breaches, has a Material Adverse Effect on the Company.
 
     Termination Fee.  Pursuant to the Merger Agreement, if (x) Parent or
Purchaser terminates the Merger Agreement pursuant to clauses (e)(i) or (e)(iv)
under the heading "Termination" above or (y) the Company terminates this
Agreement pursuant to clause (d)(i) under the heading "Termination" above, then
in each case, the Company shall pay, or cause to be paid to Parent, at the time
of termination, an amount equal to $6,000,000 (the "Termination Fee"). In
addition, if the Merger Agreement is terminated by Parent pursuant to clause
(e)(v) under the heading "Termination" above (other than by reason of a breach
of the section in the Merger Agreement summarized under "No Solicitation" above)
and at the time of such termination, Parent is not in material breach of the
Merger Agreement, then the Company shall pay to Parent, at the time of
termination, and an amount equal to Parent's and Purchaser's actual and
reasonably documented out-of-pocket expenses incurred by Parent or Purchaser in
connection with the Offer, the Merger, the Merger Agreement and the consummation
of the Transactions, including, without limitation, the fees and expenses
payable to all banks, investment banking firms, and other financial institutions
and Persons and their respective agents and counsel incurred in connection with
acting as Parent's or Purchaser's financial advisor with respect to, or
arranging or committing to provide or providing any financing for, the
Transactions (the "Expenses") and, if the breach referred to in clause (e)(v)
under the heading "Termination" above was a willful breach and if the Company
shall thereafter, within nine (9) months after such termination, enter into an
agreement with respect to a Takeover Proposal, then the Company shall pay the
Termination Fee (less any
                                       13
   15
 
Expenses previously paid by the Company to Parent pursuant to this section)
concurrently with entering into any such agreement. Any payments required to be
made pursuant to this Section shall be made by wire transfer of same day funds
to an account designated by Parent.
 
     Indemnification.  The Merger Agreement provides that Parent, and from and
after the Effective Time, the Surviving Corporation, shall indemnify, defend and
hold harmless each person who is now, or has been at any time prior to September
27, 1998 or who becomes prior to the Effective Time, an officer, director,
employee or agent of the Company or any of its Subsidiaries (the "Indemnified
Parties") against all losses, claims, damages, costs, expenses (including
reasonable attorneys' fees and expenses), liabilities or judgments or amounts of
or in connection with any threatened or actual claim, action, suit, proceeding
or investigation based on or arising out of the fact that such person is or was
serving in such person's capacity as a director, officer, employee or agent of
the Company or any of its Subsidiaries, whether pertaining to any matter
existing or occurring at or prior to the Effective Time or any acts or omissions
occurring or existing at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective Time ("Indemnified
Liabilities"), including all Indemnified Liabilities based on, or arising out
of, or pertaining to the Merger Agreement or the Transactions, in each case to
the fullest extent a corporation is permitted under the DGCL and the Certificate
of Incorporation or By-Laws as currently in effect to indemnify such persons
(and the Company and the Surviving Corporation, as the case may be, will pay
expenses promptly after statements thereof are received, to each Indemnified
Party to the fullest extent permitted by Delaware law, subject to delivery of
the undertaking described below). Without limiting the foregoing, in the event
any such claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether arising before or after the Effective Time), (i) such
Indemnified Party may retain counsel satisfactory to the Indemnified Party and
reasonably satisfactory to the Company (and reasonably satisfactory to the
Surviving Corporation after the Effective Time) and the Company (or after the
Effective Time, the Surviving Corporation) will pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements and
supporting documentation thereof are received; and (ii) the Company (or after
the Effective Time, the Surviving Corporation) will use all reasonable best
efforts to assist in the vigorous defense of any such matter, provided that
neither the Company nor the Surviving Corporation will be liable for any
settlement effected without its prior written consent which written consent will
not unreasonably be withheld. Any Indemnified Party, upon learning of any such
claim, action, suit, proceeding or investigation, will notify the Company (or
after the Effective Time, the Surviving Corporation) promptly (but the failure
so to notify will not relieve a party from any liability which it may have under
this provision except to the extent such failure materially prejudices such
party's position with respect to such claims), and will deliver to the Company
(or after the Effective Time, the Surviving Corporation) the undertaking
contemplated by Section 145(e) of the DGCL. The Indemnified Parties as a group
may retain only one law firm (and one local counsel) to represent them with
respect to each such matter unless there is, under applicable standards of
professional conduct, an existing or potential conflict on any significant issue
between the positions of any two or more Indemnified Parties in which case such
additional counsel reasonably acceptable to the Indemnified Parties, the Company
or, after the Effective Time, the Surviving Corporation as may be required may
be retained by the Indemnified Parties at the cost and expense of the Company
(or Surviving Corporation). Furthermore, the provisions with respect to
indemnification set forth in the Certificate of Incorporation and By-Laws of the
Surviving Corporation will not be amended following the Effective Time in any
way that would materially and adversely affect the rights thereunder of
individuals who at any time prior to the Effective Time were directors,
officers, employees or agents of the Company in respect of actions or omissions
occurring at or prior to the Effective Time.
 
     The Merger Agreement provides that for a period of three (3) years after
the Effective Time, Parent shall cause the Surviving Corporation to maintain in
effect, if available, directors' and officers' liability insurance covering
those persons who are currently covered by the Company's directors' and
officers' liability insurance policy with respect to acts prior to the Effective
Time on terms (including the amounts of coverage and the amounts of deductibles,
if any) that are no less favorable to the terms now applicable to them under the
Company's current policies; provided, however, that in no event shall Parent or
the Surviving Corporation be required to expend in excess of 150% of the annual
premium currently paid by the Company for such coverage; and provided further,
that if the premium for such coverage exceeds such amount, Parent or the
                                       14
   16
 
Surviving Corporation shall purchase a policy with the greatest coverage
available for such 150% of the annual premium. The Merger Agreement further
provides that the foregoing indemnification provisions shall survive the
consummation of the Merger at the Effective Time, are intended to benefit the
Company, the Surviving Corporation and the Indemnified Parties, shall be binding
on all successors and assigns of the Surviving Corporation and shall be
enforceable by the Indemnified Parties.
 
ITEM 4. THE SOLICITATION OR RECOMMENDATION
 
     (a)  Board Recommendation.  On September 27, 1998, the Company's Board of
        Directors, by unanimous vote, (i) determined that the Merger Agreement
        is fair to, and in the best interests of, the Company and the Company's
        stockholders, (ii) approved the Merger Agreement and the transactions
        contemplated thereby and (iii) recommended acceptance of the Offer and
        adoption of the Merger Agreement by holders of the Shares. The Board
        unanimously recommends that all stockholders accept the Offer and tender
        their Shares pursuant to the Offer.
 
     (b)  Background of and Reasons for the Board Recommendation
 
     On several occasions prior to February 1998, senior executive officers of
Parent contacted Mark D. Goldman, the President, Chief Executive Officer and a
Director of the Company and suggested that the companies explore the possibility
of a business combination. None of those contacts led to any agreements or
understandings.
 
     In late 1997, Mr. Goldman began a series of conversations and meetings with
members of the Board of Directors of the Company to review the current
conditions in the toy industry, and the prevailing and expected market
environment for the Company and its product lines. The Board concluded that
these market forces had made it, and would continue to make it, increasingly
difficult for the Company to compete effectively in the toy industry and to
generate consistent rates of return on equity for its stockholders. In an effort
to assess how to best maximize stockholder value, the Board authorized
management to investigate strategic alternatives that might be available to the
Company.
 
     In October 1997, the Company had entered into a Toy License Agreement and
certain related agreements (the "Star Wars License") with Lucas Licensing Ltd.
and certain of its affiliates (collectively referred to herein as "Lucas")
pursuant to which the Company was granted an exclusive, worldwide license to (i)
continue to manufacture, distribute and sell small scale figures, vehicles,
play-sets and accessories based on the original Star Wars motion picture trilogy
and (ii) manufacture, distribute and sell small scale figures, vehicles,
play-sets and accessories based on the next three Star Wars motion pictures. The
provisions of the Star Wars License include, among other things, Lucas' right to
terminate such agreements upon the Company's change of control, including an
acquisition of the Company or a merger of the Company with a third party. As a
result of the significance of the Star Wars License to the Company and Lucas'
termination rights thereunder, the Company decided to consult with Lucas prior
to approaching any third parties regarding a possible business combination
involving the Company.
 
     In November 1997, the Company contacted Allen & Company Incorporated
("Allen") to discuss the potential engagement of Allen to assist the Company in
exploring strategic alternatives to increase stockholder value, including
opportunities for the sale of or other business combination involving the
Company.
 
     On January 12, 1998, representatives of the Company, Allen and Weil,
Gotshal & Manges LLP ("Weil Gotshal"), the Company's legal counsel, met with
representatives of Lucas and its legal advisors to inform them of (i) the
Company's belief that the Company could more effectively maximize the potential
of the Star Wars License and the Company's other non-Star Wars products through
a business combination with another company, and (ii) the Company's desire to
seek Lucas' views about the types of companies which would be acceptable to
Lucas as potential assignees of the Star Wars License.
 
     During the next several weeks, senior management of the Company and
representatives of Lucas continued their discussions with respect to which
potential purchasers of the Company might be acceptable to Lucas as potential
assignees of the Star Wars License and how Lucas might work with the Company to
 
                                       15
   17
 
negotiate with potential purchasers of the Company regarding Lucas' willingness
to grant a consent to assign the Star Wars License if the Company were to engage
in a business combination.
 
     On February 9, 1998, the Company executed an engagement letter with Allen
pursuant to which the Company formally retained Allen to act as the Company's
financial advisor in connection with a possible business combination involving
the Company.
 
     In February 1998, while the Company continued its discussions with Lucas,
representatives of Parent contacted Mr. Goldman on an unsolicited basis to
inquire about the Company's interest in a potential acquisition of the Company
by Parent.
 
     In March 1998, ongoing general discussions between Allen and another
company in the toy industry ("the Other Bidder") led to an inquiry by the Other
Bidder as to the Company's potential interest in a sale of the Company to the
Other Bidder. The Company informed each of Parent and the Other Bidder that the
Company was interested in pursuing discussions concerning the possibility of a
transaction between the Company and either Parent, on the one hand, or the Other
Bidder, on the other hand.
 
     On April 2, 1998 and April 1, 1998, respectively, the Company entered into
confidentiality and standstill agreements with each of Parent and the Other
Bidder. Following the execution of such agreements, the Company provided
preliminary due diligence information relating to the Company to each of Parent
and the Other Bidder.
 
     In early May 1998, the Company received indications of interest from each
of Parent and the Other Bidder relating to the possible acquisition of the
Company by each such potential purchaser. Shortly thereafter, the Company
informed each of Parent and the Other Bidder that before the Company could
continue discussions regarding its possible sale, each such potential purchaser
should enter into discussions with Lucas to determine whether Lucas would
consent to an assignment of the Star Wars License to such potential purchaser.
During the next few months, the Company understands that Lucas held discussions
with each of Parent and the Other Bidder in connection with whether Lucas would
consent to such an assignment of the Star Wars License if the Company were to
engage in a business combination with such party. Throughout this period, the
Company provided additional due diligence materials to both Parent and the Other
Bidder.
 
     In late August 1998, representatives of Lucas contacted Mr. Goldman to
inform him that, discussions with Parent had progressed to a point where Lucas
felt it would be appropriate for discussions to resume between Parent and
Company.
 
     On August 28, 1998, representatives of Allen contacted Parent regarding
recommencing discussions with respect to a possible business combination. On
September 14, 1998, Parent indicated that it would be interested in pursuing the
purchase of the Company at a price of $10.00 per Share.
 
     On September 15, 1998, after extensive discussions with respect to Parent's
proposal, the management and Board of Directors of the Company instructed Allen
to inform Parent that the price at which it indicated an interest in acquiring
the Company was inadequate. Shortly thereafter, Allen informed Parent of the
Company's views regarding Parent's indication of interest. Representatives of
Parent indicated that they might be willing to increase their offer to purchase
the Company to a price in excess of $10.00 per Share. On the basis of these
indications by Parent, the Company determined to negotiate further with Parent
regarding the possible sale of the Company to Parent and allowed Parent to
complete its due diligence review of the Company relating to such potential
sale. Following such negotiations, and while Parent continued its due diligence
review of the Company, representatives of Parent indicated to representatives of
Allen that they might be willing to offer consideration in the range of $12.00
per Share for the Company.
 
     On September 18, 1998, Parent and its legal counsel delivered a draft
Merger Agreement to the Company and Weil Gotshal. During the period from
September 19, 1998 to September 27, 1998, representatives of Parent and the
Company and their respective legal advisors negotiated the terms of the Merger
Agreement. On September 27, 1998, the final terms of the Merger Agreement,
including the offer price of $12.00 per Share, were agreed upon by the parties.
 
                                       16
   18
 
     On the evening of September 27, 1998, the Board of Directors met with Allen
and Weil Gotshal to review the status of the negotiations with Parent.
Representatives of Weil Gotshal advised the Board of Directors regarding certain
legal matters, including their fiduciary duties with respect to Parent's
proposal, and reviewed with the Board of Directors the final terms of the Merger
Agreement. Representatives of Allen summarized their financial analysis and
advised the Board of Directors that it was Allen's opinion (which was
subsequently confirmed in writing) that, as of September 27, 1998, and based
upon and subject to the assumptions and other matters set forth therein, the
consideration to be received by the holders of Shares in the Offer and the
Merger was fair, from a financial point of view, to such holders. The Board of
Directors voted unanimously to approve the Offer, the Merger and the Merger
Agreement and to recommend that all of the Company's stockholders tender their
Shares pursuant to the Offer.
 
     Following such approval, on the evening of September 27, 1998, the Company,
Parent and Purchaser entered into the Merger Agreement. On the morning of
September 28, 1998, the Company and Parent announced in a press release the
execution of the Merger Agreement.
 
     In making the determination and recommendations described in paragraph
4(a), the Board of Directors considered the matters referred to above in this
paragraph 4(b) in addition to several other factors including, without
limitation, the following:
 
     (i)   The present and anticipated environment in the toy industry,
        including the Company's existing competitive and market position and the
        prevailing retail environment, which led to the belief that it was
        becoming difficult for small companies, such as the Company, to compete
        effectively with companies having significantly greater financial and
        market resources than the Company and that stockholder value and the
        Company's ability to compete would be maximized by selling the Company.
 
     (ii)  The historical market price and trading information with respect to
        the Shares and the fact that the $12.00 per Share price to be paid in
        the Offer represents (a) a premium of approximately 50 percent over the
        $8 closing price for the Shares on the New York Stock Exchange on
        September 25, 1998, the last trading day prior to the public
        announcement of the execution of the Merger Agreement, and (b) a premium
        of approximately 67 percent over the average price of the Shares over
        the previous twenty trading days.
 
     (iii) The views expressed by senior management of the Company and Allen
        that there appeared to be a limited number of potential acquirors with
        which the Company would be a good strategic fit.
 
     (iv) Parent's receipt of Lucas' consent to an assignment of the Star Wars
        License and the Company's belief that Lucas was unlikely to consent to
        an assignment of the Star Wars License to other potential purchasers of
        the Company.
 
     (v)  The financial condition, results of operations and prospects of the
        Company, which helped the directors evaluate the future prospects of the
        Company and determine the appropriateness of a sale of the Company at
        the price offered at this time.
 
     (vi) The terms and conditions of the Merger Agreement, including that there
        were relatively few conditions to the obligations of Parent and
        Purchaser to consummate the Merger, and that the Offer and the Merger
        were not subject to (1) any financing condition or (2) any condition
        relating to the consent of Lucas to the assignment of the Star Wars
        License.
 
     (vii) Parent's financial resources and its ability to meet its obligations
        under the Merger Agreement.
 
     (viii) The opinion of Allen to the effect that, as of September 27, 1998,
        and based upon and subject to the assumptions and other matters set
        forth in the Allen opinion, which is incorporated by reference and a
        copy of which has been filed as Exhibit E to this Schedule 14D-9, the
        consideration to be received by the holders of Shares in the Offer and
        the Merger was fair, from a financial point of view, to such holders.
 
                                       17
   19
 
     (ix) Legal matters relating to the Offer and the Merger, including the
        review provided for under the Hart-Scott-Rodino Antitrust Improvements
        Act of 1976, as amended (the "HSR Act"), with respect to the antitrust
        implications of the Offer and the terms of the Offer and the Merger
        Agreement related thereto.
 
     (x)  The structural features of the Offer and the Merger providing for a
        prompt cash tender offer for all outstanding shares of the Company to be
        followed by a merger for the same consideration, thereby enabling
        stockholders to obtain the benefits of the transaction in exchange for
        their Shares at the earliest possible time.
 
     (xi) The alternatives available to the Company in light of the
        consideration proposed for the Shares pursuant to the Offer and the
        Merger, including continuing to maintain the Company as an independent
        company.
 
     The foregoing discussion of the information and factors considered by the
Board is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the Offer and the Merger, the
Board did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. Rather, the Board viewed its recommendation as being based on the
totality of the information presented to and considered by it. In addition,
individual members of the Board may have given different weights to different
factors.
 
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
 
     The Company retained Allen to act as the Company's financial advisor with
respect to the matters referenced in Item 4 above. Pursuant to the terms of the
engagement letter, dated February 9, 1998, between Allen and the Company (the
"Engagement Letter"), the Company agreed to pay to Allen, in consideration of
its services: (i) a retainer of $250,000 that was payable upon the execution of
the Engagement Letter and that will be credited toward the transaction fee (the
"Transaction Fee"); (ii) the Transaction Fee, payable only if a sale involving
the Company is consummated based on an agreement entered into (a) on or before
the later of the termination of the Engagement Letter and October 31, 1998,
whether or not the party or parties to the sale other than the Company were
found by Allen, or Allen advised the Company concerning the sale pursuant to the
Engagement Letter, or (b) at any time during a period of one year following the
later of the termination of the Engagement Letter and October 31, 1998, provided
that the sale of the Company involves a party named on the list referred to in
Paragraph 9 of the Engagement Letter; and (iii) reimbursements for all
reasonable expenses actually incurred by Allen in connection with the sale of
the Company. The Company also agreed to indemnify Allen and related persons
against certain liabilities arising out of Allen's retention by the Company.
 
     Pursuant to the terms of the Engagement Letter, the Transaction Fee is
equal to 1.5 percent of the "consideration," defined in the Engagement Letter
as, among other things, the sum of cash, equity securities or interests received
from an acquiring party, the fair value of debt instruments or obligations
issuable from an acquiring party and the fair value of options and warrants to
purchase any such assets. A "sale" of the Company is defined in the Engagement
Letter as any transaction or event or series or combination thereof, other than
in the ordinary course of trade or business, whereby, directly or indirectly, 50
percent or more of the stock or assets of the Company is transferred.
 
     Except as set forth above, neither the Company nor any person acting on its
behalf has employed, retained or compensated any person to make solicitations or
recommendations to the Company's stockholders with respect to the Offer.
 
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
 
     (a)  Share Transactions in Last 60 Days.  To the best of the Company's
        knowledge, no transactions in the Shares have been effected during the
        last 60 days by the Company or by any executive officer, director,
        affiliate or subsidiary of the Company, other than those described
        below.
 
                                       18
   20
 
     On August 3, 1998, Craig Louisana, Senior Vice President, Sales of the
Company, sold 2,000 Shares at a price per Share of $9.25.
 
     (b)  Intent to Tender.  To the best of the Company's knowledge, to the
        extent permitted by applicable securities laws, rules or regulations,
        all of the Company's executive officers, directors and affiliates who
        own Shares presently intend to tender such Shares to Purchaser pursuant
        to the Offer.
 
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
 
     (a)  Certain Negotiations.  Except as referred to in this Schedule 14D-9,
        as of the date hereof, no negotiation is being undertaken or is underway
        by the Company in response to the Offer which relates to or would result
        in (i) an extraordinary transaction, such as a merger or reorganization
        involving the Company or any subsidiary of the Company, (ii) a purchase,
        sale or transfer of a material amount of assets by the Company or any
        subsidiary of the Company, (iii) a tender offer for or other acquisition
        of securities by or of the Company or (iv) any material change in the
        present capitalization or dividend policy of the Company.
 
     (b)  Certain Transactions.  Except as described in Item 3(b) and Item 4
        above, there are no transactions, board restrictions, agreements in
        principle, or signed contracts which relate or would result in one or
        more of the matters referred to in Item 7(a).
 
ITEM 8. ADDITIONAL ITEMS TO BE FURNISHED
 
     Short Form Merger.  Under the DGCL, if Purchaser acquires, pursuant to the
Offer or otherwise, at least 90 percent of the outstanding Shares, Purchaser
will be able to effect the Merger after the consummation of the Offer without a
vote of the Company's stockholders. However, if Purchaser does not acquire at
least 90 percent of the outstanding Shares pursuant to the Offer or otherwise,
and a vote of the Company's stockholders is required under Delaware law, a
significantly longer period of time will be required to effect the Merger.
 
     General.  Except as described in this Item 8, based on information provided
by Parent and Purchaser, none of the Company, Purchaser or Parent is aware of
any license or regulatory permit that appears to be material to the business of
the Company and its subsidiaries, taken as a whole, that might be adversely
affected by the acquisition of Shares by Parent or Purchaser pursuant to the
Offer, the Merger or otherwise, except as set forth above, of any approval or
other action by any governmental, administrative or regulatory agency or
authority, domestic or foreign, that would be required prior to the acquisition
of Shares by Purchaser pursuant to the Offer, the Merger or otherwise.
 
     State Antitakeover Statutes.  Section 203 of the DGCL, in general,
prohibits a Delaware corporation, such as the Company, from engaging in a
"Business Combination" (defined as a variety of transactions, including mergers)
with an "Interested Stockholder" (defined generally as a person that is the
beneficial owner of 15% or more of the outstanding voting stock of the subject
corporation) for a period of three(3) years following the date that such person
became an Interested Stockholder unless, prior to the date such person became an
Interested Stockholder, the board of directors of the corporation approved
either the Business Combination or the transaction that resulted in the
stockholder becoming an Interested Stockholder. The provisions of Section 203 of
the DGCL are not applicable to any of the transactions contemplated by the
Merger Agreement, since the Merger Agreement and the transactions contemplated
thereby were approved by the Board of Directors of the Company prior to the
execution thereof.
 
     A number of states have adopted laws and regulations that purport to apply
to attempts to acquire corporations that are incorporated in such states, or
whose business operations have substantial economic effects in such states, or
which have substantial assets, security holders, employees, principal executive
offices or principal places of business in such states. In Edgar v. MITE Corp.,
the Supreme Court of the United States (the "Supreme Court") invalidated on
constitutional grounds the Illinois Business Takeover statute, which, as a
matter of state securities law, made certain corporate acquisitions more
difficult. However, in 1987, in CTS Corp. v. Dynamics Corp. of America, the
Supreme Court held that the State of Indiana may, as a
 
                                       19
   21
 
matter of corporate law and, in particular, with respect to those aspects of
corporate law concerning corporate governance, constitutionally disqualify a
potential acquiror from voting on the affairs of a target corporation without
the prior approval of the remaining stockholders. The state law before the
Supreme Court was by its terms applicable only to corporations that had a
substantial number of stockholders in the state and were incorporated there.
 
     The Company does not believe that the antitakeover laws and regulations of
any state other than the State of Delaware will by their terms apply to the
Offer. If it is asserted that any state antitakeover statute is applicable to
the Offer and an appropriate court does not determine that it is inapplicable or
invalid as applied to the Offer, Purchaser might be required to file certain
information with, or to receive approvals from, the relevant state authorities,
and Purchaser might be unable to accept for payment or pay for Shares tendered
pursuant to the Offer or may be delayed in consummating the Offer. In such case,
Purchaser may not be obligated to accept for payment, or pay for, any Shares
tendered pursuant to the Offer.
 
     Antitrust.  The Offer and the Merger are subject to the HSR Act, which
provides that certain acquisition transactions may not be consummated unless
certain information has been furnished to the Antitrust Division of the
Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC")
and certain waiting period requirements have been satisfied.
 
     Parent and the Company have filed their Notification and Report Forms with
respect to the Offer under the HSR Act. The waiting period under the HSR Act
with respect to the Offer will expire at 11:59 p.m., New York City time, on the
fifteenth day after the date Parent's form was filed unless early termination of
the waiting period is granted. However, the DOJ or the FTC may extend the
waiting period by requesting additional information or documentary material from
Parent or the Company. If such a request is made, such waiting period will
expire at 11:59 p.m., New York City time, on the tenth day after substantial
compliance by Parent with such request. Only one extension of the waiting period
pursuant to a request for additional information is authorized by the HSR Act.
Thereafter, such waiting period may be extended only by court order or with the
consent of Parent. In practice, complying with a request for additional
information or material can take a significant amount of time. In addition, if
the DOJ or the FTC raises substantive issues in connection with a proposed
transaction, the parties frequently engage in negotiations with the relevant
governmental agency concerning possible means of addressing those issues and may
agree to delay consummation of the transaction while such negotiations continue.
The Purchaser will not accept for payment Shares tendered pursuant to the Offer
unless and until the waiting period requirements imposed by the HSR Act with
respect to the Offer have been satisfied.
 
     The FTC and the DOJ frequently scrutinize the legality under the Antitrust
Laws of transactions such as Purchaser's acquisition of Shares pursuant to the
Offer and the Merger. At any time before or after Purchaser's acquisition of
Shares, the DOJ or the FTC could take such action under the Antitrust Laws as it
deems necessary or desirable in the public interest, including seeking to enjoin
the acquisition of Shares pursuant to the Offer or otherwise seeking divestiture
of Shares acquired by Purchaser or divestiture of substantial assets of Parent
or its subsidiaries. Private parties, as well as state governments, may also
bring legal action under the Antitrust Laws under certain circumstances. Based
upon an examination of information provided by the Company relating to the
businesses in which Parent and the Company are engaged, Parent and Purchaser
believe that the acquisition of Shares by Purchaser will not violate the
Antitrust Laws. Nevertheless, there can be no assurance that a challenge to the
Offer or other acquisition of Shares by Purchaser on antitrust grounds will not
be made or, if such a challenge is made, of the result.
 
     As used in this Offer to Purchase, "Antitrust Laws" shall mean and include
the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the
Federal Trade Commission Act, as amended, and all other Federal and state
statutes, rules, regulations, orders, decrees, administrative and judicial
doctrines, and other laws that are designed or intended to prohibit, restrict or
regulate actions having the purpose or effect of monopolization or restraint of
trade.
 
     Information Statement.  The Information Statement attached hereto as
Schedule I is being furnished in connection with the possible designation by
Parent, pursuant to the Merger Agreement, of certain persons to be appointed to
the Board other than at a meeting of the Company's stockholders.
                                       20
   22
 
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
 
          
Exhibit A    Agreement and Plan of Merger, dated September 27, 1998, by
             and among Parent, Purchaser and the Company.
 
Exhibit B    Press Release, dated September 28, 1998.
 
Exhibit C    Confidentiality Agreement, dated as of April 2, 1998,
             amended as of June 23, 1998, between Parent and the Company.
 
Exhibit D    Letter to Stockholders, dated October 2, 1998.*
 
Exhibit E    Opinion of Allen & Company, dated September 27, 1998.**
 
Exhibit F    Severance and Change in Control Agreement, dated as of
             November 17, 1997, between Mark D. Goldman and the Company,
             filed as Exhibit 10.3 to the Company's Form 10-K for the
             fiscal year ended December 31, 1997, filed with the
             Securities and Exchange Commission (the "Commission") on
             March 27, 1998 and incorporated herein by reference.***
 
Exhibit G    Severance and Change in Control Agreement, dated as of
             January 1, 1997, as amended on August 13, 1997 and December
             15, 1997, between William G. Catron, Jr. and the Company,
             filed as Exhibit 10.4(a) to the Company's Form 10-K/A for
             the fiscal year ended December 31, 1996, filed with the
             Commission on April 30, 1997 (the "1996 Company 10-K/A") and
             incorporated herein by reference.***
 
Exhibit H    Severance and Change in Control Agreement, dated as of
             January 1, 1997, as amended on August 13, 1997 and December
             15, 1997, between Gary J. Niles and the Company, filed as
             Exhibit 10.4(e) to the 1996 Company 10-K/A and incorporated
             herein by reference.***
 
Exhibit I    Severance and Change in Control Agreement, dated as of
             January 1, 1997, as amended on August 13, 1997 and December
             15, 1997, between Louis R. Novak and the Company, filed as
             Exhibit 10.4(f) to the 1996 Company 10-K/A and incorporated
             herein by reference.***
 
Exhibit J    Severance and Change in Control Agreement, dated as of
             November 6, 1997, as amended on December 22, 1997, between
             Kathleen R. McElwee and the Company.
 
Exhibit K    Amended and Restated 1984 Employee Stock Option Plan, filed
             as Exhibit 4.6 to the Company's Registration Statement on
             Form S-8, Registration No. 33-56585, filed with the
             Commission on November 23, 1994 and incorporated herein by
             reference.***
 
Exhibit L    1994 Senior Management Stock Option Plan, filed as Exhibit
             4.6 to the Company's Registration Statement on Form S-8,
             Registration No. 33-56587, filed with the Commission on
             November 23, 1994 and incorporated herein by reference.***
 
Exhibit M    1995 Non-Employee Directors' Stock Option Plan, filed as
             Exhibit 10.1(e) to the Company's Form 10-K for the fiscal
             year ended December 31, 1995, filed with the Commission on
             March 11, 1996 and incorporated herein by reference.***
 
Exhibit N    Galoob Toys, Inc. 1996 Share Incentive Plan, filed as
             Exhibit 10.1(g) to the Company's Form 10-K for the fiscal
             year ended December 31, 1996, filed with the Commission on
             March 31, 1997 (the "1996 Company 10-K") and incorporated
             herein by reference.***
 
Exhibit O    Galoob Toys, Inc. 1996 Long Term Compensation Plan, filed as
             Exhibit 10.1(f) to the 1996 Company 10-K and incorporated
             herein by reference.***


 
- ---------------
  * Included in the materials sent to stockholders of the Company.
 
 ** Annexed hereto.
 
*** Incorporated herein by reference.
                                       21
   23
 
                                   SIGNATURE
 
     After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
 
                                          GALOOB TOYS, INC.
 
                                          By:     /s/ WILLIAM G. CATRON
 
                                            ------------------------------------
                                            Name: William G. Catron
                                            Title:  Executive Vice President,
                                                General Counsel, Chief
                                                Administrative Officer
                                                and Secretary
 
Dated: October 2, 1998
 
                                       22
   24
 
                                                                      SCHEDULE I
 
                               GALOOB TOYS, INC.
                              500 FORBES BOULEVARD
                     SOUTH SAN FRANCISCO, CALIFORNIA 94080
                            ------------------------
 
                INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
              OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
                           AND RULE 14f-1 THEREUNDER
                            ------------------------
 
             NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS
           IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT.
                       NO PROXIES ARE BEING SOLICITED AND
               YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
                            ------------------------
 
     This Information Statement is being mailed on or about October 2, 1998, as
part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") by Galoob Toys, Inc., a Delaware corporation (the "Company"),
to the holders of record of shares of Common Stock, par value $.01 per share, of
the Company (the "Shares"). You are receiving this Information Statement in
connection with the possible election of persons designated by Hasbro, Inc., a
Rhode Island corporation ("Parent"), to a majority of the seats of the Board of
Directors of the Company (the "Board"). Such designation may be made pursuant to
an Agreement and Plan of Merger, dated as of September 27, 1998 (the "Merger
Agreement"), by and among the Company, Parent and New HIAC II Corp., a Delaware
corporation and wholly-owned subsidiary of Parent ("Purchaser"). You are urged
to read this Information Statement carefully. Capitalized terms used but not
defined in this Information Statement have the meanings ascribed to such terms
in the Schedule 14D-9.
 
     NO ACTION IS REQUIRED BY THE STOCKHOLDERS OF THE COMPANY IN CONNECTION WITH
THE ELECTION OF THE DESIGNEES (AS DEFINED BELOW) TO THE BOARD. However, Section
14(f) of the Exchange Act requires the mailing to the Company's stockholders of
the information set forth in this Information Statement prior to a change in a
majority of the Company's directors otherwise than at a meeting of the Company's
stockholders.
 
