Comparison of Fiscal Year 2000 to 1999

We reported net sales of $11.3 billion and $11.9 billion. Excluding the impact of Toys - Japan in both periods, our net sales increased 4% to $11.0 billion from $10.7 billion. Further, excluding the negative impact of currency translation of $172 million, our net sales increased 5%. The net sales growth was primarily driven by a 2% increase in comparable store sales, as well as new store growth in the Babies“R”Us division. Comparable store sales for the U.S. toy store division increased 1%, reflecting the strength of its core merchandise, improved guest service and instock inventory position, despite acute shortages in video product. Comparable store sales for the International toy store division, on a local currency basis, increased 6% mainly due to the implementation of strategies similar to those being implemented in the U.S., along with adding/improving Babies“R”Us shops within its toy stores. Net sales for the Babies“R”Us division increased 26% and comparable store sales grew at a doubledigit rate. These increases were driven by strong sales in most merchandise categories and continued guest acceptance of the Babies“R”Us brand. Toysrus.com reported net sales of $180 million, up from $49 million in 1999, reflecting increased market share and the benefits from its strategic alliance with Amazon.com, which combined the two companies’ expertise to create a compelling online shopping experience.

Our consolidated gross margin, as a percentage of sales, improved to 31.1% from 29.9%. This increase was primarily attributable to shifts in the merchandise mix and growth in higher margin categories, primarily exclusive product offerings, as well as the implementation of a new strategic pricing system. Gross margin for the U.S. toy store division increased to 30.3% from 28.4%, while gross margin for the Babies“R”Us division grew to 33.8% from 32.8%. The International toy store division reported gross margin of 31.7% versus 30.8%.

Our consolidated SG&A, as a percentage of sales, increased to 24.3% from 23.1%. SG&A for the U.S. toy store division increased to 21.5% from 19.8%. This increase is primarily due to increased payroll costs related to the implementation of our new guest-focused initiatives, higher distribution center costs due to changes in the handling and amount of inventory, costs associated with actions being taken to improve store ambiance, and systems enhancements. SG&A for the International toy store division decreased to 22.7% from 23.4%. This improvement was primarily a result of the strategic store closures in Central Europe and France, which have improved the overall profitability of this division. The Babies“R”Us division reported SG&A of 23.4% versus 24.0%. This improvement was primarily due to leveraging against sales growth.

Depreciation and amortization increased to $290 million from $278 million. This increase is primarily due to our continued store expansion, remodels and front end conversions, strategic investments to improve management information systems and amortization of goodwill related to our acquisition of Imaginarium Toy Centers, Inc. in the second half of 1999.

Interest expense - net, increased to $104 million from $80 million. This increase is mainly attributable to the funding of our stock repurchase program, higher interest rates, and the funding of Toysrus.com.

International operating earnings were unfavorably impacted by the translation of local currency into U.S. dollars by approximately $14 million in 2000. The effect of inflation had no material effect on our operating results for 2000.

Our effective tax rate remained unchanged at 36.5%.

Restructuring and Other Charges

On January 28, 2002, we announced a series of steps designed to enhance our future cash flows and operating earnings and to continue to allow us to concentrate our financial resources on those stores and store formats that we believe are most productive. We are closing 37 Kids“R”Us stores and, in almost all of these locations, we are converting the nearest Toys“R”Us stores into Toys“R”Us/Kids“R”Us combo stores in tandem with the Kids“R”Us store closings. We are also closing 27 non-Mission Possible format Toys“R”Us stores, eliminating approximately 1,900 staff positions at stores and headquarters, and consolidating our store support center facilities into our new headquarters in Wayne, New Jersey, which we intend to fully occupy by the summer of 2003.

The costs associated with facilities consolidation, elimination of positions, and other actions designed to improve efficiency in our support functions were $79 million, of which $15 million related to severance. The costs associated with store closings are $73 million for Kids“R”Us and $85 million for Toys“R”Us, of which $27 million was recorded in cost of sales. We are currently marketing all of the stores and store support center facilities included in this plan and will close all stores included in this plan by the end of 2002. We also reversed $24 million of previously accrued charges ($11 million from the 1998 program and $13 million from the 1995 program) that have been deemed no longer needed. See below for further details regarding the reversal of these reserves.

These actions are expected to increase free cash flow in 2002 and beyond and to yield improvements to pre-tax earnings of approximately $25 million in 2002, and approximately $45 million annually beginning in 2003. Payroll savings associated with changes in support functions are expected to account for $30 million of the $45 million annual savings.