See accompanying condensed notes to consolidated financial statements.

See accompanying condensed notes to consolidated financial statements.

The quarterly and year to date periods ended June 27, 2004 and June 29, 2003 are 13-week and 26-week periods, respectively.

The results of operations for the six months ended June 27, 2004 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 disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The Company filed audited financial statements for the year ended December 28, 2003 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.

The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements for the fiscal year ended December 28, 2003.

(2)   Earnings per share data for the fiscal quarters and six months ended June 27, 2004 and June 29, 2003 were computed as follows:

Certain warrants containing a put feature that may be settled in cash or common stock are required to be accounted for as a liability at fair value. The Company is required to assess if these warrants, which are classified as a liability, have a more dilutive impact on earnings per share when treated as an equity contract. For the second quarter and six months ended June 27, 2004, the warrants had a more dilutive impact on earnings per share assuming they were treated as an equity contract. Accordingly, the numerator includes an adjustment to earnings for the income included therein related to the fair market value adjustment and the denominator includes an adjustment for the shares issuable as of June 27, 2004.

Options and warrants to acquire shares totaling 5,509 at June 27, 2004 and 11,188 at June 29, 2003, 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 would 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. See Note 7.

(3) 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 and net earnings per share for the fiscal quarters and six months ended June 27, 2004 and June 29, 2003 would have been:

Reclassification adjustments from other comprehensive earnings to net earnings of $664 and $3,555 for the quarter and six months ended June 27, 2004, and $1,509 and $2,907 for the quarter and six months ended June 29, 2003 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 quarter and six months ended June 27, 2004 include losses (gains) on cash flows reclassified to earnings as the result of hedge ineffectiveness of $(16) and $144 for the respective periods. 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. The Company expects the remaining deferred losses on derivative hedging instruments at June 27, 2004 of $6,353 in accumulated other comprehensive earnings to be reclassified to earnings within the next twelve months.

(5) The components of the net periodic cost of the Company's defined benefit pension and other postretirement plans for the quarters and six months ended June 27, 2004 and June 29, 2003 are as follows:

On December 8, 2003, Congress expanded Medicare to include coverage for prescription drugs. The Company sponsors retiree medical programs for certain of its locations and the Company expects that this legislation will eventually reduce the Company's costs for some of these programs. In May 2004, the FASB issued FASB Staff Position FAS 106-2 (FSP 106-2), which is applicable to the Company in the third quarter of 2004. The adoption of FSP 106-2 did not have an effect on the Company's statement of operations or financial position at June 27, 2004. The Company is still awaiting regulatory guidance from Medicare in order to determine the impact of FSP 106-2 on the third and fourth quarters of 2004.

(6)   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 one other segment, Operations, which meets 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, and 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 finished product for the majority of the Company's segments. The Company also has other segments that primarily license out certain toy and game properties and a retail segment, which operated retail stores in 2003. The Company announced the closure of these stores in December 2003. 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 referenced in Note 1.

Results shown for the quarter and six months are not necessarily representative of those which may be expected for the full year 2004, nor were those of the comparable 2003 periods representative of those actually experienced for the full year 2003. Similarly, such results are not necessarily representative of 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 27, 2004 and June 29, 2003 are as follows.

(b) Certain affiliate revenue amounts from the first quarter have been reclassified between International and Corporate and eliminations for the six months ended June 27, 2004.

(c) Included in the International assets at June 27, 2004 is an increase to goodwill of $9,390 related to the Company's acquisition of the remaining unowned interest in its Latin America operations in the first quarter of 2004.

The following table presents consolidated net revenues by class of principal products for the quarters and six month periods ended June 27, 2004 and June 29, 2003.

(7) In April 2003, the Financial Accounting Standards Board ("FASB") announced that it would mandate the fair value method of accounting for all stock-based awards. The FASB issued an Exposure Draft of a proposed statement on March 31, 2004, which is subject to a comment period. If enacted, the change in accounting is not expected to be effective for the Company until fiscal 2005. Until a final statement is issued, the Company cannot estimate the effect that this change in accounting would have on its consolidated statement of operations.

At its meeting on July 1, 2004, the Emerging Issues Task Force (EITF) reached a tentative consensus that the dilutive effect of contingent convertible debt instruments must be included in dilutive earnings per share regardless of whether the triggering contingency has been satisfied. This tentative consensus, EITF Issue 04-8, would be applied on a retroactive basis and would require restatement of prior period earnings per share. The consensus is tentative to allow time for public comment. The proposed EITF could result in additional dilution to the Company's diluted earnings per share. Until a final consensus is reached, the Company cannot estimate the effect that this change would have on its diluted earnings per share.

