Insurance Risks:
We insure a substantial portion of our general liability and workers compensation risks through a wholly-owned insurance subsidiary. Provisions for losses related to these risks are based upon independent actuarially determined estimates. While we believe these provisions for losses to be adequate, the ultimate liabilities may be in excess of, or less than, the amounts recorded.

Synthetic Lease:
Our new corporate headquarters facility, located in Wayne, New Jersey, which we intend to fully occupy by the summer of 2003, is being financed under a lease arrangement commonly referred to as a “synthetic lease.” Under this lease, unrelated third parties, arranged by Wachovia Development Corporation, a multi-purpose real estate investment company, will fund up to $125 million for the acquisition and construction of the facility. Upon completion of the construction, which is expected to be in 2003, we will begin paying rent on the facility until the lease expires in 2011. The rent will be based on a mix of fixed and variable interest rates which will be applied against the final amount funded. Upon expiration of the lease, we would expect to either: renew the lease arrangement; purchase the facility from the lessor; or remarket the property on behalf of the owner. Under accounting principles generally accepted in the United States, this arrangement is required to be treated as an operating lease for accounting purposes and will be treated as a financing for tax purposes.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We have adopted SFAS No. 144 as of February 3, 2002 and we do not expect that this adoption will have a significant effect on our consolidated financial condition, results of operations or cash flow.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment only approach. We have adopted this pronouncement on February 3, 2002. As a result of this adoption, $348 million of unamortized goodwill, which was to be amortized ratably through 2037, will no longer be amortized. Application of the non-amortization provisions of SFAS No. 142 is expected to result in an increase in net income of approximately $8 million per year.

SFAS No. 142 also requires that goodwill be tested annually for impairment. Intangible assets deemed to have an indefinite life will be tested for impairment using a one-step process which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year. Our unamortized goodwill at February 2, 2002 relates to the acquisition of Baby Super Stores, Inc. in 1997 ($319 million), which is now part of our Babies“R”Us division, and the acquisition of Imaginarium Toy Centers, Inc. in 1999 ($29 million), which is now part of our U.S. toy store division. Based on the historical and projected operating results of these reporting units, we have determined that no impairment of our goodwill exists. Therefore, the adoption of this SFAS No. 142 is not anticipated to have a material impact on our consolidated financial condition, results of operations or cash flows.

Forward Looking Statements

This annual report contains “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. All statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. We generally identify these statements by words or phrases such as “anticipate,” “estimate,” “plan,” “expect,” “believe,” “intend,” “forsee,” “will,” “may,” and similar words or phrases. These statements discuss, among other things, expected growth, strategy, store openings and renovations, future performance and anticipated cost savings and results of our 2001 restructuring. Such statements involve risks and uncertainties that exist in our operations and business environment that could render actual outcomes and results materially different than predicted. Our forward-looking statements are based on assumptions about many factors, including, but not limited to, ongoing competitive pressures in the retail industry, changes in consumer spending and consumer preferences, general economic conditions in the United States and other jurisdictions in which we conduct business (such as interest rates, currency exchange rates and consumer confidence) and normal business uncertainty. While we believe that our assumptions are reasonable at the time forward-looking statements were made, we caution that it is impossible to predict the actual outcome of numerous factors and, therefore, readers should not place undue reliance on such statements. Forwardlooking statements speak only as of the date they are made, and we undertake no obligation to update such statements in light of new information or future events that involve inherent risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statement.

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