(Amounts in millions, except per share data)

The company's fiscal year ends on the Saturday nearest to January 31. References to 2002, 2001, and 2000 are for the 52 weeks ended February 1, 2003 and February 2, 2002 and the 53 weeks ended February 3, 2001.

Certain reclassifications have been made to prior periods to conform to current presentations.

The consolidated financial statements include the accounts for the company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Assets and liabilities of foreign operations are translated at current rates of exchange at the balance sheet date while results of operations are translated at average rates in effect for the period. Unrealized translation gains or losses are shown as a component of accumulated other comprehensive loss within stockholders' equity.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

The company recognizes sales revenue at the time the guest takes possession of merchandise or at the point of sale in our stores, or at the time of delivery for products purchased from our web-sites. Layaway transactions are recognized as revenue when the guest satisfies all payment obligations and takes possession of the merchandise. Revenues from the sale of gift cards and issuance of store credits are recognized as they are redeemed.

Net advertising costs are included in selling, general and administrative expenses and are expensed at the point of first broadcast or distribution. Net advertising costs were $147, $160, and $135 for 2002, 2001 and 2000, respectively.

The company considers its highly liquid investments with original maturities of less than three months to be cash equivalents.

Merchandise inventories for the U.S. toy store division, which represent approximately 60% of total inventories, are stated at the lower of LIFO (last-in, first-out) cost or market, 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, as determined by the retail inventory method.

Credits and allowances are received from vendors and are related to formal agreements negotiated with such vendors. These credits and allowances are predominantly for cooperative advertising, promotions, and volume related purchases. These credits and allowances, excluding advertising allowances, are netted against cost of sales. The company's policy is to recognize credits, that are related directly to inventory purchases, as the related inventory is sold. Cooperative advertising allowances offset the cost of cooperative advertising that is agreed to by the company and its vendors, and are netted against advertising expenses included in selling, general and administrative expenses. The company's policy is to recognize cooperative advertising allowances in the period that the related advertising media is run.

The significant components of the line item "Cost of sales" include the cost to acquire merchandise from vendors; freight in; markdowns; provision for inventory shortages; and discounts and allowances related to merchandise inventories.

The significant components of the line item "Selling, general and administrative expenses" include store payroll and related payroll benefits; rent and other store operating expenses; net advertising expenses; costs associated with operating the company's distribution network that primarily relate to moving merchandise from distribution centers to stores; and other corporate-related expenses.

Property and equipment are recorded at cost. Leasehold improvements represent capital improvements made to leased locations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets or, where applicable, the terms of the respective leases, whichever is shorter. Accelerated depreciation methods are used for income tax reporting purposes with recognition of deferred income taxes for the resulting temporary differences. The company periodically evaluates the need to recognize impairment losses relating to long-lived assets. If indications of impairment exist and if the value of the assets are impaired, an impairment loss would be recognized.

The company capitalizes certain costs associated with computer software developed or obtained for internal use in accordance with the provisions of Statement Of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," issued by the American Institute of Certified Public Accountants. The company's policy provides for the capitalization of costs from the acquisition of external materials and services associated with developing or obtaining internal use computer software. Certain payroll costs for employees that are directly associated with internal use computer software projects are capitalized once specific criteria are met. The amount of payroll costs capitalized is limited to the time directly