The Company's principal business strategies focus on:

• Growing its core brands,
• Developing new and innovative toy and game products, and
• Increasing operating margins by optimizing efficiencies within the Company.

Management views the Company's principal product opportunities as falling into three general categories: core brands, innovative new products and licensed entertainment-based products. Although the Company intends to continue to offer products based on licensed entertainment properties, in the past three years the Company has actively sought to reduce its reliance on products based on theatrical properties and to achieve more consistent performance by focusing greater resources on the development and growth of its core brands and on producing innovative products which are not based on movies.

The Company's core brands represent Company-owned or Company-controlled brands, such as G.I. JOE, TRANSFORMERS, MY LITTLE PONY, MONOPOLY, MAGIC: THE GATHERING, PLAY-DOH, PLAYSKOOL and TONKA, which the Company views as presenting potential to be successful over the long-term. By focusing on core brands, the Company is working to build a more consistent revenue stream and basis for future growth. However, the volatility of consumer preferences and the high level of competition in the toy and game industry make it difficult to maintain the long-term success of existing product lines and consistently introduce successful new products.

In addition to its focus on core brands, the Company's strategy also involves trying to meet ever-changing consumer preferences by identifying and offering innovative products based on market opportunities. In 2003, innovative products such as BEYBLADE, FURREAL FRIENDS, and VIDEONOW contributed significantly to the Company's success. In the second half of 2004, the Company's new product launches planned include VIDEONOW COLOR, PLAY IT NOW, and LAZER TAG. The Company believes its strategy of focusing on the development of its core brands and continuing to identify opportunistic new products will prevent the Company from being dependent on the success of any one product line.

While the Company's strategy focuses on growing its core brands and the development of innovative, new products, the Company continues to evaluate and enter into strategic arrangements to license entertainment-based properties when the Company believes it is economically beneficial. The Company is offering products based on DREAMWORKS' SHREK II, which was released in May 2004. Other major movie-based properties in 2004 will include products based on DISNEY/PIXARS' THE INCREDIBLES and LUCASFILM'S STAR WARS.

Although gross profits from theatrical entertainment-based products are generally higher, this increased gross margin is offset by royalty expenses incurred on these sales, as well as amortization expense of property rights paid to the licensor of such properties.

In recent years, the Company has also focused on reducing its fixed costs and increasing its operating margins through a number of business efficiency initiatives. Two major initiatives in late 2003 were the cessation of manufacturing at the Company's Valencia, Spain facility and the announced closure of the remaining retail stores operated under the Wizards of the Coast and Game Keeper names, both of which occurred in the fourth quarter of 2003. The Company continues to review its operations in order to determine areas where greater efficiency can be achieved.

The Company's strategy for the near-term also focuses on the reduction of long-term debt. The goal of management is to reduce the Company's debt-to-capitalization ratio, defined as total debt, both short-term and long-term, as a percentage of total equity plus total debt, to 25-30%. The Company has repurchased or repaid approximately $195,900 in principal amount of long-term debt during the twelve months ended June 27, 2004. At June 27, 2004, the Company's debt-to-capitalization ratio was approximately 33%, which compared to approximately 40% at June 29, 2003. It is the Company's intent to continue to assess the desirability of using available cash from operations to reduce its outstanding long-term debt, as market conditions and the Company's committed revolving credit agreement and other sources of financing allow.

Consolidated net revenues for the quarter ended June 27, 2004 decreased 11% to $516,433 compared with $581,469 for the quarter ended June 29, 2003. For the six months ended June 27, 2004, consolidated net revenues were $990,680 compared to $1,043,237 for the six months ended June 29, 2003, a decrease of 5%. Operating profit for the quarter ended June 27, 2004 was $22,729 compared to $28,391 in the second quarter of 2003. Operating profit for the 2004 six month period was $37,401 compared to an operating profit of $44,347 for the six month period of 2003. 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 27, 2004 decreased 20% to $167,161 from $208,419 for the quarter ended June 29, 2003. Net revenues for the six months ended June 27, 2004 decreased 12% to $319,551 from $361,863 for the six months ended June 29, 2003. The decrease for both the quarter and six month period was primarily due to lower sales of BEYBLADE, and to a lesser extent, decreased sales of TRANSFORMERS, FURREAL FRIENDS, and ZOIDS products. These decreases were partially offset by increased shipments of MY LITTLE PONY products, which were reintroduced in the third quarter of 2003, as well as increased sales of VIDEONOW products.

