PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

See accompanying condensed notes to consolidated financial statements.

(continued)

See accompanying condensed notes to consolidated financial statements.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars)
(Unaudited)

(1)   In the opinion of management and subject to year-end audit, the accompanying unaudited interim financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of June 30, 2002 and July 1, 2001, and the results of operations and cash flows for the periods then ended in accordance with U.S. GAAP.

The year to date periods ended June 30, 2002 and July 1, 2001 are 26-week periods.

The results of operations for the six months ended June 30, 2002 are not necessarily indicative of results to be expected for the full year.

(2)   The Company's other comprehensive earnings (loss) for the quarter and six months ended June 30, 2002 and July 1, 2001 consist of the following:

Reclassification adjustments from other comprehensive earnings to earnings for the quarter ended June 30, 2002 are comprised primarily of an impairment charge relating to an other than temporary decrease in the value of the Company's available-for-sale securities. Additionally for the quarter and six months ended June 30, 2002, net gains on cash flow hedging derivatives for which the related transaction has impacted earnings and was reflected in costs of sales, have been reclassified to earnings. The gains on cash flow hedging derivatives for the quarter and six months ended June 30, 2002 are net of losses on cash flows reclassified to earnings as the result of hedge ineffectiveness of $14 and $18 for the respective periods.

Reclassification adjustments from other comprehensive earnings for the quarter and six months ended July 1, 2001 consist primarily of net gains on cash flow hedging derivatives for which the related transaction had impacted earnings, largely offset by losses on available-for-sale securities sold during the period. The gains on cash flow hedging derivatives for the quarter ended July 1, 2001 include gains on cash flows reclassified to earnings as the result of hedge ineffectiveness of $10, while the gains on cash flow hedging derivatives for the six months ended July 1, 2001 were net of losses on cash flows reclassified to earnings as the result of hedge ineffectiveness of $32. Additionally, in the six months ended July 1, 2001, a loss of $1,103 was recognized in earnings relating to changes in fair value of derivatives which the Company excluded from its assessment of hedge effectiveness. There was no such amount for the quarter ended June 30, 2002.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)

The Company expects substantially all of the remaining deferred loss of $5,174 on derivative hedging instruments in accumulated other comprehensive earnings to be reclassified to earnings within the next twelve months. The remainder of the balance in accumulated other comprehensive income relates primarily to losses on the translation of foreign currency financial statements.

(3)   Effective at the beginning of fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets." As a result of adopting these statements, the Company's goodwill and certain intangible assets are no longer amortized. In addition, the Company evaluated its existing intangible assets and goodwill acquired in prior purchase business combinations based on the requirements included in Statement 141 and reassessed the useful lives and residual values of those intangible assets other than goodwill. As a result of this assessment, the lives of product rights having a net book value of $75,700 obtained in the Company's acquisition of Milton Bradley in 1984 and Tonka in 1991 were determined to have an indefinite life and tested for impairment in accordance with the provisions of Statement 142. No other reclassifications or adjustments of remaining useful lives were made as a result of this assessmen t.

Statement 142 requires the Company to perform an annual impairment test for goodwill and intangible assets with indefinite lives. Additionally, within six months of adopting the statement, the Company was required to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. This assessment was completed during the second quarter. As part of this assessment, the Company allocated goodwill and other corporate assets and liabilities to its various reporting units. It then compared the carrying values of its reporting units to the fair values of these reporting units. The fair values of the reporting units were calculated using an income approach, which looks to the present value of expected future cash flows and compares these values in total with the fair value of the business based on market capitalization at the date of testing. Based on the result of this assessment, the Company recorded a one-time transitional charge of $245,732, net of tax, resultin g from the impairment of goodwill relating to the U.S. Toys reporting unit. This transitional charge was recorded as a cumulative effect of a change in accounting principle and, in accordance with the statement, recorded retroactively to the first quarter.

