2002 was a watershed year for Toysrus.com as the division achieved its first operating profit in the fourth quarter - a full year ahead of schedule. Toysrus.com's 2002 sales totaled $340 million, an increase of 23% from 2001 sales of $277 million. Sales at Toysrus.com have grown seven-fold in the last three years from $49 million in 1999, and we see significant growth ahead. In addition to our original website - www.toysrus.com - we now operate through three additional sites: www.babiesrus.com, www.imaginarium.com, and our newest site, www.giftsrus.com. The Giftsrus.com on-line store offers personalized gifts for all ages. It opened in November 2002. Customers can choose from hundreds of products ranging from exclusive stuffed animals, toys, clothing, home décor, and keepsakes and have them personalized with messages, monogrammed, hand-painted or engraved, gift wrapped and then delivered.

Toysrus.com recorded its first operating profit of $3 million during the fourth quarter of 2002 versus an operating loss of $(17) million for the prior year's fourth quarter. Total operating losses for fiscal 2002 were reduced to $(37) million, a 51% improvement over the operating loss of $(76) million for fiscal year 2001. A number of factors contributed to this significant improvement in operating performance including higher merchandise margins due to effective bundled offerings and growth in Babiesrus.com and Imaginarium.com, diligent expense control, reduced inventory levels, and increased integration between Babiesrus.com and the Babies"R"Us stores.

We are extremely pleased with the performance of the dot.com business in 2002. Achieving profitability in the fourth quarter of 2002 reinforces our optimism about our prospects for 2003 and beyond. Although we do not expect Toysrus.com to be profitable for the full year in 2003, we anticipate an increase in profits in the fourth quarter of 2003, and we have increased confidence we will be profitable for the full year in 2004. We will also continue to work closely with our strategic alliance partners at Amazon.com to increase the efficiency of our operations while reducing costs.

The future is bright for Toysrus.com. We plan to pursue a variety of initiatives to increase the integration between Toysrus.com and our U.S. toy stores in 2003 and beyond. Our overall goal is to serve our customers as they wish to be served - through websites, stores and often through some combination of the two. A significant percentage of our multi-channel customers - our most profitable customers, incidentally - already use Toysrus.com to prepare for a Toys"R"Us store visit. We believe we have numerous opportunities to realize more "click and brick" synergy, which will help us to improve the profitability of both Toysrus.com and our U.S. toy stores.