The U.S. Toys segment had an operating loss of $6,991 for the quarter ended June 27, 2004 compared to an operating profit of $12,946 for the quarter ended June 29, 2003. For the six months ended June 27, 2004, the U.S. Toys segment had an operating loss of $5,956 compared to an operating profit of $18,272 for the six months ended June 29, 2003. This decrease in operating profit for both the quarter and six month period primarily related to decreased gross margin as a result of the lower net revenues as well as a change in product mix, due to the decline in sales of BEYBLADE products which carry a higher gross margin. The decrease in operating profit was partially offset by decreased royalties, driven by lower sales of BEYBLADE products. Operating profit in the 2003 second quarter and six month periods was negatively impacted by a charge of approximately $7,000 related to exiting certain unprofitable product lines.

GAMES
Games segment net revenues increased by 9% to $161,602 for the quarter ended June 27, 2004 from $148,613 for the quarter ended June 29, 2003. Net revenues for the six months ended June 27, 2004 increased 11% to $289,200 from $260,823 for the six months ended June 29, 2003. The increase primarily related to the introduction of DUEL MASTERS trading card games in the first quarter of 2004. For the six month period ended June 27, 2004, the revenues from DUEL MASTERS were partially offset by decreased sales of TRIVIAL PURSUIT 20^th ANNIVERSARY EDITION and POKEMON trading card games. There was also significant growth in both the 2004 quarter and six month period in the pre-school category, driven by strong sales from games such as ELEFUN and CROCODILE DENTIST.

Games segment operating profit increased to $28,711 for the quarter ended June 27, 2004 from $25,363 for the quarter ended June 29, 2003. Operating profit for the six months ended June 27, 2004 increased to $48,295 from $43,372 for the six months ended June 29, 2003. Increased gross profit resulting from increased revenues was partially offset by increased advertising expense as a result of the Company's ongoing initiative to raise awareness of its core brands.

The International segment had an operating profit of $2,756 for the quarter ended June 27, 2004, compared to an operating loss of $(4,793) for the quarter ended June 29, 2003. Operating loss for the six months ended June 27, 2004 decreased to $7,276 from $10,768 for the six months ended June 29, 2003. Although revenues were positively impacted by the weaker U.S. dollar, as noted above, operating expenses were also impacted, with a resulting net unfavorable translation impact to International operating profit of approximately $1,100 for the quarter and $3,000 for the six months ended June 27, 2004. Absent the impact of foreign exchange rates, the improvement in operating profit was primarily due to increased gross margin and lower operating expenses as the result of the Company's cost reduction initiatives, including the cessation of manufacturing at the Company's Valencia, Spain facility.

EXPENSES
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For the quarter and six month period, amortization expense decreased in dollars but remained relatively consistent as a percentage of net revenues. Amortization expense of $15,752, or 3.1% of net revenues in the second quarter of 2004, compared with $18,410, or 3.2% of net revenues in the second quarter of 2003. For the six months ended June 27, 2004, amortization expense was $30,993, or 3.1% of net revenues compared with $34,588, or 3.3% of net revenues for the six months ended June 29, 2003. A portion of amortization expense relates to licensing rights and is based on expected sales of products related to those licensing rights. The decrease in amortization expense in 2004 primarily relates to decreased sales of these licensed products in the first half of 2004.

Royalty expense for the quarter ended June 27, 2004 decreased to $34,021, or 6.6% of net revenues from $52,650, or 9.1% of net revenues in the second quarter of 2003. Royalty expense for the six months ended June 27, 2004 decreased to $66,660, or 6.7% of net revenues from $86,470, or 8.3% of net revenues for the six months ended June 29, 2003. This decrease is primarily due to the lower sales of BEYBLADE products, as well as lower sales of other licensed products resulting from the Company's business strategy to continue to focus on its core brands.