A portion of the Company's goodwill and other intangible assets reside in the Corporate segment of the business. For purposes of SFAS 142 testing, these assets were allocated to the reporting units within the Company's operating segments. Including this allocation, the changes in carrying amount of goodwill, by operating segment for the six months ended June 30, 2002 are as follows:

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)

The other reduction in the carrying value of the Games segment goodwill results primarily from the settlement of a dispute with the former shareholders of Wizards of the Coast, which was acquired in September 1999.

The following table provides a reconciliation of the reported net income by quarter for 2001 to adjusted net income had SFAS 142 been applied as of the beginning of fiscal year 2001:

The Company will continue to incur amortization expense related to the use of its rights to produce various products that were acquired. The amortization of these product rights will fluctuate depending on related projected revenues during an annual period, as well as rights reaching the end of their useful lives. The Company currently estimates continuing amortization expense for the next five years to be approximately:

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)

(4)   Hasbro is a worldwide leader in children's and family leisure time and entertainment products and services, including the design, manufacture and marketing of games and toys ranging from traditional to high-tech. The Company's main reportable segments are U.S. Toys, Games and International. The Company has two other segments, Operations and Retail, which meet the quantitative thresholds for reportable segments. As of the beginning of 2002, the Company had further refined its business segments. This refinement included the realignment of the U.S. Tiger toy lines to the U.S. Toys segment, from the Games segment where all Tiger products had been included. Certain Tiger electronic games, primarily handheld, remain in the Games segment. In addition, the International operations of Tiger and Wizards of the Coast are now managed as part of the International segment beginning in January 2002. The results of these units had been included in and managed as part of the Games segment. Prior year amounts have been reclassified to reflect the Company's current focus.

In the United States, the U.S. Toys segment includes the design, marketing and selling of boys' action figures, vehicles and playsets, girls' toys, preschool toys and infant products, creative play products, electronic interactive products, children's consumer electronics, electronic learning aids, and toy-related specialty products. The Games segment includes the development, manufacturing, marketing and selling of traditional board games and puzzles, handheld electronic games, trading card games, and role-playing games. Within the International segment, the Company develops, manufactures, markets and sells both toy and certain game products in non-U.S. markets. The Operations segment sources product for the majority of the Company's segments. The Retail segment operates retail shops, which sell games products and offer an area for organized play of trading card and role-playing games. The Company also has other segments which license out certain toy and game properties. These other segments do not meet the quantitative thresholds for reportable segments and have been combined for reporting purposes.

Segment performance is measured at the operating profit level. Included in Corporate and eliminations are general corporate expenses, the elimination of intersegment transactions and certain assets benefiting more than one segment. Intersegment sales and transfers are reflected in management reports at amounts approximating cost. The accounting policies of the segments are the same as those described in Note 1 to the Company's consolidated financial statements for the fiscal year ended December 30, 2001, except for the Company's adoption of Statement of Financial Accounting Standards No. 142 described in Note 3 and the Company's adoptions of Statement of Financial Accounting Standards No. 144 as of December 31, 2001, which did not have an impact on the Company's consolidated results of operations and financial position.

Results shown for the quarter and six months are not necessarily representative of those which may be expected for the full year 2002 nor were those of the comparable 2001 periods representative of those actually experienced for the full year 2001. Similarly, such results are not necessarily those which would be achieved were each segment an unaffiliated business enterprise.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)

Information by segment and a reconciliation to reported amounts for the quarter and six months ended June 30, 2002 and July 1, 2001 are as follows.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)

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

(b) Certain intangible assets which benefit operating segments are reflected as Corporate assets for management reporting and segment reporting purposes. For application of SFAS 142, these amounts have been allocated to the reporting unit which benefits from their use. Therefore, a portion of the impairment of $296,223 of goodwill related to the U.S. Toys reporting unit as a result of the adoption of SFAS No. 142 in the six months ended June 30, 2002 is reflected in the Corporate and eliminations amount above.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)

The following table presents consolidated net revenues by classes of principal products for the quarters and six month periods ended June 30, 2002 and July 1, 2001.

For the six months ended July 1, 2001, $28,000 has been reclassified to Boys Toys from the Other category.

