Deferred Tax Assets:
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. The measurement of deferred tax assets is adjusted by a valuation allowance to recognize the extent to which, more likely than not, the future tax benefits will be recognized.

At February 1, 2003, we recorded deferred tax assets, net of valuation allowances, of $317 million. We believe it is more likely than not that we will be able to realize these assets through the reduction of future taxable income. We base this belief upon the levels of taxable income historically generated by our businesses, as well as projections of future taxable income. If future levels of taxable income are not consistent with our expectations, we may be required to record an additional valuation allowance, which could reduce our net earnings by a material amount.

Derivatives and Hedging Activities:
We enter into derivative financial arrangements to hedge a variety of risk exposures, including interest rate and currency risks associated with our long-term debt, as well as foreign currency risk relating to import merchandise purchases. We account for these hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and we record the fair value of these instruments within our consolidated balance sheet. Gains and losses from derivative financial instruments are largely offset by gains and losses on the underlying transactions. At February 1, 2003, we increased the carrying amount of our long-term debt by $172 million, representing the fair value of debt in excess of the carrying amount on that date. Also at February 1, 2003, we recorded derivative assets of $158 million and derivative liabilities of $10 million. While we intend to continue to meet the conditions for hedge accounting, if hedges were not to be highly effective in offsetting cash flows attributable to the hedged risk, the changes in the fair value of the derivatives used as hedges could have a material effect on our consolidated financial statements.

Insurance Risks:
We insure a substantial portion of our general liability and workers' compensation risks through a wholly-owned insurance subsidiary, in addition to third party insurance coverage. Provisions for losses related to self-insured 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.

Stock Options:
We account for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", which does not require compensation costs related to stock options to be recorded in net income, as all options granted under the various stock option plans had an exercise price equal to the market value of the underlying

common stock at grant date. SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123," provides guidance on acceptable approaches to the implementation of SFAS No. 123, and requires more prominent disclosures of pro forma net earnings and earnings per share determined as if the fair value method of accounting for stock options had been applied in measuring compensation cost. Stock options are further detailed in the note to our consolidated financial statements entitled "STOCK OPTIONS."

Synthetic Lease:
Our new corporate headquarters facility, located in Wayne, New Jersey, is 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 to pay 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. The lease agreement provides the lessor with a residual value guarantee equal to the funding for the acquisition and construction of the facility. Under accounting principles generally accepted in the United States, this arrangement is required to be treated as an operating lease for accounting purposes and as a financing for tax purposes.

In 2002, the FASB Emerging Issues Task Force issued EITF issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor" (EITF 02-16). EITF 02-16 considers vendor allowances as a reduction in the price of a vendor's product that should be recognized as a reduction of cost of sales. Advertising allowances that are received for specific, identifiable and incremental costs are considered a reduction of advertising expenses and should be recognized as a reduction of SG&A. The provisions of EITF 02-16 are effective for all new arrangements, or modifications to existing arrangements, beginning after December 31, 2002. We are currently evaluating the potential impact of the provisions of EITF 02-16 on our consolidated financial statements for 2003.

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which will require the consolidation of entities that are controlled by a company through interests other than voting interests. Under the requirements of this interpretation, an entity that maintains a majority of the risks or rewards associated with Variable Interest Entities (VIEs), commonly known as special purpose entities, is effectively in the same position as the parent in a parent-subsidiary relationship. Disclosure requirements of VIEs are effective in all financial statements issued after January 31, 2003. The consolidation requirements apply to all VIEs created after January 31, 2003. FIN 46 requires public companies to apply the consolidation requirements to VIEs that existed prior to February 1, 2003 and remained in existence as of the beginning of annual or interim periods