Research and product development expenses for the quarter ended June 27, 2004 increased to $37,696, or 7.3% of net revenues from $33,105 or 5.7% of net revenues, for the quarter ended June 29, 2003. These expenses increased to $69,379 or 7.0% of net revenues for the six months ended June 27, 2004 from $63,605 or 6.1% of net revenues for the six months ended June 29, 2003. Investment in research and product development costs is an important component to the Company's strategy to grow core brands and to create new and innovative toy and game products. The Company expects full year research and product development expenses as a percentage of revenue in 2004 to remain consistent with 2003 levels.

For the quarter, advertising expense decreased in dollars to $59,018 in 2004 from $67,686 in 2003, but remained consistent as a percentage of net revenues at 11.4% in 2004 and 11.6% in 2003. For the six months ended June 27, 2004, advertising expense decreased in dollars to $114,348 from $120,864 for the six months ended June 29, 2003, but remained consistent as a percentage of net revenues at 11.5% in 2004 and 11.6% in 2003. The Company continues to focus on marketing as a means to increase and sustain awareness of its core brands, as well as to introduce new products. In the second half of 2004, the Company expects to offer several new innovative products such as VIDEONOW COLOR, PLAY IT NOW, and LAZER TAG. The Company expects advertising expense in 2004 to be higher in dollars and as a percentage of net revenues than 2003 levels, as it continues to follow its strategy of focusing on core brands and offering new, innovative products.

For the quarter ended June 27, 2004, the Company's selling, distribution and administration expenses decreased in dollars to $139,867 from $150,420 for the quarter ended June 29, 2003, but increased as a percentage of net revenues to 27.1% of net revenues in 2004, compared to 25.9% in 2003. For the six months ended June 27, 2004, these expenses decreased in dollars to $277,826 from $290,319 in 2003, but remained consistent as a percentage of net revenues at 28.0% of net revenues in 2004, compared to 27.8% of net revenues in 2003. The decrease in dollars reflects lower expenses resulting from the Company's cost reduction initiatives, which were partially offset by higher international expenses in translated U.S. dollars as the result of the weaker U.S. dollar. As these costs, with the exception of distribution costs, are largely fixed, the increase as a percentage of net revenues is a function of the decrease in sales.

NONOPERATING (INCOME) EXPENSE
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Interest expense for the second quarter of 2004 was $7,924 compared with $11,974 in the second quarter of 2003. For the six months ended June 27, 2004, interest expense decreased to $16,231 from $26,996 in 2003. For the quarter and six months ended June 27, 2004, approximately 71% and 70%, respectively, of the decrease in interest expense is attributable to lower levels of short-term and long-term debt in 2004 than in the comparable 2003 periods. This mainly reflects the Company's strategy to reduce its long-term debt. The Company has repurchased and repaid approximately $195,900 in principal amount of long-term debt during the twelve months ended June 27, 2004. The remaining 29% and 30% decreases in interest expense from the quarter and six months ended June 27, 2004, respectively, are due to lower effective interest rates, primarily the result of interest rate swap agreements that reduce the amount of the Company's debt subject to fixed interest rates.

Other income, net, of $8,047 for the second quarter of 2004 compares to other expense of $777 for the quarter ended June 29, 2003. For the six month periods, other income, net was $10,093 in 2004 compared to other expense of $82 in 2003. Other income for the second quarter and six months ended June 27, 2004 includes non-cash income of $8,520 and $10,220, respectively, related to the decrease in the fair value of certain warrants required to be classified as a liability. These warrants are required to be adjusted to their fair value each quarter through earnings. The fair value of these warrants is primarily affected by the Company's stock price, but is also affected by the Company's stock price volatility, dividends, and the risk-free interest rates. Assuming the Company's stock volatility, dividend payments, and the risk-free interest rates remain constant, the fair value of the warrants would increase and the Company would recognize a charge to earnings if the price of the Company's stock increases. If the price of the Company's stock decreases and the Company's stock volatility, dividend payments, and the risk-free interest rates remain constant, the fair value of the warrants will decrease and the Company will recognize income. Based on a hypothetical increase in the Company's stock price to $25.00 per share at June 27, 2004 from its actual price of $19.35 a share on that date, the Company would have recognized a non-cash charge to earnings of approximately $14,000, rather than non-cash income of $10,220, for the 2004 six month period to adjust the warrants to their fair value.

Absent the effect of the adjustment of certain warrants to their fair value, which has no tax effect, the 2004 effective tax rate for both the quarter and six months would have been 28.0%. The increase in the rate from 2003 to 2004 is primarily due to an increase in expected operating profits in jurisdictions with higher tax rates.

