TOYS "R" US
ANNUAL REPORT
1997


<PAGE>


Fifty years ago it was a single baby store in post - World  War  II  Washington,
DC. Today, it is an $11 billion Company, and the  world's  unsurpassed leader in
toys and juvenile  products.  How did it all begin? With the vision of one  man,
Charles Lazarus.

But Charles' vision did more than that. He changed the shopping habits  of  more
than three generations of parents.  He created more than a chain of toy stores -
he created  an  industry and forever altered the way America, and now the world,
shops for toys. Along  the  way, Charles  nurtured  and  developed  hundreds  of
executives who owe much of their knowledge of the retail business to the example
he set, the high  standards he developed and the lessons  he taught. Charles has
been a constant presence among us-leading, supporting and encouraging. Toys"R"Us
will  always  be  imbued  with  the  uncompromising  dedication,  the   uniquely
refreshing personality, and the vision for a strong future that is truly Charles
Lazarus.

Those  of  us  who  follow  him  do  so  with a vivid awareness of the legacy he
created, and with a commitment to carrying on the strong tradition of excellence
he established back in 1948.

We salute you, Charles, on this momentous anniversary, and look forward to  your
counsel as Chairman Emeritus.

     Michael Goldstein                       Robert C. Nakasone     
     Chairman of the Board                   Chief Executive Officer

     /s/ Michael Goldstein                   /s/ Robert C. Nakasone

Toys"R"Us
The Worldwide Authority on Kids, Families and Fun

Table of Contents

Financial Highlights.................................................... page 3
Letter to Our Stockholders.............................................. page 4
Management's Discussion and Analysis of Results of Operations and
     Financial Condition................................................ page 12
Financial Statements.................................................... page 14
Report of  Management  and Report of  Independent  Auditors............. page 23
Directors, Officers  and  General  Managers............................. page 24
Quarterly  Financial  Data and Market Information....................... page 26
Store Locations and Corporate Data...................................... page 27

                                        2
<PAGE>

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
TOYS"R"US, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>

(Dollars in millions except per share data)                                                               Fiscal Year Ended
---------------------------------------------------------------------------------------------------------------------------
                            Jan. 31,   Feb.1,  Feb. 3,  Jan. 28, Jan. 29,  Jan. 30,   Feb. 1,   Feb. 2,  Jan. 28,  Jan. 29,
                                1998     1997*    1996*     1995     1994      1993      1992      1991      1990      1989
---------------------------------------------------------------------------------------------------------------------------
<S>                         <C>       <C>      <C>       <C>       <C>      <C>       <C>       <C>       <C>        <C>            
OPERATIONS:
 Net Sales                  $ 11,038  $ 9,932  $ 9,427   $ 8,746   $7,946   $ 7,169   $ 6,124   $ 5,510   $ 4,788   $ 4,000
 Net Earnings                    490      427      148       532      483       438       340       326       321       268
 Basic Earnings Per Share       1.72     1.56     0.54      1.88     1.66      1.51      1.18      1.12      1.11      0.92
 Diluted Earnings Per Share     1.70     1.54     0.53      1.85     1.63      1.47      1.15      1.11      1.09      0.91

FINANCIAL POSITION AT YEAR END:
 Working Capital            $    579  $   619  $   326   $   484   $  633   $   797   $   328   $   177   $   238   $   255
 Real Estate-Net               2,435    2,411    2,336     2,271    2,036     1,877     1,751     1,433     1,142       952
 Total Assets                  7,963    8,023    6,738     6,571    6,150     5,323     4,583     3,582     3,075     2,555
 Long-Term Debt                  851      909      827       785      724       671       391       195       173       174
 Stockholders' Equity          4,428    4,191    3,432     3,429    3,148     2,889     2,426     2,046     1,705     1,424

NUMBER OF STORES AT YEAR END:
 Toys"R"Us - United States       698      680      653       618      581       540       497       451       404       358
 Toys"R"Us - International       441      396      337       293      234       167       126        97        74        52
 Kids"R"Us - United States       215      212      213       204      217       211       189       164       137       112
 Babies"R"Us - United States      98       82        -         -        -         -         -         -         -         -
 KidsWorld - United States         2        2        -         -        -         -         -         -         -         -
 Total Stores                  1,454    1,372    1,203     1,115    1,032       918       812       712       615       522

</TABLE>

*After other charges as described in the Notes to Consolidated Financial
Statements.