     Pursuant to the Merger Agreement, among other things, (i) Purchaser has
agreed to commence a tender offer (the "Offer") for all outstanding Shares, at a
price of $12.00 per Share, net to the seller in cash, (ii) Purchaser will be
merged with and into the Company (the "Merger") following consummation of the
Offer, and (iii) as a result of the Merger, all Shares not purchased pursuant to
the Offer will be converted into the right to receive in cash $12.00 per Share
or such higher price as may be offered pursuant to the Offer, without any
interest thereon. As a result of the Offer and the Merger, the Company will
become a wholly-owned subsidiary of Parent.
 
     Pursuant to the Merger Agreement, Purchaser commenced the Offer on October
2, 1998. The Offer is scheduled to expire at 12:00 Midnight, New York City time,
on Friday, October 30, 1998, unless the Offer is extended.
 
     The information contained in this Information Statement (including
information incorporated by reference) concerning Parent, Purchaser and the
Designees has been furnished to the Company by either Parent or Purchaser, and
the Company assumes no responsibility for the accuracy or completeness of such
information.
 
     The Parent has advised the Company that it currently intends to designate
the individuals identified and described under the caption "The Board of
Directors -- Designees" herein to serve as directors of the Company. The Parent
has advised the Company that all of such persons have consented to act as
director of the Company, if so designated.
   25
 
                    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                             OWNERS AND MANAGEMENT
 
GENERAL INFORMATION REGARDING THE COMPANY
 
     The outstanding voting securities of the Company as of September 27, 1998,
consisted of 18,127,864 Shares, with 2,048,222 Shares reserved for issuance
pursuant to outstanding stock options and 3,580,000 Shares reserved for issuance
pursuant to outstanding warrants. Each Share is entitled to one vote.
 
PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information as of September 27, 1998
with respect to the Shares beneficially owned by (a) all persons known to the
Company to own beneficially more than five percent of the Shares, (b) all
directors and nominees, (c) the Named Executives (as defined under the caption
"Executive Compensation") and (d) all executive officers and directors of the
Company as a group.
 


                                                                                        PERCENT OF
                                                              AMOUNT AND NATURE OF     COMMON STOCK
         NAME AND ADDRESS OF BENEFICIAL OWNER(1)             BENEFICIAL OWNERSHIP(2)   OWNERSHIP(2)
         ---------------------------------------             -----------------------   ------------
                                                                                 
Lucas Licensing(3)........................................          2,130,000              10.5%
Lucasfilm Ltd.(4).........................................          1,450,000               7.4%
State of Wisconsin Investment Board(5)....................          1,313,000               7.2%
Mellon Bank Corporation(6)................................          1,155,489               6.4%
William G. Catron(7)......................................            126,917                 *
Andrew J. Cavanaugh(8)....................................              9,700                 *
Mark D. Goldman(9)........................................            609,041               3.3%
Scott R. Heldfond(10).....................................             11,450                 *
S. Lee Kling(11)..........................................             13,000                 *
Roger Kowalsky(12)........................................            106,550                 *
Gary J. Niles(13).........................................            167,950                 *
Louis R. Novak(14)........................................            178,410                 *
All executive officers and directors as a group
  (consisting of 14 persons)(15)..........................          1,283,231               6.7%

 
- ---------------
 
 *     Less than 1% of outstanding Shares.
 
(1)  Unless otherwise indicated, beneficial owner's address is Company's address
     at 500 Forbes Boulevard, South San Francisco, California 94080.
 
(2)  This table identifies persons having sole voting and/or investment power
     with respect to the Shares set forth opposite their names as of September
     27, 1998, according to the information furnished to the Company by each of
     them through such date. A person is deemed to be the beneficial owner of
     Shares that can be acquired by such person within 60 days from September
     27, 1998 upon the exercise of options. Percentage of ownership of Shares is
     based on a total of 18,127,864 Shares outstanding and assumes in each case
     that the person only, or group only, exercised his or its rights to
     purchase all Shares underlying the options.
 
(3)  Address is PO Box 2009, San Rafael, CA 94912. Includes warrants to purchase
     2,130,000 Shares. The Company also has an obligation to issue additional
     warrants to purchase 14,458 Shares. Information based on Schedule 13D,
     filed on October 24, 1997.
 
(4)  Address is PO Box 2009, San Rafael, CA 94912. Includes warrants to purchase
     1,450,000 Shares. The Company also has an obligation to issue additional
     warrants to purchase 9,841 Shares. Information based on Schedule 13D, filed
     on October 24, 1997.
 
                                       I-2
   26
 
(5)  Address is PO Box 7842, Madison, WI 53707. Information based on Schedule
     13G, filed on January 26, 1998.
 
(6)  Address is One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
     Information based on Schedule 13G, filed on January 27, 1998.
 
(7)  Includes options to purchase 96,191 Shares.
 
(8)  Includes options to purchase 8,000 Shares.
 
(9)  Includes options to purchase 454,630 Shares.
 
(10) Includes options to purchase 8,000 Shares.
 
(11) Includes options to purchase 8,000 Shares.
 
(12) Includes options to purchase 104,000 Shares.
 
(13) Consists of options to purchase 167,950 Shares.
 
(14) Includes options to purchase 167,950 Shares.
 
(15) Includes an aggregate of options to purchase 1,058,221 Shares.
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and any persons
who own more than ten-percent of the Shares to file reports of initial ownership
of the Shares and subsequent changes in that ownership with the Securities and
Exchange Commission and the New York Stock Exchange. Officers, directors and
greater than ten-percent beneficial owners are also required to furnish the
Company with copies of all Section 16(a) forms they file. Based soley upon a
review of the copies of the forms furnished to the Company, or written
representations from certain reporting persons that no Forms 5 were required,
the Company believes that during the 1997 fiscal year and to date in the 1998
fiscal year all Section 16(a) filing requirements were compiled with, except
that Kathleen R. McElwee and Craig S. Louisana filed Forms 3 late in the 1997
fiscal year.
 
                                       I-3
   27
 
                             THE BOARD OF DIRECTORS
 
     The Merger Agreement provides that promptly after (i) the purchase of and
payment for any Shares by Purchase or any of its affiliates pursuant to the
Offer as a result of which Purchaser and its affiliates own beneficially at
least a majority of then outstanding Shares and (ii) compliance with Section
14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, whichever shall
occur later, Parent shall be entitled to designate such number of directors (the
"Designees"), rounded up to the next whole number, on the Company's Board of
Directors as is equal to the product of the total number of directors on such
Board multiplied by the percentage that the number of Shares beneficially owned
by Purchaser (including Shares so accepted for payment) bears to the total
number of Shares then outstanding. In furtherance thereof, the Company shall,
upon request of Parent and compliance with Section 14(f) of the Exchange Act and
Rule 14f-l promulgated thereunder, use its best efforts promptly either to
increase the size of its Board of Directors or to secure the resignations of
such number of its incumbent directors, or both, as is necessary to enable such
Designees to be so elected or appointed to the Company's Board of Directors, and
the Company shall take all actions available to the Company to cause such
Designees to be so elected or appointed. At such time, the Company shall, if
requested by Parent, also take all action necessary to cause such Designees to
constitute at least the same percentage (rounded up to the next whole number) as
is on the Company's Board of Directors of (i) each committee of the Company's
Board of Directors, and (ii) each board of directors (or similar body) of each
subsidiary of the Company and (iii) each committee (or similar body) of each
such board.
 
     The Merger Agreement further provides that the parties thereto shall use
their respective reasonable best efforts to ensure that at least two of the
members of the Board shall, at all times prior to the effective time of the
Merger, be designated as "Continuing Directors." From and after the time, if
any, that the Designees constitute a majority of the Company's Board of
Directors, any amendment or modification of the Merger Agreement, any amendment
to the Company's Certificate of Incorporation or By-Laws inconsistent with the
Merger Agreement, any termination of the Merger Agreement by the Company, any
extension of time for performance of any of the obligations of Parent or
Purchaser under the Merger Agreement, any waiver of any condition to the
Company's obligations under the Merger Agreement or any of the Company's rights
under the Merger Agreement or any other action by the Company under the Merger
Agreement may be effected only by the action of a majority of the Continuing
Directors of the Company, which action shall be deemed to constitute the action
of any committee specifically designated by the Board of Directors of the
Company to approve the actions contemplated by the Merger Agreement and the
transactions contemplated thereby and the full Board of Directors of the
Company; provided however, that if there shall be no Continuing Directors, such
actions may be effected by majority vote of the entire Board of Directors of the
Company, except that no such action shall amend the terms of the Merger
Agreement or modify the terms of the Offer or the Merger in a manner materially
adverse to the holders of the Shares.
 
     It is expected that the Designees may assume office at any time following
the purchase by Purchaser of a majority of the outstanding Shares on a fully
diluted basis (excluding warrants) pursuant to the Offer, and that, upon
assuming office, the Designees, together with the Continuing Directors, will
thereafter constitute the entire Board. Biographical information concerning each
of the Designees is presented below.
 
                                       I-4
   28
 
DESIGNEES
 
     Parent has informed the Company that the Designees shall be the persons set
forth in the following table. The following table sets forth the name, age,
present principal occupation or employment and five-year history of each
Designee. The business address of each such person is c/o Parent, 1027 Newport
Avenue, Pawtucket, Rhode Island 02861.
 


                                                         PRESENT PRINCIPAL OCCUPATION OR
NAME                                   AGE         EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
- ----                                   ---         -------------------------------------------
                                       
Alan G. Hassenfeld...................  49    Mr. Hassenfeld has been Chairman of the Board, President
                                             and Chief Executive Officer of Parent since 1989.
Harold P. Gordon.....................  60    Mr. Gordon has been Vice Chairman of the Board of
                                             Directors of Parent since 1995. Prior thereto, he was a
                                             Partner at Stikeman, Elliott (law firm). He is also a
                                             director of Alliance Communication Corporation, Fonorola
                                             Inc. and G.T.C. Transcontinental Group, Ltd. Mr. Gordon
                                             is a citizen of Canada.
Alfred J. Verrecchia.................  55    Mr. Verrecchia has been the Executive Vice President and
                                             President of Global Operations of Parent since 1996.
                                             Prior thereto, he was Chief Operating Officer of
                                             Domestic Toy Operations of Parent. Mr. Verrecchia is
                                             also a director of Old Stone Corporation.

 
     Parent has advised the Company that, to the best knowledge of Parent, none
of the Designees currently is a director of or holds any position with the
Company, and except as disclosed in the Offer to Purchase, none of the Designees
beneficially owns any securities (or rights to acquire any securities) of the
Company or has been involved in any transactions with the Company or any of its
directors, executive officers or affiliates that are required to be disclosed
pursuant to the rules of the Securities and Exchange Commission, except that as
may be disclosed in the Offer to Purchase. Parent has also informed the Company
that certain Designees and/or their respective associates may also be directors
or officers of other companies and organizations that have engaged in
transactions with the Company or its subsidiaries in the ordinary course of
business, and that Purchaser believes that the interest of such persons in such
transactions is not of material significance.
 
     Parent has advised the Company that, to the best knowledge of Parent, each
of the persons listed in the table above has consented to act as a director, and
that none of such persons has during the last five years been convicted in a
criminal proceeding (excluding traffic violations and similar misdemeanors) or
was a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and a result of such proceeding was, or is, subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
activities subject to, federal or state securities laws or findings of any
violation of such laws.
 
CURRENT DIRECTORS OF THE COMPANY
 
     The information set forth below is as of September 27, 1998. The following
table sets forth certain information regarding the directors of the Company:
 


             NAME                AGE                                 POSITION
             ----                ---                                 --------
                                     
Mark D. Goldman                  47        President, Chief Executive Officer and Director (First
                                           Class)
Andrew J. Cavanaugh              51        Director (Third Class)
Scott R. Heldfond                52        Director (Second Class)
S. Lee Kling                     69        Director (Third Class)
Roger J. Kowalsky                63        Executive Vice President and Director (Second Class)

 
                                       I-5
   29
 
     MARK D. GOLDMAN, a Director of the Company since 1987, has served as
President and Chief Executive Officer of the Company since June, 1991. From 1987
to 1991, Mr. Goldman served as Executive Vice President and Chief Operating
Officer. Prior to 1987, Mr. Goldman served in various executive capacities at
Ages Entertainment Software, Inc. (formerly Sega Enterprises, Inc.), a video
game company ("Ages"), and Mattel, Inc. Mr. Goldman's term presently expires in
2000.
 
     ANDREW J. CAVANAUGH, a Director of the Company since 1993, serves as a
Senior Vice President, Corporate Human Resources of The Estee Lauder Companies
Inc. He has been affiliated with Estee Lauder in an executive capacity since
1988. Prior to undertaking his current position, Mr. Cavanaugh served as a
Senior Consultant with Coopers & Lybrand, New York City, from 1986 through 1988,
and Senior Vice President, Administration of Paramount Pictures Corporation,
from 1984 through 1986. Mr. Cavanaugh's term presently expires in 1999.
 
     SCOTT R. HELDFOND, a Director of the Company since 1986, has served as
President and Chief Executive Officer of Frank Crystal & Co. of California Inc.,
an insurance brokerage firm, since February 1997. Prior to undertaking his
current position, Mr. Heldfond served as Managing Director of Hales Capital
Advisors, LLC, an insurance industry merchant bank firm, since January 1995, and
he also served as a consultant to AON Risk Services (successor entity to Rollins
Hudig Hall and DSI Insurance Services) ("AON"), an insurance broker. From 1992
to 1994, he was President and CEO of Rollins Real Estate/Investment, and prior
thereto was President and CEO of DSI Insurance Services. The Company retained
the services of AON (with which Mr. Heldfond is no longer associated) for
insurance brokerage in 1997. On December 24, 1997, the Company retained the
insurance brokerage services of Frank Crystal & Co. of California Inc. Mr.
Heldfond's term presently expires in 1998.
 
     S. LEE KLING, a Director of the Company since 1991, has served since 1991
as Chairman of the Board of Kling Rechter & Company, a merchant banking company
which operates in partnership with Barclays Bank PLC. Mr. Kling served as
Chairman of the Board of Landmark Bancshares Corporation, a bank holding company
in St. Louis, Missouri ("Landmark"), until December 1991 when Landmark merged
with Magna Group, Inc. Mr. Kling served on the Boards of Directors of Magna
Group, Inc., Falcon Products, Co., Bernard Chaus Inc., Top Air Manufacturing,
Inc., National Beverage Corp., Hanover Direct, Inc. and Electro Rent Corp. Mr.
Kling's term presently expires in 1999.
 
     ROGER J. KOWALSKY, a Director of the Company since 1994, served as
Executive Vice President of the Company from June 1996 to May, 1998 and served
as Chief Financial Officer of the Company from June 1996 to December 1997. From
1989 to 1996, Mr. Kowalsky served as Director of the Vermont Studio Center, a
non-profit arts center. From 1983 to 1986, Mr. Kowalsky served as Senior Vice
President, Finance & Administration for Yale Materials Handling Corporation, an
industrial concern. From 1969 to 1982, Mr. Kowalsky worked at Pullman Inc., a
railroad company, rising to Executive Vice President, Finance and Administration
and President of Pullman Trailmobile, a subsidiary of Pullman, Inc. Mr.
Kowalsky's term presently expires in 1998.
 
CURRENT EXECUTIVE OFFICERS OF THE COMPANY
 
     The following list sets forth certain information regarding the executive
officers of the Company. Information with respect to Mark D. Goldman, the
Company's President and Chief Executive Officer, and Roger J. Kowalsky, an
Executive Vice President of the Company, are set forth under the heading
"Current Directors of the Company". The information set forth below is as of
September 27, 1998.
 


             NAME                AGE                                 POSITION
             ----                ---                                 --------
                                     
William G. Catron                52        Executive Vice President, General Counsel, Chief
                                           Administrative Officer and Secretary
Gary J. Niles                    58        Executive Vice President, Marketing and Product Acquisition
Louis R. Novak                   50        Executive Vice President and Chief Operating Officer
Craig S. Louisana                41        Senior Vice President, Sales
Kathleen R. McElwee              43        Senior Vice President and Chief Financial Officer
Anthony D. Miller                58        Senior Vice President, Preliminary Design
Ronnie Soong                     51        Managing Director of Galco International Toys, Ltd.
David Tilbor                     44        Senior Vice President, Marketing Services

 
                                       I-6
   30
 
     WILLIAM G. CATRON has served as Executive Vice President, General Counsel
and Chief Administrative Officer since May 1992 and as Corporate Secretary of
the Company since June 1995. From 1985 to 1992, Mr. Catron was Senior Vice
President, Assistant General Counsel for Paramount Pictures Corporation. Prior
to 1985, Mr. Catron served in various executive capacities at Entertainment
Software, Inc. (formerly Sega Enterprises, Inc.) ("Ages") and Mattel, Inc.
("Mattel").
 
     GARY J. NILES has served as Executive Vice President, Marketing and Product
Acquisition of the Company since February 1992. From 1989 to 1992, Mr. Niles
served as Senior Vice President, Toy Boys Division of the Company. Before
joining the Company, Mr. Niles was an executive with U.A.D, Ltd., a division of
Universal Matchbox, a toy company, Revell Incorporated, a model kit manufacturer
and Ages.
 
     LOUIS R. NOVAK has served as Executive Vice President and Chief Operating
Officer of the Company since February 1992. From 1989 to 1992, Mr. Novak served
as Senior Vice President, Operations of the Company. From 1986 to 1989 he was
Senior Vice President, Worldwide Product Operations for Coleco Industries, Inc.,
a toy and video game company. Prior to 1986, Mr. Novak was an executive with All
American Gourmet Company, Inc., a manufacturer of frozen foods products, and for
Mattel.
 
     CRAIG S. LOUISANA has served as Senior Vice President, Sales of the Company
since November 1997. From 1995 to 1997, Mr. Louisana served as Director of Field
Sales for the Company and as Senior Account Executive from 1993 to 1995. Prior
to joining the Company, Mr. Louisana held various sales positions with Mattel
and Kenner Toys, a toy company.
 
     KATHLEEN R. McELWEE has served as Senior Vice President and Chief Financial
Officer of the Company since January 1998. From 1995 to December 1997, Ms.
McElwee was Vice President of Corporate Financial Planning, Analysis and
Reporting of the Company. From 1993 to 1995, Ms. McElwee held various positions
with Nissan Motor Corporation. From 1990 to 1993, Ms. McElwee was with Canteen
Corporation, a vending company and a subsidiary of Flagstar Cos., and served as
Chief Financial Officer in 1993.
 
     ANTHONY D. MILLER has served as Senior Vice President, Preliminary Design
of the Company since June 1998, and as Vice President, Preliminary Design of the
Company since April 1993. From 1985 through 1991, Mr. Miller was founder and
partner in Red Racer Studio, a toy invention and development firm. From 1983 to
1985 and from 1987 to 1989, he served in several executive capacities for Tonka
Toys. Mr. Miller previously served in design and management capacities at
Mattel, Zee Toys, Tomy, Aurora Products, each of which are toy companies, and
Lakeside Games, a game company.
 
     RONNIE SOONG has served as Managing Director of Galco since May 1995. From
1993 to 1995, Mr. Soong served as General Manager of Galco. From 1989 to 1993,
Mr. Soong was General Manager of Zindart Industrial Co., Ltd., a manufacturing
company. Prior to 1989, Mr. Soong was the General Manager of Buddy L (HK) Ltd.,
a toy company, and an executive with the Ertl Company, a toy company in Taiwan,
from 1987 to 1989.
 
     DAVID TILBOR has served as Senior Vice President, Marketing Services of the
Company, since June, 1998. From 1994 to 1998, Mr. Tilbor served as Vice
President, Marketing Services of the Company. From 1990 to 1994, he served as
Director, Marketing Services. From 1989 to 1990 he was Director, Creative
Services, from 1988 to 1989 he was Manager, Creative Services and from 1987 to
1988 he was Copy Manager. Prior to 1987 Mr. Tilbor held positions with Coleco
Industries, Inc., a toy and video game company, CBS Toys, the toy division of
CBS Inc., and Ideal Toy Corporation.
 
                                       I-7
   31
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     On August 29, 1996, Mark D. Goldman, President, Chief Executive Officer and
Director of the Company, borrowed $950,000 in connection with the purchase of a
personal residence and executed a note payable to the Company, which is secured
by a second mortgage on such residence. The note evidencing such debt was
amended and restated on November 17, 1997 (as amended, the "Note"). Commencing
on the first day of September 1996, principal in the amount of $100 is payable
on the first of each month. The note bears no interest. The remaining principal
balance of the note shall be due and payable on (i) August 30, 2006, or (ii) as
provided in the Note and Mr. Goldman's Severance and Change in Control
Agreement, if Mr. Goldman's employment with the Company terminates. Pursuant to
the Note and Mr. Goldman's Severance and Change in Control Agreement, the Note
becomes due and payable (i) one year after termination without cause or for good
reason (each as defined in Mr. Goldman's Severance and Change in Control
Agreement) after a Change in Control or (ii) ten years after termination without
cause or for good reason prior to a Change in Control.
 
     The Company has retained the insurance brokerage services of Aon Risk
Services ("Aon") in recent years. Scott R. Heldfond, one of the Company's
directors, was previously the President and Chief Executive Officer of Rollins
Real Estate/Investment, a division of Aon. The total amount of insurance
premiums paid to Aon in 1997, 1997 and 1995 were approximately $1.4 million,
$1,2 million and $1.3 million, respectively. On December 24, 1997, the Company
retained the insurance brokerage services of Frank Crystal & Co. of California,
Inc. ("Frank Crystal"). Mr. Heldfond is the President and Chief Executive
Officer of Frank Crystal. No amounts were paid to Frank Crystal during fiscal
1997. The Company paid an aggregate of $431,206.72 to Frank Crystal for services
to date in fiscal 1998.
 
INDEBTEDNESS OF MANAGEMENT
 
     Mark D. Goldman, President, Chief Executive Officer and Director of the
Company has a loan outstanding with the Company as described under the heading
"Certain Relationships and Related Transactions" above.
 
CERTAIN BUSINESS RELATIONSHIPS
 
     See "Certain Relationships and Related Transactions" above.
 
                                       I-8
   32
 
                   THE BOARD OF DIRECTORS AND ITS COMMITTEES
 
     During the fiscal year ended December 31, 1997, the Board of Directors held
five (5) meetings. During such period, each of the then-current directors of the
Corporation attended 75% or more of the aggregate of (i) the total number of
meetings of the Board of Directors and (ii) the total number of meetings held by
all committees of the Board of Directors on which such director served.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has standing executive, audit and compensation
committees.
 
     Executive Committee:  The members of the executive committee are Mark D.
Goldman, who serves as Chairman, Andrew J. Cavanaugh and S. Lee Kling. The
executive committee has the authority to act in place of the Board of Directors
on all matters which would otherwise come before the Board of Directors except
for such matters which are required by law or by the Corporation's Certificate
of Incorporation or By-Laws to be acted upon exclusively by the Board of
Directors. In addition, the executive committee has the responsibility to
nominate persons for election as directors of the Corporation and to monitor the
Corporation's financial condition and review its credit and other financing
arrangements. The executive committee held no meetings during the fiscal year
ended December 31, 1997.
 
     Audit Committee:  The members of the audit committee are S. Lee Kling, who
serves as Chairman, and Scott R. Heldfond. The audit committee's primary
responsibilities are to review the Corporation's financial statements, to
recommend the appointment of the Corporation's independent auditors and to
review the overall scope of the audit. The audit committee held two (2) meetings
during the fiscal year ended December 31, 1997.
 
     Compensation Committee:  The members of the compensation committee are
Andrew J. Cavanaugh, who serves as Chairman, Scott R. Heldfond and S. Lee Kling.
The compensation committee's primary responsibilities are to review the
compensation arrangements relating to senior officers of the Corporation and to
administer and make recommendations to the Board of Directors regarding the
bonus plans for the senior officers of the Corporation. The compensation
committee also administers the Corporation's Amended and Restated 1984 Employee
Stock Option Plan (the "1984 Plan"), 1994 Senior Management Stock Option Plan
(the "1994 Plan"), the 1995 Non-Employee Directors' Stock Option Plan, the 1996
Share Incentive Plan and the 1996 Long Term Compensation Plan. The compensation
committee held two (2) meetings during the fiscal year ended December 31, 1997.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     None of the members of the Committee has served as a member of the
compensation committee of another entity so as to create any compensation
committee interlock. No members of the Committee are employed by the Company.
 
DIRECTOR NOMINATIONS
 
     The Corporation's By-laws provide that any stockholder entitled to vote in
the election of directors generally may nominate persons for election as
directors only if written notice of such stockholders' intent to make such
nomination is received by the Secretary of the Corporation not later than 90
days prior to such meeting; provided that if less than 100 days' notice to prior
public disclosure of the date of the meeting is given or made to stockholders,
such notice must be received no later than the close of business on the 10th day
following the date of such notice of the date of such meeting is first given to
stockholders. The Chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with these requirements.
 
                                       I-9
   33
 
                           COMPENSATION OF DIRECTORS
 
     Each director who was not a full-time employee of the Company is entitled
to receive an annual director's fee of $15,000 plus $500 for each meeting of the
Board of Directors or any committee thereof attended by such director. Each
director who was not a full-time employee of the Company received an option
immediately exercisable into 2,000 Shares on July 1, 1995 and has received an
option immediately exercisable into 2,000 Shares on January 1 of each year
thereafter through January 1, 1998. Each non-full-time employee director is
entitled to receive an option immediately exercisable into 2,000 Shares on
January 1 of each year after January 1, 1998 until such directors no longer
serve as directors of the Company. The exercise price of such options is equal
to the fair market value per Share (as determined by the closing price reported
on the New York Stock Exchange on the date of determination) on the date such
options are received. All directors are reimbursed by the Company for
out-of-pocket expenses incurred by them as directors of the Company.
 
     In addition to the aforementioned director compensation, prior to the
consummation of the Offer, the Company will pay to each of S. Lee Kling, Roger
J. Kowalsky, Andrew J. Cavanaugh and Scott R. Heldfond the sum of $40,000 as a
one-time payment for the extraordinary effort, services and consultation
rendered by each such individual, in his capacity as a Director of the Company,
in connection with the Company's efforts during 1998 to identify, analyze and
pursue a course of action designed to maximize the value of the Shares to the
Company's stockholders.
 
                                      I-10
   34
 
                       COMPENSATION OF EXECUTIVE OFFICERS
 
     The following table summarizes the compensation paid by the Company and its
subsidiaries, as well as certain other compensation paid or accrued, to the
Chief Executive Officer of the Company and the other five most highly
compensated executive officers of the Company who earned in excess of $100,000
for the Company's fiscal years ended December 31, 1997, 1996 and 1995 (each
person appearing in the table is referred to as a "Named Executive"):
 


                                                                                            LONG
                                                                              OTHER         TERM
                                                                              ANNUAL      COMPEN-        ALL OTHER
                   NAME AND                             SALARY               COMPEN-       SATION         COMPEN-
             PRINCIPAL POSITION(1)               YEAR     ($)      BONUS    SATION($)    OPTIONS(#)     SATION($)(2)
             ---------------------               ----   -------   -------   ----------   ----------   ----------------
                                                                                    
Mark D. Goldman                                  1997   500,000         0     89,130(3)   150,000          5,140
  President and Chief                            1996   500,000   937,000          0       36,140          4,660
  Executive Officer                              1995   400,000   750,000          0      200,000          3,980
Gary J. Niles                                    1997   335,000         0          0       75,000          2,250
  Executive Vice President, Marketing            1996   320,417   418,750          0       28,130          2,550
  and Product Acquisition                        1995   300,000   360,000          0            0          1,440
Louis R. Novak                                   1997   300,000         0          0       75,000            870
  Executive Vice President                       1996   291,169   375,000          0       28,130            870
  and Chief Operating Officer                    1995   272,803   334,567          0            0            870
William G. Catron                                1997   252,825         0          0       60,000          1,440
  Executive Vice President,                      1996   248,289   316,031          0       24,520          1,440
  General Counsel, Chief                         1995   236,729   217,745          0            0            870
  Administrative Officer and Secretary
Ronald D. Hirschfeld(4)                          1997   251,057         0          0       60,000            870
  Executive Vice President,                      1996   246,552   313,821          0       24,520            870
  International Sales and Marketing              1995   235,073   216,222          0            0          1,440
Roger J. Kowalsky                                1997   259,992         0     46,535(5)    60,000          3,510
  Executive Vice President                       1996   128,330   325,000          0      114,440          1,685
  and Director                                   1995        0          0          0            0              0

 
- ---------------
 
(1)  Other than as provided in this table, there were no other transactions
     among the Named Executives and the Company which are required to be
     reported in this table.
 
(2)  These amounts represent premiums paid by the Company with respect to
     term-life insurance policies.
 
(3)  This amount includes $68,452 of imputed interest from Mr. Goldman's note
     payable to the Company. See "Certain Relationships and Related
     Transactions" above.
 
(4)  On August 31, 1998, Mr. Hirschfeld submitted his resignation as Executive
     Vice President of the Company.
 
(5)  This amount represents $32,135 and $14,400 paid to Mr. Kowalsky for
     relocation and auto allowance respectively.
 
                                      I-11
   35
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
STOCK OPTION GRANTS
 
     The following table contains information concerning the grant of stock
options to each Named Executive during the Company's 1997 fiscal year:
 


                                          INDIVIDUAL
                                            GRANTS   
                                         ------------    % OF TOTAL
                                          SHARES OF       OPTIONS
                                         COMMON STOCK    GRANTED TO
                                          UNDERLYING    EMPLOYEES IN   EXERCISE                 GRANT DATE
                                           OPTIONS      FISCAL YEAR     PRICE     EXPIRATION   PRESENT VALUE
                 NAME                      GRANTED      (OF 928,000)    ($/US)       DATE         ($)(1)
                 ----                    ------------   ------------   --------   ----------   -------------
                                                                                
Mark D. Goldman........................    150,000          16.2%       15.75      1/27/07       1,399,500
Gary J. Niles..........................     75,000           8.1%       15.75      1/27/07         699,825
Louis R. Novak.........................     75,000           8.1%       15.75      1/27/07         699,825
William G. Catron......................     60,000           6.5%       15.75      1/27/07         599,860
Ronald D. Hirschfeld...................     60,000           6.5%       15.75      1/27/07         599,860
Roger J. Kowalsky......................     60,000           6.5%       15.75      1/27/07         599,860

 
- ---------------
 
(1) The Grant Date Present Values were determined using the Black-Scholes option
     pricing model. Assumptions used for the model are as follows: an option
     term of 4.7 years, stock volatility of 66%, dividend yield of 0%, and a
     risk-free rate of return of 6.1%. Options will only have values to the
     extent the Common Stock Price exceeds the Exercise Prices above. To fully
     realize the aggregate values shown above, based upon the Black-Scholes
     option model, the Common Stock price must exceed $25 per share; the options
     in the above table vest at prices ranging from $25 to $35. The Grant Date
     Present Values do not take into account risk factors such as
     non-transferability and limits on exercisability. The Black-Scholes option
     pricing model is a commonly utilized model for valuing options. The model
     assumes that the possibilities of future stock returns (dividends plus
     share price appreciation) resemble a normal "bell-shaped" curve. In
     assessing the Grant Date Present Values indicated in the above table, it
     should be kept in mind that no matter what theoretical value is placed on
     an option on the date of grant, the ultimate value of the option is
     dependent on the market value of the Common Stock at a future date, which
     will depend to a large degree on the efforts of the Named Executives to
     bring future success to the Company for the benefit of all stockholders.
 
     The Company does not currently grant stock appreciation rights.
 
                                      I-12
   36
 
                   AGGREGATED OPTION EXERCISES IN LAST FISCAL
                     YEAR AND FISCAL YEAR-END OPTION VALUES
 
     The following table sets forth information with respect to the options
exercised by the Named Executives during the 1997 fiscal year and the
unexercised options held by each Named Executive as of the end of the 1997
fiscal year:
 


                                                                         SECURITIES
                                                                         UNEXERCISED       VALUE OF UNEXERCISED
                                                           NUMBER OF      AT FISCAL        IN-THE-MONEY OPTIONS
                               SHARES                     UNDERLYING    YEAR-END (#)     AT FISCAL YEAR-END ($)(1)
                            ACQUIRED ON       VALUE         OPTIONS     -------------   ---------------------------
           NAME             EXERCISE (#)   REALIZED ($)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
           ----             ------------   ------------   -----------   -------------   -----------   -------------
                                                                                    
Mark D. Goldman...........       0              0           454,630        186,140       1,264,873          0
Gary J. Niles.............       0              0           167,950         93,050         187,471          0
Louis R. Novak............       0              0           167,950         93,050         187,471          0
William G. Catron.........       0              0            96,191         74,440         102,257          0
Ronald D. Hirschfeld......       0              0            66,191         74,440          66,632          0
Roger J. Kowalsky.........       0              0           104,000         74,440           4,375          0

 
- ---------------
 
(1) The closing sales price of the Common Stock on the New York Stock Exchange
     on December 31, 1997 was $10.19 per share.
 