(5)   Earnings per share data for the quarters and six months ended June 30, 2002 and July 1, 2001 were computed as follows:

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)

Options and warrants to acquire shares totaling 40,800 at June 30, 2002 and 40,462 at July 1, 2001, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive. The Company also has convertible debt under which potentially issuable shares were not included as the contingency features were not met. If the contingent conversion features are met, the impact of conversion of the debentures will result in an additional 11,574 shares being included in the calculation of diluted earnings per share.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of Dollars Except Per Share Data)

NET EARNINGS (LOSS) AND SEGMENT RESULTS
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Net loss for the quarter and six months ended June 30, 2002 were $(25,888) and $(288,678), respectively, compared with $(18,331) and $(43,355) for the comparable periods of 2001. Basic and diluted loss per share for the quarter and six months ended June 30, 2002 were $(0.15) and $(1.67), respectively, compared with $(.11) and $(.25) for the respective periods in 2001. The net loss and basic and diluted earnings per share for the six months ended June 30, 2002 include a cumulative effect of accounting change, net of tax, of $(245,732) or $(1.42) per share relating to the impairment of goodwill in connection with the adoption of Statement of Financial Accounting Standards No. 142 (SFAS 142). The net loss and basic and diluted earnings per share for the six months ended July 1, 2001 include a cumulative effect of accounting change, net of tax, of $(1,066) or $(.01) per share relating to the adoption of SFAS 133. Included in the net loss in the quarter and six months ended June 30, 2002 is a non-cash charge, aft er tax, of $28,589 or $0.17 per share for the write-down of the Company's investment in Infogrames Entertainment SA common stock. The related shares were received as part of the net proceeds from the sale of Hasbro Interactive and Games.com to Infogrames Entertainment SA in 2001. The results for the quarter and six months ended June 30, 2002 were also favorably impacted by the provisions of SFAS No. 142 which eliminated the amortization of goodwill and certain intangibles deemed to have indefinite lives. The elimination of this amortization and its related tax effect would have reduced the net loss for the quarter ended July 1, 2001 by $7,980 or $.05 per share and net loss for the six months ended July 1, 2001 by $15,853 or $.09 per share.

Consolidated net revenues for the six months ended June 30, 2002 were $998,257 compared to $974,257 for the six months ended July 1, 2001, an increase of 2%. Consolidated revenues for the quarter ended June 30, 2002 were $545,990 compared to $510,971 for the quarter ended July 1, 2001, an increase of 7%. Most of the Company's revenues and operating earnings are derived from its three principal segments, U.S. Toys, Games and International. In 2002, the Company has reclassified its segment results for 2001 to reflect the realignment of certain operating divisions within its major segments. Toy lines included in the U.S. Tiger product lines have been reclassed to the U.S. Toys segment from the Games segment, where all Tiger products had been included. Certain Tiger electronic games, primarily handheld, remain in the Games segment. In addition, the international operations of Tiger and Wizards of the Coast, previously managed as part of the Games segment, are now managed as part of the International segment.< /P>

U.S. TOYS
U.S. Toys net revenues for the quarter ended June 30, 2002 increased 18% to $199,635 from $168,607 for the quarter ended July 1, 2001. Revenues for the six months ended June 30, 2002 increased 22% to $400,495, from $327,111 for the six months ended July 1, 2001. The increase was primarily due to shipments of products related to STAR WARS: EPISODE II: ATTACK OF THE CLONES, which was released on May 16, 2002. The increase is also partly due to increased shipments of product related to BOB THE BUILDER and DISNEY as well as increased sales of certain core products, including PLAYSKOOL products.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of Dollars Except Per Share Data)