                        CONSOLIDATED NET SALES (billions)
                 10 year annual compounded sales growth of 13.4%
                           (GRAPHIC MATERIAL OMITTED)

Fiscal Year                         1988 4.0
                                    1989 4.8
                                    1990 5.5
                                    1991 6.1
                                    1992 7.2
                                    1993 7.9
                                    1994 8.7
                                    1995 9.4
                                    1996 9.9
                                    1997 11.0

                                        3
<PAGE>

TO OUR STOCKHOLDERS

I am pleased to be writing to you for the first time as Chief Executive  Officer
of Toys"R"Us.  As only the third CEO in our Company's fifty year history, I feel
truly privileged to play a role in moving our Company to greater  heights.  I am
committed  to  upholding  the rich  traditions  and culture that have made us so
successful.  I am also keenly aware of the need for changes to our priorities if
we are to develop  winning  strategies  that will move our  Company  forward.  I
enthusiastically  welcome the challenge and appreciate  the  opportunity to lead
this great Company.


1997 Financial Highlights

Before I outline our strategic direction  for  1998, let us   take  a quick look
at 1997.  In short, despite delivering our 19th consecutive year of record sales
since Toys"R"Us became a public company, 1997 was not the year we hoped it would
be. Our sales reached the $11 billion mark which was an  11%  increase  over the
$9.9 billion  reported last year.  While our net earnings also increased to $490
million,  we  did  not deliver the record earnings  goal  we set out to achieve.
Nonetheless,  1997  was  a  year of substantial improvements on many significant
developmental fronts that will make us a stronger  competitor  in  the future. I
will touch on some of these as I outline our plans for 1998 and the future.


1998 Strategies and Direction 

In my new role as Chief Executive Officer, I have made it clear  that  strategic
planning and management  development will be my top priorities.  We have already
begun  analyzing and  developing a number of short and long-term  initiatives to
better  position  Toys"R"Us  for the future.  These plans are designed to meet a
variety  of issues.  Most of all,  they are  intended  to  address  our  primary
objective: to increase stockholder value.

[Photograph of Robert C. Nakasone, Chief Executive Officer]


Economic Value Added: EVA_

Beginning in 1998 we plan on moving Toys"R"Us from a Company focused on building
stores and expanding to new countries to a Company  more  focused on  maximizing
asset productivity  and  free cash  flow,  together with profitable  growth.  To
achieve this goal it is imperative that our entire  organization  makes  a  very
significant, but subtle shift in mindset and attitude.  In order for this change
to permeate every level in our organization,  we have adopted an "Economic Value
Added"  management  system  -  or  EVA_  - to  determine  whether  our  business
initiatives and investments provide an adequate return to our stockholders.  The
focus on EVA_ is to instill value-creating  thinking into our management's every
day thought  processes so that they scrutinize each investment to insure that it
meets or exceeds our cost of capital.  We have  retained  the services of Stern,
Stewart & Co., the leaders in EVA_ implementation,  and we are in the process of
developing an EVA_- based  management  system to be used  throughout  our entire
organization.  We are very serious about increasing our asset  productivity and,
therefore,  the annual incentive  compensation  plan for our senior  executives,
beginning  in 1998,  will be tied to EVA_  improvement.  Our goal is to have all
incentive  plans tied to EVA_  commencing in 1999.

To show further  support for this initiative,  our Board of  Directors  approved
another $1  billion  share repurchase  program,  which we  announced in January.
We intend to continue to repurchase the Company's stock  in  a  very  aggressive
manner.