SEVERANCE AND CHANGE IN CONTROL AGREEMENTS
 
     Effective as of November 17, 1997, the Company entered into a Severance and
Change in Control Agreement with Mark D. Goldman, President and Chief Executive
Officer of the Company (the "Goldman Severance Agreement"), which superseded and
terminated a previous Severance Agreement, dated as of October 27, 1994, between
the Company and Mr. Goldman. The Goldman Severance Agreement sets forth certain
benefits that are payable to Mr. Goldman if Mr. Goldman's employment is
terminated for various reasons, including termination by the Company (or its
successor) or by him of his employment either prior to or following a Change in
Control (as defined in the Goldman Severance Agreement; such definition would
include the change in control resulting from the consummation of the Offer and
the Merger) of the Company, as follows (the "Goldman Severance Payment"):
 
     (i)   If Mr. Goldman's employment is terminated other than for cause (as
        defined in the Goldman Severance Agreement) prior to a Change in
        Control, or if Mr. Goldman terminates his employment for good reason (as
        defined in the Goldman Severance Agreement; such definition includes the
        occurrence of a Change in Control) prior to a Change in Control, the
        Goldman Severance Agreement provides that the Company shall pay to Mr.
        Goldman a lump-sum payment equal to (a) three times Mr. Goldman's
        annualized current base compensation, (b) three times an amount equal to
        the largest dollar bonus paid (including any bonus amount that was
        deferred by Mr. Goldman) in the last five years, including the year in
        which Mr. Goldman's termination of employment occurs (the "Owed Bonus"),
        and (c) three times the annual car allowance in effect for Mr. Goldman
        at the time of employment termination and three times the annual
        insurance, maintenance and gasoline costs incurred for Mr. Goldman's
        vehicle during his last full year of employment with the Company. The
        Goldman Severance Agreement further states that the Company shall
        continue to provide Mr. Goldman with medical, health and insurance
        benefits for a period of three years from the date of Mr. Goldman's
        termination of employment.
 
     (ii)  If Mr. Goldman's employment is terminated by the Company other than
        for cause within twenty-four months following a Change in Control, or if
        Mr. Goldman terminates his employment for good reason within twenty-four
        months following a Change in Control, the Goldman Severance Agreement
        provides that the Company will pay to Mr. Goldman a lump-sum payment
        equal to (a) three times Mr. Goldman's annual base salary, (b) three
        times the Owed Bonus, (c) three times the annual car allowance in effect
        for Mr. Goldman at the time of his employment termination and three
        times the annual insurance, maintenance and gasoline costs incurred for
        Mr. Goldman's vehicle during his last full year of employment with the
        Company, and (d) the amount of $948,400 (the "Special Payment") and an
        additional lump-sum payment (the
 
                                      I-13
   37
 
        "Make-Whole Payment") in such an amount as necessary to pay any income
        tax and employment tax on the Special Payment and the Make-Whole Payment
        and as necessary to pay the value of the lost tax benefit caused by the
        loss of any tax deduction resulting from Mr. Goldman's receipt of the
        Special Payment or the Make-Whole Payment. The Goldman Severance
        Agreement further states that the Company shall continue to provide Mr.
        Goldman with medical, health and insurance benefits for a period of
        three years following the date of termination of Mr. Goldman's
        employment.
 
     (iii) If Mr. Goldman's Employment is terminated by the Company for cause,
        or if Mr. Goldman terminates his employment for any reason other than
        for good reason, the Goldman Severance Agreement provides that the
        Company must pay to Mr. Goldman (a) his unpaid compensation for services
        prior to termination, (b) the value of any accrued unused vacation pay
        to the date of termination and (c) any amounts owed to Mr. Goldman
        pursuant to any deferred compensation plan.
 
     The maximum Goldman Severance Payment that the Company would be required to
make under the Goldman Severance Agreement if such amount currently became
payable as a result of a Change in Control is approximately $6,245,275. In
addition, the Goldman Severance Agreement contains a "gross-up" provision which
provides that, to the extent that any severance payment is subject to certain
excise taxes imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended ("Section 4999"), the Company would make an additional gross-up payment
so that Mr. Goldman would retain an amount of the severance payment equal to the
amount he would have retained had there been no such excise taxes. The Company
has purchased a life insurance policy in the face amount of $2,000,000 on the
life of Mr. Goldman. The beneficiary of such insurance policy is Mr. Goldman's
wife.
 
     Each of William G. Catron, Gary J. Niles and Louis R. Novak (each an
"Executive Vice President" and collectively, the "Executive Vice Presidents")
entered into a Severance and Change in Control Agreement (the "EVP Severance and
Change in Control Agreements") with the Company, each dated as of January 1,
1997, as each was amended on August 13, 1997 and December 15, 1997. The EVP
Severance and Change in Control Agreements provide that if an Executive Vice
President's employment is terminated other than for cause or due to Disability
(each as defined in the EVP Severance and Change in Control Agreements), then
such Executive Vice President is entitled to continue to receive his salary and
certain benefits (excluding the continuation of any bonus, incentive or profit
sharing) for a period of twelve months after termination. The severance payments
are reduced in the event that an Executive Vice President commences regular
full-time employment elsewhere during such period. If there is a Change in
Control (for the purpose of this paragraph, as defined in the EVP Severance and
Change in Control Agreements; such definition would include the change in
control resulting from the consummation of the Offer and the Merger) and the
employment of an Executive Vice President is terminated voluntarily or
involuntarily (other than for death, Disability or cause) prior to the first
anniversary of such Change in Control, in lieu of the above-described severance
payments, each such Executive Vice President is entitled to receive a lump-sum
payment in an amount equal to three times such Executive Vice President's annual
salary and bonus (as described in the EVP Severance and Change in Control
Agreements), plus the continuation of certain benefits for a thirty-six month
period of time. If the employment of an Executive Vice President is terminated
involuntarily by the Company (other than for cause) during the twelve months
following the first anniversary of a Change in Control, then such Executive Vice
President is entitled to continue to receive his salary and benefits (excluding
the payment of any bonus) for a period of up to twenty-four months. Any payment
or benefit received pursuant to the EVP Severance and Change in Control
Agreements will be reduced to the extent that such payment or benefit would be
subject to excise taxes pursuant to Section 4999 occurring as a result of a
Change in Control. If the employment of all of the Executive Vice Presidents
were to be terminated as a result of a Change in Control, then the Executive
Vice Presidents would currently be entitled to receive approximately $5,373,469,
in the aggregate, under the EVP Severance and Change in Control Agreements.
 
     Ronald D. Hirschfeld entered into a Severance and Change in Control
Agreement with the Company that had the same terms described above for the EVP
Severance and Change and Control Agreements. On August 31, 1998, Mr. Hirschfeld
submitted his resignation as Executive Vice President of the Company. Mr.
Hirschfeld's resignation was not in connection with the transactions
contemplated by the Offer and
 
                                      I-14
   38
 
the Merger. Mr. Hirschfeld's resignation automatically terminated his Severance
and Change in Control Agreement in accordance with its terms.
 
     Roger J. Kowalsky entered into a Severance and Change in Control Agreement
with the Company that had the same terms described above for the EVP Severance
and Change in Control Agreements. Pursuant to an agreement, dated as of April
28, 1998, the Company and Mr. Kowalsky agreed to terminate Mr. Kowalsky's
Severance and Change in Control Agreement in connection with Mr. Kowalsky's
agreement to take on fewer responsibilities with the Company.
 
     Kathleen R. McElwee entered into a Severance and Change in Control
Agreement (the "McElwee Severance and Change in Control Agreement") with the
Company, dated November 6, 1997, as amended on December 22, 1997. The McElwee
Severance and Change in Control Agreement provides that if Ms. McElwee's
employment is terminated other than for cause or due to Disability (each as
defined in the McElwee Severance and Change in Control Agreement) then Ms.
McElwee is entitled to continue to receive her salary and certain benefits
(excluding the continuation of any bonus, incentive or profit sharing) for a
period of nine months after termination. The severance payments are reduced in
the event that Ms. McElwee commences regular full-time employment elsewhere
during such period. If there is a Change in Control (for the purpose of this
paragraph, as defined in the McElwee Severance and Change in Control Agreement;
such definition would include the change in control resulting from the
consummation of the Offer and the Merger) and the employment of Ms. McElwee is
terminated voluntarily or involuntarily (other than for death, Disability or
cause) prior to the first anniversary of such Change of Control, in lieu of the
above-described severance payments, Ms. McElwee is entitled to receive a lump
sum payment in an amount equal to one and one-half (1 1/2) times Ms. McElwee's
annual salary and bonus (as described in the McElwee Severance and Change in
Control Agreement), plus the continuation of certain benefits for an eighteen
month period of time. Any payment or benefit received pursuant to the McElwee
Severance and Change in Control Agreement will be reduced to the extent that
such payment or benefit would be subject to excise taxes pursuant to Section
4999 occurring as a result of a Change in Control. If the employment of Ms.
McElwee was to be terminated as a result of a Change in Control, Ms. McElwee
would currently be entitled to receive approximately $468,067, in the aggregate.
 
     The Merger Agreement provides that Parent will cause the Surviving
Corporation to honor the obligations of the Company or any of its subsidiaries
under the provisions of all employment, consulting, termination, severance,
change in control and indemnification agreements between or among the Company or
any of its subsidiaries and any current or former officer, director, consultant
or employee of the Company or any of its subsidiaries.
 
LONG TERM COMPENSATION PLAN
 
     The Company currently maintains a Long Term Compensation Plan for its
executive management. The Long Term Compensation Plan provides financial rewards
for exceptional corporate performance that results in long term increases in the
Company's earnings. The payment of compensation pursuant to the Long Term
Compensation Plan is dependent on the Company's achieving certain cumulative
earnings per share goals for the period of July 1, 1996 through December 31,
1998. Achieving those specified goals enables members of the Company's executive
management to earn an award of up to three times their annual salary in effect
on July 1, 1996 (the "Targeted Award"). In addition, exceeding the maximum goal
by at least 50% enables executive management to earn an award equal to 125% of
their Targeted Award. The maximum amount of compensation that any member of
executive management may receive pursuant to the Long Term Compensation Plan is
$1.875 million. Attainment of 100% of the goal will result in a total payment in
1999 of approximately $6 million which would have been accrued ratably over the
performance period. Termination of employment with the Company for any reason
prior to January 1, 1999 will result in full forfeiture of a participant's right
to any payment under the Long Term Compensation Plan, except in the event of a
participant's death or disability (in either such case, a pro rata payment shall
be made, if appropriately earned) or as otherwise determined by the Compensation
Committee of the Board of Directors. The Company does not anticipate that any
payments will be due under the Long Term Compensation Plan at the end of the
performance period.
 
                                      I-15
   39
 
                             EXECUTIVE COMPENSATION
                         COMPENSATION COMMITTEE REPORT
 
     The compensation committee of the Board of Directors (the "Committee"),
subject to the approval of the entire Board of Directors, establishes and
reviews the compensation arrangements for the executive officers of the
Corporation, including the officers named in the compensation table contained in
this proxy statement. The Committee is composed entirely of directors who are
neither officers nor employees of the Corporation.
 
COMPENSATION BACKGROUND, OBJECTIVES AND PHILOSOPHY
 
     In fiscal 1996 the Committee set compensation arrangements for executive
officers for that year and the two (2) years thereafter. In taking this action
the Committee focused on compensatory elements which both enhance year to year
profitability and encourage management effectively to address strategic growth
opportunities.
 
     Accordingly, the executive compensation arrangements approved in fiscal
1996 have three (3) appropriate focuses: (i) base salary, set with due regard to
competitive practice; (ii) an annual incentive plan, to reward successful
performance against year to year profitability goals; and (iii) long term
incentives, tied to indicators of strategic success, and closely allied with
stockholder interests.
 
     The Committee believed that year to year results and strategic business
growth are the most important performance measures, and accordingly assigned a
substantial percentage of total compensation opportunity to the annual and long
term incentive elements.
 
     The annual incentive arrangement is principally based on performance by the
Corporation against year to year targets for earnings available to stockholders.
The Committee believes that sustained growth in earnings available to
stockholders is the best intermediate term index of the effectiveness of the
executive group in directing a company in a highly competitive and
innovation-based business environment. As noted, in fiscal 1996 the Committee,
in consultation with the Chief Executive Officer, established year to year
objectives for earnings available to stockholders, against which annual
incentive awards will be calculated. Bonus opportunities for individual
executive officers are computed as a percentage of the individual's base salary.
A portion of each annual incentive award is dependent on the achievement of
numerate and non-numerate performance goals established in advance by each such
executive and the Chief Executive Officer, and reviewed by the Committee. No
award under the annual incentive award is available if certain base line
financial performance goals are not achieved. In fiscal 1997, no awards were
made under this plan.
 
     Additionally, in order to encourage management to achieve exceptional
corporate performance that results in a long term increase in the Corporation's
earnings, the Committee adopted in 1996, and the stockholders subsequently
approved, a long term incentive arrangement for executive management focused on
measurable achievement of strategic growth plans. The Committee established
compound annual growth in earnings per share over a multi-year period as the
performance measure for this arrangement, since it views sustained increases in
earnings per share as a viable index of sustained business growth and a close
surrogate of increased stockholder value. Through the end of fiscal 1997, no
award or fractional amount was payable under the long term incentive
arrangement.
 
     Finally, the Committee recognized that a central aspect of management
responsibility is business success which is intrinsically allied to an increase
in stockholder value. In prior years, the Committee utilized a program of stock
option grants, as approved by the stockholders, as an important compensatory
element by which strategic growth and increased stockholder value were
recognized. The Committee continues to view the use of stock option grants as
appropriate for this purpose. At the instance of the Committee, the Corporation
submitted for stockholder approval the 1996 Stock Option Plan, to provide
additional option grants for executive officers and other management personnel.
This submission was subsequently approved by the stockholders, and certain
option grants were made thereunder. Each of the grants made to executive
officers under the 1996 Stock Option Plan contains a vesting provision tied to
an increase in market value of the Corporation's common stock. Through the end
of fiscal 1997, no vesting had occurred under the 1996 Share Incentive Plan.
                                      I-16
   40
 
CEO COMPENSATION
 
     The Committee and Mr. Goldman have agreed that Mr. Goldman's compensation
arrangements shall be determined by the Committee and that Mr. Goldman's annual
incentive will be determined on the basis of the same profit plan used in
determining the annual bonuses for other executive management. However, the
amount of Mr. Goldman's annual bonus will be based solely on the achievement of
corporate objectives. Similarly, performance measures under the long term
incentive arrangement were established for, and options under the 1996 Share
Incentive Plan were awarded to Mr. Goldman on the same basis as the
Corporation's other executive management (including vesting positions tied to an
increase in market value of the Corporation's common stock), recognizing his
senior position grade level. In light of the particular corporate-wide
responsibilities of the Chief Executive Officer, the Committee believes that,
more than other executive management, the most substantial portion of Mr.
Goldman's potential compensation should be tied to the appreciation of the share
price of the Corporation's Common Stock. No awards were made to Mr. Goldman in
respect of fiscal 1997 under either the annual incentive plan or the long term
incentive arrangement, and no vesting of his options under the 1996 Share
Incentive Plan occurred during fiscal 1997.
 
                           THE COMPENSATION COMMITTEE
 
     The Compensation Committee consists of the following individuals:
 
       ANDREW J. CAVANAUGH (CHAIRMAN)
       SCOTT R. HELDFOND
       S. LEE KLING
 
                                      I-17
   41
 
                               PERFORMANCE GRAPH
 
     The graph below compares the cumulative total returns on an assumed
investment of $100 on the last trading day of each of the calendar years
indicated below in the Corporation's Common Stock, the S&P 500 Index and the S&P
Small Capitalization Index (which includes the Corporation), assuming full
reinvestment of dividends and no payment of brokerage or other commissions or
fees. Past performance is not necessarily indicative of future performance.
 


                                                              S&P Small
                                    Galoob Toys, Inc.      Capitalization          S&P 500
                                                                     
1992                                        100                  100                 100
1993                                        300                  118                 107
1994                                        184                  111                 105
1995                                        376                  142                 141
1996                                        448                  171                 170
1997                                        316                  213                 223

 


                                                1992    1993    1994    1995    1996    1997
                                                ----    ----    ----    ----    ----    ----
                                                                      
Galoob Toys, Inc............................    $100    $300    $184    $376    $448    $316
S&P Small Capitalization....................     100     118     111     142     171     213
S&P 500.....................................     100     107     105     141     170     223

 
                                      I-18

EX-99.A

   1
                                                                      Exhibit A

                          AGREEMENT AND PLAN OF MERGER


                                  by and among


                                  HASBRO, INC.,


                                NEW HIAC II CORP.


                                       and


                                GALOOB TOYS, INC.


                                   dated as of


                               September 27, 1998
   2
                          AGREEMENT AND PLAN OF MERGER

                  AGREEMENT AND PLAN OF MERGER, dated as of September 27, 1998,
by and among HASBRO, INC., a Rhode Island corporation ("Parent"), NEW HIAC II
CORP., a Delaware corporation and a wholly-owned Subsidiary of Parent
("Purchaser"), and GALOOB TOYS, INC., a Delaware corporation (the "Company").

                  WHEREAS, the Board of Directors of each of Parent, Purchaser
and the Company have approved, and deem it fair to, advisable and in the best
interests of their respective stockholders to consummate, the acquisition of the
Company by Parent and Purchaser upon the terms and subject to the conditions set
forth herein;

                  WHEREAS, in furtherance thereof, it is proposed that Purchaser
make a cash tender offer to acquire all shares of the issued and outstanding
common stock, $.01 par value, of the Company (the "Shares") (including the
related Preferred Stock Purchase Rights (as herein defined)) for $12.00 per
share, net to the seller in cash, upon the terms and subject to the conditions
set forth herein;

                  WHEREAS, also in furtherance of such acquisition, the Board of
Directors of each of Parent, Purchaser and the Company have approved this Agree-
ment and the Merger (as herein defined) following the Offer (as herein defined)
pursuant to which Purchaser shall merge with and into the Company and
outstanding Shares shall be converted into the right to receive the Offer Price
(as herein defined) in cash, without interest, all in accordance with the DGCL
(as herein defined) and upon the terms and subject to the conditions set forth
herein;

                  WHEREAS, the Board of Directors of the Company has determined
that the consideration to be paid for each Share in the Offer and the Merger is
fair to the holders of such Shares and has resolved to recommend that the
holders of such Shares tender their Shares pursuant to the Offer and approve and
adopt this Agree ment and the Merger upon the terms and subject to the
conditions set forth herein;

                  WHEREAS, the Company, Parent and Purchaser desire to make
certain representations, warranties, covenants and agreements in connection with
the Offer and the Merger; and


                                        1
   3
                  NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements set forth herein, the
parties hereto, intending to be legally bound hereby, agree as follows:

                                    ARTICLE I

                              THE OFFER AND MERGER

                  Section 1.1  The Offer.

                  (a) As promptly as practicable (but in no event later than
five business days after the public announcement of the execution hereof),
Purchaser shall commence (within the meaning of Rule 14d-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) a tender offer (the
"Offer") for all of the outstanding Shares (including the related Preferred
Stock Purchase Rights) at a price of $12.00 per Share, net to the seller in cash
(such price, or such higher price per Share as may be paid in the Offer, being
referred to herein as the "Offer Price"), subject to the conditions set forth in
Annex A hereto.

                  (b) The obligations of Purchaser to commence the Offer and to
accept for payment and to pay for any Shares validly tendered on or prior to the
expiration of the Offer and not withdrawn shall be subject only to the
conditions set forth in Annex A hereto; provided, that Purchaser's right in
Annex A hereto to terminate the Offer shall be subject to Purchaser's
obligations under this Agreement. The Offer shall be made by means of an offer
to purchase (the "Offer to Purchase") containing the terms set forth in this
Agreement and the conditions set forth in Annex A hereto.

                  (c) Purchaser expressly reserves the right to modify the terms
of the Offer; provided, that, without the Company's prior written consent,
Purchaser shall not decrease the Offer Price, change the form of consideration
to be paid in the Offer, waive the Minimum Condition or decrease the number of
Shares sought or amend any other condition of the Offer in any manner adverse to
the holders of the Shares (other than with respect to insignificant changes or
amendments and subject to the penultimate sentence of this Section 1.1) or
impose additional conditions without the written consent of the Company;
provided further, however, that, if on the initial scheduled expiration date of
the Offer, which shall be 20 business days after the date that the Offer is
commenced, all conditions to the Offer shall not have been satisfied or waived,
Purchaser may, from time to time until such time as all


                                        2
   4
such conditions are satisfied or waived, in its sole discretion, extend the
expiration date provided, however, that the expiration date of the Offer may not
be extended beyond March 1, 1999. Parent and Purchaser agree that if all of the
conditions set forth on Annex A hereto are not satisfied on any scheduled
expiration date of the Offer then, provided that all such conditions are
reasonably capable of being satisfied, Purchaser shall extend the Offer from
time to time until such conditions are satisfied or waived, provided that
Purchaser shall not be required to extend the Offer beyond March 1, 1999. In
addition, the Offer Price may be increased and the Offer may be extended to the
extent required by applicable Law in connection with such increase, in each case
without the consent of the Company. Purchaser shall, on the terms and subject to
the prior satisfaction or waiver of the conditions of the Offer, accept for
payment and pay for Shares validly tendered as promptly as practicable;
provided, however, that if, immediately prior to the initial expiration date of
the Offer, the Shares validly tendered and not withdrawn pursuant to the Offer
equal less than 90% of the outstanding Shares, Purchaser may extend the Offer
for a period not to exceed 10 business days, notwithstanding that all conditions
to the Offer are satisfied as of such expiration date of the Offer so long as
Purchaser irrevocably waives the satisfaction of any of the conditions to the
Offer (other than the Minimum Condition and the condition set forth in paragraph
(b) of Annex A hereto) that subsequently may not be satisfied during such
extension to the Offer.

                  Section 1.2  Company Actions.

                  (a) The Company hereby approves of and consents to the Offer
and represents that the Board of Directors of the Company, at a meeting duly
called and held, has (i) unanimously determined that each of the Agreement, the
Offer and the Merger (as defined in Section 1.5) are fair to and in the best
interests of the stockholders of the Company, (ii) unanimously approved this
Agreement, the Offer, the acquisition of Shares pursuant to the Offer and the
Merger for purposes of Section 203 of the DGCL (the "Section 203 Approval"),
(iii) received the opinion of Allen & Company Incorporated, financial advisor to
the Company, to the effect that the Offer Price to be received by holders of
Shares pursuant to the Offer and the Merger Consideration (as defined herein)
pursuant to the Merger is fair to the stockholders of the Company from a
financial point of view, (iv) approved this Agreement and the transactions
contemplated hereby including the Offer and the Merger (collectively, the
"Transactions") and (v) resolved to recommend that the stockholders of the
Company accept the Offer, tender their Shares thereunder to Purchaser and
approve and adopt this Agreement and the Merger. The Company has been advised by
each of its directors and by each executive officer who as of the


                                        3
   5
date hereof is actually aware (to the Knowledge of the Company) of the
Transactions that each such Person either intends to tender pursuant to the
Offer all Shares owned by such Person or vote all Shares owned by such Person in
favor of the Merger.

                  (b) In connection with the Offer, the Company will promptly
furnish or cause to be furnished to Purchaser mailing labels, security position
listings and any available listings or computer files containing the names and
addresses of all holders of record of the Shares as of a recent date, and shall
furnish Purchaser with such additional information (including, but not limited
to, updated lists of holders of the Shares and their addresses, mailing labels
and lists of security positions) and such assistance as Purchaser or its agents
may reasonably request in communicating the Offer to the record and beneficial
holders of the Shares. Subject to the requirements of applicable Law, and except
for such steps as are necessary to disseminate the Offer Documents and any other
documents necessary to consummate the Merger, Purchaser and its affiliates and
associates shall hold in confidence the information contained in any such
labels, listings and files and all other information delivered pursuant to this
Section 1.2(b), will use such information only in connection with the Offer and
the Merger and, if this Agreement shall be terminated, will deliver to the
Company all copies, extracts or summaries of such information in their
possession or the possession of their agents.

                  Section 1.3 SEC Documents.

                  (a) On the date the Offer is commenced, Parent and Purchaser
shall file with the United States Securities and Exchange Commission (the "SEC")
a Tender Offer Statement on Schedule 14D-1 in accordance with the Exchange Act
with respect to the Offer (together with all amendments and supplements thereto
and including the exhibits thereto, the "Schedule 14D-1"). The Schedule 14D-1
will include, as exhibits, the Offer to Purchase and a form of letter of
transmittal (collectively, together with any amendments and supplements
thereto, the "Offer Documents"). Concurrently with the filing of the Schedule
14D-1 by Parent and Purchaser, the Company shall file with the SEC a
Solicitation/Recommendation State ment on Schedule 14D-9 in accordance with the
Exchange Act (together with all amendments and supplements thereto and including
the exhibits thereto, the "Schedule 14D-9"), which shall, except as otherwise
provided herein, contain the recommendation referred to in clause (v) of
Section 1.2(a) hereof.

                  (b) Parent and Purchaser will take all steps necessary to
ensure that the Offer Documents, and the Company will take all steps necessary
to


                                        4
   6
ensure that the Schedule 14D-9, will comply in all material respects with the
provisions of applicable Federal and state securities Laws. Each of Parent and
Purchaser will take all steps necessary to cause the Offer Documents, and the
Company will take all steps necessary to cause the Schedule 14D-9, to be filed
with the SEC and to be disseminated to holders of the Shares, in each case as
and to the extent required by applicable Federal and state securities Laws. Each
of Parent and Purchaser, on the one hand, and the Company, on the other hand,
will promptly correct any information provided by it for use in the Offer
Documents and the Schedule 14D-9 if and to the extent that it shall have become
false and misleading in any material respect and Purchaser will take all steps
necessary to cause the Offer Documents, and the Company will take all steps
necessary to cause the Schedule 14D-9, as so corrected to be filed with the SEC
and to be disseminated to holders of the Shares, in each case as and to the
extent required by applicable Federal and state securities Laws. Parent and its
counsel shall be given a reasonable opportunity to review and comment upon the
Schedule 14D-9 and all amendments and supplements thereto prior to their filing
with the SEC or dissemination to stockholders of the Company. The Company and
its counsel shall be given a reasonable opportunity to review and comment upon
the Offer Documents prior to their filing with the SEC or dissemination to
stockholders of the Company. The Company agrees to provide Parent and its
counsel with copies of any written comments that the Company or its counsel may
receive from the SEC or its staff with respect to the Schedule 14D-9 promptly
after the receipt of such comments and each of Parent and Purchaser agrees to
provide the Company and its counsel with copies of any written comments that
Parent, Purchaser or their counsel may receive from the SEC or its staff with
respect to the Offer Documents promptly after the receipt of such comments.

                  Section 1.4 Directors.

                  (a) Promptly after (i) the purchase of and payment for any
Shares by Purchaser or any of its affiliates pursuant to the Offer as a result
of which Purchaser and its affiliates own beneficially at least a majority of
then outstanding Shares and (ii) compliance with Section 14(f) of the Exchange
Act and Rule 14f-1 promulgated thereunder, whichever shall occur later, Parent
shall be entitled to designate such number of directors, rounded up to the next
whole number, on the Company's Board of Directors as is equal to the product of
the total number of directors on such Board (giving effect to the increase in
the size of such Board pursuant to this Section 1.4) multiplied by the
percentage that the number of Shares beneficially owned by Purchaser (including
Shares so accepted for payment) bears to the total number of Shares then
outstanding. In furtherance thereof, the Company


                                        5
   7
shall, upon request of Parent and compliance with Section 14(f) of the Exchange
Act and Rule 14f-1 promulgated thereunder, use its best efforts promptly either
to increase the size of its Board of Directors or to secure the resignations of
such number of its incumbent directors, or both, as is necessary to enable such
designees of Parent to be so elected or appointed to the Company's Board of
Directors, and the Company shall take all actions available to the Company to
cause such designees of Parent to be so elected or appointed. At such time, the
Company shall, if requested by Parent, also take all action necessary to cause
Persons designated by Parent to constitute at least the same percentage (rounded
up to the next whole number) as is on the Company's Board of Directors of (i)
each committee of the Company's Board of Directors, (ii) each board of directors
(or similar body) of each Subsidiary of the Company and (iii) each committee (or
similar body) of each such board.

                  (b) The Company shall promptly take all actions required
pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated
thereunder in order to fulfill its obligations under Section 1.4(a), including
mailing to stockholders the information required by such Section 14(f) and Rule
14f-1 (or, at Parent's request, furnishing such information to Parent for
inclusion in the Offer Documents initially filed with the SEC and distributed to
the stockholders of the Company) as is necessary to enable Parent's designees to
be elected to the Company's Board of Directors. Parent or Purchaser will supply
to the Company in writing and be solely responsible for any information with
respect to either of them and their nominees, officers, directors and affiliates
required by such Section 14(f) and Rule 14f-1. The provisions of this Section
1.4 are in addition to and shall not limit any rights which Purchaser, Parent or
any of their affiliates may have as a holder or beneficial owner of Shares as a
matter of applicable Law with respect to the election of directors or otherwise.

                  (c) Notwithstanding the provisions of this Section 1.4, the
parties hereto shall use their respective reasonable best efforts to ensure that
at least two of the members of the Board shall, at all times prior to the
Effective Time (as defined in Section 1.6 hereof) be, Continuing Directors. From
and after the time, if any, that Parent's designees constitute a majority of the
Company's Board of Directors, any amendment or modification of this Agreement,
any amendment to the Company's Certificate of Incorporation or By-Laws
inconsistent with this Agree ment, any termination of this Agreement by the
Company, any extension of time for performance of any of the obligations of
Parent or Purchaser hereunder, any waiver of any condition to the Company's
obligations hereunder or any of the Company's rights hereunder or other action
by the Company hereunder may be effected only by


                                        6
   8
the action of a majority of the Continuing Directors of the Company, which
action shall be deemed to constitute the action of any committee specifically
designated by the Board of Directors of the Company to approve the actions
contemplated hereby and the Transactions and the full Board of Directors of the
Company; provided, that, if there shall be no Continuing Directors, such actions
may be effected by majority vote of the entire Board of Directors of the
Company, except that no such action shall amend the terms of this Agreement or
modify the terms of the Offer or the Merger in a manner materially adverse to
the holders of Shares.

                  Section 1.5 The Merger. (a) Subject to the terms and
conditions of this Agreement, and in accordance with the DGCL, at the Effective
Time (as defined in Section 1.6 hereof), the Company and Purchaser shall
consummate a merger (the "Merger") pursuant to which (x) Purchaser shall be
merged with and into the Company and the separate corporate existence of
Purchaser shall thereupon cease and (y) the Company shall be the surviving
corporation in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation") and shall continue to be governed by the Laws of the State of
Delaware.

                  (b) Pursuant to the Merger, at the Effective Time, (x) the
Certificate of Incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be the certificate of incorporation of the Surviving
Corporation and (y) the By-Laws of the Company, as in effect immediately prior
to the Effective Time, shall be the by-laws of the Surviving Corporation, each
until thereafter changed or amended as provided therein and by the DGCL.

                  (c) The directors of Purchaser at the Effective Time shall be
the initial directors of the Surviving Corporation until their respective
successors are duly elected and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
certificate of incorporation and by-laws. The officers of the Company at the
Effective Time shall be the initial officers of the Surviving Corporation until
their respective successors are duly elected and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's certificate of incorporation and by-laws.

                  (d) The Merger shall have the effects specified in the
applicable provisions of the DGCL.



                                        7
   9
                  Section 1.6 Effective Time. Subject to the terms and
conditions of this Agreement, Parent, Purchaser and the Company will cause a
certificate of merger or, if applicable, a certificate of ownership and merger
(as applicable, the "Certificate of Merger"), to be executed and filed on the
date of the Closing (as defined in Section 1.7) (or on such other date as Parent
and the Company may agree) with the Secretary of State of Delaware (the
"Secretary of State") as provided in the DGCL. The Merger shall become effective
on the date on which the Certificate of Merger has been duly filed with the
Secretary of State or such time as is agreed upon by the parties and specified
in the Certificate of Merger, and such time is hereinafter referred to as the
"Effective Time."