The income tax rate for the full year 2003 was 28.3% and, excluding the effect of the adjustment of the above warrants to their fair value, would have been 26.8%.

OTHER INFORMATION
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Typically, 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 Company expects that this trend will generally continue, particularly as more of its business shifts to customers with order patterns concentrated in the second half of the 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 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 practices now being used result in more orders being placed for immediate delivery and fewer orders being placed well in advance of shipment. Consequently, unshipped orders on any date in a given year are not necessarily indicative of future sales. In addition, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. At June 27, 2004 and June 29, 2003, the Company's unshipped orders were approximately $522,400 and $548,200, respectively.

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 statement 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. In March 2004, the Financial Accounting Standards Board ("FASB") issued an Exposure Draft of a proposed statement, subject to a comment period, which would mandate the fair value method of accounting for all stock-based awards. If enacted, the change in accounting is not expected to be effective for the Company until fiscal 2005. Until the statement is finalized, the Company cannot estimate the effect that this change in accounting would have on its consolidated statement of operations.

As an additional source of liquidity, in December 2003, the Company entered into a three-year receivables securitization program whereby undivided interests in up to $250,000 of eligible domestic trade accounts receivable may be sold, on a revolving basis, to bank conduits. In accordance with Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", receivable interests securitized are accounted for as a sale and removed from the consolidated balance sheet. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through the securitization program and committed lines of credit, are adequate to meet its needs for 2004. However, unforeseen circumstances in the toy or game industry, such as softness in the retail environment or unanticipated changes in consumer preferences could result in a significant decline in revenues and operating results of the Company, which could result in the Company being in non-compliance with its financial covenants and unable to use funding from its receivables securitization program. Non-compliance with its financial covenants could result in the Company being unable to utilize borrowings under its revolving credit facility, other bank lines and the securitization program, a circumstance most likely to occur when operating shortfalls would most require supplementary borrowings to enable the Company to continue to fund its operations. In addition, a significant deterioration in the business of a major U.S. customer could result in a decrease in eligible accounts receivable, which would prevent the Company from being able to fully utilize its receivables securitization program. The Company has been and expects to be in compliance with its borrowing and securitization financial covenants during 2004.

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 provided by operating activities were $10,850 for the six months ended June 27, 2004 compared to cash flows utilized by operating activities of $88,298 for the six months ended June 29, 2003. The increase in cash flow provided by operating activities is primarily the result of the utilization of the accounts receivable securitization facility. Accounts receivable were $307,013 at June 27, 2004 compared to $485,108 at June 29, 2003. The decrease in accounts receivable was principally due to the Company's securitization program, as well as increased collections and lower revenues, partly offset by increases resulting from higher translation of international balances due to the currency impact of the weaker U.S. dollar. Prepaid expenses were $150,359 at June 27, 2004 compared to $123,313 at June 29, 2003.

The increase resulted from higher prepaid advertising and prepaid royalties. Prepaid royalties increased as a result of a reclassification of royalty advances from long-term assets in anticipation of the release of the next STAR WARS film in the second quarter of 2005. Inventories decreased to $237,129 at June 27, 2004 from $273,803 at June 29, 2003, reflecting the Company's continued focus on supply chain management.

Accounts payable and accrued expenses increased to $619,030 at June 27, 2004 from $577,775 at June 29, 2003. This increase is due to the Company's adoption of Statement of Financial Accounting Standards No. 150 in the third quarter of 2003. As a result of this new accounting standard, the Company reclassified certain warrants from equity to a current liability and is required to adjust the amount of this liability to its fair value on a quarterly basis. At June 27, 2004, the fair value of these warrants was approximately $128,400. This increase was partly offset by decreased accrued royalties reflecting the lower level of royalty expense in the first half of 2004, as well as decreased accounts payable.

Collectively, property, plant and equipment and other assets decreased $149,417 from the comparable period in the prior year. The decrease is primarily due to depreciation and amortization, net of additions. Long-term deferred tax assets decreased primarily as a result of utilization of loss carryforwards. These decreases were offset by an increase in goodwill of $9,390 relating to the Company's purchase of the remaining unowned interest in its Latin America operations in the first quarter of 2004. The Company paid cash of $9,824 relating to this transaction, which is included in cash utilized by investing activities.

During the second quarter, the Company repurchased an aggregate of $28,608 in principal amount of long-term debt, comprised of $13,625 in principal amount of 6.60% Debentures due 2028, $9,133 in principal amount of 6.15% Notes due 2008, and $5,850 in principal amount of 5.60% Notes due 2005.