Asset Productivity

Another  crucial  priority  for 1998 will be to  increase  our free cash flow by
operating our business with significantly lower asset levels. We are targeting a
reduction of $500 million in same store  inventories by the year 2000 and expect
at least  half of this  reduction  to occur  this year.  Key to  achieving  this
ambitious  objective will be a major overhaul of our purchasing and distribution
systems.  We have  retained  Andersen  Consulting to work with a team of our key
merchandising,  distribution  and operating  executives and anticipate that this
project will take three years to complete.


"Toys"R"Us... The Worldwide Authority on Kids, Families and Fun"

Over the past several months we have been focusing on  the  changing  profile of
our customers to determine how we can better  meet  their  needs.  While we have
been doing a lot of things right, it is clear that there are areas which require
radically new approaches in how we do business.  Our current vision of

                                        4
<PAGE>

being the "preeminent worldwide retailer of toys and juvenile products" is quite
narrow and no longer  consistent  with  how  our  business is evolving.  Without
weakening that position, we think it is important for us to break the boundaries
of how we perceive ourselves, thereby allowing us to sell not only products, but
services...  to serve not only children, but families... and to provide not only
toys,  but  also  fun.  Our strategy, therefore, is to broaden and capitalize on
our brand  equity as a Company  focused on fun - not just for kids,  but for the
entire  family.  By  expanding  the definition of merchandise  and  services  we
offer, we believe we can capitalize on our established name and  image.  We plan
to expand  our  vision statement to the  following:  "Toys"R"Us... The Worldwide
Authority on Kids, Families and Fun."


Store Design

In order to make our stores more  flexible,  we  are  rethinking  how all of our
stores can be redesigned so that  flexibility  becomes central to the  business.
This is particularly  relevant during our "out of season" time period  where our
average  sales per square  foot runs at less than 1/4 of our average sales level
during the November/December Holiday  selling season.  Our  Concept  2000  pilot
stores have taught us a great deal about what our customers are looking  for and
they  are a vital  step in the  evolution of our stores.  Our customer  research
indicates that the appeal of the Concept 2000 store emanates from  the  ease  of
shopping, enhanced store ambiance, freedom of movement and improved displays and
fixtures.

One priority in 1998 will be to apply the newly expanded  definition of our core
business to additional  products and services, thereby  broadening our offering.
It's clear that the look and feel of Concept 2000 is "on target" with customers;
however,  we  also  recognize  that  the  biggest  and  fastest  rewards  to our
stockholders can come from creating new excitement through the expansion  of the
merchandise  offering in our  traditional store format, which comprises over 85%
of our stores. As a result, we will be applying new  strategies  to  both  store
formats and taking the best of what we learned to create an even  more  exciting
store...based on the Concept 2000 design but with more to offer. Therefore, 1998
will be a year of enormous experimentation  as  we  look   to  expand  the  core
definition  of  our  business.  


Exclusive  Product Development

Product differentiation will be critical to our long-term success.  We feel this
is an unusually  fertile area for margin enhancement and customer loyalty.  This
will  include  private  label  development,  branded  exclusives produced by key
toy manufacturers and  exclusive  licenses.  We  realize  this  is  a  long-term
commitment requiring patience and brand management  expertise.  To that end,  we
recently  hired one of the most respected  principals  in the  toy manufacturing
industry to  spearhead  this  effort.  Andy  Gatto,  our new  Vice President  of
Product  Development,  comes  to us  with  over 25  years  of toy manufacturing,
marketing  and  distribution  experience as a principal with Fisher-Price,  LJN,
Matchbox,  V-Tech and Toy Biz. Andy is now  in  the  process  of  formulating an
aggressive five-year business plan which we will begin to execute in 1998.


New Venues for Selling

Electronic commerce represents an outstanding opportunity to extend our presence
beyond  our stores.  Our plans include expanding our existing Home Page to allow
for easy customer shopping as we begin selling merchandise through the Internet.
We will begin  selling about 1,500 items during  the second quarter of this year
from  www.toysrus.com.  In light of the growing importance of "e-tail"  selling,
we have promoted Joel Anderson to  the  newly  created  post  of Vice President,
Toys"R"Us Direct.  