                  Section 1.7 Closing. The closing of the Merger (the "Closing")
shall take place at 10:00 a.m., local time, on a date to be specified by the
parties, which shall be no later than the second business day after satisfaction
or waiver of all of the conditions set forth in Article VI hereof (the "Closing
Date"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third
Avenue, New York, New York, 10022, unless another date or place is agreed to in
writing by the parties hereto.


                                   ARTICLE II

                            CONVERSION OF SECURITIES

                  Section 2.1 Conversion of Capital Stock. As of the Effective
Time, by virtue of the Merger and without any action on the part of the holders
of any Shares or any shares of capital stock of Purchaser:

                           (a) Purchaser Capital Stock. Each issued and
outstanding share of common stock, par value $.01 per share, of Purchaser shall
be converted into and become one fully paid and nonassessable share of common
stock, par value $.01 per share, of the Surviving Corporation.

                           (b) Cancellation of Treasury Stock and Purchaser-
Owned Stock. All Shares that are owned by the Company or any Subsidiary of the
Company and any Shares owned by Parent, Purchaser or any Subsidiary of Parent or
Purchaser shall be cancelled and retired and shall cease to exist and no
consideration shall be delivered in exchange therefor.



                                        8
   10
                           (c) Exchange of Shares. Each issued and outstanding
Share (other than Shares to be cancelled in accordance with Section 2.1(b) and
Dissenting Shares (as herein defined)) shall be converted into the right to
receive the Offer Price in cash, without interest (the "Merger Consideration").
All such Shares, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing any such Shares shall cease to have any rights
with respect thereto, except the right to receive the Merger Consideration
therefor upon the surrender of such certificate in accordance with Section 2.2,
without interest.

                  Section 2.2  Exchange of Certificates.

                           (a)  Paying Agent.  Prior to the Effective Time,
Parent shall designate a bank, trust company or other Person, reasonably
acceptable to the Company, to act as agent for the holders of the Shares in
connection with the Merger (the "Paying Agent") to receive the funds to which
holders of the Shares shall become entitled pursuant to Section 2.1(c). Parent
shall, from time to time, make available to the Paying Agent funds in amounts
and at times necessary for the payment of the Merger Consideration as provided
herein. All interest earned on such funds shall be paid to Parent.

                           (b)  Exchange Procedures.  As soon as reasonably
practicable after the Effective Time, Parent shall cause the Paying Agent to
mail to each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding Shares (the "Certificates")
whose Shares were converted into the right to receive the Merger Consideration
pursuant to Section 2.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Paying Agent and shall be in
such form not inconsistent with this Agreement as Parent may specify) and (ii)
instructions for use in surrendering the Certificates in exchange for payment of
the Merger Consideration. Upon surrender of a Certificate for cancellation to
the Paying Agent, together with such letter of transmittal, duly executed, and
such other documents as may reasonably be required by the Paying Agent, Parent
shall cause the Paying Agent to pay to the holder of such Certificate the Merger
Consideration, and the Certificate so surrendered shall forthwith be cancelled.
In the event of a surrender of a Certificate representing Shares which are not
registered in the transfer records of the Company under the name of the Person
surrendering such Certificate, payment may be made to a Person other than the
Person in whose name the Certificate so surrendered is registered if such
Certificate


                                        9
   11
shall be properly endorsed or otherwise be in proper form for transfer and the
Person requesting such payment shall pay any transfer or other Taxes required by
reason of payment to a Person other than the registered holder of such
Certificate or establish to the satisfaction of the Paying Agent that such tax
has been paid or is not applicable. Until surrendered as contemplated by this
Section 2.2, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration which the holder thereof has the right to receive in respect of
such Certificate pursuant to the provisions of this Article II. No interest
shall be paid or will accrue on the Merger Consideration payable to holders of
Certificates pursuant to the provisions of this Article II.

                           (c)  Transfer Books; No Further Ownership Rights in
Shares. At the Effective Time, the stock transfer books of the Company shall be
closed and thereafter there shall be no further registration of transfers of the
Shares on the records of the Company. From and after the Effective Time, the
holders of Certificates evidencing ownership of the Shares outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to such Shares, except as otherwise provided for herein or by applicable
Law. If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided in
this Article II.

                           (d)  Termination of Fund; No Liability.  At any time
following one year after the Effective Time, the Surviving Corporation shall be
entitled to require the Paying Agent to deliver to it any funds (including any
interest received with respect thereto) which had been made available to the
Paying Agent and which have not been disbursed to holders of Certificates, and
thereafter such holders shall be entitled to look to the Surviving Corporation
(subject to abandoned property, escheat or other similar Laws) only as general
creditors thereof with respect to the Merger Consideration payable upon due
surrender of their Certificates, without any interest thereon. Notwithstanding
the foregoing, none of Parent, the Company, the Surviving Corporation or the
Paying Agent shall be liable to any holder of a Certifi cate for Merger
Consideration delivered to a public official pursuant to any applica ble
abandoned property, escheat or similar Law.

                           (e)  Lost Certificates.  If any Certificate shall
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the Person claiming such Certificate to be lost, stolen or destroyed
and, if required by the Surviving Corporation, the posting by such Person of a
bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that


                                       10
   12
may be made against it with respect to such Certificate, the Paying Agent shall
pay in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration pursuant to this Agreement.

                  Section 2.3 Withholding Taxes. Parent and Purchaser shall be
entitled to deduct and withhold, or cause the Paying Agent to deduct and
withhold, from the Offer Price or the Merger Consideration payable to a holder
of Shares pursuant to the Offer or the Merger any withholding and stock transfer
Taxes and such amounts as are required under the Code, or any applicable
provision of state, local or foreign Tax law. Parent shall take appropriate
steps to minimize such Taxes. To the extent that amounts are so withheld by
Parent or Purchaser, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of the Shares in respect of
which such deduction and withholding was made by Parent or Purchaser.

                  Section 2.4. Stock Options. (a) Immediately prior to the
Effective Time, each then outstanding option to purchase any shares of capital
stock of the Company (in each case, an "Option"), whether or not then vested or
exercisable, shall be cancelled by the Company and in consideration of such
cancellation and except to the extent that Parent or the Purchaser and the
holder of any such Option otherwise agree, the Company (or, at Parent's option,
the Purchaser) shall pay to such holders of Options an amount in respect thereof
equal to the product of (A) the excess, if any, of the Offer Price over the
exercise price of each such Option and (B) the number of Shares previously
subject to the Option immediately prior to its cancellation (such payment to be
net of withholding taxes and without interest).

                           (b)  The Company shall use its reasonable best
efforts to take all actions necessary and appropriate so that all stock option
or other equity based plans maintained with respect to the Shares, including,
without limitation, the plans listed in Section 3.3 hereof ("Option Plans"),
shall terminate as of the Effective Time and the provisions in any other Benefit
Plan providing for the issuance, transfer or grant of any capital stock of the
Company or any interest in respect of any capital stock of the Company shall be
deleted as of the Effective Time, and the Company shall use its best efforts to
ensure that following the Effective Time no holder of an Option or any
participant in any Option Plan shall have any right thereunder to acquire any
capital stock of the Company, Parent, Purchaser or the Surviving Corporation.



                                       11
   13
                           (c)  Prior to the Effective Time, the Company shall
use its reasonable best efforts to (i) obtain all necessary consents from, and
provide (in a form acceptable to Parent) any required notices to, holders of
Options and (ii) amend the terms of the applicable Option Plan, in each case as
is necessary to give effect to the provisions of paragraphs (a) and (b) of this
Section 2.4.

                  Section 2.5. Appraisal Rights. Notwithstanding anything in
this Agreement to the contrary, Shares (the "Dissenting Shares") that are issued
and outstanding immediately prior to the Effective Time and which are held by
stock holders who did not vote in favor of the Merger and who comply with all of
the relevant provisions of Section 262 of the DGCL (the "Dissenting
Stockholders") shall not be converted into or be exchangeable for the right to
receive the Merger Consideration, unless and until such holders shall have
failed to perfect or shall have effectively withdrawn or lost their rights to
appraisal under the DGCL. If any Dissenting Stockholder shall have failed to
perfect or shall have effectively with drawn or lost such right, such holder's
Shares shall thereupon be converted into and become exchangeable for the right
to receive, as of the Effective Time, the Merger Consideration without any
interest thereon. The Company shall give Parent (i) prompt notice of any written
demands for appraisal of any Shares, attempted withdrawals of such demands and
any other instruments served pursuant to the DGCL and received by the Company
relating to stockholders' rights of appraisal, and (ii) the opportunity to
direct all negotiations and proceedings with respect to demands for appraisal
under the DGCL. Neither the Company nor the Surviving Corporation shall, except
with the prior written consent of Parent, voluntarily make any payment with
respect to, or settle or offer to settle, any such demand for payment. If any
Dissenting Stockholder shall fail to perfect or shall have effectively withdrawn
or lost the right to dissent, the Shares held by such Dissenting Stockholder
shall thereupon be treated as though such Shares had been converted into the
right to receive the Merger Consideration pursuant to Section 2.1(c).





                                                 12
   14
                                   ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

                  The Company represents and warrants to Parent and Purchaser as
follows:

                  Section 3.1 Organization, Standing and Corporate Power. Each
of the Company and each of its Subsidiaries is a corporation duly organized,
validly existing and in good standing under the Laws of the jurisdiction in
which it is organized and has the requisite corporate power and authority to
carry on its business as is now being conducted. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed (individually or in the aggregate) would not have a
Material Adverse Effect on the Company. The Company has delivered to Parent
complete and correct copies of the Certificate of Incorporation of the Company
and By-Laws of the Company, in each case as amended to the date of this
Agreement, and has delivered the certificates of incorporation and by-laws or
other organizational documents of its Subsidiaries that currently have
operations, in each case as amended as of the date of this Agreement. Except as
set forth on Schedule 3.2 of the Company Disclosure Schedule or in the Company's
SEC Documents, the respective certificates of incorporation and by-laws or other
organizational documents of the Subsidiaries of the Company do not contain any
provision limiting or otherwise restricting the ability of the Company to
control such Subsidiaries.

                  Section 3.2 Subsidiaries. (a) Exhibit 21.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and
Schedule 3.2 of the disclosure schedule delivered by the Company to Parent at or
prior to the execution of this Agreement (the "Company Disclosure Schedule")
together include the names, jurisdictions of incorporation and capitalization of
all of the Subsidiaries of the Company. Except as set forth on Schedule 3.2 of
the Company Disclosure Schedule or in the Company's SEC Documents, all the
outstanding shares of capital stock of, or other equity interests in, each
Subsidiary of the Company have been validly issued and are fully paid and
nonassessable and are owned directly or indirectly by the Company, free and
clear of all Liens and free of any other restric-

                                       13
   15
tion (including any restriction on the right to vote, sell or otherwise dispose
of such capital stock or other ownership interests).

                           (b)  The Company does not directly or indirectly
beneficially own any securities or other beneficial ownership interests in any
other entity (including through joint ventures or partnership arrangements)
other than (i) the Subsidiaries of the Company or (ii) as disclosed on Schedule
3.2 of the Company Disclosure Schedule.

                  Section 3.3 Capital Structure. The authorized capital stock of
the Company consists of 50,000,000 Shares and 1,000,000 shares of preferred
stock, par value $1.00 per share (the "Preferred Shares") of which 50,000 shares
have been designated as Series A Preferred Stock (the "Series A Preferred
Shares"). As of the date hereof, (i) 18,127,864 Shares were issued and
outstanding and no Preferred Shares were issued and outstanding, (ii) 511,810
Shares were reserved for issuance upon exercise of outstanding Options pursuant
to the Company's Amended and Restated 1984 Employee Stock Option Plan with an
exercise price range of a minimum exercise price of $3.00 and a maximum exercise
price of $30.63, (iii) 727,912 Shares were reserved for issuance upon exercise
of outstanding Options pursuant to the Company's 1994 Senior Management Stock
Option Plan with an exercise price range of a minimum exercise price of $9.00
and a maximum exercise price of $21.25, (iv) 28,000 Shares were reserved for
issuance upon exercise of outstanding Options pursuant to the 1995 Non-Employee
Directors' Stock Option Plan with an exercise price range of a minimum exercise
price of $8.00 and a maximum exercise price of $14.13, (v) 780,500 Shares were
reserved for issuance upon exercise of outstanding Options pursuant to the 1996
Share Incentive Plan with an exercise price range of a minimum exercise price of
$9.25 and a maximum exercise price of $15.75, (vi) 1,450,000 Shares were
reserved for issuance upon exercise of warrants (the "Lucasfilm Ltd. Warrants"),
expiring October 14, 2009, held by Lucasfilm Ltd., with an exercise price of
$15.00 per Share, (vii) 2,130,000 Shares were reserved for issuance upon
exercise of warrants (the "Lucas Licensing Ltd. Warrants"), expiring October 14,
2009, held by Lucas Licensing Ltd., with an exercise price of $15.00 per Share
and (viii) no Shares were issued and are held in the Company's treasury. Except
as set forth above or on Schedule 3.3 of the Company Disclosure Schedule, as of
the date of this Agreement: (i) no shares of capital stock or other voting
securities of the Company are issued, reserved for issuance or outstanding; (ii)
there are no stock appreciation rights, phantom stock units, restricted stock
grants, contingent stock grants or Benefit Plans which grant awards of any of
the foregoing, and there are no other outstanding contractual rights to which


                                       14
   16
the Company is a party the value of which is based on the value of Shares; (iii)
all outstanding shares of capital stock of the Company are, and all Shares which
may be issued will be, when so issued, duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights; and (iv) there are
no bonds, debentures, notes or other indebtedness of the Company having the
right to vote (or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which stockholders of the Company may vote.
Except for the Preferred Stock Purchase Rights, and except as set forth above,
as of the date of this Agree ment, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which the Company or any of its Subsidiaries is a party or by
which any of them is bound obligating the Company or any of its Subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other voting securities of the Company or of any of
its Subsidiaries or obligating the Company or any of its Subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking. There are no programs in
place, nor any outstanding contractual obligations of the Company or any of its
Subsidiaries, to repurchase, redeem or otherwise acquire any shares of capital
stock of the Company or any of its Subsidiaries. Schedule 3.3 of the Company
Disclosure Schedule accurately sets forth information regarding the current
exercise price, date of grant and number of granted Options for each holder of
Options pursuant to any Company Option Plan. Following the Effective Time, no
holder of Options will have any right to receive shares of common stock of the
Surviving Corporation upon exercise of Options.

                  Section 3.4 Authority; Noncontravention; Company Action. The
Company has the requisite corporate power and authority to enter into this Agree
ment and, subject to approval of this Agreement by the holders of a majority of
the outstanding Shares, to consummate the Merger contemplated by this Agreement.
The execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the Transactions have been duly authorized by all
necessary corporate action on the part of the Company, subject, in the case of
the Merger, to approval of this Agreement by the holders of a majority of the
outstanding Shares. This Agreement has been duly executed and delivered by the
Company and, assuming this Agreement constitutes the valid and binding
obligation of Parent and Purchaser, constitutes the valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms,
except that (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar Laws now or hereafter in effect
relating to creditors' rights generally and (ii)


                                       15
   17
the remedy of specific performance and injunctive relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. Except as set forth on Schedule 3.4 of the
Company Disclosure Schedule or waivers or consents that have been obtained and
delivered to Parent, the execution, delivery and performance of this Agreement
do not, and the consummation of the Transactions (including the changes in the
composition of the Board of Directors of the Company) and compliance with the
provisions of this Agreement will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of a material benefit under, or result in the creation of any Lien upon
any of the material properties or assets of the Company or any of its
Subsidiaries under, or result in the termination of, or require that any consent
be obtained or any notice be given with respect to, (i) the Certificate of
Incorporation or By-laws of the Company or the comparable charter or organiza-
tional documents of any of its Subsidiaries, (ii) any loan or credit agreement
note, bond, mortgage, indenture, lease or other agreement, instrument or Permit
applicable to the Company or any of its Significant Subsidiaries or their
respective properties or assets, (iii) any Law applicable to the Company or any
of its Subsidiaries or their respective properties or assets or (iv) any
licenses to which the Company or any of its Subsidiaries is a party, other than,
in the case of clauses (ii), (iii) or (iv), any such conflicts, violations,
defaults, rights, Liens, losses of a material benefit, consents or notices that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company and its Subsidiaries taken as a whole or the consents Parent and
Purchaser have obtained as described in Section 5.14 hereof. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity is required by the Company or any of its
Subsidiaries in connection with the execution and delivery of this Agreement by
the Company or the consummation by the Company of the Transactions, except for
(i) the filings, permits, authorizations, consents and approvals set forth in
Section 3.4 of the Company Disclosure Schedule, or as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act, the HSR
Act, any applicable state securities or "blue sky" Laws and the DGCL, and (ii)
such other consents, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would not,
individually or in the aggregate, (x) impair, in any material respect, the
ability of the Company to perform its obligations under this Agreement, (y)
prevent or significantly delay the consummation of the Transactions or (z) have
a Material Adverse Effect on the Company and its Subsidiaries taken as a whole.
The Board of Directors of the Company has taken all appropriate action so that
neither Parent nor Purchaser will be an "interested stockholder" within


                                       16
   18
the meaning of Section 203 of the DGCL by virtue of Parent, Purchaser and the
Company entering into this Agreement or any other agreement contemplated hereby
and consummating the Transactions.

                  Section 3.5 SEC Documents; Financial Statements. The Company
has filed all SEC Documents required to be filed by it since January 1, 1996
(the "Company's SEC Documents"). As of their respective dates, (i) the Company's
SEC Documents complied in all material respects with the requirements of the
Securities Act, or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC Documents,
and (ii) none of the Company's SEC Documents contained at the time of their
filing any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the Company's
SEC Documents, as of the dates of such SEC Documents, are true and complete and
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles as in effect at such time ("GAAP") in the United States applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented the consolidated financial position of the
Company and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as set forth on Schedule 3.5 of the Company Disclosure
Schedule and except as set forth in the Company's SEC Documents filed and
publicly available prior to the date of this Agreement, and except for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice since the date of the most recent consolidated
balance sheet included in the Company's SEC Documents filed and publicly
available prior to the date of this Agreement, neither the Company nor any of
its Subsidiaries has any material liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise).

                  Section 3.6 Schedule 14D-9; Offer Documents; Proxy Statement.
Neither the Schedule 14D-9, any other document required to be filed by the
Company with the SEC in connection with the Transactions, nor any information
supplied by the Company in writing for inclusion in the Offer Documents shall,
at the respective times the Schedule 14D-9, any such other filings by the
Company, the Offer Documents or any amendments or supplements thereto are filed
with the SEC


                                       17
   19
or are first published, sent or given to stockholders of the Company, as the
case may be, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they are
made, not misleading. The Proxy Statement will not, on the date the Proxy
Statement (including any amendment or supplement thereto) is first mailed to
stockholders of the Company, contain any untrue statement of a material fact, or
omit to state any material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they are made, not misleading or shall, at the time of the Special Meeting
(as hereinafter defined) or at the Effective Time, omit to state any material
fact necessary to correct any statement in any earlier communication in light of
the circumstances in which they are made, with respect to the solicitation of
proxies for the Special Meeting which shall have become false or misleading in
any material respect. The Schedule 14D-9, any other document required to be
filed by the Company with the SEC in connection with the Transactions and the
Proxy Statement will, when filed by the Company with the SEC, comply as to form
in all material respects with the applicable provisions of the Exchange Act and
the rules and regulations thereunder. Notwithstanding the foregoing, the Company
makes no representation or warranty with respect to the statements made in any
of the foregoing documents based on and in conformity with information supplied
by or on behalf of Parent or Purchaser specifically for inclusion or
incorporation by reference therein.

                  Section 3.7 Absence of Certain Changes or Events. Except as
set forth in the Company's SEC Documents or on Schedule 3.7 of the Company
Disclosure Schedule, since December 31, 1997, the Company and its Subsidiaries
have conducted their respective businesses only in the ordinary course, and
there has not been any Material Adverse Change in the Company and its
Subsidiaries, taken as a whole.

                  Section 3.8 Litigation. Except as set forth in the Company's
SEC Documents or on Schedule 3.8 of the Company Disclosure Schedule or to the
extent reserved for as reflected on the Company's financial statements for the
fiscal year ended December 31, 1997, there are (i) no suits, actions or
proceedings pending or, to the Knowledge of the Company, threatened against the
company or any of its Subsidiaries that, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on the Company, (ii) no
complaints, lawsuits, charges or other proceedings pending or, to the Knowledge
of the Company, threatened in any forum by or on behalf of any present or
former employee of the Com-

                                       18
   20
pany or any of its Subsidiaries, any applicant for employment or classes of the
foregoing alleging breach of any express or implied contract of employment, any
applicable Law governing employment or the termination thereof or other
discriminatory, wrongful or tortious conduct in connection with the employment
relationship that, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on the Company, (iii) no judgments,
decrees, injunctions or orders of any Governmental Entity or arbitrator
outstanding against the Company that, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on the Company and (iv)
no orders, writs, judgments, injunctions, decrees or determinations adverse to
the Trademarks or the Other Intellectual Property.

                  Section 3.9 Absence of Changes in Benefit Plans; SEC
Disclosure. Except as disclosed on Schedule 3.9 of the Company Disclosure
Schedule, there has not been any adoption or amendment by the Company or any of
its Subsidiaries or any ERISA Affiliate (as defined in Section 3.10 hereof) of
any Benefit Plan (as defined in Section 3.10 hereof) since December 31, 1997.
Except as disclosed on Schedule 3.9 of the Company Disclosure Schedule, neither
the Company nor any of its Subsidiaries has any formal plan or commitment to
create any additional Benefit Plan or modify or change any existing Benefit Plan
that would affect any employee or terminated employee of the Company or a
Subsidiary of the Company. All employment, consulting, severance, termination,
change in control or indemnification agreements, arrangements or understandings
between the Company or any of its Subsidiaries and any current or former officer
or director of the Company or any of its Subsidiaries which were required to be
disclosed in the Company's SEC Documents at the time such documents were filed
have been disclosed therein.

                  Section 3.10 Employee Benefits; ERISA. (a) Schedule 3.10 of
the Company Disclosure Schedule contains a true and complete list of each
material bonus, deferred compensation, incentive compensation, stock purchase,
stock option, employment, severance or termination pay, health insurance,
supplemental unemployment benefits, profit-sharing, pension, or retirement
plan, program, agreement or arrangement, and each other material (as determined
in the Company's reasonable good faith) employee benefit plan, program,
agreement or arrangement, other than a non-material fringe benefit plan,
sponsored, maintained or contributed to or required to be contributed to by the
Company or any of its Subsidiaries or by any trade or business, whether or not
incorporated (an "ERISA Affiliate"), that is a member of a "controlled group"
within the meaning of section 4001 of the Employee Retirement Income Security
Act of 1974, as amended, and the regulations promulgated thereun-

                                       19
   21
der ("ERISA") of which the Company or a Subsidiary is a member or which is under
"common control" within the meaning of Section 4001 of ERISA, with the Company
or a Subsidiary, for the benefit of any employee or terminated employee of the
Company, its Subsidiaries or any ERISA Affiliate, whether formal or informal
(the "Benefit Plans").

                           (b)  With respect to each Benefit Plan, the Company
has made available a true and complete copy thereof (including all amendments
thereto), as well as true and complete copies of the two most recent annual
reports, if required under ERISA, with respect thereto; the most recent Summary
Plan Description, together with each Summary of Material Modifications, if
required under ERISA with respect thereto; if the Benefit Plan is funded through
a trust or any third party funding vehicle, the trust or other funding agreement
(including all amendments thereto) and the latest financial statements thereof;
and the most recent determination letter received from the Internal Revenue
Service with respect to each Benefit Plan that is intended to be qualified under
section 401 of the Code.

                           (c) No material liability to the Pension Benefit
Guaranty Corporation ("PBGC") under Title IV of ERISA has been incurred by the
Company, its Subsidiaries or any ERISA Affiliate since the effective date of
ERISA that has not been satisfied in full, and no condition exists that presents
a material risk to the Company, its Subsidiaries or any ERISA Affiliate of
incurring a liability under such Title, other than liability for premiums due
the PBGC (which premiums have been paid when due). Each Benefit Plan has been
operated and administered in all respects in accordance with its terms and
applicable Law, including but not limited to ERISA and the Code, except for such
noncompliance which would not reasonably be expected to have a Material Adverse
Effect on the Company.

                           (d) No Benefit Plan is subject to Section 302 of the
Code or Title IV of ERISA.

                           (e)  Neither the Company, nor any Subsidiary of the
Company, nor any trust created thereunder, nor, to the Knowledge of the Company,
any trustee or administrator thereof has engaged in a transaction in connection
with which the Company or any Subsidiary of the Company, any such trust, or any
trustee or administrator thereof, or any party dealing with any Benefit Plan or
any such trust could be subject to either a civil penalty assessed pursuant to
section 409 or 502(i) of ERISA or a tax imposed pursuant to section 4975 or 4976
of the Code and which assessment or imposition would have a Material Adverse
Effect on the Company.


                                       20
   22
                           (f) All Benefit Plans that are subject to the laws of
any jurisdiction outside the United States are in material compliance with such
applicable laws, including relevant tax laws, and the requirements of any trust
deed under which they are established, except for such non-compliance which
would not reasonably be expected to have a Material Adverse Effect on the
Company.

                           (g) Each Benefit Plan which is intended to be
"qualified" within the meaning of section 401(a) of the Code is so qualified and
the trusts maintained thereunder are exempt from taxation under section 501(a)
of the Code.

                           (h)  Except as set forth on Schedule 3.10 of the
Company Disclosure Schedule, no Benefit Plan that is subject to the laws of any
jurisdiction within the United States provides health, death or medical benefits
(whether or not insured) with respect to current or former employees of the
Company or its Subsidiaries beyond their retirement or other termination of
employment (other than (a) coverage mandated by applicable Law or (b) benefits
the full cost of which is borne by the current or former employee (or his
beneficiary)).

                           (i)  Except as set forth on Schedule 3.10 of the
Company Disclosure Schedule, the consummation of the Transactions, alone, will
not (a) entitle any current or former employee or officer of the Company or any
Subsidiary to severance pay, unemployment compensation or any other payment, (b)
accelerate the time of payment or vesting, or increase the amount of
compensation or benefits due any such employee or officer or (c) require the
Company or any ERISA Affiliate to fund or make any payments to any trust or
other funding vehicle in respect of any Benefit Plan.

                           (j)  There are no pending, anticipated or, to the
Knowledge of the Company, threatened claims by or on behalf of any Benefit Plan,
by any employee or beneficiary covered under any such Benefit Plan, or
otherwise involving any such Benefit Plan (other than routine claims for
benefits) which would result in a Material Adverse Effect on the Company.


                  Section 3.11 Taxes.  Except as set forth on Schedule 3.11 of
the Company Disclosure Schedule:

                  (a) Each of the Company and each of its Subsidiaries has duly
and timely filed (or has had duly and timely filed on its behalf) all federal,
state and local


                                       21
   23
income Tax Returns and all other material Tax Returns required to be filed by
it, and all such Tax Returns are true, complete and correct in all material
respects. Each of the Company and each of its Subsidiaries has either paid (or
has had paid on its behalf) all Taxes due and owing by them, or the most recent
financial statements contained in the Company's SEC Documents reflect adequate
reserves in accordance with generally accepted accounting principles for all
Taxes not yet paid, except as would not, individually or in the aggregate, have
a Material Adverse Effect on the Company and its Subsidiaries taken as a whole.

                  (b) Each of the Company and each of its Subsidiaries has
complied in all material respects with all applicable Laws relating to the
payment and withholding of Taxes (including, without limitation, the
withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar
provisions under any applicable foreign Laws) and have, within the time and in
the manner prescribed by applicable Laws, withheld from employee wages and paid
over to the proper Governmental Entity all material amounts required to be so
withheld and paid over under all applicable Laws.

                  (c) (i) No material deficiencies for any Taxes have been
threatened, proposed, asserted or assessed (either in writing or orally) to the
Knowledge of the Company against the Company or any of its Subsidiaries which
have not been fully paid or finally settled, (ii) no Governmental Entity is
conducting or has proposed in writing to conduct an audit with respect to Taxes
or any Tax Returns of the Company or any of its Subsidiaries, (iii) no extension
or waiver of the statute of limitations with respect to Taxes or any Tax Return
has been granted by the Company or any of its Subsidiaries, which remains in
effect, (iv) neither the Company nor any of its Subsidiaries is a party to any
agreement or arrangement to allocate, share or indemnify another party for
Taxes, (v) there are no material Liens for Taxes upon the assets of the Company
or any of its Subsidiaries, except for Liens for Taxes not yet due, (vi) no
jurisdiction where either the Company or any of its Subsidiaries does not file a
Tax Return has asserted or otherwise made a claim that the Company or any of its
Subsidiaries is required to file a Tax Return for such jurisdiction, except as
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company and its Subsidiaries taken as a whole, (vii) neither the Company nor
any of its Subsidiaries has agreed to make, or is required to make, any
adjustment under Section 481(a) of the Code (or comparable provision under
state, local or foreign Tax laws) by reason of a change in accounting method or
otherwise and the Company and each of its Subsidiaries do not have knowledge
that the Internal Revenue Service has proposed any such adjustment or change in
accounting method, (viii) neither the


                                       22
   24
Company nor any of its Subsidiaries is or has been a member of an affiliated
group (within the meaning of Section 1504(a) of the Code) filing a consolidated
return for federal income tax purposes (or a group filing consolidated, combined
or unitary income tax returns under comparable provisions of state, local or
foreign laws) for any taxable period beginning on or after January 1, 1994,
other than a group the common parent of which is the Company, (ix) neither the
Company nor any of its Subsidiaries has filed a consent pursuant to Section
341(f) of the Code (or any predecessor provision) or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
such term is defined in Section 341(f)(4) of the Code) owned by the Company or
any of its Subsidiaries, (x) the Company has filed, as a common parent
corporation of an affiliated group (within the meaning of Section 1504(a) of the
Code) a consolidated return for Federal income tax purposes on behalf of such
affiliated group and (xii) no power of attorney has been granted by or with
respect to the Company or any of its Subsidiaries with respect to any matter
relating to Taxes which remains in force.

                  (d) Schedule 3.11(d) of the Company Disclosure Schedule sets
forth a list of the Company's income Tax Returns for taxable years or periods
for which the statute of limitations has not expired.

                  Section 3.12  No Nondeductible Payments.

                  (a) Except as set forth on Schedule 3.12 of the Company
Disclosure Schedule, no amounts payable as a result of the Transactions under
the Benefit Plans or any other plans or arrangements will be nondeductible by
reason of Section 280G of the Code.

                  (b) Except as set forth on Schedule 3.12 of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to any contract, agreement or other arrangement which would result in the
payment of amounts prior to the Effective Time that will be nondeductible by
reason of Section 162(m) of the Code.


                                       23
   25
                  Section 3.13  Compliance with Applicable Laws.

                  Except as set forth on Schedule 3.13 of the Company Disclosure
Schedule:

                  (a) The Company and each of its Subsidiaries have complied and
are presently complying in all material respects with all applicable Laws, and
neither the Company nor any of its Subsidiaries has received notification of any
asserted present or past failure to so comply, except, in each case, such
non-compliance that would not be reasonably expected to (x) result in a Material
Adverse Effect on the Company or (y) materially impair the ability of the
parties hereto to consummate the Transactions.

                  (b) Except as would not, individually or in the aggregate,
have a Material Adverse Effect on the Company or its Subsidiaries taken as a
whole, each of the Company and its Subsidiaries has in effect, or has timely
filed applications for, all material Permits necessary for it to own, lease or
operate its properties and assets and to carry on its business substantially as
now conducted and there are no appeals nor any other actions pending to revoke
any such Permits, and there has occurred no material default or violation under
any such Permits.

                  (c) Each of the Company and its Subsidiaries is, and has been,
and each of the Company's former Subsidiaries, while a Subsidiary of the
Company, was in compliance in all material respects with all applicable
Environmental Laws (and Permits issued thereunder), and there are no
circumstances or conditions that would be reasonably likely to prevent or
interfere with material compliance by the Company or its Subsidiaries in the
future with Environmental Laws (or Permits issued thereunder).

                  (d) Neither the Company nor any Subsidiary of the Company has
received any material written claim, demand, notice, complaint, court order,
administrative order or request for information from any Governmental Entity or
private party, alleging violation of, or asserting any noncompliance with or
liability under or potential liability under, any Environmental Laws, except for
matters which are no longer threatened or pending or for which the Company or
its Subsidiaries are not subject to further requirements pursuant to an
administrative or court order, judgment or settlement agreement.



