See accompanying condensed notes to consolidated financial statements.

(continued)

See accompanying condensed notes to consolidated financial statements.

The quarterly and year to date periods ended June 29, 2003 and June 30, 2002 are 13-week and 26-week periods, respectively.

The results of operations for the six months ended June 29, 2003 are not necessarily indicative of results to be expected for the full year.

These condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company filed audited financial statements for the year ended December 29, 2002 in its annual report on Form 10-K, which includes all such information and disclosures, and accordingly, should be read in conjunction with the financial information included herein.

Hasbro uses the intrinsic-value method of accounting for stock options granted to employees. As required by the Company's existing stock plans, stock options are granted at, or above, the fair market value of the Company's stock, and, accordingly, no compensation expense is recognized for these grants in the Consolidated Statements of Operations. The Company records compensation expense related to other stock-based awards, such as restricted stock grants, over the period the award vests, typically three years. Had compensation expense been recorded under the fair value method as set forth in the provisions of Statement of Financial Accounting Standards No. 123 for stock options awarded, the impact on the Company's net earnings (loss) and net earnings (loss) per share for the fiscal quarters and six months ended June 29, 2003 and June 30, 2002 would have been:

(2)   Earnings per share data for the quarters and six months ended June 29, 2003 and June 30, 2002 were computed as follows:

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

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

Options and warrants to acquire shares totaling 11,188 at June 29, 2003 and 40,800 at June 30, 2002, 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, to the extent those shares would be dilutive.

(3)   Other comprehensive earnings (loss) for the quarter and six months ended June 29, 2003 and June 30, 2002 consist of the following:

Reclassification adjustments from other comprehensive earnings to earnings of $1,509 and $2,907 for the quarter and six months ended June 29, 2003, respectively, represent net losses on cash flow hedging derivatives for which the related transaction has impacted earnings and was reflected in cost of sales. The losses on cash flow hedging derivatives for the six months ended June 29, 2003 are net of gains on cash flows reclassified to earnings as the result of hedge ineffectiveness of $1. 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. 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. The Company expects the remai ning deferred losses on derivative hedging instruments at June 29, 2003 of $9,146 in accumulated other comprehensive earnings to be reclassified to earnings within the next twelve months.

(4)    Effective at the beginning of fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). As a result of adopting this statement, the Company's goodwill and certain intangible assets are no longer amortized. The Company also evaluated its existing intangible assets and goodwill acquired in prior purchase business combinations 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 totaling $75,700 obtained in the Company's acquisition of Milton Bradley in 1984 and Tonka in 1991 were adjusted to an indefinite life and tested for impairment in accordance with the provisions of SFAS 142. As a result, the accumulated amortization on these assets is excluded from the balance sheet disclosure of accumulated amortization of other intangible assets. No other reclassifications or adjustments of remaining useful l ives were made as a result of this assessment.

SFAS 142 required the Company, within six months of the date of adoption, to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. This initial assessment was completed during the second quarter of 2002. 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 those 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. These values were compared 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, resulting from the impairment of goodwill relating to the U.S. Toys reporting unit primarily as the result of the change in goodwi ll impairment criteria from an undiscounted to a discounted cash flow method. 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. The first quarter of 2002 was restated to reflect this application. The Company performs its annual impairment test in the fourth quarter of the fiscal year. The impairment test for the fourth quarter of 2002 indicated that there was no further impairment.

The other reduction in the carrying value of the Games segment goodwill in 2002 results primarily from the settlement of a dispute with the former shareholders of Wizards of the Coast, which was acquired in September 1999.

(5)   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.

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 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 game products. The Company also has other segments which primarily 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. Certain shared costs are allocated to segments based upon foreign exchange rates fixed at the beginning of the year, with adjustment to actual foreign exchange rates included in Corporate and eliminations.

The accounting policies of the segments are the same as those described in note 1 to the Company's consolidated financial statements for the fiscal year ended December 29, 2002, except for the Company's adoption of Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", as of December 30, 2002, which did not have an effect on the Company's consolidated results of operations or financial position.