Catalogue shopping is another  venue we will be exploring in the fourth  quarter
of 1998, making  shopping  by  mail  even  easier  for customers and giving them
another reason to choose Toys"R"Us.

Finally, "Buy  Here/Pick Up There" is a new service that we will  be  testing in
1998 with the goal of making it simple for customers  to  order selected  large,
bulk items (such as swing sets, battery operated ride-on vehicles, play  houses,
etc.) for family  members  or friends who live a long distance away. Rather than
incurring high shipping  charges,  the "Buy Here/Pick Up There"  concept  allows
for the  purchase  in one store and the pick-up in  another.


Database  Marketing

Currently,  we  have  38  million customers in our "R"Us database. Our Kids"R"Us
division has been very successful in leveraging off this  data  by  distributing
the  majority  of its direct mail circulars to targeted customers. This has also
enabled us to mail specific advertising vehicles to our customers based on prior
purchases  and targeted  demographics.  Given that 30 percent  of our  customers
generate  80 percent of our  business,  our  database  marketing  will become an
increasingly  powerful  tool - not only  for  Kids"R"Us, but for Babies"R"Us and
Toys"R"Us as well.

[Map of Toys "R" Us Around the World - 27 Countries Worldwide]

                                        5
<PAGE>

Babies"R"Us

With the consolidation of the Baby Superstore  acquisition  into the Babies"R"Us
family, we became the clear leader of the $25 billion juvenile market.  We ended
1997  with a total of 98 Babies"R"Us stores and plan to open an additional 15 to
20 stores in 1998.  Our unrivaled assortment coupled with our database marketing
and automated Baby Registry are key strengths in targeting  new mothers and gift
givers for the roughly 4 million  children  born  each  year.  In addition,  the
introduction of in-store "Baby Fest" weekends have been  a  proven  winner  with
customers.  These weekends, which offer demonstrations, seminars and educational
programs, reinforce our brand identity and build customer  loyalty.  There is no
question that the investment  we made in  developing  this  business has put the
newest  member of the "R"Us family on a firm footing and should serve us well in
the years ahead.


International Business

Another priority in 1998 will be to continue to accelerate the positive earnings
momentum in  our  international  toy  stores. In 1997, our  international  sales
increased to $2.9 billion.  More importantly, our operating profit increased 28%
to $168 million.  These accomplishments  resulted from stronger sales  trends in
toys, video games and juvenile products around the world,  coupled with improved
operating efficiency.

In Japan, we have achieved market share leadership in just over 5  years.  Japan
is now our largest business outside of the United States.

The poor economic climate in most of Europe continues to challenge our business.
Despite  the  tough  business  environment,  we improved our operating profit in
every  market  with  the  exception  of  France.   In  an  effort   to   improve
productivity, we are expanding our juvenile category in most of these markets as
well as piloting several Concept 2000 prototype stores.  In  addition,  we  have
recently  appointed  Johannes  Dercks as President of Toys"R"Us  Central Europe.
Johannes brings over 20 years of mass  merchandising  experience  with the Metro
Group, Promodes Group and Aral Shop, Ltd.


Management

Management   excellence  is  the  most   fundamental   ingredient  to  enhancing
stockholder  value. I am very proud of the strong management  exemplified by our
Toys"R"Us associates  throughout the world, and even happier to introduce you to
the newest members of our senior executive team. It is a group I am particularly
excited about since it clearly  comprises  some of the best talent in the retail
industry.

                           NUMBER OF STORES WORLDWIDE
                           (GRAPHIC MATERIAL OMITTED)

FISCAL YEAR                      1988       522
                                 1989       615
                                 1990       712
                                 1991       812
                                 1992       918
                                 1993     1,032
                                 1994     1.115
                                 1995     1,203
                                 1996     1,372
                                 1997     1,454

Bruce  Krysiak,  our  new  President  and  Chief  Operating  Officer,  joins  us
officially  on April  15 from  Dollar  General,  where he  served  in a  similar
capacity.  In Bruce, we have an executive with  extraordinary  retail experience
and  knowledge  of  merchandising,  marketing  and  operations.  Prior to Dollar
General,  Bruce was COO of Circle K, and he spent the early  years of his career
in senior marketing and  merchandising  roles at Southland's 7-11 stores.  Bruce
also had the unique experience of working in the former Soviet Union as chairman
of the joint  venture  that built that  country's  first  fully-integrated  food
distribution system.