                                       24
   26
                  (e) During the period of ownership or operation by the Company
and its Subsidiaries of any of their respective current or previously owned or
leased properties, there have been no Releases of Hazardous Material in, on,
under or affecting such properties at concentrations requiring reporting,
investigation, or remediation under Environmental Laws or which would otherwise
pose a significant threat to human health or the environment. None of the
Company or its Subsidiaries have disposed of any Hazardous Material or any other
substance at other properties, in a manner that has led, or could reasonably be
anticipated to lead, to a Release that could have a Material Adverse Effect on
the Company and its Subsidiaries taken as a whole. Prior to the period of
ownership or operation by the Company and its Subsidiaries of any of their
respective current or previously owned or leased proper ties, to the Knowledge
of the Company, no Hazardous Material was disposed of at such current or
previously owned or leased properties, and there were no Releases of Hazardous
Material in, on, under or affecting any such property, except for disposal or
Releases that would not require investigation or remediation under Environmental
Laws and do not pose a significant threat to human health or the environment.

                  (f) Except for leases and credit agreements entered into in
the ordinary course of business, as to which no notice of a claim for indemnity
or reimbursement has been received and is outstanding by the Company, neither
the Company nor any of its Subsidiaries has entered into any agreement that may
require it to pay to, reimburse, guarantee, pledge, defend, indemnify, or hold
harmless any Person for or against any Environmental Liabilities and Costs.

                  (g) Neither the Company nor any of its Subsidiaries has
treated, stored or disposed of "hazardous waste", as that term is defined in the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.,
analogous state Laws, or the regulations promulgated thereunder, such that the
Company or any of its Subsidiaries would be required to obtain a permit (as
compared to a registration or identification number) under said Laws for such
treatment, storage or disposal.

                  (h) The Company has provided to Parent true and correct copies
of all environmental studies and reports in its possession or in the possession
of its representative, agents or consultants, prepared within the last five
years, relating to the environmental condition of the Company's and its
Subsidiaries' currently owned or leased properties, including, but not limited
to, the extent of any on-site contamination at any of such properties, results
of investigations at such properties, remedial action plans for such properties,
and asbestos surveys.



                                       25
   27
                  Section  3.14  Intellectual Property.

                  (a) (i) Except as set forth on Schedule 3.14(a)(i) of the
Company Disclosure Schedule, the Company or one of its Subsidiaries is the sole
and exclusive owner of, or has the valid right to use and enforce, the
Trademarks and Internet domain names, free and clear of all Liens. Schedule
3.14(a)(i) of the Company Disclosure Schedule sets forth a complete and accurate
list of all such U.S., state and foreign Trademark registrations and
applications and Internet domain names, registrations and applications. Except
as set forth in Schedule 3.14(a)(i) of the Company Disclosure Schedule, the
Company or one of its Subsidiaries currently is listed in the records of the
appropriate United States, state or foreign agency as the sole owner of record
for each application and registration listed on Schedule 3.14(a)(i) of the
Company Disclosure Schedule that is currently owned by the Company or one of its
Subsidiaries.

                           (ii) Except as set forth on Schedule 3.14(a)(ii) of
the Company Disclosure Schedule, the Company is the sole and exclusive owner of,
or has the valid right to use and enforce the Other Intellectual Property, free
and clear of all Liens. Schedule 3.14(a)(ii) of the Company Disclosure Schedule
sets forth a complete and accurate list of all U.S. and foreign:

                           (1)      patents and patent applications, and

                           (2)      copyright registrations and applications.

                  Except as set forth on Schedule 3.14(a)(ii) of the Company
Disclosure Schedule, the Company or one of its Subsidiaries currently is listed
in the records of the appropriate United States, state or foreign agency as the
sole owner of record for each patent, patent application, copyright application,
and copyright registration listed on Schedule 3.14(a)(ii) of the Company
Disclosure Schedule that is currently owned by the Company or one of its
Subsidiaries.

                  (b) The patents, applications and registrations listed on
Schedules 3.14(a)(i) and 3.14(a)(ii) of the Company Disclosure Schedule are
valid and subsisting, in full force and effect in all material respects, and
have not been cancelled, expired or abandoned. There is no material pending,
existing or, to the Company's Knowledge, threatened, opposition, interference,
cancellation proceeding or other legal or governmental proceeding before any
court or registration authority in any jurisdiction against the foregoing. To
the Company's Knowledge, there is no


                                       26
   28
pending, existing or threatened, opposition, interference, cancellation
proceeding or other legal or governmental proceeding before any court or
registration authority in any jurisdiction against any of the Trademarks or any
of the Other Intellectual Property owned by the Company or its Subsidiaries.

                  (c) Schedule 3.14(c)(i) of the Company Disclosure Schedule
sets forth a complete and accurate list of all agreements granting to third
parties any right to use or practice any rights under any of the Trademarks or
any of the Other Intellectual Property owned by the Company. Schedule
3.14(c)(ii) of the Company Disclosure Schedule sets forth a complete and
accurate list of all agreements permitting the Company or its Subsidiaries to
use any third party's Trademarks or Other Intellectual Property (such
agreements, together with the agreements referenced on Schedule 3.14(c)(i) of
the Company Disclosure Schedule are collectively referred to herein as the
"Licenses"). The Licenses are valid and binding agreements of the Company or one
or more of its Subsidiaries, as applicable, enforceable in accordance with their
terms, and the Company and the Subsidiaries, and to the Company's Knowledge, the
other parties thereto, as applicable, are not in material breach or default
thereunder.

                  (d) The Company has taken reasonable measures to protect the
confidentiality of its material trade secrets, including requiring employees
having access thereto to execute written non-disclosure agreements. To the
Company's Knowledge, no trade secret or confidential know-how material to the
business of the Company or any of its Subsidiaries as currently operated has
been disclosed or authorized to be disclosed to any third party, other than
pursuant to a non-disclosure agreement that protects the Company's or such
Subsidiary's proprietary interests in and to such trade secrets and confidential
know-how.

                  (e) To the Company's Knowledge, except as set forth on
Schedule 3.14(e) of the Company Disclosure Schedule the conduct of the business
of the Company and each of its Subsidiaries does not infringe upon any
intellectual property right owned or controlled by any third party. Except as
set forth in the Company's SEC Documents or on Schedule 3.14(e) of the Company
Disclosure Schedule, there are no claims or suits pending or, to the Company's
Knowledge, threatened, and neither the Company nor any of its Subsidiaries has
received any written notice of a third party claim or suit:



                                       27
   29
                   (i)     alleging that the Company's or such Subsidiary's
                           activities or the conduct of its business infringes
                           upon or constitutes the unauthorized use of the
                           proprietary rights of any third party, or

                  (ii)     challenging the ownership, use, validity or
                           enforceability of the Trademarks or the Other
                           Intellectual Property owned or used by the Company or
                           its Subsidiaries.

                  (f) To the Company's Knowledge, except as set forth on
Schedule 3.14(f) of the Company Disclosure Schedule, no third party is
infringing upon any of the Trademarks or the Other Intellectual Property owned
by the Company or any of its Subsidiaries and, except as set forth on Schedule
3.14(f) of the Company Disclosure Schedule, no such claims have been made
against a third party by the Company or any of its Subsidiaries.

                  (g) Except as set forth on Schedule 3.14(g) of the Company
Disclosure Schedule, there are no settlements, consents, judgments or orders or
other agreements which restrict the Company's or any of its Subsidiaries' rights
to use any of the Trademarks or the Other Intellectual Property, and no
concurrent use or other agreements (aside from license and other like
agreements) which restrict the Company's or any of its Subsidiaries' rights to
use any of the Trademarks or the Other Intellectual Property owned by the
Company or any of its Subsidiaries.

                  (h) Except as set forth on Schedule 3.14(h) of the Company
Disclosure Schedule, the consummation of the Transactions will not result in the
loss or impairment of the Company's or any of its Subsidiaries' rights to own or
use any of the Trademarks or the Other Intellectual Property owned by or
licensed to the Company or its Subsidiaries nor will it require the consent of
any Governmental Authority or third party in respect of any such Trademarks or
the Other Intellectual Property.

                  Section 3.15 Properties. Each of the Company and each of its
Subsidiaries has sufficiently good and valid title to, or an adequate leasehold
interest in, its material properties and assets (including the Real Property) in
order to allow it to conduct, and continue to conduct, its business as currently
conducted in all material respects. Except as set forth on Schedule 3.15 of the
Company Disclosure Schedule such material tangible properties and assets
(including the Real Property) are sufficiently free of Liens to allow the
Company and each of its Subsidiaries to conduct, and continue to conduct, its
business as currently conducted in all material


                                       28
   30
respects and the consummation of the Transactions will not alter or impair such
ability in any material respect. Except as set forth on Schedule 3.15 of the
Company Disclosure Schedule the Company and/or its Subsidiaries have good,
valid, market able and fee simple title to all the Fee Property, free and clear
of all Liens other than Liens the enforcement of which is not reasonably likely
to have a material impact on the continued use (as currently used) or value of
such properties.

                  Section 3.16 Contracts. (a) Except as set forth in the
Company's SEC Documents or Schedule 3.16 of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries is a party to or bound by any
(i) "material contract" (as such term is defined in Item 601(b)(10) of
Regulation S-K of the SEC), (ii) non-competition agreement or any other
agreement or obligation which purports to limit in any respect the manner in
which, or the localities in which, all or any material portion of the business
of the Company and its Subsidiaries, taken as a whole, may be conducted, (iii)
transaction, agreement, arrangement or understanding with any Affiliate that
would be required to be disclosed under Item 404 of regulation S-K under the
Securities Act, (iv) voting or other agreement governing how any Shares shall be
voted, (v) material agreement with any stockholders of the Company, (vi)
acquisition, merger, asset purchase or sale agreement related to the acquisition
or sale of a business or (vii) contract or other agreement which would prohibit
or materially delay the consummation of the Merger or any of the Transactions
(all contracts of the type described in clauses (i) - (vii) being referred to
herein as "Company Material Contracts"). Each Company Material Contract is valid
and binding on the Company (or, to the extent a Subsidiary of the Company is a
party, such Subsidiary) and is in full force and effect. Neither the Company nor
any Subsidiary of the Company is in default or knows of, or has received notice
of, any violation or default under (nor, to the Knowledge of the Company, does
there exist any condition which with the passage of time or the giving of notice
or both would result in such a violation or default under) any Company Material
Contract; except as would not, individually or in the aggregate have a Material
Adverse Effect on the Company.

                  (b) Except as disclosed in the Company's SEC Documents or on
Schedule 3.16 of the Company Disclosure Schedule or as provided for in this
Agreement, neither the Company nor any of its Subsidiaries is a party to any
oral or written (i) employment agreements or consulting agreements (in excess of
$50,000 per year) not terminable on thirty (30) days' or less notice, (ii) union
or collective bargaining agreement, (iii) agreement with any executive officer
or other key employee of the Company or any of its Subsidiaries the benefits of
which are


                                       29
   31
contingent or vest, or the terms of which are materially altered, upon the
occurrence of a transaction involving the Company or any of its Subsidiaries of
the nature contemplated by this Agreement, or (iv) agreement with respect to any
executive officer or other key employee of the Company or any of its
Subsidiaries providing any term of employment or compensation guarantee.

                  Section 3.17 Labor Relations. Except to the extent set forth
in the Company's SEC Documents or Schedule 3.17 of the Company Disclosure
Schedule, there is no labor strike, slowdown, stoppage or lockout actually
pending, or, to the Knowledge of the Company, threatened against or affecting
the Company or any of its Subsidiaries, and neither the Company nor any of its
Subsidiaries is a party to or bound by any collective bargaining or similar
agreement with any labor organization.

                  Section 3.18 Products Liability; Recalls. (a) Except as set
forth in the Company's SEC Documents or on Schedule 3.18 of the Company
Disclosure Schedule, (i) there is no notice, demand, claim, action, suit,
inquiry, hearing, proceeding, notice of violation or investigation of a civil,
criminal or administrative nature (collectively, "Notices") pending, or to the
Company's Knowledge, threatened before any Governmental Entity in which a
Product is alleged to have a Defect or relating to or resulting from any alleged
failure to warn or from any alleged breach of express or implied warranties or
representations, nor, to the Company's Knowledge, is there any valid basis for
any such demand, claim, action, suit, inquiry, hearing, proceeding, notice of
violation or investigation; (ii) no demand, claim, action, suit, inquiry,
hearing, proceeding, notice of violation or investigation referred to in clause
(i) of this Section 3.18 would, if adversely determined, have, individually or
in the aggregate, a Material Adverse Effect on the Company; (iii) there has not
been any recall, rework, retrofit or post-sale general consumer warning since
January 1, 1993 (collectively, "Recalls") of any Product, or any investigation
or consideration of or decision made by any person or entity concerning whether
to undertake or not to undertake any Recalls and the Company has received no
Notices from any Governmental Entity or any other person with respect to the
foregoing; and (iv) to the Company's Knowledge, there are currently no material
defects in design, manufacturing, materials, or workmanship, including, without
limitation, any failure to warn, or any breach of express or implied warranties
or representations, which involve any Product that accounts for a material
portion of the Company's sales.

                  (b) Section 3.18 of the Company Disclosure Schedule sets forth
all Notices received by the Company or its Subsidiaries since January 1, 1996
and the Company's best estimate of the reserves provided therefor.


                                       30
   32
                  Section 3.19 Applicability of State Takeover Statutes. The
Section 203 Approval is valid and in full force and effect. Section 203 of the
DGCL will not apply to the Offer, the acquisition of Shares pursuant to the
Offer or the Merger. No other state takeover statute or similar statute or
regulation applies or purports to apply to the Offer, the Merger or the other
Transactions.

                  Section 3.20 Voting Requirements. In the event that Section
253 of the DGCL is inapplicable and unavailable to effectuate the Merger, the
affirmative vote of the holders of a majority of all the outstanding Shares
entitled to vote approving this Agreement at the Special Meeting is the only
vote of the holders of any class or series of the Company's capital stock
necessary to approve this Agreement and the Transactions.

                  Section 3.21 Brokers. No broker, investment banker, financial
advisor or other Person, other than Allen & Company Incorporated, the fees and
expenses of which will be paid by the Company, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the Transactions based upon arrangements made by or on behalf of the
Company. The Company has provided Parent true and correct copies of all
agreements between the Company and Allen & Company Incorporated, including,
without limitations, any fee arrangements.

                  Section 3.22 Opinion of Financial Advisor. The Company has
received the opinion of Allen & Company Incorporated, to the effect that, as of
the date of this Agreement, the consideration to be received in the Offer and
the Merger by the Company's stockholders is fair to the Company's stockholders
from a financial point of view, and a complete and correct signed copy of such
opinion has been, or promptly upon receipt thereof will be, delivered to Parent.
The Company has been authorized by Allen & Company Incorporated to permit the
inclusion of such opinion in its entirety in the Schedule 14D-9 and the Proxy
Statement, so long as such inclusion is in form and substance reasonably
satisfactory to Allen & Company Incorporated and its counsel.

                  Section 3.23 Year 2000.

                  Except as set forth on Schedule 3.23 of the Company Disclosure
Schedule or the Company's SEC Documents, or as would not have, individually or
in the aggregate, a Material Adverse Effect on the Company:



                                       31
   33
                  (a) all of the Computer Programs, computer firmware, computer
hardware (whether general or special purpose) and other similar or related items
of automated, computerized and/or software system(s) that are used or relied on
by the Company or by any of its Subsidiaries in the conduct of their respective
businesses will not malfunction, will not cease to function, will not generate
incorrect data, and will not provide incorrect results when processing,
providing, and/or receiving (i) date-related data into and between the twentieth
and twenty-first centuries and (ii) date-related data in connection with any
valid date in the twentieth and twenty-first centuries; and

                  (b) all of the products and services sold, licensed, rendered
or otherwise provided by the Company or by any of its Subsidiaries in the
conduct of their respective businesses will not malfunction, will not cease to
function, will not generate incorrect data and will not produce incorrect
results when processing, providing and/or receiving (i) date-related data into
and between the twentieth and twenty-first centuries and (ii) date-related data
in connection with any valid date in the twentieth and twenty-first centuries;
and neither the Company nor any of its Subsidiaries is or shall be subject to
claims or liabilities arising from their failure to do so; and

                  (c) neither the Company nor any of its Subsidiaries has made
other representations or warranties regarding the ability of any product or
service sold, licensed, rendered or otherwise provided by the Company or by any
of its Subsidiaries in the conduct of their respective businesses to operate
without malfunction, to operate without ceasing to function, to generate
correct data and to produce correct results when processing, providing and/or
receiving (i) date-related data into and between the twentieth and twenty-first
centuries and (ii) date-related data in connection with any valid date in the
twentieth and twenty-first centuries.

                  Section 3.24 Company Rights Agreement. The Company and its
Board of Directors have taken all action which may be necessary under the
Company Rights Agreement so that the Offer is deemed to be an "Approved
Transaction" (as defined in the Company Rights Agreement") and the execution and
delivery of this Agreement (and any amendments thereto by the parties hereto),
and the consummation of the Merger and the Transactions, will not cause (i)
Parent or Purchaser to constitute an "Acquiring Person" (as defined in the
Company Rights Agreement), (ii) a "Distribution Date," "Section 13 Event,"
"Triggering Event," or "Stock Acquisition Date" (each as defined in the Company
Rights Agreement) to occur or (iii) the Rights


                                       32
   34
(as defined in the Company Rights Agreement) to become exercisable pursuant to
Section 11(a)(ii) thereof or otherwise.

                  Section 3.25 Absence of Questionable Payments. To the
Company's Knowledge, neither the Company nor any of its Subsidiaries nor any
director, officer, agent, employee or other person acting on behalf of the
Company or any of its Subsidiaries, has used any corporate or other funds for
unlawful contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds in violation of
Section 30A of the Exchange Act. To the Company's Knowledge, neither the Company
nor any of its Subsidiaries nor any current director, officer, agent, employee
or other person acting on behalf of the Company or any of its Subsidiaries, has
accepted or received any unlawful contributions, payments, gifts, or
expenditures. To the Company's Knowledge, the Company and each of its
Subsidiaries which is required to file reports pursuant to Section 12 or 15(d)
of the Exchange Act is in compliance with the provisions of Section 13(b) of the
Exchange Act.


                                   ARTICLE IV

                        REPRESENTATIONS AND WARRANTIES OF
                              PARENT AND PURCHASER

                  Parent and Purchaser represent and warrant to the Company as
follows:

                  Section 4.1 Organization, Standing and Corporate Power. Each
of Parent and Purchaser is a corporation duly organized, validly existing and in
good standing under the Laws of the jurisdiction in which each is incorporated
and has the requisite corporate power and authority to carry on its business as
now being conducted. Each of Parent and Purchaser is duly qualified or licensed
to do business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed (individually or in the aggregate)
would not have a Material Adverse Effect on Parent.



                                       33
   35
                  Section 4.2 Authority; Noncontravention. Parent and Purchaser
have the requisite corporate power and authority to enter into this Agreement
and to consummate the Transactions. The execution and delivery of this Agreement
by Parent and Purchaser and the consummation by Parent and Purchaser of the
Transactions have been duly authorized by all necessary corporate action on the
part of Parent and Purchaser, as applicable. This Agreement has been duly
executed and delivered by Parent and Purchaser and, assuming this Agreement
constitutes the valid and binding obligation of the Company, constitutes a valid
and binding obligation of each such party, enforceable against each such party
in accordance with its terms, except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or
hereafter in effect relating to creditors' rights generally and (ii) the remedy
of specific performance and injunctive relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. The execution and delivery of this Agreement do not, and the
consummation of the Transactions will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any lien upon any of the material properties or assets of Parent under, (i)
the certificate of incorporation or by-laws of Parent or Purchaser, (ii) any
loan or credit agreement, note, bond, indenture, lease or other agreement,
instrument or Permit applicable to the Company or any of its Significant
Subsidiaries or their respective properties or assets, (iii) any Law applicable
to Parent or Purchaser or their respective properties or assets, other than, in
the case of clause (ii) and (iii), any such conflicts, violations, defaults,
rights or Liens that individually or in the aggregate would not (x) impair in
any material respect the ability of Parent and Purchaser to perform their
respective obligations under this Agreement or (y) prevent or impede the
consummation of any of the Transactions. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity or any other Person is required by Parent or Purchaser in connection with
the execution and delivery of this Agreement or the consummation by Parent or
Purchaser, as the case may be, of any of the Transactions, except for (i) the
filings, permits, authorizations, consents and approvals set forth in Schedule
4.2 of the disclosure schedule delivered by Parent to the Company at or prior to
the execution of this Agreement (the "Parent Disclosure Schedule"), or as may be
required under, and other applicable requirements of, the Securities Act, the
Exchange Act, the HSR Act, any applicable state securities or "blue sky" Laws
and the DGCL, and (ii) such other consents, approvals, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the


                                       34
   36
aggregate, prevent the consummation of or materially impair the ability of
Parent or Purchaser to consummate the Transactions.

                  Section 4.3 Proxy Statement; Offer Documents. The Offer
Documents and any other documents to be filed by Parent with the SEC or any
other Government Entity in connection with the Merger and the other Transactions
will (in the case of the Offer Documents and any such other documents filed with
the SEC under the Securities Act or the Exchange Act) comply as to form in all
material respects with the applicable provisions of the Exchange Act and the
Securities Act, respectively, and the rules and regulations thereunder. None of
the Offer Documents, any other documents required to be filed by Parent or
Purchaser with the SEC in connection with the Transactions, nor any information
supplied by Parent or Purchaser in writing for inclusion in the Schedule 14D-9
shall, at the respective times the Offer Documents or any amendments and
supplements thereto, any such other filings by Parent or Purchaser or the
Schedule 14D-9 are filed with SEC or are first published, sent or given to
stockholders of the Company, as the case may be, or, in the case of the Proxy
Statement, on the date the Proxy Statement is first mailed to stockholders of
the Company, contain any untrue statement of a material fact, or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in the light of the circumstances under which they
are made, not misleading or shall, at the time of the Special Meeting (as
defined in Section 5.3) or at the Effective Time, omit to state any material
fact necessary to correct any statement in any earlier communication in light of
the circumstances in which they are made, with respect to the solicitation of
proxies for the Special Meeting which shall have become false or misleading in
any material respect. Notwithstanding the foregoing, neither Parent nor
Purchaser makes any representation or warranty with respect to the statements
made in any of the foregoing documents based on and in conformity with
information supplied by or on behalf of the Company specifically for inclusion
or incorporation by reference therein.

                  Section 4.4 Operations of Purchaser. Purchaser is a wholly
owned Subsidiary of Parent and was formed solely for the purpose of engaging in
the Transactions and has not engaged in any business activities or conducted any
operations other than in connection with the Transactions.



                                       35
   37
                  Section 4.5 Brokers. No broker, investment banker, financial
advisor or other Person is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the Transactions
based upon arrangements made by or on behalf of Parent or Purchaser.

                  Section 4.6  Financing.

                  (a) Parent or a wholly owned subsidiary thereof owns all of
the outstanding capital stock of Purchaser. At all times prior to the Effective
Time, no person other than Parent has owned, or will own, any of the outstanding
capital stock of Purchaser. Purchaser has not incurred, and prior to the
Effective Time will not incur, directly or though any Subsidiary, any
liabilities or obligations for borrowed money or otherwise, except incidental
liabilities or obligations not for borrowed money incurred in connection with
its organization and except in connection with the Transactions.

                  (b) Parent and Purchaser have, and, at all times between the
date hereof and the payment for Shares validly tendered and not withdrawn in the
Offer or converted in the Merger, will have sufficient financial capacity to
accept for payment, purchase and pay for all of the Shares validly tendered and
not withdrawn pursuant to the Offer, and will have sufficient financial capacity
to pay the Merger Consideration payable in the Merger.


                                    ARTICLE V

                                    COVENANTS

                  Section 5.1 Interim Operations of the Company. After the date
hereof and prior to the time the designees of Parent have been elected or
appointed to, and shall constitute a majority of, the Board of Directors of the
Company pursuant to Section 1.4 or the date, if any, on which this Agreement is
earlier terminated pursuant to Section 7.1, and except (i) as expressly
contemplated by this Agreement, (ii) as set forth on Schedule 5.1 of the Company
Disclosure Schedule or (iii) as agreed in writing by Parent:

                           (a) the Company shall and shall cause its
Subsidiaries to carry on their respective businesses in the ordinary course;



                                       36
   38
                           (b)  the Company shall and shall cause its
Subsidiaries to use all reasonable best efforts consistent with good business
judgment to preserve intact their current business organizations, keep available
the services of their current officers and key employees and preserve their
relationships consistent with past practice with desirable customers, suppliers,
licensors, licensees, distributors and others having business dealings with
them;

                           (c) neither the Company nor any of its Subsidiaries
shall, directly or indirectly, amend its certificate of incorporation or by-laws
or similar organizational documents;

                           (d)  Representatives of the Company and its
Subsidiaries shall confer at such times as Parent may reasonably request with
one or more Representatives of Parent to report material operational matters
and the general status of ongoing operations;

                           (e) neither the Company nor any of its Subsidiaries
shall: (i)(A) declare, set aside or pay any dividend or other distribution
payable in cash, stock or property with respect to the Company's capital stock
or that of its Subsidiaries, except that a wholly-owned Subsidiary of the
Company may declare and pay a dividend or make advances to its parent or the
Company or (B) redeem, purchase or otherwise acquire directly or indirectly any
of the Company's capital stock or that of its Subsidiaries; (ii) issue, sell,
pledge, dispose of or encumber any additional shares of, or securities
convertible into or exchangeable for, or options, warrants, calls, commitments
or rights of any kind to acquire, any shares of capital stock of any class of
the Company or its Subsidiaries, other than Shares issued upon the exercise of
Options outstanding on the date hereof in accordance with the Option Plans as in
effect on the date hereof or additional warrants issued in accordance with the
terms of the Warrants; or (iii) split, combine or reclassify the outstanding
capital stock of the Company or of any of the Subsidiaries of the Company;

                           (f)  neither the Company nor any of its Subsidiaries
shall enter into any agreement or arrangement with respect to the distribution
of any of the Company's products;

                           (g)  except as permitted by this Agreement, neither
the Company nor any of its Subsidiaries shall acquire or agree to acquire (A) by
merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
joint venture,


                                       37
   39
association or other business organization or division thereof (including
entities which are Subsidiaries of the Company or any of the Company's
Subsidiaries) or (B) any assets, including real estate, except purchases in the
ordinary course of business consistent with past practice;

                           (h)  neither the Company nor any of its Subsidiaries
shall make any new capital expenditure or expenditures in excess of $50,000
individually, or $500,000 in the aggregate, other than the specific capital
expenditures disclosed and set forth on Schedule 5.1 of the Company Disclosure
Schedule;

                           (i)  neither the Company nor any of its Subsidiaries
shall, except in the ordinary course of business and except as otherwise
permitted by this Agreement, amend or terminate any Company Material Contract
where such amendment or termination would have a Material Adverse Affect on the
Company, or waive, release or assign any material rights or claims;

                           (j)  neither the Company nor any of its Subsidiaries
shall transfer, lease, license, sell, mortgage, pledge, dispose of or encumber
any property or assets other than in the ordinary course of business and
consistent with past practice;

                           (k)  neither the Company nor any of its Subsidiaries
shall: (i) enter into any employment or severance agreement with or grant any
severance or termination pay to any officer, director or key employee of the
Company or any its Subsidiaries; or (ii) hire or agree to hire any new or
additional key employees or officers;

                           (l)  neither the Company nor any of its Subsidiaries
shall, except as required to comply with applicable Law or expressly provided in
this Agreement, (A) adopt, enter into, terminate, amend or increase the amount
or accelerate the payment or vesting of any benefit or award or amount payable
under any Benefit Plan or other arrangement for the current or future benefit or
welfare of any director, officer or current or former employee, except to the
extent necessary to coordinate any such Benefit Plans with the terms of this
Agreement, (B) increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any director, officer or employee provided that employees with
annual compensation of $100,000 or less may receive increases of not more than
5.0% on the anniversary date of their employment in the ordinary course of
business and consistent with past practice, (C) pay any benefit not provided for
under, or contemplated by, any Benefit Plan, (D)


                                       38
   40
grant any awards under any bonus, incentive, performance or other compensation
plan or arrangement or Benefit Plan (including the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any Benefit Plans
or agreements or awards made thereunder) or (E) take any action to fund or in
any other way secure the payment of compensation or benefits under any employee
plan, agreement, contract or arrangement or Benefit Plan;

                           (m)  neither the Company nor any of its Subsidiaries
shall: (i) incur or assume any long-term debt, or except in the ordinary course
of business, incur or assume any short-term indebtedness in amounts not
consistent with past practice; (ii) incur or modify any material indebtedness or
other liability except as set forth on Schedule 5.1 of the Company Disclosure
Schedule; (iii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other Person, except in the ordinary course of business and consistent with
past practice; (iv) make any loans, advances or capital contributions to, or
investments in, any other Person (other than to wholly owned Subsidiaries of the
Company or customary loans or advances to employees in the ordinary course of
business and consistent with past practice); or (v) settle any material claims
other than in the ordinary course of business, in accordance with past practice
and without admission of liability;

                           (n)  neither the Company nor any of its Subsidiaries
shall change any of the accounting methods used by it unless required by GAAP,
the SEC or Law;

                           (o)  neither the Company nor any of its Subsidiaries
shall make any Tax election, amend any material Tax Return, make a claim for any
material Tax Refund or settle or compromise any material Tax liability (whether
with respect to amount or timing);

                           (p)  neither the Company nor any of its Subsidiaries
shall pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of any such claims, liabilities or
obligations, in the ordinary course of business and consistent with past
practice, of claims, liabilities or obligations reflected or reserved against
in, or contemplated by, the consolidated financial statements (or the notes
thereto) of the Company and its consolidated Subsidiaries; or, except in the
ordinary course of business consistent with past practice, waive the


                                       39
   41
benefits of, or agree to modify in any manner, any confidentiality, standstill
or similar agreement to which the Company or any of its Subsidiaries is a party;

                           (q)  neither the Company nor any of its Subsidiaries
shall (by action or inaction) amend, renew, terminate or cause to be extended
any lease, agreement or arrangement relating to any of the Leased Properties or
enter into any lease, agreement or arrangement with respect to any real
property;

                           (r)  neither the Company nor any of its Subsidiaries
will enter into an agreement, contract, commitment or arrangement to do any of
the foregoing, or to authorize, recommend, propose or announce an intention to
do any of the foregoing; and

                           (s)  neither the Company nor any of its Subsidiaries
shall take any action that would result in (i) any of its representations and
warranties set forth in this Agreement that are qualified as to materiality
becoming untrue, (ii) any of such representations and warranties that are not so
qualified becoming untrue in any material respect or (iii) any of the conditions
to the Offer set forth in Annex A not being satisfied (subject to the Company's
right to take action specifically permitted by Section 5.5).

                  Section 5.2 Access; Confidentiality. The Company shall (and
shall cause each of its Subsidiaries to) afford to the Representatives of Parent
reasonable access on reasonable prior notice during normal business hours,
throughout the period prior to the earlier of the Effective Time or the
termination of this Agreement, to all of its properties, offices, employees,
contracts, commitments, books and records (including but not limited to Tax
Returns) and any report, schedule or other document filed or received by it
pursuant to the requirements of federal or state securities laws and shall (and
shall cause each of its Subsidiaries to) furnish promptly to Parent such
additional financial and operating data and other information as to its and its
Subsidiaries' respective businesses and properties as Parent may from time to
time reasonably request. Parent and Purchaser will make all reasonable efforts
to minimize any disruption to the businesses of the Company and its Subsidiaries
which may result from the requests for data and information hereunder and
pursuant to Section 5.1(d) hereof. Parent agrees that it will not, and will
cause its Representatives not to, use any information obtained pursuant to this
Section 5.2 for any purpose unrelated to the Transactions. Except as otherwise
agreed to by the Company, unless and until Parent and Purchaser shall have
purchased Shares pursuant to the Offer, Parent will be bound by the terms of a
confidentiality agreement (the


                                       40
   42
"Confidentiality Agreement"), dated as of April 2, 1998 and amended as of June
23, 1998, by and between Parent and the Company. Except as otherwise agreed to
by Parent or Purchaser, unless and until Parent and Purchaser shall have
purchased Shares pursuant to the Offer, the Company will be bound by the terms
of the Confidentiality Agreement.

                  Section 5.3.  Special Meeting, Proxy Statement.