Results shown for the quarter and six months are not necessarily representative of those which may be expected for the full year 2003 nor were those of the comparable 2002 periods representative of those actually experienced for the full year 2002. Similarly, such results are not necessarily those which would be achieved were each segment an unaffiliated business enterprise.

Information by segment and a reconciliation to reported amounts for the quarter and six months ended June 29, 2003 and June 30, 2002 are as follows.

(b) Certain intangible assets which benefit operating segments are reflected as Corporate assets for segment reporting purposes. For application of SFAS 142, these amounts have been allocated to the reporting unit which benefits from their use.

The following table presents consolidated net revenues by classes of principal products for the quarters and six month periods ended June 29, 2003 and June 30, 2002.

(6) Effective December 30, 2002, the Company adopted Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The adoption of this statement did not have an impact on the Company's consolidated results of operations or financial position.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), which established new disclosure and liability-recognition requirements for guarantees of debt. The recognition and measurement requirements of FIN 45 were effective for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have an effect on the consolidated results of operations or financial position of the Company.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", (SFAS 149) which is effective for contracts entered into or modified after June 30, 2003 as well as for hedging relationships designated after June 30, 2003. The initial adoption of SFAS 149 will not have a material effect on the consolidated results of operations or financial position of the Company.

In May of 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity", (SFAS 150) which establishes standards for issuers' classification as liabilities in the statement of financial position of certain financial instruments that have characteristics of both liabilities and equity. At June 29, 2003, the Company has certain warrants recorded as equity, which will be required under SFAS 150 to be recorded as a liability and subsequently adjusted to fair value through earnings.

SFAS150 is effective for the Company as of June 30, 2003, the first day of the third quarter of fiscal 2003. On that date, the Company will reclassify the value of these warrants, previously recorded in equity of approximately $108 million, to current liabilities and record a charge for the cumulative effect of accounting change of approximately $17 million to adjust the warrants to their fair value as of that date.

At June 29, 2003, the above warrants contained an option through January 2008 for the holder to sell all of these warrants to Hasbro for a price to be paid at the Company's election of either $100 million in cash, or $110 million in the Company's common stock, such stock being valued at the time of the exercise of the option. Had this option been exercised at June 29, 2003 and the Company had elected to settle this option in the Company's stock, the Company would have been required to issue 6,449 shares.

RESULTS OF OPERATIONS
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Net earnings for the quarter and six months ended June 29, 2003 were $11,417 and $12,606, respectively, compared with a net loss of $(25,888) and $(288,678) for the comparable periods of 2002. Basic earnings per share for both the quarter and six months ended June 29, 2003 were $0.07 compared with a basic loss per share of $(0.15) and $(1.67) for the respective periods in 2002. Diluted earnings per share for the quarter and six months ended June 29, 2003 were $0.06 and $0.07, respectively, compared with a diluted loss per share of $(0.15) and $(1.67) for the respective periods in 2002. The net loss and basic and diluted loss 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 adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Included in the net loss in the quarter and six months ended June 30, 2002 is a non-cash charge, after 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 ended June 30, 2002 were also favorably impacted by interest income received on a tax settlement, net of tax, of $7,556.

Consolidated net revenues for the quarter ended June 29, 2003 increased 7% to $581,469 compared with $545,990 for the quarter ended June 30, 2002. For the six months ended June 29, 2003, consolidated net revenues were $1,043,237 compared to $998,257 for the six months ended June 30, 2002, an increase of 5%. Operating profit for the quarter ended June 29, 2003 was $28,391 compared to an operating profit of $14,001 in 2002. Operating profit for the six months ended June 29, 2003 was $44,347 compared to an operating profit of $7,656 for the six months ended June 30, 2002. Most of the Company's revenues and operating earnings are derived from its three principal segments: U.S. Toys, Games and International.

U.S. TOYS
U.S. Toys segment net revenues for the quarter ended June 29, 2003 increased 4% to $208,419 from $199,635 for the quarter ended June 30, 2002. Net revenues for the six months ended June 29, 2003 decreased 10% to $361,863 from $400,495 for the six months ended June 30, 2002. The increase for the quarter was primarily due to sales of BEYBLADE and FURREAL FRIENDS products, which were introduced in the second half of 2002, as well as increased revenues from core brands such as the PLAYSKOOL and TRANSFORMERS lines. These increases offset the expected decrease in shipments from the prior year of STAR WARS products. Shipments of STAR WARS related products were higher in 2002 as a result of the theatrical release of STAR WARS: EPISODE II: ATTACK OF THE CLONES in May 2002. Decreased sales of BOB THE BUILDER and ZOIDS products in 2003 also partially offset the increase in sales for the quarter.

