The company has adopted the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” issued in October 1995. In accordance with the provisions of SFAS No. 123, the company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the table below:

The weighted-average fair value at date of grant for options granted in 2001, 2000 and 1999 was $9.16, $5.88 and $6.26, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. As there were a number of options granted during the years of 1999 through 2001, a range of assumptions are provided below:

The effects of applying SFAS No. 123 and the results obtained through the use of the Black-Scholes option pricing model are not necessarily indicative of future values.

REPLACEMENT OF CERTAIN STOCK OPTION GRANTS WITH RESTRICTED STOCK

In 2000, the company authorized the exchange of certain stock options, having an exercise price above $22 per share, for an economically equivalent grant of restricted stock. The exchange, which was voluntary, replaced approximately 14.4 options with approximately 1.7 restricted shares. Shares of restricted stock resulting from the exchange vest over a period of three years, with one-half of the grant vesting on April 1, 2002 and the remainder vesting on April 1, 2003. Accordingly, the company recognizes compensation expense throughout the vesting period of the restricted stock. The company recorded $8 in compensation expense related to this restricted stock in both 2002 and 2001.

PROFIT SHARING PLAN

The company has a profit sharing plan with a 401(k) salary deferral feature for eligible domestic employees. The terms of the plan call for annual contributions by the company as determined by the Board of Directors, subject to certain limitations. The profit sharing plan may be terminated at the company’s discretion. Provisions of $46, $50 and $48 have been charged to earnings in 2001, 2000 and 1999, respectively.

TOYSRUS.COM

The company entered into an agreement with SOFTBANK which included an investment by SOFTBANK of $60 in Toysrus.com for a 20% ownership interest. Accordingly, the company has recorded a 20% minority interest in the net losses of Toysrus.com in selling, general and administrative expenses. Toysrus.com received additional capital contributions of $37 from SOFTBANK representing its proportionate share of funding required for the operations of Toysrus.com. In connection with the agreement with SOFTBANK, the company issued 1.2 stock purchase warrants for $8.33 per warrant. Each warrant gives the holder thereof the right to purchase one share of Toys“R”Us common stock at an exercise price of $13 per share, until the expiration date of February 24, 2010. As of February 2, 2002, none of these warrants have been exercised.

Toysrus.com entered into a 10-year strategic alliance with Amazon.com to create a co-branded toy and video game on-line store, which was launched in the third quarter 2000. In addition, a co-branded baby products on-line store was launched in May 2001 and a co-branded creative and learning products on-line store launched in July 2001. Under this alliance, Toysrus.com and Amazon.com are responsible for specific aspects of the on-line stores. Toysrus.com is responsible for merchandising and content for the co-branded stores. Toysrus.com also identifies, buys, owns and manages the inventory. Amazon.com handles web-site development, order fulfillment, guest services, and the housing of Toysrus.com’s inventory in Amazon.com’s U.S. distribution centers. Also in August 2000, Amazon.com was granted a warrant entitling it to acquire up to 5% (subject to dilution under certain circumstances) of the capital of Toysrus.com at the then market value. As of February 2, 2002, this warrant has not been exercised.

In the third quarter of 2000, Toysrus.com recorded $118 in nonrecurring costs and charges as a result of the transition to the co-branded site, of which, $10 were included in cost of sales and $108 were included in selling, general and administrative expenses. These costs and charges related primarily to the closure of three distribution centers and web-site asset write-offs, as well as other costs associated with migrating data and merchandise to the new site and facilities. At the end of 2001, Toysrus.com had remaining reserves of approximately $42, primarily for the exit of its Memphis Tennessee distribution center, which is being actively marketed. The company believes that these remaining reserves are adequate to complete all remaining action plans.

SEGMENTS

The company’s reportable segments are Toys“R”Us - U.S., which operates toy stores in 49 states and Puerto Rico, Toys“R”Us - International, which operates, licenses or franchises toy stores in 28 countries outside the United States, Babies“R”Us, which operates stores in 34 states, and Toysrus.com, the company’s internet subsidiary.