                           (a) If required by applicable Law in order to
consummate the Merger, the Company, acting through its Board of Directors,
shall, in accordance with applicable Law, its Certificate of Incorporation and
By-laws:

                           (i) as promptly as practicable following the
         acceptance for payment and purchase of Shares by Purchaser pursuant to
         the Offer duly call, give notice of, convene and hold a special meeting
         of its stockholders (the "Special Meeting") for the purposes of
         considering and taking action upon the approval of the Merger and the
         approval and adoption of this Agreement;

                           (ii) prepare and file with the SEC a preliminary
         proxy or information statement relating to the Merger and this
         Agreement and (x) obtain and furnish the information required to be
         included by the SEC in the Proxy Statement (as hereinafter defined)
         and, after consultation with Parent, respond promptly to any comments
         made by the SEC with respect to the preliminary proxy or information
         statement and cause a definitive proxy or information statement,
         including any amendment or supplement thereto (the "Proxy Statement")
         to be mailed to its stockholders at the earliest practicable date;
         provided that no amendment or supplement to the Proxy Statement will be
         made by the Company without consultation with Parent and its counsel
         and (y) use its reasonable best efforts to obtain the necessary
         approvals of the Merger and this Agreement by its stockholders; and

                           (iii) unless this Agreement has been terminated in
         accordance with Article VII, subject to its rights pursuant to Section
         5.5, include in the Proxy Statement the recommendation of its Board of
         Directors that stockholders of the Company vote in favor of the
         approval of the Merger and the approval and adoption of this Agreement.



                                       41
   43
                           (b) Parent shall vote, or cause to be voted, all of
the Shares then owned by it, Purchaser or any of its other Subsidiaries in favor
of the approval and adoption of this Agreement.

                            (c) Notwithstanding anything else herein or in this
Section 5.3, in the event that Parent, Purchaser and any other Subsidiaries of
Parent shall acquire in the aggregate a number of the outstanding shares of each
class of capital stock of the Company, pursuant to the Offer or otherwise,
sufficient to enable Purchaser or the Company to cause the Merger to become
effective under applicable Law without a meeting of stockholders of the Company,
the parties hereto shall, at the request of Parent and subject to Article VI,
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after the consummation of such acquisition,
without a meeting of stockholders of the Company, in accordance with Section
253 of the DGCL.

                  Section 5.4.  Reasonable Efforts; Notification.

                           (a)  Upon the terms and subject to the conditions
hereof, each of the parties hereto will (i) make promptly its respective
filings, and thereafter make any other required submissions, under the HSR Act,
the Securities Act and the Exchange Act, with respect to the Transactions and
(ii) use all reasonable efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable to satisfy the conditions to the Offer and the Merger and to
consummate and make effective the Transactions. In case at any Time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and directors of each party to
this Agreement will use all reasonable efforts to take all such action.

                           (b) Parties hereby agree that they will, and they
will cause each of their respective affiliates to, use all reasonable efforts to
obtain any government clearances required for completion of the Offer and the
Merger (including through compliance with the HSR Act), to respond to any
government requests for information, and to contest and resist any action,
including any legislative, administrative or judicial action, and to have
vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order (whether temporary, preliminary or permanent) (an "Order") that
restricts, prevents or prohibits the consummation of the Merger, including by
vigorously pursuing all available avenues of administrative and judicial appeal.
Notwithstanding the foregoing, in no event shall the Parent, Purchaser or the
Surviving Corporation be required to divest any of their respective


                                       42
   44
assets or agree to any restriction in their businesses as currently or proposed
to be conducted. The parties hereto will consult and cooperate with one another,
and consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, memoranda, briefs, arguments, opinions and
proposals made or submitted by or on behalf of any party hereto in connection
with proceedings under or relating to the HSR Act or any other federal, state
or foreign antitrust or fair trade law.

                           (c)      Each of the Company, Parent and Purchaser
shall give prompt notice to the other of (i) any of their representations or
warranties contained in this Agreement becoming untrue or inaccurate in any
respect (including in the case of representations or warranties receiving
knowledge of any fact, event or circumstance which may cause any representation
qualified as to the knowledge to be or become untrue or inaccurate in any
respect) or (ii) the failure by them to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied
by them under this Agreement; provided, however, that no such notification shall
affect the representations, warranties, covenants or agreements of the parties
or the conditions to the obligations of the parties under this Agreement.

                  Section 5.5 No Solicitation. (a) The Company shall not, nor
shall it permit any of its Subsidiaries to, nor shall it authorize (and shall
use its best efforts not to permit) any officer, director or employee of, or any
investment banker, attorney or other advisor or representative of, the Company
or any of its Subsidiaries to, (i) solicit or initiate, or encourage, directly
or indirectly, any inquiries or the submission of, any Takeover Proposal, (ii)
participate in any discussions or negotiations regarding, or furnish to any
Person any information or data with respect to or access to the properties of,
or take any other action to knowingly facilitate the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Takeover Proposal or
(iii) enter into any agreement with respect to any Takeover Proposal or approve
or resolve to approve any Takeover Proposal; provided, that nothing contained in
this Section 5.5 or any other provision hereof shall prohibit the Company or the
Company's Board of Directors from (i) taking and disclosing to the Company's
stockholders a position with respect to a tender or exchange offer by a third
party pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act, or
(ii) making such disclosure to the Company's stockholders as, in the good faith
judgment of the Company's Board of Directors, after receiving advice from
outside counsel, is required under, or is necessary to comply with, applicable
Law, provided that the Company may not, except as permitted by Section 5.5(b),
withdraw or modify, or propose to withdraw or modify, its position with respect
to the Offer or


                                       43
   45
the Merger or approve or recommend, or propose to approve or recommend any
Takeover Proposal, or enter into any agreement with respect to any Takeover
Proposal. Upon execution of this Agreement, the Company will immediately cease
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. Notwithstanding the foregoing,
prior to the time of acceptance of Shares for payment pursuant to the Offer, the
Company may withdraw or modify its recommendation of the Offer, may furnish
information concerning its business, properties or assets to any Person or group
and may negotiate and participate in discussions and negotiations with such
Person or group concerning a Takeover Proposal if:

                           (x) such Person or group has submitted a Superior
         Proposal; and


                           (y) in the opinion of the Company's Board of
         Directors such action is required to discharge the Board's fiduciary
         duties to the Company's stockholders under applicable Law, determined
         only after receipt of advice from independent legal counsel to the
         Company that the failure to provide such information or access or to
         engage in such discussions or negotiations may cause the Company's
         Board of Directors to violate its fiduciary duties to the Company's
         stockholders under applicable Law.

The Company will promptly (but in no case later than 24 hours) notify Parent of
the existence of any proposal, discussion, negotiation or inquiry received by
the Company regarding any Takeover Proposal, and the Company will promptly
communicate to Parent the terms of any proposal, discussion, negotiation or
inquiry which it may receive regarding any Takeover Proposal (and will promptly
provide to Parent copies of any written materials received by the Company in
connection with such proposal, discussion, negotiation or inquiry) and the
identity of the party making such proposal or inquiry or engaging in such
discussion or negotiation. The Company will promptly provide to Parent any
non-public information concerning the Company provided to any other Person in
connection with any Takeover Proposal which was not previously provided to
Parent. The Company will keep Parent informed of the status and details of any
such Takeover Proposal and of any amendments or proposed amendments to any
Takeover Proposal and will promptly (but in no case later than 24 hours) notify
Parent of any determination by the Company's Board of Directors that a Superior
Proposal has been made.



                                       44
   46
                           (b)  Except as set forth in this Section 5.5(b),
neither the Board of Directors of the Company nor any committee thereof shall
(i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to
Parent or Purchaser, the approval or recommendation by the Board of Directors of
the Company or any such committee of the Offer, this Agreement or the Merger,
(ii) approve or recommend, or propose to approve or recommend, any Takeover
Proposal or (iii) enter into any agreement with respect to any Takeover
Proposal. Notwithstanding the foregoing, subject to compliance with the
provisions of this Section 5.5, prior to the time of acceptance for payment of
Shares pursuant to the Offer, the Company's Board of Directors may withdraw or
modify its approval or recommendation of the Offer, this Agreement or the
Merger, approve or recommend a Superior Proposal, or enter into an agreement
with respect to a Superior Proposal, in each case at any time after the third
business day following Parent's receipt of written notice (including by
facsimile) from the Company advising Parent that the Board of Directors of the
Company has received a Superior Proposal which it intends to accept, specifying
the material terms and conditions of such Superior Proposal and identifying the
Person making such Superior Proposal, but only if the Company shall have caused
its financial and legal advisors to negotiate with Parent to make such
adjustments to the terms and conditions of this Agreement as would enable the
Company to proceed with the Transactions on such adjusted terms.

                  Section 5.6 Publicity. Except as required by Law or as
permitted by Section 5.5, so long as this Agreement is in effect, neither the
Company, Parent nor any of their respective affiliates shall issue or cause the
publication of any press release or other announcement with respect to the
Merger, this Agreement or the other Transactions without the prior consultation
of the other party.

                  Section 5.7 Transfer Taxes. All liability for transfer or
other similar Taxes arising out of or related to the Offer and the Merger or the
consummation of any other Transaction, and due to the property owned by the
Company or any of its Subsidiaries or affiliates ("Transfer Taxes") shall be
borne by the Company, and the Company shall file or cause to be filed all Tax
Returns relating to such Transfer Taxes which are due.

                  Section 5.8 State Takeover Laws. Notwithstanding any other
provision in this Agreement, in no event shall the Section 203 Approval be
withdrawn, revoked or modified by the Board of Directors of the Company. If any
state takeover statute other than Section 203 of the DGCL becomes or is deemed
to become applicable to the Company Stockholder Agreement, the Offer, the
acquisi-

                                       45
   47
tion of Shares pursuant to the Offer or the Merger, the Company shall take all
reasonable action necessary to render such statute inapplicable to all of the
foregoing.

                  Section 5.9  Indemnification and Insurance.

                  (a) Parent, and from and after the Effective Time, the
Surviving Corporation, shall indemnify, defend and hold harmless each person who
is now, or has been at any prior time to the date hereof or who becomes prior to
the Effective Time, an officer, director, employee or agent of the Company or
any of its Subsidiaries (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses (including reasonable attorneys' fees and expenses),
liabilities or judgments or amounts of or in connection with any threatened or
actual claim, action, suit, proceeding or investigation based on or arising out
of the fact that such person is or was serving in such person's capacity as a
director, officer, employee or agent of the Company or any of its Subsidiaries,
whether pertaining to any matter existing or occurring at or prior to the
Effective Time or any acts or omissions occurring or existing at or prior to the
Effective Time and whether asserted or claimed prior to, or at or after, the
Effective Time ("Indemnified Liabilities"), including all Indemnified
Liabilities based on, or arising out of, or pertaining to this Agreement or the
Transactions, in each case to the fullest extent a corporation is permitted
under the DGCL and the Company's Certificate of Incorporation or By-Laws as
currently in effect to indemnify such persons (and the Company and the Surviving
Corporation, as the case may be, will pay expenses promptly after statements
thereof are received, to each Indemnified Party to the fullest extent permitted
by Delaware law, subject to delivery of the undertaking described below).
Without limiting the foregoing, in the event any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Party (whether
arising before or after the Effective Time), (i) such Indemnified Party may
retain counsel satisfactory to the Indemnified Party and reasonably satisfactory
to the Company (and reasonably satisfactory to the Surviving Corporation after
the Effective Time) and the Company (or after the Effective Time, the Surviving
Corporation) will pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements and supporting documentation thereof
are received; and (ii) the Company (or after the Effective Time, the Surviving
Corporation) will use all reasonable best efforts to assist in the vigorous
defense of any such matter, provided that neither the Company nor the Surviving
Corporation will be liable for any settlement effected without its prior written
consent which written consent will not unreasonably be withheld. Any Indemnified
Party, upon learning of any such claim, action, suit, proceeding or
investigation, will notify the Company (or after the Effective Time, the
Surviving Corporation) promptly (but the


                                       46
   48
failure so to notify will not relieve a party from any liability which it may
have under this Section 5.9 except to the extent such failure materially
prejudices such party's position with respect to such claims), and will deliver
to the Company (or after the Effective Time, the Surviving Corporation) the
undertaking contemplated by Section 145(e) of the DGCL. The Indemnified Parties
as a group may retain only one law firm (and one local counsel) to represent
them with respect to each such matter unless there is, under applicable
standards of professional conduct, an existing or potential conflict on any
significant issue between the positions of any two or more Indemnified Parties
in which case such additional counsel reasonably acceptable to the Indemnified
Parties, the Company or, after the Effective Time, the Surviving Corporation as
may be required may be retained by the Indemnified Parties at the cost and
expense of the company (or Surviving Corporation). Furthermore, the provisions
with respect to indemnification set forth in the Certificate of Incorporation
and By-Laws of the Surviving Corporation will not be amended following the
Effective Time in any way that would materially and adversely affect the rights
thereunder of individuals who at any time prior to the Effective Time were
directors, officers, employees or agents of the Company in respect of actions or
omissions occurring at or prior to the Effective Time.

                  (b) For a period of three years after the Effective Time,
Parent shall cause the Surviving Corporation to maintain in effect, if
available, directors' and officers' liability insurance covering those Persons
who are currently covered by the Company's directors' and officers' liability
insurance policy with respect to acts prior to the Effective Time (a copy of
which has been made available to Parent) on terms (including the amounts of
coverage and the amounts of deductibles, if any) that are no less favorable to
the terms now applicable to them under the Company's current policies; provided,
however, that in no event shall Parent or the Surviving Corporation be required
to expend in excess of 150% of the annual premium currently paid by the Company
for such coverage; and provided further, that, if the premium for such coverage
exceeds such amount, Parent or the Surviving Corporation shall purchase a
policy with the greatest coverage available for such 150% of the annual premium.

                  (c) This Section 5.9 shall survive the consummation of the
Merger at the Effective Time, is intended to benefit the Company, the Surviving
Corporation and the Indemnified Parties, shall be binding on all successors and
assigns of the Surviving Corporation and shall be enforceable by the Indemnified
Parties.



                                       47
   49
                  Section 5.10 Certain Employment Matters. (a) Parent will cause
the Surviving Corporation to honor the obligations of the Company or any of its
Subsidiaries under the provisions of all employment, consulting, termination,
severance, change in control and indemnification agreements between or among the
Company or any of its Subsidiaries and any current or former officer, director,
consultant or employee of the Company or any of its Subsidiaries.

                  (b) Immediately following the consummation of the Offer,
Parent shall cause the Company and the Surviving Corporation, and, in either
case, its Subsidiaries, through December 31, 1998 (except in the case of
employees of Galco International Toys, Ltd. ("Galco"), which date shall be the
first day of the Chinese New Year 4697 (February 16, 1999) and not December 31,
1998), to continue the employment of each employee of the Company and its
Subsidiaries who is employed by the Company or any of its Subsidiaries
immediately prior to the consummation of the Offer (other than officers of the
Company who have written agreements with the Company that are disclosed pursuant
to Schedule 3.4(ii) of the Company Disclosure Schedule) at the compensation in
effect immediately prior to the consummation of the Offer. In addition, all such
employees shall be entitled to receive through December 31, 1998 (except in the
case of employees of Galco, which date shall be the first day of the Chinese New
Year 4697 (February 16, 1999) and not December 31, 1998) health and welfare
benefits, and qualified retirement benefits, on terms that are not substantially
less favorable, in the aggregate, to those currently provided to employees of
the Company and its Subsidiaries under the Company's existing plans. The Company
may provide severance payments to each domestic employee of the Company or its
Subsidiaries (other than those officers of the Company who have written
agreements with the Company that are disclosed pursuant to Schedule 3.4(ii) of
the Company Disclosure Schedule) who is employed by the Company or its
Subsidiaries immediately following the consummation of the Offer, and who is
thereafter involuntarily terminated without cause by the Company or the
Surviving Corporation or, in either case, any of its Subsidiaries after such
time, in an amount per such employee equal to two weeks' base salary for each
full year of any such employee's service with the Company or any of its
Subsidiaries, subject to a receipt from such employee of a full and complete
release of all claims against Parent, Purchaser, the Surviving Corporation, the
Company and their respective affiliates, directors, officers, agents and
representatives. For purposes of eligibility for the paid vacation and the
health and welfare benefit plans of the Surviving Corporation, such employees
will be credited for their years of service with the Company or any of its
Subsidiaries.



                                       48
   50
                  Section 5.11 Acceleration of Outstanding Indebtedness. If,
after the Offer is consummated, the Company's or any Subsidiary's obligation for
borrowed money outstanding is accelerated or the Company or such Subsidiary is
otherwise required to repurchase, repay or prepay any such obligation, Parent
agrees within ten business days after written notice thereof, to loan to the
Company an amount equal to the amount which the Company or any such Subsidiary
is required to so repurchase, repay or prepay (including any related prepayment
premiums or penalties) at an interest rate not to exceed the rate under Parent's
existing bank credit facility.

                  Section 5.12 The Company Rights Plan. The Company, acting
through its Board of Directors or otherwise, shall not, except as specifically
provided herein, (a) amend, alter or modify the Company Rights Plan or (b) take
any action with respect to, or make any determination under, the Company Rights
Plan, to facilitate a Takeover Proposal.

                  Section 5.13 Confidentiality and Standstill Agreements. (a)
The Company hereby waives any rights the Company may have under any "standstill"
or similar agreements to object to the transfer to Purchaser of all Shares held
by stockholders covered by such "standstill" or similar agreements and hereby
covenants not to consent to the transfer of any Shares held by such
stockholders to any other Person unless (i) the Company will have obtained the
specific, prior written consent of Parent with respect to any such transfer or
(ii) this Agreement will have been terminated pursuant to Article VII and (b)
the Company covenants not to alter, modify or amend the terms or conditions of
any confidentiality agreement to which it is a party or beneficiary in a manner
adverse to the interests of Parent or Purchaser, including, but not limited, to
authorizing any other Person to disclose or use any confidential information it
has received from the Company, whether to facilitate a Takeover Proposal or
otherwise.

                  Section 5.14 Certain Matters Related to Lucas Licensing Ltd.
and Lucasfilm Ltd. Notwithstanding anything contained in this Agreement to the
contrary, it shall be the obligation of Parent and not the Company to obtain all
necessary consents and approvals of Lucas Licensing Ltd. and Lucasfilm Ltd.
under the Toy Licensing Agreement, dated as of October 14, 1997, by and between
Lucas Licensing Ltd. and the Company, the Agreement of Strategic Relationship,
dated as of October 14, 1997, by and between Lucasfilm Ltd. and the Company, and
any other agreement between Lucas Licensing Ltd. and/or Lucasfilm Ltd. and the
Company that have been disclosed to Parent, to the consummation of the Offer,
the Merger and the other Transactions contemplated by this Agreement, and the
obtain-

                                       49
   51
ing of any of such consents or approvals shall not be a condition to Parent or
Purchaser consummating the Offer, the Merger or the other Transactions, and the
failure to obtain any of such consents or approvals shall not under any
circumstances constitute a "Material Adverse Effect" or "Material Adverse
Change" under this Agreement or otherwise be a basis, in any respect, for Parent
or Purchaser to terminate this Agreement.



                                   ARTICLE VI

                                   CONDITIONS

                  Section 6.1 Conditions to Each Party's Obligation to Effect
the Merger. The respective obligation of each party to effect the Merger shall
be subject to the satisfaction on or prior to the Effective Time of each of the
following conditions, any and all of which may be waived in whole or in part by
the Company, Parent or Purchaser, as the case may be, to the extent permitted by
applicable Law:

                           (a)  this Agreement shall have been approved and
adopted by the requisite vote of the holders of Shares, if required by
applicable Law and the Certificate of Incorporation, in order to consummate the
Merger;

                           (b)  any waiting period applicable to the Merger
under the HSR Act shall have expired or been terminated;

                           (c) no statute, rule, regulation, order, decree or
injunction shall have been enacted, promulgated or issued by any Governmental
Entity precluding, restraining, enjoining or prohibiting consummation of the
Merger; and

                           (d) Parent, Purchaser or their affiliates shall have
purchased Shares pursuant to the Offer.



                                       50
   52
                                   ARTICLE VII

                                   TERMINATION

                  Section 7.1 Termination. This Agreement may be terminated and
the Merger contemplated herein may be abandoned at any time prior to the
Effective Time, whether before or after approval of matters presented in
connection with the Merger by the stockholders of the Company:

                           (a)  By the mutual written consent of Parent and the
Company; provided, however, that if Parent shall have a majority of the
directors pursuant to Section 1.4, such consent of the Company may only be given
if approved by the Continuing Directors.

                           (b) By either of Parent or the Company if (i) a
statute, rule or executive order shall have been enacted, entered or promulgated
prohibiting the Transactions on the terms contemplated by this Agreement or (ii)
any Governmental Entity shall have issued an order, decree or ruling or taken
any other action (which order, decree, ruling or other action the parties hereto
shall use their reasonable best efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the Transactions and such
order, decree, ruling or other action shall have become final and
non-appealable.

                           (c) By either of Parent or the Company if the
Effective Time shall not have occurred on or before March 31, 1999; provided,
however, that if the Effective Time shall not have occurred by such date solely
as a result of the failure of the condition set forth in Section 6.1(c) by
reason of the entry of a preliminary injunction, this Agreement may not be
terminated pursuant to this Section 7.1(c) until June 30, 1999; provided,
further, that the party seeking to terminate this Agreement pursuant to this
Section 7.1(c) shall not have breached in any material respect its obligations
under this Agreement in any manner that shall have been the cause of, or
resulted in, the failure to consummate the Merger on or before such date;

                           (d) By the Company:

                                    (i) if the Company has entered into an
         agreement with respect to a Superior Proposal or has approved or
         recommended a Superior Proposal in accordance with Section 5.5(b),
         provided the Company has complied with all provisions thereof,
         including the notice provisions therein,


                                       51
   53
         and that it simultaneously terminates this Agreement and makes
         simultaneous payment to the Parent of the Termination Fee; or

                                    (ii) if Parent or Purchaser shall have
         terminated the Offer or the Offer expires without Parent or Purchaser,
         as the case may be, purchasing any Shares pursuant thereto; provided
         that the Company may not terminate this Agreement pursuant to this
         Section 7.1(d)(ii) if the Company is in material breach of this
         Agreement; or

                                    (iii) if Parent, Purchaser or any of their
         affiliates shall have failed to commence the Offer on or prior to five
         business days following the date of the initial public announcement of
         the Offer; provided, that the Company may not terminate this Agreement
         pursuant to this Section 7.1(d)(iii) if the Company is in material
         breach of this Agreement.

                                    (iv) if there shall be a material breach by
         either Parent or Purchaser of any of their representations, warranties
         covenants or agreements contained in this Agreement, except where such
         breach does not have a material adverse effect on the ability of Parent
         or Purchaser to consummate the Offer or the Merger.

                           (e)  By Parent or Purchaser:

                                    (i)  (A) if prior to the purchase of the
         Shares pursuant to the Offer, the Board of Directors of the Company
         shall have withdrawn, or modified or changed in a manner adverse to
         Parent or Purchaser its approval or recommendation of the Offer, this
         Agreement or the Merger or shall have recommended or approved a
         Takeover Proposal; or

                                    (B) there shall have been a material breach
         of any provision of Section 5.5, Parent shall have given at least 5
         days' written notice of such breach and such breach shall not have been
         cured within such 5 day period; or

                                    (ii)  if due to an occurrence that if
         occurring after the commencement of the Offer would result in a failure
         to satisfy any of the conditions set forth in Annex A hereto, Parent or
         Purchaser shall have terminated the Offer without Parent or Purchaser
         purchasing any Shares thereunder, provided that Parent or Purchaser may
         not terminate this Agree-

                                       52
   54
         ment pursuant to this Section 7.1(e)(ii) if Parent or Purchaser is in
         material breach of this Agreement; or

                                    (iii)  if, due to an occurrence that if
         occurring after the commencement of the Offer would result in a failure
         to satisfy any of the conditions set forth in Annex A hereto, Parent,
         Purchaser or any of their affiliates shall have failed to commence the
         Offer on or prior to five business days following the date of the
         initial public announcement of the Offer, provided that Parent or
         Purchaser may not terminate this Agreement pursuant to Section
         7.1(e)(iii) if Parent of Purchaser is in material breach of this
         Agreement; or

                                    (iv)  any Person or "group" (as defined in
         Section 13(d)(3) of the Exchange Act), other than Parent, Purchaser or
         their affiliates or any group of which any of them is a member, shall
         have acquired beneficial ownership (as determined pursuant to Rule
         13d-3 promulgated under the Exchange Act) of 30% or more of the Shares;
         or

                                    (v)  if there shall be a breach by the
         Company of any of its representations, warranties, covenants or
         agreements contained in this Agreement and such breach (without giving
         effect to any limitation as to "knowledge," "materiality" or "material
         adverse effect" set forth herein) individually, or together with any
         other breaches, has a Material Adverse Effect on the Company.

                  Section 7.2 Effect of Termination. In the event of termination
of this Agreement by either the Company or Parent or Purchaser as provided in
Section 7.1, this Agreement shall forthwith become void and have no effect,
without any liability or obligation on the part of Parent, Purchaser or the
Company, other than the provisions of Section 3.21, 4.5, 5.2 (only with respect
to the last two sentences thereof), this Section 7.2 and Article VIII and except
to the extent that such termination results from the wilful and material breach
by a party of any of its representations, warranties, covenants or agreements
set forth in this Agreement.




                                       53
   55
                                  ARTICLE VIII

                                  MISCELLANEOUS

                  Section 8.1 Fees and Expenses. (a) Except as provided below,
all fees and expenses incurred in connection with the Offer, the Merger, this
Agreement and the Transactions shall be paid by the party incurring such fees or
expenses, whether or not the Offer or the Merger is consummated; provided, that
all printing expenses related to the Offer Documents, the Schedule 14D-9 and the
Proxy Statement shall be borne by Parent.

                           (b) If (x) Parent or Purchaser terminates this
Agreement pursuant to Section 7.1(e)(i) or 7.1(e)(iv) or (y) the Company
terminates this Agree ment pursuant to Section 7.1(d)(i), then in each case, the
Company shall pay, or cause to be paid to Parent, at the time of termination, an
amount equal to $6,000,000 (the "Termination Fee"). In addition, if this
Agreement is terminated by Parent pursuant to Section 7.1(e)(v) (other than by
reason of a breach of Section 5.5) and at the time of such termination, Parent
is not in material breach of this Agreement, then the Company shall pay to
Parent, at the time of termination, an amount equal to Parent's and Purchaser's
actual and reasonably documented out-of-pocket expenses incurred by Parent or
Purchaser in connection with the Offer, the Merger, this Agreement and the
consummation of the Transactions, including, without limitation, the fees and
expenses payable to all banks, investment banking firms, and other financial
institutions and Persons and their respective agents and counsel incurred in
connection with acting as Parent's or Purchaser's financial advisor with respect
to, or arranging or committing to provide or providing any financing for, the
Transactions (the "Expenses") and, if the breach referred to in Section
7.1(e)(v) was a willful breach and the Company shall thereafter, within 9 months
after such termination, enter into an agreement with respect to a Takeover
Proposal, then the Company shall pay the Termination Fee (less any Expenses
previously paid by the Company to Parent pursuant to this Section 8.1(b))
concurrently with entering into any such agreement. Any payments required to be
made pursuant to this Section 8.1 shall be made by wire transfer of same day
funds to an account designated by Parent.

                  Section 8.2 Amendment and Modification. Subject to applicable
Law, this Agreement may be amended, modified and supplemented in any and all
respects, whether before or after any vote of the stockholders of the Company
contemplated hereby, by written agreement of the parties hereto (which in the
case of the Company shall include approvals as contemplated in Section 1.4(c)),
at any time


                                       54
   56
prior to the Closing Date with respect to any of the terms contained herein;
provided, however, that after the approval of this Agreement by the stockholders
of the Company, no such amendment, modification or supplement shall reduce the
amount or change the form of the Merger Consideration or otherwise adversely
affect the rights of stockholders, and provided, further, that there shall be no
decrease in the amount of the Merger Consideration after consummation of the
Offer.

                  Section 8.3 Nonsurvival. None of the representations,
warranties, covenants and agreements in this Agreement or in any schedule,
instrument or other document delivered pursuant to this Agreement shall survive
the Effective Time. This Section 8.3 shall not limit any covenant or agreement
of the parties which by its terms contemplates performance after the Effective
Time including, without limitation, those contained in Article III and Sections
5.9, 5.10, 8.1 and 8.8 hereto, and the last two sentences of Section 5.2 hereof.

                  Section 8.4 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given upon receipt, and shall
be given to the parties at the following addresses or telecopy numbers (or at
such other address or telecopy number for a party as shall be specified by like
notice):

                  (a)      if to Parent or Purchaser, to:

                           Hasbro, Inc.
                           1027 Newport Avenue
                           Pawtucket, Rhode Island 02862
                           Attention: Alfred J. Verrecchia, Executive Vice
                           President
                           Telecopy:  (401) 721-7202

                           with a copy to:

                           Hasbro, Inc.
                           1027 Newport Avenue
                           Pawtucket, Rhode Island 02862
                           Attention: Cynthia S. Reed, Senior Vice President
                           and General Counsel
                           Telecopy:  (401) 729-7025

                           with a copy to:



                                       55
   57
                           Hasbro, Inc.
                           32 W. 23rd Street
                           New York, New York 10010
                           Attention: Phillip H. Waldoks
                           Senior Vice President-Corporate
                           Legal Affairs and Secretary
                           Telecopy:  (212) 741-0663

                           with a copy to:

                           Skadden, Arps, Slate, Meagher & Flom LLP
                           919 Third Avenue
                           New York, New York  10022-3897
                           Attention: Thomas H. Kennedy, Esq.
                           Telecopy: 212-735-2000

                  (b)      if to the Company, to:

                           Galoob Toys, Inc.
                           500 Forbes Boulevard
                           South San Francisco, California 94080
                           Attention: William G. Catron, Esq.
                           Telecopy: 650-583-5572

                           with a copy to:

                           Weil, Gotshal & Manges LLP
                           767 Fifth Avenue
                           New York, New York  10153
                           Attention: Jeffrey J. Weinberg, Esq.
                           Telecopy: 212-310-8007

                  Section 8.5 Interpretation. (a) The words "hereof," "herein"
and "herewith" and words of similar import shall, unless otherwise stated, be
construed to refer to this Agreement as a whole and not to any particular
provision of this Agreement, and article, section, paragraph, exhibit and
schedule references are to the articles, sections, paragraphs, exhibits and
schedules of this Agreement unless otherwise specified. Whenever the words
"include," "includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without


                                       56
   58
limitation." All terms defined in this Agreement shall have the defined meanings
contained herein when used in any certificate or other document made or
delivered pursuant hereto unless otherwise defined therein. The definitions
contained in this Agreement are applicable to the singular as well as the plural
forms of such terms and to the masculine as well as to the feminine and neuter
genders of such term. Any agreement, instrument or statute defined or referred
to herein or in any agreement or instrument that is referred to herein means
such agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements and instruments) by waiver or
consent and (in the case of statutes) by succession of comparable successor
statutes and all attachments thereto and instruments incorporated therein.
References to a Person are also to its permitted successors and assigns.

                           (b)      The phrases "the date of this Agreement,"
"the date hereof" and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to September 27, 1998. The phrase "made
available" in this Agreement shall mean that the information referred to has
been actually delivered to the party to whom such information is to be made
available.

                           (c)      The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any
provisions of this Agreement.

                  Section 8.6 Counterparts. This Agreement may be executed in
two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when two or more counterparts have been
signed by each of the parties and delivered to the other parties.

                  Section 8.7 Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership. This Agreement and the Confidentiality Agreement (including
the documents and the instruments referred to herein and therein): (a)
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Section 5.9 are not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.



                                       57
   59
                  Section 8.8 Governing Law. This Agreement shall be governed by
and construed in accordance with the Laws of the State of Delaware without
giving effect to the principles of conflicts or choice of law thereof or of any
other jurisdiction.

                  Section 8.9 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of Law or otherwise) without the prior
written consent of the other parties, except that Purchaser may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to Parent or to any direct or indirect wholly owned Subsidiary of Parent,
provided that Parent shall remain primarily responsible for the obligations of
Purchaser or any other Subsidiary of Parent, and any of their permitted assigns.
Subject to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns.

