Toys"R"Us Annual Report 2002

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 $34, $46 and $50 have been charged to earnings in 2002, 2001 and 2000, respectively.

Toysrus.com operates a co-branded toy and video game on-line store (Toysrus.com), a co-branded baby products on-line store (Babiesrus.com), and a co-branded learning products and information on-line store (Imaginarium.com) under a strategic alliance with Amazon.com.

The Toysrus.com strategic alliance with Amazon.com was launched in the third quarter of 2000 and expires in 2010. Under this alliance, each company is responsible for specific aspects of the on-line stores. Toysrus.com is responsible for merchandising, marketing 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, customer service, and the housing of Toysrus.com's inventory in Amazon.com's U.S. distribution centers. The company recognizes revenue for Toysrus.com at the point in time when merchandise is shipped to customers, in accordance with the shipping terms (FOB shipping point) that exist under the agreement with Amazon.com.

Toysrus.com also opened a personalized gifts for all ages on-line store (Giftsrus.com) in November 2002. Visitors can choose from hundreds of products, ranging from exclusive stuffed animals, toys, clothing, home décor, and keepsakes, have them personalized with messages, monogrammed, hand-painted or engraved, gift wrapped, and then delivered. Giftsrus.com does not operate as part of the strategic alliance with Amazon.com.

In February 2000, the company entered into an agreement with SOFTBANK that included an investment of $60 by SOFTBANK in Toysrus.com. Accordingly, the company records 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.

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 29 countries outside the United States; Babies"R"Us, which operates stores in 35 states; and Toysrus.com, the company's internet subsidiary.

Information on segments and reconciliation to earnings before income taxes, are as follows:

(1) Includes the net sales of Toysrus.com - Japan.
(2) Includes the net sales of the Kids"R"Us and Geoffrey divisions, and the net sales of the Toys - Japan division prior to its initial public offering on April 24, 2000.
(3) Includes markdowns related to the store closings announced as part of the restructuring in 2001.
(4) Includes the operations of Toysrus.com - Japan, net of minority interest.
(5) Includes corporate expenses, the operating results of the Kids"R"Us and Geoffrey divisions, and the equity in net earnings of Toys - Japan.
(6) Includes the Kids"R"Us and Geoffrey divisions, as well as corporate assets and related depreciation.

In January 2002, the company announced plans to reposition its business, and as part of this plan, the company closed 27 non-Mission Possible format Toys"R"Us stores and closed 37 Kids"R"Us stores. In conjuction with the Kids"R"Us store closings in most of these locations, the company converted the nearest Toys"R"Us store into a Toys"R"Us/Kids"R"Us combo store.