Through unique, high quality products and excellent customer service, Imaginarium continues to secure a leading position for Toys“R”Us and its divisions in the profitable specialty educational toy market, all from a winning combination of learning and play. By October of 2002, virtually all Toys“R”Us stores in the United States will have an Imaginarium presentation within the larger store.

Transforming our business and strengthening our financial position

Over the last two years, we have thoroughly assessed our business to determine how best to reposition Toys“R”Us and its divisions for growth and profitability. We have made solid progress, and in January we announced a restructuring which will enable us to concentrate our financial resources on those formats and stores that are most productive. The announcement detailed the closing of 64 stores and the related elimination of approximately 1,900 staff positions in our stores and headquarters.

We are closing 27 Toys“R”Us stores that, while cash-flow positive, do not meet our return-on-investment objectives. In addition, we announced the closing of 37 Kids“R”Us stores. In almost all of these locations, the nearest Toys“R”Us store will be converted to a combo store, a Toys“R”Us store with a Kids“R”Us store inside. Toys“R”Us currently operates 273 combo stores which are performing very well, and by the end of 2002 we expect to have approximately 375 combo stores in our portfolio.

Improved service for our guests isn’t just about Mom & Dad... it’s about making our store kid-friendly, too.

The restructuring also includes consolidating our five separate store support facilities throughout New Jersey into one central location in Wayne, New Jersey. By moving to a shared services model across a variety of corporate support functions such as finance and human resources, we believe we will significantly improve the effectiveness and efficiency of our company while materially lowering SG&A expenses.

In this period of economic uncertainty, we believe it is important to strengthen our balance sheet and enhance our liquidity. Therefore, in 2001, we sold $466 million of 3-year Eurobonds, $250 million of 5-year U.S. bonds and $500 million of 10-year U.S. bonds. We have also filed registration statements with the Securities and Exchange Commission to issue $550 million of equity and equity linked securities in the form of $350 million of equity security units and $200 million of Toys“R”Us common stock.

Looking forward with excitement and energy

We are optimistic about 2002, not only because we believe that our strategies will be successful, but also because our industry is becoming vibrant again. We are more enthusiastic than ever about the exciting product lines our stores will be offering, and we will continue to execute our strategies with all the energy and discipline at our command.

To that end, after a thorough review of our 2001 performance, we’ve concluded that the “R”Us organization must focus all its resources and efforts on four priorities that will provide our shareholders the greatest return on investment and position us solidly for success in 2002.