Net borrowings (short-term borrowings, current installments of long-term debt, and long-term debt, less cash and cash equivalents) decreased to $215,482 at June 27, 2004 from $706,719 at June 29, 2003. This reflects an increase in cash of $307,567 as the result of improved earnings and utilization of the accounts receivable securitization facility, as mentioned above. The decrease in net borrowings was also the result of the repurchase and repayment of approximately $195,900 in principal amount of long-term debt during the last twelve months. It is the Company's intent to continue to assess the desirability of using available cash from operations and other sources of financing to reduce its outstanding long-term debt, as market conditions and the Company's committed revolving credit agreement allow.

The Company currently has an unsecured revolving credit facility of $350,000, maturing in March 2007. The credit facility reduces by $50,000 effective March 31, 2005, and by a further $50,000 effective November 30, 2005. If the Company fails to maintain certain financial ratios or if the credit rating of the Company drops below BB at Fitch Ratings or Standard & Poor's, or Ba3 at Moody's, borrowings under the amended and restated facility would be secured by substantially all domestic inventory as well as certain intangible assets. At June 27, 2004, the Company was rated BBB- by Fitch, BBB- by Standard & Poor's, and Baa3 by Moody's. The Company is not required to maintain compensating balances under the agreement. The agreement contains certain restrictive covenants setting forth minimum cash flow and coverage requirements, and a number of other limitations, including restrictions with respect to capital expenditures, investments, acquisitions, share repurchases and dividend payments. The Company was in compliance with all restrictive covenants as of and for the six months ended June 27, 2004. The Company had approximately $29,000 in borrowings outstanding under its committed revolving credit facility at June 27, 2004.

The Company also has other uncommitted lines from various banks, of which approximately $13,900 was outstanding at June 27, 2004. Amounts available and unused under the committed line at June 27, 2004 were approximately $312,200. 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 operating needs in 2004.

In December 2003, the Company entered into a three-year receivables securitization program. Under this program, the Company sells on an ongoing basis, substantially all of its U.S. trade accounts receivable to a bankruptcy remote special purpose entity, Hasbro Receivables Funding, LLC ("HRF"). HRF is consolidated with the Company for financial reporting purposes. The securitization program then allows HRF to sell, on a revolving basis, an undivided interest of up to $250,000 in the eligible receivables it holds to certain bank conduits. The program provides the Company with a cost-effective source of liquidity. Based on the amount of eligible accounts receivable as of June 27, 2004, the Company had availability under this program to sell approximately $97,000, all of which was utilized.

The Company had letters of credit of approximately $33,900 and purchase commitments of $242,280 outstanding at June 27, 2004. Other contractual obligations and commercial commitments, as detailed in the Company's annual report on Form 10-K for the year ended December 28, 2003, did not materially change outside of payments made in the normal course of business and the repurchase of $28,608 in principal amount of long-term debt outstanding. The Company currently has $250,000 outstanding in principal amount of contingent convertible debentures due 2021. If the closing price of the Company's stock exceeds $23.76 for at least 20 trading days, within the 30 consecutive trading day period ending on the last trading day of the calendar quarter, the holders have the right to convert the notes to shares of the Company's common stock at the initial conversion price of $21.60 in the next calendar quarter. This contingent conversion feature was not met in the first six months of 2004. The Company believes that cash from operations, the securitization facility, and if necessary the committed line of credit, will allow the Company to meet these and its other obligations. It is the Company's current strategy to reduce its long-term debt through repurchases when it is considered economically beneficial and permitted under the Company's amended and restated revolving credit agreement.

Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue when the related revenue is recognized. Revenue from product sales is recognized upon passing of title to the customer, at the time of shipment. Revenue from product sales, less related sales allowances, is added to royalty revenue and reflected as net revenues in the consolidated statements of operations. The Company routinely commits to promotional sales allowance programs with customers. These allowances primarily relate to fixed programs, which the customer earns 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 the returns allowance, 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, as an increase to cost of sales, when deemed necessary under the lower of cost or market standard.

Goodwill and other intangible assets deemed to have indefinite lives are tested for impairment at least annually. If an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim test at that time. The impairment test begins by allocating goodwill and intangible assets to applicable reporting units. Goodwill is then tested using a two step process that begins with an estimation of the 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, which is also calculated using an income approach. The Company's annual impairment test was performed in the fourth quarter of 2003 and no impairment was indicated. At June 27, 2004, the Company has goodwill and intangible assets with indefinite lives of $549,140 recorded on the balance sheet.