These increases were partially offset by decreased sales of products related to JURASSIC PARK III, which was released in July 2001, as well as decreased shipments of electronic interactive products, such as POO-CHI. U.S. Toys operating profit increased to $14,556 for the quarter ended June 30, 2002 from an operating loss of $(4,208) for the quarter ended July 1, 2001. Operating profit for the six months ended June 30, 2002 increased to $40,796 from an operating loss of $(19,164) for the six months ended July 1, 2001. The increase for the quarter, in dollars, was primarily due to increased revenues and related gross margins partially offset by higher royalty expenses. In addition to the above, the increase for the six months is due to decreased selling, distribution and administration expenses. Selling, distribution and administration costs decreased as a percentage of sales in both periods as the result of the Company's cost reduction initiatives, including the combination of its U.S. Toys group in essential ly one location, a process begun in late 2000. Resulting decreases in these fixed expenses offset the increase in volume related expenses. During the remainder of 2002, the Company continues to expect higher sales of STAR WARS related products due to the theatrical release of STAR WARS: EPISODE II: ATTACK OF THE CLONES, in May 2002. Sales of product related to entertainment-based properties, such as STAR WARS, typically carry a higher gross margin. These products also typically carry a higher royalty rate and the resulting operating profit is not as high as it is for revenues derived from the sale of Hasbro owned brands.

Higher amortization expense relating to the product rights associated with STAR WARS was offset by the elimination of amortization of goodwill and product rights deemed to have an indefinite life as the result of the Company's adoption of SFAS 142 at the beginning of fiscal 2002.

GAMES
Games net revenues decreased by 6% to $152,039 for the quarter ended June 30, 2002 from $161,908 for the quarter ended July 1, 2001. Revenues for the six months ended June 30, 2002 decreased 15% to $244,888 from $286,528 for the six months ended July 1, 2001. For the quarter, the decrease primarily relates to decreased sales of POKEMON and MAGIC: THE GATHERING trading card games, partially offset by increased sales of STAR WARS related games as well as traditional board games, primarily TRIVIAL PURSUIT and MONOPOLY. The decrease for the six months, in addition to decreases in MAGIC and POKEMON, was due to decreased sales of children's and preschool games partially offset by increased sales of STAR WARS related games. The decrease in MAGIC: THE GATHERING is principally due to an additional release in 2001 versus 2002. Product sales are generally higher during the period subsequent to new releases. Games operating profit decreased to $22,444 for the quarter ended June 30, 2002 from $35,907 for the quarter ended July 1, 2001. Operating profit for the six months ended June 30, 2002 decreased to $19,943 from $51,999 for the six months ended July 1, 2001. The decrease in operating profit was primarily due to decreased gross margin as the result of the decrease in overall sales as well as increased research and development expenses. Partially offsetting these factors were decreased selling, distribution and administrative expenses primarily due to the Company's cost reduction initiatives, and reduced intangible amortization expense as the result of the adoption of Statement of Financial Accounting Standards No. 142, which eliminates amortization of goodwill and certain intangibles deemed to have indefinite lives.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of Dollars Except Per Share Data)

OTHER SEGMENTS
Revenues from the Retail segment decreased 7% to $8,601 for the quarter ended June 30, 2002 from $9,277 for the quarter ended July 1, 2001. Revenues for the Retail segment for the six months ended June 30, 2002 decreased 7% to $17,469 from $18,762 for the six months ended July 1, 2001. Operating loss for the retail segment decreased to $(5,834) for the quarter ended June 30, 2002 from $(7,214) for the quarter ended July 1, 2001. Operating loss for the six months ended June 30, 2002 decreased to $(11,256) from $(14,019) for the six months ended July 1, 2001. The decrease in revenues and operating loss was primarily due to the closing of certain underperforming stores in 2001.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of Dollars Except Per Share Data)

EXPENSES
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Amortization expense of $22,766 in the second quarter of 2002 decreased from $28,862 in the second quarter of 2001. Amortization expense for the six months ended June 30, 2002 decreased to $44,215 from $58,283 for the six months ended July 1, 2001. These decreases are related to the Company's adoption on December 31, 2001 of Statements of Financial Accounting Standard 142, which require that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead, be tested for impairment at least annually. The decrease related to the adoption of these statements is partially offset by increased amortization of the product rights related to STAR WARS as a result of increased sales of STAR WARS product due to the May 2002 release of STAR WARS EPISODE II: ATTACK OF THE CLONES. The Company expects full year amortization for 2002 to approximate $90,000.

