Operating Activities

Net cash provided by operating activities was $504 million in 2001, which was primarily driven by net income adjusted for non-cash items, as well as an increase in income taxes payable. Net cash used in operations was $151 million in 2000, primarily due to an increase in merchandise inventories, which more than offset net earnings adjusted for non-cash items. Net cash provided by operations was $865 million in 1999, which was primarily driven by net income adjusted for non-cash items, as well as an increase in accounts payable and accrued expenses.

Investing Activities

Capital expenditures - net of dispositions, were $705 million in 2001, $402 million in 2000 and $533 million in 1999. Capital expenditures during these periods include investments: to open new stores, to reformat certain of our existing store base to new store formats and combo stores, and to improve and enhance our management information systems. We reformatted 268 existing U.S. toy stores to the Mission Possible format, and converted another 94 existing U.S. toy stores to Toys“R”Us/Kids“R”Us combo stores in 2001. In addition, we converted 10 Kids“R”Us stores to our new store prototype. Also, in 2001, we opened 39 new stores worldwide, opened our new Flagship store in the center of Times Square, New York City, and opened our new state of the art distribution center in Texas. The significant decrease in capital expenditures, net, from 1999 to 2000 was primarily due to the disposal of distribution centers and other facilities in 2000. During 2002, we plan on investing approximately $475 million in capital to open approximately 30 new stores, primarily Babies“R“Us and International stores, to convert the remainder of our U.S. toy store chain to the Mission Possible format (approximately 240 stores), to convert approximately 102 existing U.S. toy stores to combo stores and to convert approximately 30 existing Kids“R”Us stores into our new store prototype.

Investing activities for 2000 included $267 million of cash proceeds related to the initial public offering of shares of Toys - Japan, which is discussed in the section “Other Matters” in this report. Investing activities for 1999 included net cash expended to acquire all of the outstanding common stock of Imaginarium Toy Centers, Inc, which is also described further in the section “Other Matters” in this report.

Financing Activities

Net cash from financing activities was $191 million in 2001, primarily as a result of net borrowings of $216 million during the year. On July 19, 2001, we issued and sold $500 million of notes bearing interest at 7.625% per annum maturing on August 1, 2011, and also borrowed $250 million of notes bearing interest at 6.875% per annum maturing on August 1, 2006. Simultaneously, we entered into interest rate swap agreements. As a result of the interest rate swap agreements, interest on the $500 million notes will accrue at the rate of LIBOR plus 1.5120% and interest on the $250 million notes will accrue at the rate of LIBOR plus 1.1515%. Interest is payable on both notes semi-annually on February 1 and August 1 of each year, commencing on February 1, 2002. On February 13, 2001, we borrowed 500 million EURO through the public issuance of a EURO bond bearing interest at 6.375% per annum. The obligation was swapped into a $466 million fixed rate obligation with an effective rate of 7.43% per annum with interest payments due annually and principal due February 13, 2004. The proceeds were used to reduce outstanding commercial paper obligations. Accordingly, we have reclassified $466 million from short-term borrowings to long-term debt at February 3, 2001.

Net cash used for financing activities was $2 million for 2000. Net borrowings for 2000 were $521 million, primarily driven by the repurchase of 42 million shares of our common stock, increased inventory levels and the funding of Toysrus.com. In 2000, we received a total of $97 million from SOFTBANK Venture Capital and affiliates (“SOFTBANK”) relating to our 20% minority interest in Toysrus.com, which is discussed in further detail in the section “Other Matters” in this report.

Net cash used for financing activities were $102 million for 1999, which was principally driven by the repurchase of 12 million shares of our common stock, partially offset by net borrowings of $84 million.