We also promoted  Keith Van Beek to  President  of  Toys  USA Merchandising  and
Marketing.  Most  recently,  Keith  served  as  President  of Toys"R"Us  Canada.
Under  his  helm,  our  Canadian  business  has  experienced back-to-back  years
of double digit comparable store sales increases powered by innovative marketing
and  in-store  promotional  programs - all  in the midst of a highly competitive
retail climate.  We think Keith's track record and skill set make  him  uniquely
qualified  to  rethink  and  expand our  marketing  and merchandising  offerings
with a heavy emphasis on in-store presentation.

To better capitalize on pan-European  initiatives  by having  top  level  senior
management  "on the  ground" in Europe,  David  Rurka was named  Chairman of our
newly-formed  European  Management  Board.  David joined the Company in 1984 and
started our UK  Operations.  As a result of his efforts  over the last 13 years,
our UK Operations have consistently  achieved the highest levels of performance.
With David coordinating key initiatives with our Managing  Directors  throughout
Europe, we expect to see some dramatic benefits in the near future.

And  finally,  we  named  Bruno  Roqueplo  Senior  Vice  President,  Finance and
Administration   for   Toys"R"Us  International.  Bruno   brings   with  him  an
established  career  in  international   business  affairs.  Most  recently,  he
served as Chairman and Managing Director of Campbell Distillers, a subsidiary of
Group Pernod Ricard, a leading wine and beverage

                                        6
<PAGE>

company in Europe. Bruno had a distinguished career at Campbell, where he served
in  numerous  positions including  Managing  Director  of  divisions  in the UK,
France and Australia.


Looking To The Future

I think it is fair to say that no CEO has ever started out with a  better  team.
From the strength  of our associates  around  the  world to the  caliber  of our
senior management, we have a superb infrastructure to both  establish the vision
and develop and implement  the plan for growing our business and building  value
for you.

In  reflecting  on  this  past  year  and  in looking ahead, I feel inextricably
linked with Toys"R"Us in several ways.  Both  of us celebrate 50 years this year
(although Geoffrey is aging far more gracefully!),  and as we stand on the brink
of a new millennium, we are presented with the unparalleled opportunity to seize
new challenges and broaden our vision for the future.  All of us affiliated with
Toys"R"Us  are  recipients of a great legacy  started by Charles  Lazarus half a
century ago.

Those of us who follow  Charles do so with a  keen  awareness of the dedication,
creativity and drive that it took to earn  his  reputation.  We  also  recognize
that this is an exciting time for our company; a time to  move  ahead in further
defining who we are and what we mean to our  customers. It is true  that  no one
knows what the future holds.  But with a clear vision and  strategic initiatives
well in place, I do know that we hold the keys to the future.  1998 will be  the
beginning of re-energizing and revitalizing Toys"R"Us - creating a company truly
dedicated to reasserting  itself and its position as the  Worldwide Authority on
Kids, Families and Fun!

Sincerely,

/s/ Robert C. Nakasone
Robert C. Nakasone
Chief Executive Officer
March 24, 1998

                        STOCKHOLDERS' EQUITY (billions)
                          10 year growth of $3 billion
                           (GRAPHIC MATERIAL OMITTED)
                                 1988      1.4
                                 1989      1.7
                                 1990      2.0
                                 1991      2.4
                                 1992      2.9
                                 1993      3.1
                                 1994      3.4
                                 1995      3.4
                                 1996      4.2
                                 1997      4.4

(Photo of Michael Goldstein, Chairman of the Board)