Royalties for the quarter ended June 30, 2002 increased 64% to $65,712 from $39,961 for the quarter ended July 1, 2001. Royalties for the six months ended June 30, 2002 increased 76% to $117,168 from $66,399 for the six months ended July 1, 2001. This increase was the result of increased sales of entertainment based product, primarily STAR WARS related. As noted above, the Company expects a higher level of royalties in 2002 as the result of product sales related to the theatrical releases of STAR WARS EPISODE II: ATTACK OF THE CLONES and Disney's LILO & STITCH.

Research and product development expenses for the quarter ended June 30, 2002 increased to $36,770 or 6.7% of net revenues from $29,907 or 5.9% of net revenues in the second quarter of 2001. These expenses increased to $69,983 or 7.0% of net revenues for the six months ended June 30, 2002 from $60,204 or 6.2% of net revenues for the six months ended July 1, 2001. This increase is the result of the Company's continued focus on product innovation as part of its core brand strategy.

For the quarterly periods, advertising expense increased in amount and as a percentage of net revenues to $58,507 or 10.7% of net revenues in 2002 from $51,065 or 10.0% of net revenues in 2001. For the six month periods, advertising expense increased to $105,396 or 10.6% of net revenues from $98,678 or 10.1% of net revenues in 2001.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of Dollars Except Per Share Data)

Interest expense for the second quarter of 2002 was $18,317 compared with $25,321 in the first quarter of 2001. For the six month periods, interest expense decreased to $37,859 in 2002 from $51,211 in 2001. These decreases arise from lower long-term interest rates in 2002 due to the issuance of $250,000 of 2.75% convertible senior debentures in the fourth quarter of 2001, the proceeds of which were used to repurchase debt with higher interest rates and, to a lesser extent, lower short-term borrowings in 2002.

INCOME TAXES
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Income tax benefit as a percentage of pretax loss in the first half of 2002 was 26% compared to 32% in the first half of 2001. The income tax rate for the full year 2001 was 36.8%. The decrease in the rate in 2002 from the full year 2001 rate is primarily due to the adoption of Statement of Financial Accounting Standard No. 142, which eliminates amortization of goodwill and certain intangibles deemed to have an indefinite life.

CHANGE IN ACCOUNTING PRINCIPLE
- -------------------------------------------------------
On December 31, 2001, the first day of fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which eliminates the amortization of goodwill, as well as amortization of intangible assets deemed to have an indefinite life. Under this statement, goodwill and other intangible assets are allocated to applicable reporting units. Goodwill and intangible assets deemed to have indefinite lives are tested for impairment annually using a two step process that begins with an estimation of fair value of a reporting unit. The first step is a screen for potential impairment while the second step measures the amount of impairment if there is an indication from the first step that one exists. Completion of step one identified that the U.S. Toys reporting unit had a fair value which was less than its carrying value, indicating a need for step two. No other reporting units required step two procedures. After allocating the fair value of the U.S. Toys repor ting unit to its assets and liabilities, the remaining amount was insufficient to cover goodwill by $296,223. Goodwill of the U.S. Toys reporting unit was impaired by this amount. This impairment was reflected as though it had happened on the first day of fiscal 2002, and is included in results for the six months ended June 30, 2002, net of related tax impact of $50,491.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of Dollars Except Per Share Data)

On January 1, 2001, the Company implemented Statement of Financial Accounting Standards No. 133, as amended by Statement of Financial Accounting Standards No. 138, which requires that all derivative instruments, such as foreign exchange contracts, be recorded on the balance sheet at fair value. The effect of adopting these standards on earnings, net of taxes, was $(1,066) while the effect on Accumulated Other Comprehensive Earnings was $(753), which was reclassified to earnings over the final three quarters of 2001 through cost of sales.

OTHER INFORMATION
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Due to the seasonal nature of its business, the Company expects the second half of the year and within that half, the fourth quarter, to be more significant to its overall business for the full year. The concentration of sales in the second half of the year and, specifically, the fourth quarter increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, inventory levels, policies of retailers and differences in overall economic conditions. The trend of retailers over the past few years has been to purchase a greater percentage of product within or close to the fourth quarter holiday consumer selling season, which includes Christmas. Quick response inventory management pract ices now being used result in fewer orders being placed in advance of shipment and more orders being placed for immediate delivery.

