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Three analysts and top management from six sector firms examine the Leisure/Toys sector in this 44-page Leisure/Toys Issue from The Wall Street Transcript, available at (212/952-7433) or www.twst.com

TWST: Jill, what has gone on in the entertainment and leisure space so far this year?

Ms. Krutick: There has been an interesting dichotomy in the entertainment and leisure space. We’ve seen the leisure stocks, for which we carry an overweight rating, outperform the market by almost 13% year to date. Broadly, these companies tend to be more recession-resistant, putting them in a favorable light during tougher times. The cruise companies have bounced back broadly with Carnival (CCL) up 35% year to date and Royal Caribbean (RCL) up 72%. Toy maker Hasbro (HAS) surged 66% this year as the company has proven it is on a firmer recovery path. On the flip side, Six Flags (PKS) is down by 15% as the key season has fallen short of expectations. The big cap media stocks have outperformed the market much more modestly — by about 4%-5%. We have a market-weight rating on the media space, and that is based on the notion that advertising might see a more protracted or uneven recovery, which would limit some appreciation in several of the stocks.

TWST: The other one you mentioned was Royal Caribbean. I thought the cruise business was difficult.

Ms. Krutick: The cruise business can be difficult when you have too much supply in the market, but we have gone through an amazing change with Carnival successfully acquiring Princess, giving them close to 50% market share when they finish the next couple of years of capacity growth. With Royal Caribbean at about 25% market share, this means a duopoly is basically heading up the business. With that scenario, we have a lot of capacity coming onstream in the next couple of years. But beginning in 2005 supply and demand should come into better balance, paving the way for some pricing power — which is the key to the business. Demand has historically grown at an 8% rate. As supply comes down to that level in 2005 we could see better pricing translate into some nice earnings momentum.

TWST: What are your longer-term expectations for Royal?

Ms. Krutick: Royal Caribbean doesn’t have the integration risk and is in a deceleration mode in terms of adding new ship capacity. As a result, Royal Caribbean is in a very good position to focus on upgrading its operating profile in terms of improving margins. The company recently brought in a new CFO who is going to take great care in managing the cost side of the business and trying to get its operating margins closer to the market leader — Carnival. We think Royal Caribbean will show good earnings momentum because it is delevering its balance sheet over the next couple of years and driving tremendous free cash flow beginning next year. We are entering into an unusual sweet spot for Royal Caribbean. We recently raised our estimates and price target on Royal Caribbean from $28 to $35 as its second quarter results exceeded our expectations, particularly in terms of its pricing recovery.

TWST: Do they have a lot of new capacity coming on as well?

Ms. Krutick: They have capacity coming on, but not at the rate they did a few years ago when it was in the high teens. You’re seeing a low double-digit rate of capacity growth in the next couple of years, whereas Carnival is up in the high teens area. Unfortunately, the cruise players are only as strong as the weakest competitor. So if Carnival is seeing some demand pullback because they are not able to get the pricing they want in the market, Royal Caribbean will have no choice but to follow Carnival’s lead.

This special issue includes:

1) Entertainment & Leisure Stocks - In an in-depth (4,000 words) Analyst Interview, Jill S. Krutick, Managing Director and an Analyst at Citigroup Global Markets, examines the outlook for the sector and shares specific stock recommendations.

2) Outlook for Leisure Stocks - In an in-depth (4,300 words) Analyst Interview, Joseph Yurman, an Associate Director in equity research at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

3) Video Games & Toy Manufacturers - In an in-depth (4,100 words) Analyst Interview, Anthony Gikas, a Vice President of U.S. Bancorp Piper Jaffray Inc., examines the outlook for the sector and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of six - sector firms examine the outlook for their firm and the sector. Firms include:

Applause, LLC, Fountain Powerboat Industries, Geerlings & Wade, Meade Instruments Corp., QRS Music Technologies, Vermont Teddy Bear Company