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 the value 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 future discounted cash flows. The estimation of future cash flows requires significant judgments and estimates with respect to future revenues related to the respective asset 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 this assessment and result in an impairment charge. The estimation 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. Intangible assets covered under this policy were $605,564 at June 27, 2004. During the first six months of 2004, there were no impairment charges related to these intangible assets.

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 royalty expense 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. At June 27, 2004, the Company had $192,462 of prepaid royalties, $73,951 of which are included in prepaid expenses and other current assets and $118,511 which are included in other assets.

The Company, except for certain International subsidiaries, has pension plans covering substantially all of its full-time employees. Pension expense is based on actuarial computations of current and future benefits using estimates for expected return on assets, expected compensation increases, and applicable discount rates. These estimates are established for the upcoming year at the Company's measurement date of September 30. The Company estimates expected return on assets using a weighted average rate based on historical market data for the investment classes of assets held by the plan, the allocation of plan assets among those investment classes, and the current economic environment.

FINANCIAL RISK MANAGEMENT
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The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates primarily as the result of sourcing products priced 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, currencies in Latin American and Asia Pacific countries.

To manage this exposure, the Company has hedged a portion of its estimated foreign currency transactions using forward foreign exchange contracts, and purchased 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. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts. The Company does not speculate in, and, other than set forth above, the Company does not hedge foreign currency exposures. The Company reflects all derivatives at their fair value as an asset or liability on the balance sheet.

FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
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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, concerning management's expectations, goals, objectives, and similar matters. 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 results or experience 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 in a timely manner and customers' and consumers' acceptance of those products at prices that will be sufficient to profitably recover development, manufacturing, marketing, royalty and other costs of products;
• economic and public health conditions, including factors which impact the strength of the retail market and retail demand or the Company's ability to manufacture and deliver products, higher fuel and commodity prices, higher transportation costs, currency fluctuations, government regulation and other conditions in the various markets in which the Company operates throughout the world;
• the Company's ability to generate sales during the fourth quarter, particularly during the relatively brief holiday season, which is the period in which the Company derives a substantial portion of its revenues;
• 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;
• work stoppages, slowdowns or strikes, which may impact the Company's ability to manufacture or deliver product;
• concentration of manufacturing of many of the Company's products in the People's Republic of China and the associated impact to the Company of health conditions and other factors affecting social and economic activity in China or affecting the movement of people and products into and out of China;
• an adverse change in purchasing policies or the bankruptcy or other lack of success of one or more of the Company's significant retailers comprising its relatively concentrated retail customer base, which could negatively impact the Company's revenues, operating margins, 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 employees in a competitive environment;
• the risk that anticipated benefits of acquisitions may not occur or be delayed or reduced in their realization;
• the risk that the market appeal of the Company's licensed products will be less than expected or that the sales revenue generated by those products will be insufficient to cover the minimum guaranteed royalties;
• the Company's ability to obtain and enforce intellectual property rights both in the United States and abroad;
• the risk that any litigation or arbitration disputes or regulatory investigations could entail significant expense and result in significant fines or other harm to the Company's business;
• the Company's ability to obtain external financing on terms acceptable to it in order to meet working capital needs;
• the Company's ability to generate sufficient available cash flow to service its outstanding debt;
• restrictions that the Company is subject to under its credit agreement;
• unforeseen circumstances, such as severe softness in or collapse of the retail environment that 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 and the Company being unable to utilize borrowings under its revolving credit facility, a circumstance likely to occur when operating shortfalls would result in the Company being in the greatest need of such supplementary borrowings;
• 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, or reduce actual results;
• the risk that the Company may be subject to governmental sanctions for failure to comply with applicable regulations or to product liability suits relating to products it manufactures and distributes;
• the risk that the Company's reported goodwill may become impaired, requiring the Company to take a charge against its income;
• 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 filings on 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.

On December 6, 1999, the Board of Directors authorized a common share repurchase program for up to $500 million in common stock. No repurchases were made under this program during the second quarter of 2004. At June 27, 2004, $204.5 million remained under this authorization.

No share repurchases were made by the Company during the second quarter of 2004.

Item 3. Defaults Upon Senior Securities.

None.

None.