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

The year to date revenue decline from 2002 was primarily due to the expected decrease in shipments of STAR WARS products, as well as decreases in shipments of BOB THE BUILDER and ZOIDS related products. These decreases were partially offset by revenues from BEYBLADE and FURREAL FRIENDS products, as well as increased revenues from core products, such as the PLAYSKOOL and TRANSFORMERS lines.

U.S. Toys operating profit decreased to $12,946 for the quarter ended June 29, 2003 from $14,556 for the quarter ended June 30, 2002. For the six months ended June 29, 2003, operating profit decreased to $18,272 from $40,796 for the six months ended June 30, 2002. This decrease in operating profit for both periods was primarily due to decreased gross margin resulting from lower shipments of STAR WARS products, which have a higher gross margin, partially offset by lower royalty and amortization expense. Product rights associated with the STAR WARS property are being amortized in proportion to expected remaining revenues. In periods with higher sales of STAR WARS products, resulting amortization expense will be higher. During the remainder of 2003, the Company expects lower sales of STAR WARS related products compared to 2002, due to the theatrical, DVD and video release of STAR WARS: EPISODE II: ATTACK OF THE CLONES in 2002 and, therefore, lower royalty and amortization expense in 2003. Sales of product re lated 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 owned brands. Operating profit in the 2003 quarter and six month periods was also negatively impacted by a charge of approximately $7,000 related to exiting certain unprofitable product lines.

GAMES
Games segment net revenues decreased by 2% to $148,613 for the quarter ended June 29, 2003 from $152,039 for the quarter ended June 30, 2002. Net revenues for the six months ended June 29, 2003 increased 7% to $260,823 from $244,888 for the six months ended June 30, 2002. The decrease for the quarter primarily relates to decreased sales of licensed trading card games, primarily POKEMON. The decrease was partially offset by sales of TRIVIAL PURSUIT 20TH ANNIVERSARY EDITION, which was initially released in the U.S. in the third quarter of 2002, and increased sales of non-licensed trading card games including MAGIC: THE GATHERING. The increase over the six month period primarily relates to strong board game revenues as a result of shipments of TRIVIAL PURSUIT 20TH ANNIVERSARY EDITION, as well as increased shipments of MAGIC: THE GATHERING and other non-licensed trading card games, which were partially offset by decreased sales of POKEMON and other licensed trading card games.

Games operating profit increased to $25,363 for the quarter ended June 29, 2003 from $22,444 for the quarter ended June 30, 2002. Operating profit for the six months ended June 29, 2003 increased to $43,372 from $19,943 for the six months ended June 30, 2002. The increase in operating profit for the quarter was primarily because of lower royalty expense from lower sales of licensed trading card games. The increase in operating profit for the six months ended June 29, 2003 was primarily due to increased gross margin as the result of the increase in sales as well as the mix of products sold in 2003. Operating profit for both the quarter and the six months ended June 29, 2003 also benefited from decreased fixed costs as the result of cost reduction initiatives of the Company.

International operating loss decreased to $4,793 for the quarter ended June 29, 2003 from $17,298 for the quarter ended June 30, 2002. Operating loss for the six months ended June 29, 2003 decreased to $10,768 from $46,388 for the six months ended June 30, 2002. The decrease in operating loss for both periods was primarily the result of increased gross margin in dollars from higher revenues, partially offset by an increase in advertising expense. Selling, distribution and administration costs decreased as a result of the Company's expense reduction initiatives, although these were largely offset by the foreign exchange impact of the weaker U.S. dollar. Although revenues were positively impacted by the weaker U.S. dollar, as noted above, operating expenses were also impacted, with a resulting negative impact to International operating loss of approximately $1,100 for the quarter and $1,900 for the six months ended June 29, 2003.