                  Section 8.10 Enforcement. The parties agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any court of the
United States located in the State of Delaware or in Delaware state court, this
being in addition to any other remedy to which they are entitled at law or in
equity. In addition, each of the parties hereto (a) consents to submit itself to
the personal jurisdiction of any Federal court located in the State of Delaware
or any Delaware state court in the event any dispute arises out of this
Agreement or any of the Transactions, (b) agrees that it will not attempt to
deny or defeat such personal jurisdiction by motion or other request for leave
from any such court and (c) agrees that it will not bring any action relating to
this Agreement or any of the Transactions in any court other than a Federal or
state court sitting in the State of Delaware.

                  Section 8.11 Extension; Waiver. At any time prior to the
Effective Time, the parties may (a) extend the time for the performance of any
of the obligations or other acts of the other parties, (b) waive any
inaccuracies in the representations and warranties of the other parties
contained in this Agreement or in any document delivered pursuant to this
Agreement or (c) subject to the proviso of Section 8.2, waive compliance by the
other parties with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any


                                       58
   60
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.

                  Section 8.12 Procedure for Termination, Amendment, Extension
or Waiver. A termination of this Agreement pursuant to Section 7.1, an amendment
of this Agreement pursuant to Section 8.2 or an extension or waiver pursuant to
Section 8.11 shall, in order to be effective, require in the case of Parent,
Purchaser or the Company, action by its Board of Directors or the duly
authorized designee of its Board of Directors; provided, however, that in the
event that Parent's designees are appointed or elected to the Board of Directors
of the Company as provided in Section 1.4, after the acceptance for payment of
Shares pursuant to the Offer and prior to the Effective Time, except as
otherwise contemplated by this Agreement the affirmative vote of a majority of
the Continuing Directors of the Company shall be required by the Company to
amend this Agreement by the Company.

                  Section 8.13 Certain Undertakings of Parent. Parent shall be
responsible for the performance of, and, if necessary, shall perform, or cause
to be performed any obligation of Purchaser or the Surviving Corporation, or
either of their permitted successors and assigns under this Agreement.

                  Section 8.14 Definitions. For purposes of this Agreement:

         "Affiliate" has the meaning set forth in Rule 12b-2 of the Exchange
Act.

         "Benefit Plans" has the meaning assigned thereto in Section 3.10.

         "By-laws" means the by-laws of the Company as in effect on the date of
this Agreement.

         "Certificate of Incorporation" means the certificate of incorporation
of the Company as in effect on the date of this Agreement.

         "Certificate of Merger" has the meaning assigned thereto in Section
1.6.

         "Certificates" has the meaning assigned thereto in Section 2.2.

         "Closing" has the meaning assigned thereto in Section 1.7.


                                       59
   61
         "Closing Date" has the meaning assigned thereto in Section 1.7.

         "Code" means the Internal Revenue Code of 1986, as amended.

         "Company" means Galoob Toys, Inc., a Delaware corporation.

         "Company Disclosure Schedule" has the meaning assigned thereto in
Article III.

         "Company Material Contract" has the meaning assigned thereto in Section
3.16.

         "Company's SEC Documents" has the meaning assigned thereto in Section
3.5.

         "Computer Programs" means:

                  (i)      any and all computer software programs, including all
                           source and object code,

                  (ii)     databases and compilations, including any and all
                           data and collections of data, whether machine
                           readable or otherwise,

                  (iii)    billing, reporting, and other management information
                           systems,

                  (iv)     all descriptions, flow-charts and other work product
                           used to design, plan, organize and develop any of the
                           foregoing,

                  (v)      all content contained on any Internet site(s), and

                  (vi)     all documentation, including user manuals and
                           training materials, relating to any of the
                           foregoing.

         "Company Rights Agreement" means the Preferred Stock Rights Agreement,
dated as of January 17, 1990, by and between the Company and Mellon Securities
Trust Company.

         "Confidentiality Agreement" has the meaning assigned thereto in Section
5.2.



                                       60
   62
         "Continuing Director" means (i) any member of the Board of Directors of
the Company as of the date hereof, or (ii) any successor of a Continuing
Director who is (A) unaffiliated with, and not a designee or nominee, of Parent
or Purchaser, and (B) recommended to succeed a Continuing Director by a majority
of the Continuing Directors then on the Board of Directors of the Company, and
in each case under clauses (i) and (ii), who is not an employee of the Company.

         "Defect" means a defect or impurity of any kind, whether in design,
manufacture, processing, or otherwise, including, without limitation, any
dangerous propensity associated with any reasonably foreseeable use of a
Product, or the failure to warn of the existence of any defect, impurity, or
dangerous propensity.

         "DGCL" means the Delaware General Corporation Law, as in effect on the
date of this Agreement and as amended from time to time.

         "Dissenting Shares" has the meaning assigned thereto in Section 2.5.

         "Dissenting Stockholders" has the meaning assigned thereto in Section
2.5.

         "Effective Time" has the meaning assigned thereto in Section 1.6.

         "Environmental Laws" means all applicable foreign, Federal, state and
local Laws relating to pollution or protection of human health, safety and the
environment, including, without limitation, Laws relating to Releases or
threatened Releases of Hazardous Materials into the indoor or outdoor
environment (including, without limitation, ambient air, surface water,
groundwater, land, surface and subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, Release,
transport or handling of Hazardous Materials, and all Laws and regulations with
regard to record keeping, notification, disclosure and reporting requirements
respecting Hazardous Materials, and all Laws relating to endangered or
threatened species of fish, wildlife and plants and the management or use of
natural resources, provided, however, that the above definition does not include
the Occupational Safety and Health Act, 29 U.S.C.A. Section 651.

         "Environmental Liabilities and Costs" means all liabilities,
obligations, responsibilities, obligations to conduct cleanup, losses, damages,
deficiencies, punitive damages, consequential damages, treble damages, costs and
expenses (including, without limitation, all reasonable fees, disbursements and
expenses of counsel, expert and consulting fees and costs of investigations and
feasibility studies


                                       61
   63
and responding to government requests for information or documents), fines,
penalties, restitution and monetary sanctions or interest resulting from any
claim or demand, by any Person or entity under any Environmental Law, or arising
from the Release or threatened Release of Hazardous Materials by the Company
into the environment.

         "ERISA" has the meaning assigned thereto in Section 3.10.

         "ERISA Affiliate" has the meaning assigned thereto in Section 3.10.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Expenses" has the meaning assigned thereto in Section 8.1.

         "Fee Properties" means all real property and interests in real property
owned in fee by the Company or one of its Subsidiaries.

         "GAAP" has the meaning assigned thereto in Section 3.5.

         "Galco" has the meaning assigned thereto in Section 5.10.

         "Governmental Entity" means any (i) nation, state, county, city, town,
village, district, or other jurisdiction of any nature; (ii) federal, state,
local, municipal, foreign or other government; (iii) governmental or
quasi-governmental authority of any nature (including any governmental agency,
branch, department, official, or entity and any court or other tribunal); or
(iv) body exercising, or entitled to exercise any administrative, executive,
judicial, legislative, police, regulatory, or taxing authority or power of any
nature.

         "Hazardous Materials" means all substances defined as hazardous
substances in the National Oil and Hazardous Substances Pollution Contingency
Plan, 40 C.F.R. Section 300.5, or substances defined as hazardous substances,
hazardous materials, toxic substances, hazardous wastes, pollutants or
contaminants, under any Environmental Law, or substances regulated under any
Environmental Law, including, but not limited to, petroleum (including crude oil
or any fraction thereof), asbestos, and polychlorinated biphenyls.

         "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.


                                       62
   64
         "Indemnified Parties" has the meaning assigned thereto in Section 5.9.

         "Indemnified Liabilities" has the meaning assigned thereto in Section
5.9.

         "Knowledge" or "knowledge" means, with respect to the Company and/or
any Subsidiary thereof, knowledge of the President, Chief Financial Officer and
any Executive Vice President of the Company after reasonable investigation and
inquiry commensurate with that of a reasonable person holding such a position
with a public company.

         "Laws" means any administrative order, constitution, law, ordinance,
principle of common law, rule, regulation, statute, treaty, judgment, decree,
license or permit enacted, promulgated, issued, enforced or entered by any
Governmental Entity.

         "Leased Properties" means all real property and interests in real
property leased by the Company or one of its Subsidiaries.

         "Licenses" has the meaning assigned thereto in Section 3.14 hereof.

         "Lien" means any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, lien, mortgage, pledge,
reservation, restriction, security interest, title retention or other security
arrangement, or any adverse right or interest, charge or claim of any nature
whatsoever of, on, or with respect to any asset, property or property interest.

         "Lucasfilm Ltd. Warrants" has the meaning assigned thereto in Section
3.3.

         "Lucas Licensing Ltd. Warrants" has the meaning assigned thereto in
Section 3.3.

         "Material Adverse Change" or "Material Adverse Effect" means, when used
in connection with the Company or Parent, any change or effect (or any
development that, insofar as can reasonably be foreseen, is likely to result in
any change or effect) that is materially adverse to the business, properties,
assets, financial condition or results of operations of such party and its
Subsidiaries taken as a whole (except for any such change or effect that (i) is
caused by or otherwise results from conditions affecting the United States or
world economy as a whole, (ii) is caused by or otherwise results from changes
in general political or regulatory conditions in the United


                                       63
   65
States or any foreign jurisdiction in which the Company conducts business, (iii)
affects generally the industry in which the Company competes or (iv) arises as a
result of the announcement or pendency of the Offer or the Merger).

         "Merger" has the meaning assigned thereto in Section 1.5.

         "Merger Consideration" has the meaning assigned thereto in Section 2.1.

         "Minimum Condition" has the meaning assigned thereto in Annex A.

         "Occurrence" means any accident, happening or event which is caused or
allegedly caused by any alleged hazard or alleged defect in manufacture, design,
materials or workmanship including, without limitation, any alleged failure to
warn or any breach of express or implied warranties or representations with
respect to, or any such accident, happening or event otherwise involving, a
product (including any parts or components) which results or is alleged to have
resulted in injury or death to any person or damage to or destruction of
property, or other consequential damages, at any time.

         "Offer" has the meaning assigned thereto in Section 1.1.

         "Offer Documents" has the meaning assigned thereto in Section 1.3.

         "Offer Price" has the meaning assigned thereto in Section 1.1.

         "Offer to Purchase" has the meaning assigned thereto in Section 1.1.

         "Option Plans" has the meaning assigned thereto in Section 2.4.

         "Option" has the meaning assigned thereto in Section 2.4.

         "Other Intellectual Property" shall mean all intellectual property
rights used in the business of the Company or any of its Subsidiaries as
currently conducted, including but not limited to all patents and patent
applications; copyrights, copyright registrations and applications (including
copyrights in Computer Programs); Computer Programs; technology, trade secrets,
know-how, confidential information, proprietary processes and formulae;
"semiconductor chip product" and "mask works" (as such terms are defined in 17
U.S.C. 901); and rights of publicity and privacy relating to the use of the
names, signatures, likenesses, voices and biographical


                                       64
   66
information of real persons; together with any and all rights of renewal thereof
and the right to sue for past, present or future infringements or
misappropriations thereof.

         "Paying Agent" has the meaning assigned thereto in Section 2.2.

         "Parent" means Hasbro, Inc., a Rhode Island Corporation.

         "PBGC" means the Pension Benefit Guaranty Corporation.

         "Permit" means any Federal, state, local and foreign governmental
approval, authorization, certificate, filing, franchise, license, notice, permit
or right.

         "Person" means an individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, labor union,
estate, trust, unincorporated organization or other entity, including any
Governmental Entity.

         "Preferred Shares" has the meaning assigned thereto in Section 3.3.

         "Preferred Stock Purchase Rights" shall mean the preferred stock
purchase rights issued pursuant to the Company Rights Agreement.

         "Product" means any product designed, manufactured, shipped, sold,
marketed, distributed and/or otherwise introduced into the stream of commerce
by or on behalf of the Company or any of its past or present Subsidiaries.

         "Proxy Statement" has the meaning assigned thereto in Section 5.3.

         "Purchaser" means New HIAC II Corp., a Delaware corporation.

         "Real Property" means the Leased Properties and the Fee Properties.

         "Recalls" has the meaning assigned thereto in Section 3.18

         "Release" means any release, spill, emission, discharge, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environment (including, without limitation,
ambient air, surface water, groundwater, and surface or subsurface strata) or
into or out of any property of any Hazardous Material, including the movement of
Hazardous Materials through or in the air, soil, surface water, groundwater or
property.


                                       65
   67
         "Representative" means, with respect to any Person, such Person's
officers, directors, employees, agents and representatives (including any
investment banker, financial advisor, accountant, legal counsel, agent,
representative or expert retained by or acting on behalf of such Person or its
Subsidiaries).

         "Schedule 14D-1" has the meaning assigned thereto in Section 1.3.

         "Schedule 14D-9" has the meaning assigned thereto in Section 1.3.

         "SEC" means the United States Securities and Exchange Commission or any
successor agency.

         "SEC Documents" means reports, proxy statements, forms, and other
documents required to be filed with the SEC under the Securities Act and the
Exchange Act, including any schedules and exhibits thereto.

         "Secretary of State" has the meaning assigned thereto in Section 1.6.

         "Section 203 Approval" has the meaning assigned thereto in Section 1.2.

         "Securities Act" means the Securities Act of 1933, as amended.

         "Series A Preferred Shares" has the meaning assigned thereto in Section
 3.3.

         "Shares" has the meaning assigned thereto in the recitals.

         "Significant Subsidiaries" has the meaning assigned thereto in Rule
1-02 of Regulation S-X of the SEC.

         "Special Meeting" has the meaning assigned thereto in Section 5.3.

         "Subsidiary" means, with respect to any Person, any corporation,
partnership, joint venture or other entity, whether incorporated or
unincorporated, of which such Person or any other Subsidiary of such Person (i)
owns, directly or indirectly, 50% or more of the outstanding voting securities
or equity interests, (ii) is entitled to elect at least a majority of the Board
of Directors or similar governing body, or (iii) is a general partner (excluding
such partnerships where such Person or any Subsidiary of such Person do not have
a majority of the voting interests in such partnership).



                                       66
   68
         "Superior Proposal" means an unsolicited Takeover Proposal on terms
which the Board of Directors of the Company determines in good faith to be more
favorable to the Company's stockholders than the Offer and the Merger (based on
advice of the Company's independent financial advisor that the value of the
consideration provided for in such proposal is superior to the value of the
consideration provided for in the Offer and the Merger), for which financing, to
the extent required, is then committed or which, in the good faith reasonable
judgment of the Board of Directors of the Company, based on advice from the
Company's independent financial advisor, is reasonably capable of being financed
by such Third Party and which, in the good faith reasonable judgment of the
Board of Directors of the Company, is reasonably likely to be consummated within
a period of time not materially longer in duration that the period of time
reasonably believed to be necessary to consummate the Offer and the Merger.

         "Surviving Corporation" has the meaning assigned thereto in Section
1.5.

         "Takeover Proposal" means any bona fide proposal or offer, whether in
writing or otherwise, from any Person other than Parent, Purchaser or any
affiliates thereof (a "Third Party") to acquire beneficial ownership (as defined
under Rule 13(d) of the Exchange Act) of all or a material portion of the assets
of the Company and its Subsidiaries on a consolidated basis or 30% or more of
any class of equity securities of the Company pursuant to a merger,
consolidation or other business combination, sale of shares of capital stock,
sale of assets, tender offer, exchange offer or similar transaction with respect
to the Company including any single or related multi-step transaction or series
of related transactions, which is structured to permit such Third Party to
acquire beneficial ownership of any material portion of the assets of or 30% or
more of the equity interest in the Company.

         "Tax" or "Taxes" mean all taxes, charges, fees, levies, penalties or
other assessments imposed by any federal, state, local or foreign Taxing
Authority including but not limited to net income, gross income, receipts,
windfall profit, severance, property, production, sales, use, license, excise,
franchise, employment, payroll, withholding, alternative or add-on minimum, ad
valorem, transfer, stamp or environmental tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or penalty, addition to tax or additional amount
imposed by any Governmental Entity.

         "Taxing Authority" shall mean a governmental authority or any
subdivision, agency, commission or authority thereof, any judicial body, or any
quasi-governmen-

                                       67
   69
tal or private body having jurisdiction over the assessment, determination,
collection or imposition of any Tax (including, without limitation, the Internal
Revenue Service).

         "Tax Returns" mean all returns, reports, or statements required to be
filed with any Governmental Entity with respect to any Tax (including any
attachments thereto), including, without limitation, any consolidated, unitary
or similar return, information return, claim for refund, amended return or
declaration of estimated Tax.

         "Termination Fee" has the meaning assigned thereto in Section 8.1.

         "Third Party" has the meaning assigned thereto in this Section 8.14
under "Takeover Proposal."

         "Trademarks" shall mean all United States and foreign trademarks
(including service marks and trade names, whether registered or at common law),
registrations and applications therefor, owned or licensed by the Company or its
Subsidiaries, and the goodwill of the Company's and each of its Subsidiaries'
respective businesses associated therewith, together with any and all (i) rights
of renewal thereof and (ii) rights to sue for past, present and future
infringements or misappropriation thereof.

         "Transactions" has the meaning assigned thereto in Section 1.2.

         "Transfer Taxes" has the meaning assigned thereto in Section 5.7.

         "Warrants" means collectively the Lucasfilm Ltd. Warrants and the Lucas
Licensing Ltd. Warrants.


                                       68
   70
                  IN WITNESS WHEREOF, Parent, Purchaser and the Company have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.

                             HASBRO, INC.


                        By:  /s/ Alfred J. Verrecchia
                             ______________________________________________
                             Name:  Alfred J. Verrecchia
                             Title: Executive Vice President and President
                                    - Global Operations


                             NEW HIAC II CORP.


                        By:  /s/ Alfred J. Verrecchia
                             ______________________________________________
                             Name:  Alfred J. Verrecchia
                             Title: Executive Vice President and President
                                    - Global Operations


                             GALOOB TOYS, INC.


                        By:  /s/ Mark D. Goldman
                             ______________________________________________
                             Name:  Mark D. Goldman
                             Title: President and Chief Executive Officer

EX-99.B

   1
                                                                       EXHIBIT B


FOR IMMEDIATE RELEASE:

         CONTACT:
         HASBRO:  Wayne S. Charness (News Media)                    401-727-5983
                  Renita E. O'Connell (Investor Relations)          401-727-5401

         GALOOB:  Kathleen R. McElwee                         650-952-1678 x2210


HASBRO ANNOUNCES DEFINITIVE AGREEMENT TO ACQUIRE GALOOB TOYS, INC.


         Pawtucket, RI (September 28, 1998) - Hasbro, Inc. [ASE:HAS] announced
today that it has entered into a definitive agreement to acquire Galoob Toys,
Inc. [NYSE:GAL], an international toy manufacturer whose leading brands include
Micro Machines(R) miniature-scale boys' toys, Star Wars(TM) small-scale figures
and vehicles, Spice Girls(TM) fashion dolls, and Pound Puppies(R) mini-dolls.
The purchase price is $12 per common share of Galoob, payable in cash, for a
total transaction value of approximately $220 million. Closing is expected in
the fourth quarter of 1998.

         "Galoob is a tremendous addition to our rich brand portfolio," said
Alan G. Hassenfeld, Chairman and CEO of Hasbro, Inc. "This acquisition will
allow us to build critical mass worldwide in the fast-growing vehicles category
by combining our popular Winner's Circle(TM) racing cars with Galoob's highly
successful Micro Machines(R). We are also excited about adding Galoob's
tremendously popular Spice Girls(TM) line to our portfolio," Hassenfeld
continued.
   2
         "In addition, the combination of Galoob's Star Wars(TM) small-scale
figures and vehicles license with Hasbro's extensive Star Wars(TM) license will
allow us to further develop this global brand franchise," Hassenfeld added.

         By fully integrating the worldwide operations of Galoob into Hasbro,
the Company expects to achieve economies of scale and cost savings in a variety
of areas including product sourcing, manufacturing, marketing, advertising and
administrative support functions. Hasbro expects the transaction will be
modestly dilutive to earnings in 1998 and accretive beginning in 1999.

         Mark D. Goldman, President and Chief Executive Officer of Galoob, said,
"We are excited about joining Hasbro. Hasbro's global reach and resources will
enormously expand the potential of Galoob's brands, especially Star Wars(TM) and
Micro Machines(R)."

         The merger agreement with Galoob calls for a wholly owned subsidiary of
Hasbro to commence a tender offer no later than October 2, 1998 for all of
Galoob's approximately 18 million outstanding common shares. The offer will be
conditioned upon, among other things, the expiration or earlier termination of
the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and the tender of a majority of the common shares outstanding on a
diluted basis of Galoob. Following the consummation of the offer, Hasbro's
subsidiary will be merged with Galoob common shares will be converted into the
right to receive $12 per share in cash.


                                        2
   3
         Founded in 1957, Galoob Toys' current product categories include
miniature vehicles, led by Micro Machines(R); entertainment-based toys, led by
Star Wars(TM); mini-dolls, comprised of the number one mini-doll brand in 1997,
Pound Puppies(R), newly introduced authentic military vehicles, figures and
playsets led by Battle Squads(TM); a series of Titanic collector fashion dolls
and celebrity-based fashion dolls. The Company's first celebrity fashion doll
offering is the highly successful Spice Girls(TM) line based on the British pop
group. Micro Machines(R) is the most comprehensive line of miniature scale toys
for boys in the world, embracing traditional vehicle, military and male action
play patterns. Now in its eleventh successful year, the brand has generated over
$1 billion in retail sales in the U.S. alone.

         Hasbro, Inc. is a worldwide leader in the design, manufacture and
marketing of toys, games, interactive software, puzzles and infant products.
Both internationally and in the U.S., its Playskool(R), Kenner(R), Tonka(R),
OddzOn(R), Super Soaker(R), Milton Bradley(R), Parker Brothers(R), Tiger(TM) and
Hasbro Interactive(TM) products, provide children and families with the highest
quality and most recognizable toys and games in the world.

         Galoob Toys, Inc. designs, develops, markets and sells high quality
toys worldwide. For more information about the Company and its products, visit
Galoob's World Wide Web site at http://www.galoob.com.


                                        3

EX-99.C

   1
                                                                   EXHIBIT C


                                Galoob Toys, Inc.
                              500 Forbes Boulevard
                      South San Francisco, California 94080


                                  April 2, 1998


Hasbro, Inc.
1027 Newport Avenue
Pawtucket, RI  02861
Attention:  Alfred J. Verrecchia
            Executive Vice President and
            President, Global Operations

Dear Mr. Verrecchia:

         In connection with your analysis of a possible negotiated transaction
(the "Transaction") with or involving Galoob Toys, Inc. (the "Company"), you
have requested and may from time to time receive oral and/or written information
concerning the Company, from officers, directors, employees and/or agents of the
Company (collectively, the "Evaluation Material"), which the Company views as
containing confidential and/or proprietary information regarding the Company. In
consideration of furnishing you (whether prior to or after the date hereof) with
the Evaluation Material, you and the Company hereby agree as follows (it being
understood that you are also agreeing to cause your affiliates to comply with
the provisions hereof):

         (1)      All Evaluation Material heretofore or hereafter furnished to
                  you by or on behalf of the Company shall be deemed
                  confidential and shall be kept in strict confidence in
                  accordance with the terms hereof and under appropriate
                  safeguards. The Evaluation Material is to be used solely for
                  the purpose of evaluating a possible transaction between the
                  Company and you, and the Evaluation Material will be kept
                  confidential by you, except that you may disclose the
                  Evaluation Material or portions thereof to those of your
                  directors, officers and employees and representatives of your
                  advisors (the category of persons to whom the disclosure is
                  permissible being collectively called "Representatives") who
                  need to know the information (it being understood that those
                  Representatives will be informed of the confidential nature of
                  the Evaluation Material and
   2
Alfred J. Verrecchia
April 2, 1998
Page 2


                  will agree to be bound by this agreement as if a party hereto
                  and not to disclose the Evaluation Material to any other
                  individual). You agree to be responsible for any breach of
                  this agreement by your Representatives. In the event that you
                  or any of your Representatives become legally compelled (by
                  deposition, interrogatory, request for documents, subpoena,
                  civil investigative demand or similar process) to disclose any
                  of the Evaluation Material, you shall provide the Company with
                  prompt prior notice of the requirement (by written notice to
                  the Company delivered to the address set forth above and to
                  the attention of the General Counsel) so that the Company may
                  seek (with your cooperation, if so requested by the Company) a
                  protective order or other appropriate remedy. In the event
                  that the protective order or other remedy is not obtained, you
                  agree to furnish only that portion of the Evaluation Material
                  that is legally required. In any event, neither you nor any of
                  your Representatives will oppose action by the Company to
                  obtain an appropriate protective order or other reliable
                  assurance that confidential treatment will be accorded the
                  Evaluation Material.

         (2)      The term "Evaluation Material" does not include any
                  information that (i) at the time of disclosure or thereafter
                  is generally available to and known by the public (other than
                  as a result of a disclosure directly or indirectly by you or
                  your Representatives), (ii) was available to you on a
                  nonconfidential basis from a source other than the Company or
                  its advisors, provided that the source is not known to you
                  (after reasonable inquiry) to be bound by a confidentiality
                  agreement with the Company or another party, or otherwise
                  prohibited from transmitting the information by a contractual,
                  legal or fiduciary obligation to the Company or another party,
                  (iii) has been independently acquired or developed by you
                  without violating any of your obligations under this
                  agreement, or (iv) is disclosed by the Company to others on an
                  unrestricted and non-confidential basis.
   3
Alfred J. Verrecchia
April 2, 1998
Page 3


         (3)      If a Transaction with the Company is not consummated by you or
                  if the Company so requests, you promptly will return to the
                  Company all copies of the Evaluation Material in your
                  possession or in the possession of your Representatives, and
                  you will destroy all copies, notes or extracts thereof, and
                  all copies of any analyses, compilations, studies or other
                  documents (whether in written form or contained in database or
                  other similar form) prepared by you or for your use containing
                  or reflecting any Evaluation Material. If requested by the
                  Company this destruction shall be confirmed in writing by you
                  and your Representatives to the Company. Notwithstanding the
                  return or destruction of the Evaluation Material and the other
                  documents, you and your Representatives shall continue to be
                  bound by your obligations hereunder.

         (4)      You and the Company agree that, without the prior written
                  consent of the other, you and the Company will not, and will
                  direct your and its Representatives not to, disclose to any
                  person (i) the fact that we have provided Evaluation Material
                  to you, (ii) that discussions have taken or are taking place
                  between us concerning the Transaction or disclose the status,
                  terms, conditions or other facts concerning such discussions,
                  or (iii) otherwise identify the other by name or by
                  identifiable description to any other person in connection
                  with your or our participation in such discussions, provided,
                  however, that such disclosures may be made if a party has
                  received the opinion of counsel that such disclosure is
                  required by applicable law or stock exchange rules, (and then
                  only subject to and in accordance with the terms of paragraph
                  1 hereof). The term "person" as used in this agreement will be
                  interpreted broadly to include, without limitation, the
                  media and any corporation, company, partnership or individual.
                  Notwithstanding the foregoing: (x) the Company shall have the
                  right to advise Lucasfilm Ltd. and its subsidiaries,
                  affiliates and related entities ("Lucas") or its
                  representatives that the Company has been contacted by you
                  regarding a possible Transaction, in which event the Company
                  will promptly notify
   4
Alfred J. Verrecchia
April 2, 1998
Page 4


                  you that Lucas has been so advised; and (y) within five
                  business days after the execution and delivery of this
                  Agreement, you and the Company shall jointly advise Lucas that
                  we have entered into a Confidentiality Agreement, after which
                  either of us shall be permitted to discuss the information in
                  this paragraph or in the Evaluation Material relating to Lucas
                  with Lucas or its representatives provided, however, that (a)
                  you shall not disclose the terms or provisions of this
                  Confidentiality Agreement to Lucas without the prior written
                  consent of the Company and (b) within five business days upon
                  reaching an agreement or understanding with Lucas relating to
                  its approval or consent in connection with a Transaction, you
                  will either terminate discussions with the Company by written
                  notice to the Company or disclose to the Company the complete
                  terms of any such agreement or understanding and any
                  modifications of existing terms under licenses with Lucas.
                  Except to the extent required by law, the Company will hold in
                  strict confidence and will not disclose any information with
                  respect to your agreement with Lucas to any third party.

         (5)      (a) Subject to subparagraph 5(b) below, during the period from
                  the date hereof through December 31, 1999, you agree that you
                  shall not, and you will ensure that your affiliates, and any
                  person acting on behalf of or in concert with you or any of
                  your affiliates shall not, without the prior written approval
                  of the Board of Directors of the Company, (i) in any manner
                  acquire, agree to acquire or make any proposal to acquire,
                  directly or indirectly, any securities or property of the
                  Company or any of its subsidiaries, (ii) propose to enter
                  into, directly or indirectly, any merger or business
                  combination involving the Company or any of its subsidiaries
                  or to purchase, directly or indirectly, a material portion of
                  the assets of the Company or any of its subsidiaries, other
                  than a confidential proposal made to the Board of Directors of
                  the Company without any public disclosure thereof by you (iii)
                  make, or in any way participate, directly or indirectly, in
                  any "solicitations" of "proxies" (as such terms are used in
                  the proxy rules of the Securities and
   5
Alfred J. Verrecchia
April 2, 1998
Page 5


                  Exchange Commission) to vote, or seek to advise or influence
                  any person with respect to the voting of any securities of the
                  Company or any of its subsidiaries, (iv) form, join or in any
                  way participate in a "group" (within the meaning of Section
                  13(d)(3) of the Securities Exchange Act of 1934) with respect
                  to any securities of the Company or any of its subsidiaries,
                  (v) otherwise act, alone or in concert with others, to seek to
                  control or influence the management, Board of Directors or
                  policies of the Company, (vi) disclose any intention, plan or
                  arrangement inconsistent with the foregoing or (vii) advise,
                  assist or encourage any other persons in connection with any
                  of the foregoing. Subject to subparagraph 5(b) below, you also
                  agree during such period not to (i) request the Company (or
                  its directors, officers, employees or agents), directly or
                  indirectly, to amend or waive any provisions of this paragraph
                  (including this sentence) or (ii) take any action which might
                  require the Company to make a public announcement regarding
                  any of the matters specified in this paragraph. You will
                  promptly advise the Company of any inquiry or proposal made to
                  you with respect to any of the foregoing.

                  (b) The restrictions contained in subparagraph 5(a) above
                  shall not apply to you in the event that either or both of the
                  following events shall occur: (i) a tender offer or exchange
                  offer is commenced by another party for a majority of the
                  outstanding common stock of the Company or (ii) a definitive
                  agreement is entered into by the Company providing for the
                  merger of the Company or the sale of more than 50% of the
                  assets or securities of the Company or for any similar
                  business combination involving the Company.

         (6)      For a period of one year from the date hereof, you agree that
                  neither you nor any of your subsidiaries will directly or
                  indirectly solicit to employ any of the officers or employees
                  of the Company. The parties agree that this restriction shall
                  not apply to (i) any solicitation directed at the public in
                  general by you in publications available to the public in
                  general, whether or not
   6
Alfred J. Verrecchia
April 2, 1998
Page 6


                  the individuals responding to such general solicitations were
                  also individuals that you may have been acquainted with during
                  the course of the anticipated negotiations, or (ii) your
                  employment of the Company's employees not involving any
                  initial solicitation by you.

         (7)      You understand and acknowledge that the Company is not making
                  any representation or warranty, express or implied, as to the
                  accuracy or completeness of the Evaluation Material, and
                  neither the Company nor any of its officers, directors,
                  employees, stockholders, owners, affiliates or agents will
                  have any liability to you or any other person resulting from
                  your use of the Evaluation Material. Only those particular
                  representations or warranties that are made to you in a
                  definitive Transaction Agreement (as defined in paragraph 9
                  below) when, as, and if it is executed, and subject to the
                  limitations and restrictions as may be specified in the
                  Transaction Agreement, will have any legal effect.

         (8)      You acknowledge that you (i) are aware that the United States
                  federal securities laws prohibit any person who has material
                  non-public information about a company which is obtained from
                  the company or its representatives from purchasing or selling
                  any securities of that company or communicating the
                  information to any person under circumstances in which it is
                  reasonably foreseeable that such person is likely to purchase
                  or sell any of those securities, unless the counterparty in
                  such purchase or sale also has such information or such
                  information is generally available to the market, and (ii) are
                  familiar with the United States Securities Exchange Act of
                  1934 (the "Exchange Act") and the rules and regulations
                  promulgated thereunder, and agree that you will not use, or
                  communicate to any person under circumstances where it is
                  reasonably likely that such person is likely to use or cause
                  any person to use, any Evaluation Material in contravention of
                  the Exchange Act or any of its rules and regulations,
                  including Rules 10b-5 and 14e-3. In connection with the
                  foregoing, the Company hereby agrees and acknowledges that you
                  shall be permitted to
   7
Alfred J. Verrecchia
April 2, 1998
Page 7


                  disclose publicly any information (including any information
                  which is otherwise confidential hereunder) which you believe,
                  after receipt of advice of counsel, must be disclosed in order
                  to comply with the Exchange Act and such other securities laws
                  as may be applicable in order to permit you to purchase or
                  offer to purchase any securities of the Company at any time
                  when you are not precluded from doing so under paragraph 5
                  hereof.