Consequently, unshipped orders on any date in a given year are not necessarily indicative of sales for the entire year. In addition, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. At June 30, 2002 and July 1, 2001, the Company's unshipped orders were approximately $459,800 and $498,700, respectively.

During 2001, the Company received two inquiries from the Office of Fair Trading in the United Kingdom (the "OFT") into allegedly anti-competitive pricing practices by the Company's United Kingdom ("U.K.") subsidiary, Hasbro U.K. Ltd. ("Hasbro U.K."). In May of 2002, the OFT issued preliminary decisions proposing to find that Hasbro U.K. had entered into agreements with certain retailers and distributors in the U.K. to fix prices in violation of U.K. competition laws. These decisions are not final and the Company has submitted a response to the OFT. If a fine is imposed pursuant to the OFT inquiry, the Company currently estimates that the amount of the fine could range from approximately $236 to approximately $38,300. Because of a number of factors, including the lack of precedent under the applicable U.K. statute and the significant appeal rights available to the Company in the event of an adverse final determination by the OFT, there is no amount within this range which is a better estimate than any ot her amount in the range. The Company accrued a charge to earnings in 2001 equal to the low end of the range set forth above.

HASBRO, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial

Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)

As a result, any fine that is imposed in excess of this accrued amount would have an adverse effect on the Company's results of operations in the quarter in which such additional liability is fixed or resolved. While the Company believes that some fine will be imposed, it is the Company's position that the amount of any fine should be at or near the low end of the range set forth above, and it is vigorously pursuing this position in its submissions to the OFT.

LIQUIDITY AND CAPITAL RESOURCES
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Hasbro has historically generated a significant amount of cash from normal operations. The Company funds its operations and liquidity primarily through cash flows from operations, as well as utilizing borrowings under the Company's secured and unsecured credit facilities when needed. The seasonality of the Company's business results in the interim cash flow statements not being representative of that which may be expected for the full year. Historically, the majority of the Company's cash collections occur late in the fourth quarter and early in the first quarter of the subsequent year. As receivables are collected, the proceeds are used to repay a significant portion of outstanding short-term debt. During 2002, the Company expects to continue to fund its working capital needs primarily through operations and, when needed, through its revolving credit facility and believes that the funds available to it are adequate to meet its needs. However, unforeseen circumstances, such as severe softness in or collapse of the retail environment may result in a significant decline in revenues and operating results of the Company, thereby causing the Company to be in non-compliance with its debt covenants. Non-compliance with its debt covenants could result in the Company being unable to utilize borrowings under its revolving credit facility, a circumstance most likely to occur when operating shortfalls would most likely require supplementary borrowings.

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

Cash flows utilized by operating activities were $76,903 for the six months ended June 30, 2002 compared to cash provided by operations of $13,930 for the six months ended July 1, 2001. Receivables were $479,443 at June 30, 2002 compared to $399,402 at July 1, 2001. The increase in receivables is due to the timing of shipments in the period, lower sales program costs in the period and the mix of products sold in the first six months of 2002. The Company had lower sales of trading card games in 2002, which generally have shorter payment terms. While receivables are higher, past due accounts therein decreased by 21% over the comparable period last year. Inventories decreased approximately 17% from last year's levels, primarily reflecting improved inventory management. The Company has actively sought to manage inventory to reduce the risk of obsolescence. Prepaid expenses decreased to $191,841 at June 30, 2002 from $234,344 at July 1, 2001. The Company has been actively seeking to r educe expenditures and this decreased level of spending is reflected in decreased prepaid expenses, as well as in decreased liabilities.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of Dollars Except Per Share Data)

In addition, prepaid expenses decreased due to a decrease in advance royalties as the result of royalties earned in the second quarter on products relating to certain licenses, most significantly the May 2002 release of STAR WARS: EPISODE II: ATTACK OF THE CLONES.