MESSAGE FROM THE CHAIRMAN

The past 15 years I've spent as part of the Toys"R"Us  family  have  undoubtedly
been the most rewarding of my business career.  I've been fortunate to have been
a part of so many significant milestones for the Company - from the  rollout  of
our toy stores across the USA tot he start-up of our Kids"R"Us and international
businesses, to the birth of Babies"R"Us and the acquisition of Baby  Superstore.
I'm proud to say that in every instance our Company has  consistently  set  high
standards of performance and has successfully risen to the challenge.  I am also
confident that our management team will continue in the strong  tradition  while
looking toward an exciting future.  As you know, last year I made  the  decision
to relinquish my day to day involvement as your CEO in 1998 to devote more  time
and energy to my family and charity  work.  I  will,  however,  remain  actively
in the Company as Chairman of the Board, and - for the record - I'll always be a
Toys"R"Us Kid.

MICHAEL GOLDSTEIN
Chairman of the Board

/s/ Michael Goldstein

                                        7
<PAGE>

(Photograph of Charles Lazarus in 1948)

A TIME TO CELEBRATE!

In 1948,  Charles Lazarus began a business  totally  dedicated to kids and their
needs - just in time for the post-war  baby boom.  He had no idea that his first
baby  furniture  store would evolve and mushroom into an eleven  billion  dollar
worldwide  chain of toy stores.  He did believe  that if he was  innovative  and
imaginative, he could make his concept work.  He was right.

The continuing strength of his vision, coupled with the dedication and hard work
of  every  individual  in the Toys"R"Us organization, has carried the company to
its  present  day  success.  In 1998,  we celebrate and take pride in our shared
history - five decades full of challenge, change and creativity.

                                        8
<PAGE>

LOOKING BACK

"I came out of service after the war and  everyone  I  talked  to said they were
going to go home,  get married, have children and live in the suburbs...live the
American Dream...I had saved a few  dollars in the  service,  so I decided  that
I would open a store where my father had a bicycle repair shop.  I opened a baby
store  and sold cribs, carriages,  strollers,  high  chairs...everything for the
baby. It was a one-man business and that was nice."

Charles Lazarus begins his story with a  smile, sitting  in  his  office  at the
Corporate Headquarters of the world's biggest toy store, Toys"R"Us.

His narrative, peppered with  memorable  experiences, recollections  of business
challenges and creative decision-making, contains all the  elements  of  a  real
success story. 

Against  the  backdrop of a  country restoring its spirit after the Second World
War,  25-year-old Charles set up his business. As he learned the ins and outs of
running his first store, he realized that one  of  the  most  valuable skills he
could acquire was to listen. He listened to his  customers,  and  provided  what
they needed.

"I need a toy for my baby..." was something he heard over and over again.  So he
began to stock and sell baby toys...and then  toys  for  older kids,  responding
each time to what the customers asked for.

"Listening  to  the  customer  is probably the  best thing in the world.  Almost
all that we have  here and how we expanded  the  business came from the customer
saying 'I need...' or 'I  want...' or 'Don't you  have...'?" Charles affirms.

As  if  timed  by  some  fortunate  coincidence, toy manufacturers in the United
States were also growing and becoming  more  innovative  and  aggressive, taking
a  stronger  stand in a  market previously dominated by European  toy companies.
Charles could not have picked a better time to set some new ideas in motion. 

"The idea of  selling toys in a bigger environment?  What I did was I copied the
supermarket.  I said, 'If they can go into a supermarket and pick products right
off the shelf,  they can go into my store and pick toys right off the shelf'."

"So, in the original  store  people  used  to  come and bring their own boxes or
bring their own bags and it was cash and carry. And we sold things very cheaply.
That's how the business got going."

Introducing a "supermarket environment" for his shoppers  and  offering a bigger
selection of merchandise at lower prices also enabled  Charles to extend the toy
shopping season - from Christmas to all year-round!

                                        9
<PAGE>

MOVING FORWARD

"We were probably  the  first  ones  selling  toys  and  juvenile  product  at a
discount.  Here  we  were,  located  in  the  middle   of  Washington,  DC - and
customers had to go find parking, which was really hard to do! But  one customer
told another,  and all the word-of-mouth really worked for us." 

