RESULTS OF OPERATIONS
Comparison of Fiscal Year 2001 to 2000

We reported net sales of $11.0 billion for the 52 week fiscal year ended February 2, 2002 and $11.3 billion for the 53 week fiscal year ended February 3, 2001. Net sales of Toys“R”Us - Japan, Ltd. (“Toys - Japan“), which has been accounted for on the “equity method” since its initial public offering, are included in our net sales in the first quarter of 2000 and excluded from our net sales thereafter. Our net sales were $11.0 billion for both fiscal 2001 and fiscal 2000, after excluding sales of Toys - Japan. Currency translation did not have a significant impact on our net sales for fiscal 2001. Our total enterprise sales, which include the net sales of all our brand stores, whether operated by us, by licensees, franchisees or under joint-venture agreements, were $12.6 billion versus $12.8 billion.

Our consolidated comparable store sales, in local currencies, declined 1%. Comparable store sales for our U.S. toy store division declined 1% for the fiscal year and increased 2% for the fourth quarter. Video sales, due to the introduction of XBox, Gamecube and Gameboy Advance in the latter half of the year, were the primary drivers of the fourth quarter increase. Video accounted for approximately 22% of our U.S. toy store sales in the fourth quarter of 2001 as compared to 18% in the fourth quarter of the prior year. We had 433 stores in the Mission Possible format by the start of the 2001 Holiday season, which also contributed to the comparable store sales increase in the fourth quarter. This gain partially offset the negative impact of 268 stores under construction during the first nine months of 2001, which were being retrofitted to the Mission Possible format, as well as the negative impact resulting from the events of the September 11th terrorist attacks. Our International division reported comparable toy store sales increases of 5%, in local currencies, primarily driven by the performance of our toy stores in the United Kingdom, which reported double-digit comparable store sales growth. Our Babies“R”Us division reported 8% net sales growth, primarily driven by the opening of 20 new Babies“R”Us stores in the United States this year, as well as a 2% comparable store sales increase. Toysrus.com reported net sales increases of 54% for the full year and 24% for the fourth quarter, which continues to reflect increases in its market share and the impact of the Toysrus.com alliance with Amazon.com that began in 2000.

In the fourth quarter of 2001, we recorded restructuring and other charges of $213 million (pre-tax) which are discussed in further detail in the section “Restructuring and Other Charges” in this report. In addition, our fiscal 2000 results include the impact of the initial public offering of Toys - Japan and the non-recurring costs and charges relating to the Toysrus.com/Amazon.com alliance, both of which are discussed in further detail in the section “Other Matters” in this report. For comparability purposes, the remaining discussion of our results of operations for 2001, 2000 and 1999 excludes the impact of these items, unless otherwise noted.

Our consolidated gross margin, as a percentage of sales, improved by 10 basis points to 31.2%. This increase was primarily driven by our Babies“R”Us division which reported a 1.2% improvement in gross margin to 35%, primarily due to a favorable sales shift to higher margin juvenile import and proprietary product. Gross margin for the U.S. toy store division remained constant at 30.3%, reflecting our continued emphasis on higher margin exclusive product, which was offset by the impact of lower margin video product. Our International toy store business contributed to the improvement of our consolidated gross margin, reporting a 20 basis point increase to 31.9%, primarily due to our continued emphasis on exclusive products.

Our consolidated SG&A, as a percentage of sales, increased 70 basis points to 25.0%. SG&A for our U.S. toy store division, increased 110 basis points to 22.6%, reflecting the strategic investments we are making in our business including the renovation of our U.S. toy stores to the Mission Possible format and certain guest focused initiatives, as well as additional SG&A expenses resulting from the September 11th events. SG&A for our international toy store business increased 10 basis points to 22.8%. SG&A for the Babies“R”Us division increased 40 basis points to 23.8%, primarily attributable to increased payroll costs to support our emphasis on guest focused initiatives.

Depreciation and amortization increased by $18 million, primarily due to the Mission Possible store remodeling program, continued new store expansion and strategic investments to improve our management information systems.

Interest expense decreased by $10 million, primarily due to lower interest rates, partially offset by the impact of higher average total debt outstanding during the year. Interest and other income decreased by $15 million, primarily due to lower average investments outstanding, as well as lower interest rates.

Our effective tax rate before restructuring and other charges remained unchanged at 36.5%. However, the impact of the 2001 restructuring and other charges reduced our tax rate to 26.9%.

Neither foreign currency exchange nor inflation had a significant impact on our consolidated net earnings.