Accounts payable and accrued liabilities decreased by $63,633 to $553,208 at June 30, 2002 from $616,841 at July 1, 2001. Approximately 41% of the decrease relates to decreased restructuring provisions relating to the Company's December 2000 consolidation plan as a result of payments made pursuant to that plan, and approximately 30% of the decrease is due to decreased accrued royalties primarily as a result of the Company's strategy to focus on core brands rather than licensed products. The remaining decrease is primarily due to reduced amounts payable as a result of the lower level of inventory and other expenses at June 30, 2002. These decreases were partially offset by an increase in accrued income taxes due to an increase in taxable income for the six months ended June 30, 2002 versus the six months ended July 1, 2001.

Collectively, property, plant and equipment and other assets decreased $378,023 from the comparable period in the prior year. The principal reason for this decrease is the goodwill impairment charge of $296,223 as a result of the Company's adoption of SFAS No. 142, as well as amortization of intangibles and depreciation of property, plant and equipment. In addition to the goodwill impairment, there was a significant decline in the fair value of the Company's investment in the common stock of Infogrames SA over the comparable period in the prior year. In connection with the decline in the value of this investment, the Company recorded a non-cash charge to earnings of $38,633 in the quarter ended June 30, 2002. These decreases were partially offset by an increase in long-term deferred tax assets resulting from the SFAS No. 142 impairment charge and the decrease in the value of the Infogrames Entertainment SA stock, and an increase in long-term advance royalties as a result of a payment made related to the M ay 2002 release of STAR WARS EPISODE II: ATTACK OF THE CLONES as well as additions to property, plant and equipment.

In connection with the license for the STAR WARS properties, the Company has aggregate minimum guaranteed royalty payments of $590,000. Of this amount, from the inception of the contract in 1998 through the quarter ended June 30, 2002, the Company has paid $470,000 to the licensor. For that same time period, the Company has also earned and recorded related royalty expense of approximately $250,000.

Net borrowings (short and long-term borrowings less cash and cash equivalents) improved to $1,084,298 at June 30, 2002 from $1,285,198 at July 1, 2001. This reflects a decrease in short-term debt of $156,187, primarily as the result of improved cash management which has resulted in a lower level of short term borrowings in 2002. This decrease is also due to the ability of the Company to repurchase $50,000 of 7.95% Notes due March 2003 during the quarter ended June 30, 2002 while maintaining cash balances consistent with the prior year. The Company has $274,873 of 7.95% Notes due March 2003, which are shown as current installments of long-term debt at June 30, 2002. It is the Company's current expectation that cash provided by operations will be used to settle this obligation.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of Dollars Except Per Share Data)

At December 30, 2001, the Company had a committed secured revolving credit agreement of $325,000, maturing in February 2003. In March 2002, the Company entered into an amended and restated revolving credit facility with its bank group, which extended the term of the facility through March 2005, increased the amount available to the Company for borrowing under this facility to $380,000, and eased certain restrictions regarding the retirement of long-term debt prior to stated maturity. The amended and restated facility is secured by substantially all domestic accounts receivable and inventory, as well as certain intangible assets of the Company. In addition to this available committed line, the Company also has available uncommitted lines approximating $55,000. At June 30, 2002, approximately $46,000 of these committed and uncommitted lines were in use. The Company believes that funds provided by operations and amounts available for borrowing from time to time under these lines of credit are adequate to meet its needs in 2002.

The Company had letters of credit of approximately $28,700 and inventory purchase commitments of $168,011 outstanding at June 30, 2002.

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

Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue when the related revenue is recognized. This net revenue is reflected as such in the Company's financial statements. The Company routinely commits to promotional allowance programs with customers. These allowances primarily relate to fixed programs, with the customer earning the allowances based on purchases of Company products during the year. Discounts are recorded as a reduction of related revenue at the time of sale. While many of the allowances are based on fixed amounts, certain of the allowances, such as returns, are based on market data, historical trends and information from customers and are therefore subject to estimation.