By the late 1950's, Charles had two stores in the Washington,  DC area  that had
become  popular  with   parents.  Shopping  at  his   Baby   Furniture  and  Toy
Supermarket  stores meant finding  almost every style of stroller or crib...  in
stock and at a good  price.  Toys were still the top  ticket,  though.  In 1957,
making  another bold business  move,  Charles opened a toy store with a peculiar
but catchy little name: Toys"R"Us, the store with the backwards "R".

Once again, his timing could not have been better as the growing  popularity  of
television gave rise to the phenomenon  of "hot toys".  Every child wanted them,
and parents knew just where to go: Toys"R"Us!

By 1966,  Charles had four stores that sold about $12 million worth of toys each
year.  To raise the  capital he needed to expand, he sold these four  stores  to
Interstate Stores, a large retail  conglomerate. After the sale, Interstate gave
Charles Lazarus the responsibility of  running the stores  and the toy  division
of their business.

Toys"R"Us continued to grow under his leadership.  Interstate  Stores,  however,
faced   major   difficulties   with  the  rest  of  its  business - despite  the
profitability  of the toy  stores -  eventually  filing  for  bankruptcy  in the
mid-1970's.  Charles persuaded the court  to allow him to run Interstate  during
this critical period.  With a combination of persistence, determination, careful
business  decisions, excellent business relationships, and investments in talent
and technology he began to restructure  the company.  Charles sold or liquidated
the  unprofitable operations  and  retained  his  toy  stores.  After  only four
years, Interstate emerged from bankruptcy and was renamed Toys"R"Us.


LEADING THE WAY

Moving into the 80's fueled by energy, enthusiasm and optimism, Toys"R"Us opened
even more stores in the U.S. and began expanding internationally.  Hot toys, now
powered by television and blockbuster  movies,  brought kids and parents through
the doors. The company was  constantly challenged by competitors, but  continued
to utilize winning strategies.

"I think we have the edge over competition in our knowledge of product.  There's
a long history in the company of understanding and analyzing merchandise... much
more intensely than anyone else," Charles says with confidence.

Venturing out and thinking big, the company opened the first  Kids"R"Us store in
July, 1983 to offer the same selection and value to our customers,  this time in
kids'  fashion.  Toys"R"Us  International  opened its first  stores in 1984,  in
Singapore  and Canada,  marking the  Company's  expansion  to a bigger  world of
children and opportunity.

Toys"R"Us was a name every parent and grown-up knew, a  store every child loved,
a place where kids could be kids in the best possible way.

                                        10
<PAGE>

The backwards "R" logo was recognized everywhere, and Toys"R"Us  moved  into the
position of an industry leader.

At that time, Charles realized that this leadership position came with a certain
responsibility as well.

Toys"R"Us wanted to give back to its employees, customers and to the communities
where its stores operated.  The  Company  became  a  leader  in  offering  equal
opportunity  employment and  diversity  in  the  work  force. In  addition,  the
Toys"R"Us  Children's  Benefit  Fund  was  established  to  provide  support for
programs and health initiatives that benefit  children.  The Children's  Benefit
Fund  has  contributed  more  than  $15  million  to  hospitals  and  children's
charities.

Toys"R"Us is  also  a  leader in  recognizing  the  needs  of  differently-abled
children.   The  Company,   in partnership  with the  National  Lekotek  Center,
produces the Toy Guide for Differently-Abled Kids, featuring toys that have been
tested  and  evaluated  based  on  10  developmental  categories.  The  Guide is
designed  to assist parents, families and friends in making  informed  decisions
about toy selection for children with special needs.


FACING THE FUTURE

Toys"R"Us  continues  to  focus  on what  today's  experienced,  value-conscious
consumer wants - with bright, redesigned stores, improved customer service,  and
baby and gift registries.  The Company is also exploring ways to reach consumers
through  a  number  of  new  avenues,  including  the Internet.  The traditional
offerings of a huge merchandise  selection and value pricing are as strong today
as they were 50 years ago.