         (9)      You and the Company also understand and agree that this
                  agreement pertains only to the confidentiality of Evaluation
                  Material and the related matters expressly stated herein and
                  that no contract or agreement with respect to any possible
                  Transaction shall be deemed to exist between you and the
                  Company and/or the owners or stockholders of the Company
                  unless and until a definitive agreement has been executed and
                  delivered by you and the Company as shall be mutually agreed
                  to by the parties thereto (a "Transaction Agreement"). For
                  purposes of this paragraph, the term "Transaction Agreement"
                  shall not include an executed letter of intent or any other
                  preliminary written agreement, nor does it include any verbal
                  acceptance of an offer or bid.

         (10)     You agree that the Company shall be entitled to equitable
                  relief, including injunction and specific performance, in the
                  event of any breach or threatened breach of the provisions of
                  this agreement, in addition to all other remedies available to
                  the Company at law or in equity. You also hereby irrevocably
                  and unconditionally consent to submit to the exclusive
                  jurisdiction of the courts of the State of New York and of the
                  United States located in the City of New York for any actions,
                  suits or proceedings arising out of or relating to this
                  agreement and the transactions contemplated hereby (and you
                  agree not to commence any action, suit or proceeding relating
                  thereto except in those courts), and further agree that
                  service of any process, summons, notice or document by United
                  States registered mail, return receipt requested, to your
                  address set forth above shall be effective service of process,
                  summons,
   8
Alfred J. Verrecchia
April 2, 1998
Page 8


                  notice or document for or in any action, suit or proceeding
                  brought against you in any of those courts. You hereby
                  irrevocably and unconditionally waive any objection to the
                  laying of venue of any action, suit or proceeding arising out
                  of this agreement or the transactions contemplated hereby, in
                  the courts of the State of New York or the United States
                  located in the City of New York, and hereby further
                  irrevocably and unconditionally waive and agree not to plead
                  or claim in that court that any action, suit or proceeding
                  brought in that court has been brought in an inconvenient
                  forum.

         (11)     It is further understood and agreed that no failure or delay
                  by the Company in exercising any right, power or privilege
                  hereunder will operate as a waiver thereof, nor will any
                  single or partial exercise thereof preclude any other or
                  further exercise thereof or the exercise of any right, power
                  or privilege hereunder.

                  This letter agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

                  This agreement contains, and is intended as, a complete
statement of all of the terms of the arrangements among the parties with respect
to the matters provided for and supersedes any previous agreements and
understandings among the parties with respect to those matters.

                  This agreement will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to the principles,
policies or provisions thereof concerning conflict or choice of law.
   9
Alfred J. Verrecchia
April 2, 1998
Page 9


                  If you agree with the foregoing, please sign and return two
copies of this letter, which will constitute our agreement with respect to the
subject matter of this letter.


                                       Very truly yours,

                                       GALOOB TOYS, INC.


                                       By: /s/ William G. Catron
                                           -------------------------------
                                           Name:  William G. Catron
                                           Title: Executive Vice President





CONFIRMED AND AGREED

HASBRO, INC.


By: /s/ Alfred J. Verrecchia
    -------------------------------
    Name:  Alfred J. Verrecchia
    Title: Executive Vice President
   10
                                  Hasbro, Inc.
                               1027 Newport Avenue
                               Pawtucket, RI 02862


                                                                   June 23, 1998


Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, CA  94080
Attention: Mark N. Goldman
           President and Chief Executive Officer

Dear Mr. Goldman:

                  Reference is made to our letter agreement dated April 2, 1998.
The proviso in the third sentence of paragraph 4 of the letter agreement shall
be amended to read as follows:

         provided, however, that within five business days upon reaching an
         agreement or understanding with Lucas relating to its approval or
         consent in connection with a Transaction, you will either terminate
         discussions with the Company by written notice to the Company or
         disclose to the Company the existence of such agreement or
         understanding, but you shall not be required to disclose any terms of
         any such agreement or understanding with Lucas or any modifications of
         existing terms under licenses with Lucas unless and until you and the
         Company have executed a definitive agreement providing for your
         acquisition of the Company, which definitive agreement may not be
         conditioned or terminable in any respect based upon the Company's
         satisfaction with your agreement with Lucas.

The letter, dated June 18, 1998, which amended the proviso in the third sentence
of paragraph 4 of the letter agreement, is hereby superceded and shall be of no
force and effect. All other terms of the letter agreement shall remain in full
force and effect.
   11
                  If you agree with the foregoing, please sign and return two
copies of this letter, which together with the letter agreement, will constitute
our complete agreement with respect to the subject matter hereof.

                                       Very truly yours,


                                       HASBRO, INC.



                                       By: /s/ Alfred J. Verracchia
                                           -------------------------------
                                           Name:  Alfred J. Verracchia
                                           Title: Executive Vice President



CONFIRMED AND AGREED

GALOOB TOYS, INC.



By: /s/ Mark D. Goldman
    -------------------------------
    Name:  Mark D. Goldman
    Title: President and
           Chief Executive Officer


                                        2

EX-99.D

   1
                                                                       EXHIBIT D
[GALOOB LOGO]
 
                                October 2, 1998
 
Dear Stockholder:
 
     I am pleased to inform you that Galoob Toys, Inc. (the "Company") has
entered into a definitive merger agreement with Hasbro, Inc. ("Hasbro") pursuant
to which Hasbro has agreed to acquire the Company. Under the merger agreement, a
wholly-owned subsidiary of Hasbro today commenced a cash tender offer for all
outstanding shares of the Company's common stock at a price of $12.00 per share,
subject to the terms and conditions in the Offer to Purchase and the related
Letter of Transmittal that you will receive in Hasbro's offering materials. The
merger agreement provides that, following completion of the tender offer,
Hasbro's subsidiary will be merged with and into the Company and all shares of
the Company's common stock not purchased in the tender offer will be converted
into the right to receive $12.00 per share in cash, without interest.
 
     YOUR BOARD OF DIRECTORS, BY UNANIMOUS VOTE, HAS APPROVED THE MERGER
AGREEMENT, INCLUDING THE TENDER OFFER AND MERGER, AND DETERMINED THAT THE TERMS
OF THE TENDER OFFER AND MERGER ARE FAIR TO AND IN THE BEST INTEREST OF
STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
ALL STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES TO HASBRO'S
SUBSIDIARY.
 
     In arriving at its decision to recommend the offer, the Board of Directors
gave careful consideration to a number of factors, which are described in the
Schedule 14D-9 filed by the Company with the Securities and Exchange Commission
and enclosed with this letter, including the opinion of Allen & Company
Incorporated, the Company's financial advisor, that the consideration to be
received by the stockholders in the tender offer and the merger is fair, from a
financial point of view, to such holders. We urge you to consider carefully the
Schedule 14D-9 and Hasbro's offering materials, which are also enclosed with
this letter and provide instructions on how to tender shares.
 
     Galoob's management and Directors thank you for the support you have given
the Company over the years.
 
                                   Sincerely,
 
                                   /s/ Mark D. Goldman
 
                                   Mark D. Goldman
                                   President and
                                   Chief Executive Officer

EX-99.E

   1
                                                                       EXHIBIT E


                          [ALLEN & COMPANY LETTERHEAD]
 
                                                              September 27, 1998
 
Board of Directors
Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, CA 94080
Gentlemen:
 
     We understand that Galoob Toys, Inc. ("Galoob") and Hasbro, Inc. ("Hasbro")
are considering entering into a Merger Agreement with terms substantially as set
forth in the draft dated September 27, 1998 (the "Merger Agreement") proposing
to effect a transaction as described in the Merger Agreement and related
documentation (the "Transaction").
 
     Pursuant to an engagement letter dated February 9, 1998, you have asked us
to render our opinion as to the fairness of the Transaction from a financial
point of view to the shareholders of Galoob.
 
     Allen & Company Incorporated ("Allen"), as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, private placements and
related financings, bankruptcy reorganizations and similar recapitalizations,
negotiated underwritings, secondary distributions of listed and unlisted
securities, and valuations for corporate and other purposes.
 
     As you know, Allen has been engaged by Galoob since February 9, 1998, to
render certain financial advisory services in connection with a potential sale
of Galoob. In connection with such engagement, Allen will receive a fee upon
consummation of the Transaction.
 
     Our opinion as expressed herein reflects and gives effect to information
concerning Galoob which we acquired during the course of this assignment,
including information provided by senior management in the course of a number of
discussions. We have not, however, conducted an independent appraisal of
Galoob's assets, or independently verified the information concerning Galoob's
operations or other data which we have considered in our review, and for the
purpose of expressing our opinion set forth herein, we have assumed that all
such information is accurate, complete and current.
 
     In arriving at our conclusion, we have considered, among other factors we
deemed relevant, (i) the terms of the draft Merger Agreement and related
documentation (which prior to the delivery of this opinion has not been executed
by the parties); (ii) the nature of the operations and financial history of
Galoob, including discussions with senior management of Galoob of the business
and prospects of Galoob relating to, among other things, Galoob's operating
budget and financial outlook; (iii) certain license agreements and other
material contracts of Galoob, including, but not limited to, the license
agreement dated October 14, 1997 between Lucas Licensing Ltd. and Galoob; (iv)
Galoob's filings with the Securities and Exchange Commission, including audited
and unaudited financial statements for Galoob; (v) certain publicly available
reports on Galoob independently prepared by various research analysts; (vi) the
historical trading information for the common stock of Galoob; (vii) certain
financial and stock market information for certain other companies in businesses
related to those of Galoob; (viii) certain financial information relating to
certain merger and acquisition transactions involving companies in businesses
related to those of Galoob; and (ix) certain publicly available information
relating to premiums paid in certain selected merger and acquisition
transactions. In addition to our review and analyses of the specific information
set forth above, our opinion herein reflects and gives effect to our assessment
of general economic, monetary, market and industry conditions existing as of the
date hereof as they may affect the business and prospects of Galoob.
   2
Board of Directors
September 27, 1998
Page 2
 
     It is understood that this letter is for the information of the Board of
Directors of Galoob and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
filing made by Galoob or Hasbro with the Securities and Exchange Commission with
respect to the Transaction.
 
     The opinion rendered herein does not constitute a recommendation to
shareholders of Galoob as to whether to vote in favor of the Transaction or to
tender any or all of their shares in connection with the Transaction.
 
     Based upon and subject to the foregoing, it is our opinion as of the date
hereof that the consideration to be received by the shareholders of Galoob in
connection with the Transaction is fair from a financial point of view.
 
                                          Very truly yours,
                                          ALLEN & COMPANY INCORPORATED
 
                                          By: /s/ ERAN S. ASHANY
                                            ------------------------------------
                                            Name: Eran S. Ashany
                                            Title: Vice President

EX-99.J

   1
                                                                     EXHIBIT J

                   SEVERANCE AND CHANGE IN CONTROL AGREEMENT


     AGREEMENT, dated as of November 6, 1997, by and between GALOOB TOYS, INC.,
a Delaware corporation (the "Company"), and Kathy McElwee (the "Employee").

                                    PREAMBLE
                                    --------

     The Compensation Committee of the Board of Directors of the Company has
determined that it is in the best interests of the Company and its stockholders
for the Company to revise and restate the termination arrangements with the
Employee in the event the Employee should leave the employ of the Company under
the circumstances described in this Agreement. In part, this Agreement is being
executed and delivered to help assure a continuing dedication by the Employee to
her duties to the Company notwithstanding the occurrence of a business
combination proposal.  In particular, the Compensation Committee believes it
imperative, should the Company receive proposals from third parties with respect
to its future, to enable the Employee, without being influenced by the
uncertainties of her own situation, to assess and advise management and the
Board of Directors whether such proposals would be in the best interest of the
Company and its stockholders and to enable the Employee to take such other
action regarding such proposals as the Board of Directors might determine to be
appropriate.

     NOW, THEREFORE, in view of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which each party acknowledges, the
Company and the Employee hereby agree as follows:

     1.  EFFECTIVE DATE AND TERM OF AGREEMENT.

     (a) This Agreement is effective and binding on both parties as of the
date hereof and, shall continue in effect through the second anniversary of the
date hereof (the "Expiration Date"); provided, however, that, if a Change in
Control (as defined in Section 3(a) hereof) shall have occurred during the term
of this Agreement, this Agreement shall continue in effect for a period of
twenty-four (24) months beyond the Expiration Date.  

     (b) Nothing in this Agreement shall affect any right which the Employee
may otherwise have to terminate her employment from the Company.  Likewise,
nothing in this Agreement shall affect any right which the Company may have to
terminate the Employee's employment at any time in any lawful manner, except the
obligation of the Company to make the payments provided for herein.   






                                       1
   2
     2.  EMPLOYMENT AND SEVERANCE.
         -------------------------

     (a) Subject to Section 3(c) below, if the Employee is terminated by the
Company for reasons other than "for Cause" or due to the Employee's "Disability"
(as those terms, respectively, are defined in Sections 3(d)(ii) and (i) hereof),
such Employee shall receive a continuation of her Base Salary (as defined in
Section 3(d)(iii) hereof) and certain other benefits as hereinafter provided
("Other Benefits", and collectively with such Base Salary, "Severance Benefits")
for a period of nine (9) months from and after the Date of Termination (as
defined in Section 3(d)(iv)) ("Extension Period"); provided, however, that from
and after the Date of Termination the Employee shall not receive or be entitled
to any continuation of any bonus, incentive or profit sharing participation or
eligibility for any part or all of the Company's fiscal year in which the Date
of Termination occurs or for any part of the Extension Period.  Except as
provided below, such Base Salary during the Extension Period shall be paid in
accordance with the Company's normal payroll schedule.  If, however, during the
Extension Period the Employee commences regular full-time employment elsewhere,
the ongoing Severance Benefits shall cease as of the date of commencement of
such employment; provided, however, that as of such date a calculation shall be
made to determine the aggregate amount of Base Salary (excluding Other Benefits)
that remains unpaid and which the Employee would have otherwise been entitled to
receive during the remaining portion of the Extension Period, and the Company
shall promptly pay the Employee a lump sum (minus withholdings and other
required deductions) of an amount equal to one-half (1/2) of such unpaid amount.

     (b) The Other Benefits referred to in Section 2(a) above include all
medical, health and welfare and insurance benefits that were in effect and in
which the Employee participated as of the Date of Termination and these will
continue during the Extension Period until the earlier to occur of nine (9)
months from the Date of Termination or the date the Employee becomes eligible
for benefits from a subsequent employer.  The provisions and conditions covering
these Other Benefits, including but not limited to the amount of any
contributions to be made by the Employee on a monthly or other periodic basis,
will be governed by the various plans as they are in effect from time to time.
Notwithstanding the foregoing, earned Flexible Time Off ("FTO") shall stop
accruing and/or being earned as of the Date of Termination and all contributions
to the Company's 401K and "cafeteria" benefit plan shall stop as of the Date of
Termination.  The Employee shall however be entitled to receive the amount of
any accrued but unused FTO or vacation time to which the Employee is entitled
through the Date of Termination and any amounts to be paid to the Employee
pursuant to any deferred compensation plan.

     (c) The Employee's automobile allowance and automobile program
benefits, including Company gasoline credit card and reimbursement for
maintenance, insurance and other



                                       2
   3
auto-related expenses, will cease as of the Date of Termination and shall
not be extended to the Employee during the Extension Period.

     (d) For purposes of this Agreement, "regular full-time employment
elsewhere" shall not include or be deemed to include any situation where the
Employee becomes self- employed, or any self-employment circumstances where the
Employee owns or controls at least 51 percent of the stock or other controlling
equity of an entity that serves as the Employee's employer and was created after
the Date of Termination solely for the purpose of the Employee's ongoing
employment.

     (e) In the event of (i) a termination for Cause, whether before or
after a Change in Control, or (ii) the voluntary termination by the Employee of
her employment at any time other than as provided for in Sections 3 and 4, the
Company shall pay the Employee no later than five (5) days after the Date of
Termination her Base Salary through the Date of Termination, the amount of any
accrued but unused FTO or vacation time to which the Employee is entitled
through the Date of Termination, and any amounts to be paid to the Employee
pursuant to any deferred compensation plan.  Except as provided in the preceding
sentence, and except for other payments routinely owed to the Employee by the
Company for such items as travel and expense reimbursement, the Company shall
have no further obligations to the Employee under this Agreement or otherwise.

     3.  TERMINATION FOLLOWING CHANGE IN CONTROL.
         ----------------------------------------

     (a) For purposes of this Agreement, a "Change in Control" of the
Company shall be deemed to have occurred upon any of the following events:

         (i)  A person or entity or group of persons or entities, acting in
concert, shall become the direct or indirect beneficial owner (within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended from
time to time) of securities of the Company representing twenty-five percent
(25%) or more of the combined voting power of the issued and outstanding common
stock of the Company (a "Significant Owner"), unless such shares are originally
issued to such Significant Owner by the Company; or

         (ii) The majority of the Company's Board of Directors is no longer
comprised of the incumbent directors who constitute the Board of Directors on
the date of this Agreement and any other individual(s) who becomes a director
subsequent to the date of this Agreement whose initial election or nomination
for election as a director, as the case may be, was approved by at least a
majority of the directors who comprised the incumbent directors as of the date
of such election or nomination; or 





                                       3
   4
         (iii) The Company's common stock, par value $.01 per share, shall
cease to be publicly traded; or

         (iv)  A sale of all or substantially all of the assets of the Company;
or

         (v)   The Board of Directors shall approve any merger, consolidation,
or like business combination or reorganization of the Company, the consummation
of which would result in the occurrence of any event described in clause (ii) or
(iii) above, and such transaction shall have been consummated.

     (b) In the event that any person or organization commences a tender or
exchange offer, circulates a proxy statement to the Company's stockholders, or
takes other steps designed to effect a Change in Control of the Company, the
Employee agrees that, in order to receive the benefits provided by Sections 3
and 4 of this Agreement, she will not voluntarily leave the employ of the
Company and will continue to perform her regular duties and to render her
regular services, until such person or organization has abandoned or terminated
his or its efforts to effect a Change in Control or until a Change in Control
has occurred.  Should the Employee voluntarily terminate her employment before a
Change in Control of the Company has so occurred, she shall not be entitled to
the payments provided for in Sections 3 and 4 hereof.

     (c) If a Change in Control of the Company shall have occurred, the
Employee shall be entitled (in lieu of the payments and benefits provided for in
Sections 2(a) and 2(b)) to the payments and benefits pursuant to Section 4
hereof upon the subsequent voluntary or involuntary termination of her
employment, unless such termination is (i) due to the Employee's death or (ii)
by the Company by reason of the Employee's Disability or for Cause.

     (d) For purposes of this Agreement:

         (i)   "Disability" shall mean that, as a result of the Employee's
incapacity due to physical or mental illness or injury, the Employee has been
absent from the full-time performance of her duties with the Company for six (6)
consecutive months and within thirty (30) days after Notice of Termination is
given to the Employee, she has not returned to the full- time performance of her
duties for a period of at least 14 consecutive days.  Any question as to the
existence of Disability shall be determined by a qualified independent physician
selected by the Employee (or, if she is unable to make such selection, such
selection shall be made by any adult member of the Employee's family) and
approved by the Company.  The written determination of such physician shall be
final and conclusive for purposes of this Agreement.

         (ii)  "for Cause" shall mean:  (A)  The willful and continued failure
by the Employee to substantially perform her duties with the Company (other than
any such failure 


                                       4
   5
resulting from the Employee's incapacity due to physical or mental illness or
injury); or (B)  The willful engagement in conduct by the Employee which is
demonstrably and materially injurious to the Company, monetarily or otherwise;
or (C)  Conviction for a felony or other crime punishable by imprisonment for
more than one (1) year, or the entering of a plea of nolo contendere thereto.

         (iii) "Base Salary" shall mean (A) if a Change in Control has
occurred, the annual base salary of the Employee in effect immediately prior to
the Change in Control of the Company or immediately prior to the Date of
Termination, whichever is greater, and (B) if no Change in Control has occurred,
the annual base salary of the Employee in effect immediately prior to the Date
of Termination.  Base Salary does not include any amounts paid for automobile
allowance.

         (iv)  "Date of Termination" shall mean (A) if the Employee's employment
is terminated for Disability, thirty (30) days after Notice of Termination is
given (provided that the Employee shall not have returned to the full-time
performance of her duties for a period of at least 14 consecutive days during
such thirty (30) day period) and (B) if the Employee's employment is terminated
otherwise by the Company or the Employee, the date specified in the Notice of
Termination.

     (e) "Notice of Termination" shall mean a written notice of termination
communicated in writing by one party to the other party hereunder in accordance
with Section 6(e) hereof.

     4.  PAYMENTS UPON TERMINATION.
         --------------------------

     If required pursuant to Section 3(c) hereof, the Company will pay to the
Employee as compensation for services rendered:

     (a) Not later than the 5th day after the Date of Termination, the
Employee's Base Salary through the Date of Termination, the amount of any
accrued but unused FTO or vacation time to which the employee is entitled
through the Date of Termination, and any amounts to be paid to the Employee
pursuant to any deferred compensation plan; and 

     (b) If the Date of Termination is within twelve (12) months following a
Change in Control, the Employee shall also receive the following:

         (i)   no later than ten (10) days after such Date of Termination, a
lump sum payment (minus withholdings and other required deductions) of an amount
equal to one and one-half (1-1/2) times the Employee's Base Salary, plus
eighteen (18) times the amount to which 




                                       5
   6
the Employee was then entitled immediately prior to the Change in Control
for the monthly automobile allowance; and

         (ii) no later than ten (10) days after such Date of Termination, an
additional lump sum payment (minus withholdings and other required deductions)
of an amount equal to one and one-half (1-1/2) times the greater of (x) the
percentage of maximum bonus otherwise payable for the full fiscal year in which
the Date of Termination occurs assuming performance relative to plan for the
entirety of such fiscal year was the same as performance relative to plan year
to date as of the Date of Termination, or (y) the largest bonus dollar amount
actually awarded to the Employee for any one of the five fiscal years
immediately preceding the year in which the Date of Termination occurs (for the
purpose of this Section 4(b)(ii), "bonus" shall include regular annual bonus
awards, any annual PIC bonus awards, any annual super performance bonus awards,
and any other designated annual (as opposed to long-term) bonus awards); and

         (iii) commencing upon the Date of Termination: 

               (1) All Other Benefits that were in effect and in which the
Employee participated immediately prior to the Change in Control, for the period
of the earlier to occur of eighteen (18) months following the Date of
Termination or the date the Employee becomes eligible for benefits from a
subsequent employer. The provisions and conditions covering these Other
Benefits, including but not limited to the amount of any contributions to be
made by the Employee on a monthly or other periodic basis, shall be governed by
the various plans as they are in effect from time to time.  Notwithstanding the
foregoing, earned FTO shall stop accruing and/or being earned as of the Date of
Termination and all contributions to the Company's 401k and "cafeteria" benefit
plan shall stop as of the Date of Termination.

               (2) In addition to the lump sum payment of the monthly automobile
allowance, for the period of eighteen (18) months following the Date of
Termination the Employee shall be entitled to continue to receive reimbursement
for items such as automobile maintenance, insurance and other auto-related
expenses, including the use of a Company gasoline credit card, all in accordance
with the Company's executive automobile allowance and reimbursement program as
it is in effect immediately prior to the Change in Control; or

     (c)(i)  In the event that any payment or benefit received or to be received
by the Employee pursuant to the terms of this Agreement (the "Contract
Payments") or of any other plan, arrangement or agreement of the Company (or any
affiliate) ("Other Payments" and, together with the Contract Payments, the
"Payments") would, in the written opinion of independent tax counsel selected by
the Company and reasonably acceptable to the Employee 



                                       6
   7
("Tax Counsel"), which opinion will be provided to both the Employee and
the Company, be subject to the excise tax (the "Excise Tax") imposed by section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or
in part), as determined as provided below, the Payments shall be reduced as
provided herein, (but not below zero) until no portion of the Payments would be
subject to the Excise Tax.  For purposes of this limitation, (i) no portion of
the Payments the receipt or enjoyment of which the Employee shall have
effectively waived in writing shall be taken into account, (ii) only the portion
of the Payments which in the opinion of Tax Counsel constitute a "parachute
payment" within the meaning of Section 280G(b)(2) of the Code shall be taken
into account, (iii) the Payments shall be reduced only to the extent necessary
so that the Payments would not be subject to the Excise Tax, in the opinion of
Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment
or benefit included in such payments shall be determined in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.  The Employee shall make
the determination, by written notice to the Company, at her sole discretion, as
to exactly how the Payments shall be reduced, and shall select from among the
Payments those to be so reduced, unless the Employee refuses to make such a
determination, whereupon the Company shall determine the Payments reduction.  To
assist the Employee in making the foregoing determination, the Company shall
require the Tax Counsel to counsel and advise the Employee, at the Company's
expense, as to how to reduce the Payments so the maximum net economic value can
be achieved by the Employee.

         (ii)  If it is established pursuant to an opinion of Tax Counsel or a
final determination of a court or an Internal Revenue Service proceeding that,
notwithstanding the good faith of the Employee and the Company in applying the
terms of Section 4(c)(i) hereof, any Payments paid to the Employee or for her
benefit exceeded the limitation contained in Section 4(c)(i) hereof, then the
Employee shall pay to the Company, within 90 days of receipt of notice of such
final determination or opinion, an amount equal to the sum of the excess of the
Payments paid to her or for her benefit over the maximum Payments that should
have been paid to or for her benefit taking into account the limitations
contained in Section 4(c)(i) hereof; provided, however, that (x) the Employee
shall not be required to make any payment to the Company pursuant to this
Section 4(c)(ii),(A) if, and to the extent that, such final determination
requires the payment by her of an Excise Tax by reason of any Payment or portion
thereof, or (B) in the case of the opinion of Tax Counsel, until the expiration
of the applicable statute of limitations or a final determination of a court or
an Internal Revenue Service proceeding that no Excise Tax is due and (y) the
Employee shall only be required to make a payment to the Company pursuant to
this Section 4(c)(ii) to the extent such payment is deductible or otherwise
reduces the Employee's tax liability for federal income tax purposes.  If for
any reason hereunder, the Employee is required to pay any Excise Tax, the
Company shall pay the Employee an additional payment (a "Gross-Up Payment") in
such an amount that after the payment of all taxes (including, without
limitation, any interest and penalties on such taxes and the Excise Tax) on the
Payment and on the Gross-Up Payment, the Employee shall retain an amount equal
to the

                                       7
   8
Payment minus all ordinary taxes on the Payment.  It is the intent of the
parties that, in connection with this Section 4(c)(ii), the Company shall be
responsible for, and shall pay the Employee, any amount constituting Excise Tax
on any Payment and Gross-Up Payment and any taxes (including, without
limitation, penalties and interest) imposed on any Gross-Up Payment.

         (iv)  If it is established pursuant to an opinion of Tax Counsel or a
final determination of a court or an Internal Revenue Service proceeding that,
notwithstanding the good faith of the Employee and the Company in applying the
terms of Section 4(c)(i) hereof, any Payments paid to her or for her benefit
were in an amount less than the maximum Payments which could be payable to her
without such payments being subject to the Excise Tax, then the Company shall
pay to her, within ninety days of receipt of notice of such final determination
or opinion, an amount equal to the sum of (A) the excess, if any, of the
payments that should have been paid to her or for her benefit over the payments
paid to or for her benefit and (B) interest on the amount set forth in clause
(A) of this sentence at the applicable federal rate (as defined in Section
1274(d) of the Code) from the Date of her non-receipt of such excess until the
date of such payment.

     5.  STOCK OPTIONS
         -------------

     In the event of a Change in Control, unless the employment of the Employee
is terminated for Cause, (i) all then outstanding stock options granted to the
Employee under the Amended and Restated 1984 Employee Stock Option Plan shall
become immediately exercisable without regard to any installment or vesting
provisions that may have been made part of the terms and conditions of such
options.  If the Employee voluntarily terminates her employment with the Company
within 12 months following a Change in Control for a reason other than death or
Disability, or if the Employee is terminated by the Company within 12 months
following a Change in Control other than for Cause, any and all then outstanding
stock options and stock appreciation rights granted to such employee under the
1996 Share Incentive Plan shall become immediately exercisable.

     6.  GENERAL
         -------

     (a) Subject to the second sentence hereof, the Company shall pay to the
Employee reasonable attorneys' fees that may be incurred by the Employee in
enforcing the terms of this Agreement.  If litigation or an arbitration
proceeding ensues, and the Employee prevails in such litigation or arbitration,
the Company shall promptly reimburse the Employee for her attorneys' fees and
disbursements incurred in such litigation or arbitration proceeding and pay
prejudgment interest on any money judgment obtained by the Employee calculated
at the base rate of interest charged from time to time by Citibank, N.A. from
the date that payment should have been made under this Agreement.


                                       8
   9


     (b) The Company's obligation to pay the Employee the compensation and to
make the arrangements provided herein shall be absolute and unconditional and
shall not be affected by any circumstance, including, without limitation, any
setoff, counterclaim, recoupment, defense or other right which the Company may
have against the Employee or anyone else.  All amounts payable by the Company
hereunder shall be paid without notice or demand.  The Employee shall not be
required to mitigate the amount of any payment provided for in this Agreement by
seeking other employment and if Employee obtains such other employment, any
compensation earned by Employee pursuant thereto shall not be applied to
mitigate any payment made to Employee pursuant to this Agreement except as
expressly provided herein.

     (c) The Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or other-wise) to all or substantially all of
the business and/or assets of the Company, by written agreement to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.  As used in this Agreement, the term "Company" shall mean the
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which executes and delivers the agreement required by this Section
5(c), or which otherwise becomes bound by all terms and provisions of this
Agreement by operation of law.

     (d) This Agreement shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.  If the Employee should
die while any amounts would still be payable to the Employee hereunder if she
had continued to live, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to the Employee's
devisee, legatee or other designee or, if there be no such designee, to the
Employee's estate.

     (e) For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:

     If to the Employee:

     Kathy McElwee
     2822 Tiburon Way
     Burlingame, CA  94010




                                       9
   10


     If to the Company:

     Galoob Toys, Inc.
     500 Forbes Blvd.
     South San Francisco, California  94080
     Attn:  President

or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon receipt.

     (f) This Agreement shall constitute the entire agreement between the
Employee and the Company concerning the subject matter hereof, and performance
of its obligations hereunder by the Company shall constitute full settlement and
release of any claim or cause of action, of whatsoever nature, which the
Employee might otherwise assert or claim against the Company or any of its
directors, stockholders, officers or employees on account of any termination.
No provisions of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing, signed by the
Employee and an authorized officer of the Company.  No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of any similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.  No assurances or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement.  However, this Agreement is in addition to and not
in lieu of any other plan providing for payments to or benefits for the Employee
or any agreement now existing or which hereafter may be entered into between the
Company and the Employee.  The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Delaware without giving effect to the provisions, principles, or policies
thereof relating to choice or conflict of laws.

     (g) The invalidity or unenforceability of any provision of this Agreement
in any circumstance shall not affect the validity or enforceability of such
provision in any other circumstance or the validity or enforceability of any
other provision of this Agreement, and except to the extent such provision is
invalid or unenforceable, this Agreement shall remain in full force and effect.
Any provision in this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating or affecting the
remaining provisions hereof in such jurisdiction, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.


                                       10
   11


     (h) Except as otherwise explicitly provided herein, any dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in accordance with the rules of the American
Arbitration Association then in effect.  Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that the
Employee shall be entitled to seek specific performance of her right to be paid
as provided in this Agreement in the event of any dispute.  

     (i) The masculine or neuter gender shall include the feminine gender.
This Agreement may be executed in more than one counterpart, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.

         IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.


GALOOB TOYS, INC.                             Kathy McElwee



By: /s/ William Catron                        /s/ Kathleen R. McElwee
    ______________________________________    __________________________________
    Name: William Catron                      Name: Kathleen R. McElwee
    Title: Executive V.P.                     Title: V.P. Finance