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

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of Dollars Except Per Share Data)

On December 31, 2001, the first day of fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which eliminates the amortization of goodwill, as well as amortization of intangible assets deemed to have an indefinite life. Under this Statement, goodwill and intangible assets are allocated to applicable reporting units. Goodwill and intangible assets deemed to have indefinite lives are tested for impairment annually. Goodwill is tested using a two step process that begins with an estimation of fair value of the reporting unit using an income approach, which looks to the present value of expected future cash flows. The first step is a screen for potential impairment while the second step measures the amount of impairment if there is an indication from the first step that one exists. Intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value also calculated using the inc ome approach.

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

The recoverability of royalty advances and contractual obligations with respect to minimum guaranteed royalties is assessed by comparing the remaining minimum guaranty to the estimated future sales forecasts and related cash flow projections to be derived from the related product. If sales forecasts and related cash flows from the particular product do not support the recoverability of the remaining minimum guaranty or, if the Company decides to discontinue a product line with royalty advances or commitments, a charge to write-off the remaining minimum guaranty is required. The preparation of revenue forecasts and related cash flows for these products requires judgments and estimates. Actual revenues and related cash flows or changes in the assessment of anticipated revenues and cash flows related to these products could result in a change to the assessment of recoverability of remaining minimum guaranteed royalties.

FINANCIAL RISK MANAGEMENT
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The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates primarily as a result of sourcing products in U.S. dollars, Hong Kong Dollars and Euros while marketing those products in more than twenty currencies. Results of operations may be affected primarily by changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound, Canadian dollar, and Mexican peso and, to a lesser extent, other currencies, including those in Latin American countries.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of Dollars Except Per Share Data)

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

In May of 2002, the Company entered into interest rate swap agreements with notional amounts totaling $350 million in order to adjust the amount of total debt that is subject to fixed interest rates. These agreements are designated and effective as hedges of the change in fair value of the associated debt. At June 30, 2002, these contracts had a fair value of $4,150 of which $423 is recorded as a current asset and $3,727 is recorded in other assets.

FORWARD-LOOKING STATEMENTS
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This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "intend," "look forward," "may," "planned," "potential," "should," "will," and "would" or any variations of words with similar meanings. These forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual actions or results may differ materially from those expected or anticipated in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to, the Company's ability to manufacture, source and ship new and continuing products on a timely basis and the acceptance of those products by customers and consumers at prices that will be sufficient to profitably recover development, manufacturing, marketing, royalty and oth er costs of products; economic conditions, including higher fuel prices, currency fluctuations and government regulations and other actions in the various markets in which the Company operates throughout the world; the inventory policies of retailers, including the concentration of the Company's revenues in the second half and fourth quarter of the year, together with the increased reliance by retailers on quick response inventory management techniques, which increases the risk of underproduction of popular items, overproduction of less popular items and failure to achieve tight and compressed shipping schedules; the bankruptcy or other lack of success of one of the Company's significant retailers which could negatively impact the Company's revenues or bad debt exposure; the impact of competition on revenues, margins and other aspects of the Company's business, including the ability to secure, maintain and renew popular licenses and the ability to attract and retain talented employees in a competitive enviro nment; the ability of the Company to generate sufficient available cash flow to service its outstanding debt; restrictions on the Company contained in the Company's credit

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of Dollars Except Per Share Data)

agreements; market conditions, third party actions or approvals, the impact of competition, and other factors that could delay or increase the cost of implementation of the Company's consolidation programs, prevent the Company from fully realizing advance royalties paid in connection with licensed products, result in an impairment of the goodwill associated with acquired companies or impacted product lines, reduce actual results, and cause anticipated benefits of acquisitions to be delayed or reduced in their realization; and other risks and uncertainties as are or may be detailed from time to time in the Company's public announcements and filings with the SEC, such as Forms 8-K, 10-Q, and 10-K. The Company undertakes no obligation to revise the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect events or circumstances occurring after the date of the filing of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Item 2. Changes in Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K.

Item 6. Exhibits and Reports on Form 8-K. (continued)