OTHER SEGMENTS
Revenues from the Retail segment decreased 15% to $7,285 for the quarter ended June 29, 2003 from $8,601 for the quarter ended June 30, 2002. Revenues for the Retail segment for the six months ended June 29, 2003 decreased 11% to $15,553 from $17,469 for the six months ended June 30, 2002. Operating loss for the retail segment decreased to $(3,092) for the quarter ended June 29, 2003 from $(5,834) for the quarter ended June 30, 2002. Operating loss for the six months ended June 29, 2003 decreased to $(9,921) from $(11,256) for the six months ended June 30, 2002. The decrease in revenues and operating loss was primarily due to the closing of additional retail stores. During the first six months of 2003, the Company closed fourteen retail stores.

EXPENSES
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Amortization expense of $18,410 in the second quarter of 2003 decreased from $22,766 in the second quarter of 2002. Amortization expense for the six months ended June 29, 2003 decreased to $34,588 from $44,215 for the six months ended June 30, 2002. These decreases are primarily related to decreased amortization of the product rights related to STAR WARS. As noted above, the STAR WARS property rights are amortized in proportion to expected remaining sales. In periods with higher sales of STAR WARS products, such as 2002, the resulting amortization expense will be higher. As a result, the Company expects amortization expense to be lower in 2003 as compared to 2002.

Royalty expense for the quarter ended June 29, 2003 decreased to $52,650, or 9.1% of net revenues from $65,712, or 12.0% of net revenues in the second quarter of 2002. Royalty expense for the six months ended June 29, 2003 decreased to $86,470, or 8.3% of net revenues from $117,168, or 11.7% of net revenues for the six months ended June 30, 2002. This decrease is the result of decreased sales of entertainment-based product, primarily STAR WARS related. As noted above, the Company expects a lower level of royalty expense in 2003 due to the lower sales of STAR WARS products and as a result of the Company's business strategy to continue to invest in its core brands.

Research and product development expenses for the quarter ended June 29, 2003 decreased to $33,105 or 5.7% of net revenues from $36,770 or 6.7% of net revenues in the second quarter of 2002. These expenses decreased to $63,605 or 6.1% of net revenues for the six months ended June 29, 2003 from $69,983 or 7.0% of net revenues for the six months ended June 30, 2002. The Company expects full year product development expense to be lower than 2002 both in dollars and as a percentage of revenue as part of its strategy of focusing development spending on its core brands to provide increased returns from those brands.

For the quarter, advertising expense increased in amount and as a percentage of net revenues to $67,686 or 11.6% of net revenues in 2003 from $58,507 or 10.7% of net revenues in 2002. For the six months ended June 29, 2003, advertising expense increased to $120,864 or 11.6% of net revenues from $105,396 or 10.6% of net revenues in 2002. These increases reflect the Company's focused marketing to increase and maintain awareness of its core brands, as well as to introduce new products. The Company expects advertising expense in 2003 to continue to be higher than 2002 levels both in dollars and as a percentage of revenue as a result of this business strategy.

The Company's selling, distribution and administration expenses, which, with the exception of distribution costs are largely fixed, decreased to $150,420 or 25.9% of net revenues for the quarter ended June 29, 2003 from $152,069 or 27.9% of net revenues for the quarter ended June 30, 2002. For the six months ended June 29, 2003, these expenses decreased to $290,319 or 27.8% of net revenues, compared to $291,260 or 29.2% of net revenues in 2002. These decreases reflect lower expenses resulting from the Company's cost reduction efforts, which were partly offset by higher international expenses in translated U.S. dollars as the result of the weaker dollar and increased distribution costs, due to increased sales volume.

NONOPERATING (INCOME) EXPENSE
- -------------------------------------------------------
Other expense for the quarter ended June 29, 2003 was $777 compared to $30,667 for the quarter ended June 30, 2002. For the six month periods, other expense was $82 in 2003 compared to $27,832 in 2002. During the quarter ended June 30, 2002, the Company incurred a charge of $38,633 related to the decline in the fair value of the common stock of Infogrames Entertainment SA, held by the Company as an available-for-sale investment. This charge was partially offset by interest income received in the second quarter of 2002 on a tax settlement of $10,211.