recorded a provision for current income taxes of $82 million and a provision for deferred income taxes of $33 million. As a result of this transaction, our ownership percentage in the common stock of Toys - Japan was reduced from 80% to 48%. Toys - Japan is a licensee of our company.

We are exposed to market risk from potential changes in interest rates and foreign exchange rates. The countries in which we own assets and operate stores are politically stable, and we regularly evaluate these risks and have taken the following measures to mitigate these risks: our foreign exchange risk management objectives are to stabilize cash flow from the effects of foreign currency fluctuations; we do not participate in speculative hedges; and we will, whenever practical, offset local investments in foreign currencies with liabilities denominated in the same currencies. We also enter into derivative financial instruments to hedge a variety of risk exposures, including interest rate and currency risks.

Our foreign currency exposure is primarily concentrated in the United Kingdom, Europe, Canada, Australia and Japan. We face currency exposures that arise from translating the results of our worldwide operations into U.S. dollars from exchange rates that have fluctuated from the beginning of the period. We also face transactional currency exposures relating to merchandise that we purchase in foreign currencies. We enter into forward exchange contracts to minimize and manage the currency risks associated with these transactions. The counter-parties to these contracts are highly rated financial institutions and we do not have significant exposure to any one counter-party. Gains or losses on these derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. For foreign currency derivative instruments, market risk is determined by calculating the impact on fair value of an assumed one-time change in foreign rates relative to the U.S. dollar. Fair values were estimated based on market prices, where available, or dealer quotes. With respect to derivative instruments outstanding at February 1, 2003, a 10% appreciation of the U.S. dollar would have increased pre-tax earnings in 2002 by $39 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings in 2002 by $42 million. Comparatively, considering our derivative instruments outstanding at February 2, 2002, a 10% appreciation of the U.S. dollar would have increased pre-tax earnings in 2001 by $13 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings in 2001 by $13 million.

We are faced with interest rate risks resulting from interest rate fluctuations. We have a variety of fixed and variable rate debt instruments. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and variable rate debt and have entered into interest rate swaps to maintain that balance. For interest rate derivative instruments, market risk is determined by calculating the impact to fair value of an assumed

one-time change in interest rates across all maturities. Fair values were estimated based on market prices, where available, or dealer quotes. A change in interest rates on variable rate debt is assumed to impact earnings and cash flow, but not the fair value of debt. A change in interest rates on fixed rate debt is assumed to impact the fair value of debt, but not earnings and cash flow. Based on our overall interest rate exposure at February 1, 2003 and February 2, 2002, a 1% increase in interest rates would have decreased pre-tax earnings by $15 million in 2002 and $11 million in 2001, respectively. A 1% decrease in interest rates would have increased pre-tax earnings by $15 million in 2002 and $11 million in 2001. A 1% increase in interest rates would decrease the fair value of our long-term debt at February 1, 2003 and February 2, 2002 by approximately $90 million and $79 million, respectively. A 1% decrease in interest rates would increase the fair value of our long-term debt at February 1, 2003 and February 2, 2002 by approximately $98 million and $87 million, respectively.

See notes to our consolidated financial statements for additional discussion of our outstanding derivative financial instruments at February 1, 2003.

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities as of the date of the financial statements and during the applicable periods. We base these estimates on historical experience and on other various assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and could have a material impact on our consolidated financial statements.

We believe the following are some of the critical accounting policies that include significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventories and Vendor Allowances:
Merchandise inventories for the U.S. toy store division, which represent approximately 60% of total merchandise inventories, are stated at the lower of LIFO (last-in, first-out) cost or market value, as determined by the retail inventory method. All other merchandise inventories are stated at the lower of FIFO (first-in, first-out) cost or market value, as determined by the retail inventory method.

We receive various types of merchandise and other types of allowances from our vendors, which are based on negotiated terms. We use estimates at interim periods to record our provisions for inventory shortage and to record vendor funded merchandise allowances. These estimates are based on available data and other factors and are adjusted to actual amounts at the completion of our physical inventories and finalization of all vendor allowances.