With over 1,450 stores in 27  countries,  Toys"R"Us  continues to mark milestone
after milestone.  In 1996, with  the  merger of Babies"R"Us and Baby Superstore,
we expanded our business to encompass  all babies' needs.  In a unique move, the
Company has come full circle to Charles Lazarus' original store concept!

What  has  remained  constant throughout the past five decades  is the company's
business focus: kids. Kids of all ages. What's good for them is good for us.

We have many reasons to celebrate this  anniversary  of  Toys"R"Us - 50 years of
incredible growth, 50 years of bringing great value to customers and, of course,
50 years of making kids' eyes grow wide with wonder... 50 years of FUN!

Speaking with the same excitement and pride today, Charles says:

"I think our business is fascinating.  So  much  is  new  in  toys  every  year!
That's exciting because you're challenged all the time."

"I still  do get a buzz when I visit  the  stores.  I  walk  around  and  I  see
customers who are happy walking in the  store.  I  think  we  are  in  the  best
business in the whole world."

                                        11
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS*

In 1997, the Company posted its 19th consecutive year of record sales, reporting
sales of $11 billion. Sales increased by 11.1% in 1997, 5.4% in 1996 and 7.8% in
1995. The sales growth is primarily  attributable  to the increase in comparable
U.S.A. toy store sales of 6% in 1997, the acquisition of Baby Superstore and the
Company's  continued  store  expansion.  The  Company  opened 84 new U.S.A.  toy
stores,  149  international  toy stores,  including  franchise and joint venture
stores, 19 children's  clothing stores, 25 baby specialty stores, 2 superstores,
and acquired 76 baby specialty  stores during the three year period.  Comparable
U.S.A. toy store sales increased 2% in 1996 and decreased 2% in 1995.

Cost of sales as a percentage of sales  increased to 69.8% in 1997 from 69.4% in
1996 as a result of higher  costs related to the Company's  promotional  holiday
selling program, higher than historical inventory shrinkage  and  the  continued
strengthening  of the Company's lower margin video business.  Cost of sales as a
percentage  of sales  decreased  in 1996  from  69.9% in 1995  primarily  due to
improved markup on basic toy products,  partially offset by the strengthening of
the lower margin video hardware business.

Selling,  advertising,  general and administrative  expenses as a percentage  of
sales were 20.2% in 1997,  20.3% in 1996 and 20.1% in 1995. The slight  decrease
in 1997 from 1996 was primarily due to  expense control  and  sales  leveraging,
partially offset by additional distribution and handling costs related to higher
than planned inventory  levels.  The  increase  in  1996 was  primarily  due  to
heavier advertising and promotional efforts, as well as the Company's  increased
emphasis on customer service.

Depreciation,  amortization  and asset  write-offs as a percentage of sales were
2.3% in  1997,  2.1% in 1996  and 2.0% in  1995.  The  increase  in 1997 was due
primarily to $19 million in asset  write-offs for the 56 stores converted to the
"Concept  2000"  store  design as well as $9  million of  goodwill  amortization
related to the acquisition of Baby Superstore.

The  Company's  1996  results  were  impacted  by  a  charge of $60 million ($38
million, net of tax benefits or $.14 cents per share) relating to an arbitration
award rendered  against the Company involving  a  dispute over a 1982  franchise
agreement to operate stores in the Middle East.

The Company's 1995 results  were  impacted  by  charges  of  $397  million ($269
million,  net of tax  benefits  or  $.98  cents per share)  to  restructure  its
worldwide  operations and to adopt SFAS No. 121, Accounting for  the  Impairment
of Long-Lived  Assets and  Long-Lived  Assets to be  Disposed  Of.  Elements of 
the restructuring plan are described below and in the notes to the  consolidated
financial  statements and consisted of certain asset  write-offs and established
reserves for certain contractual obligations, primarily in the United States and
Europe.

The Company has substantially completed its restructuring program  action  plan,
including the strategic inventory repositioning  initiative, the  closing  of  3
Toys"R"Us and 7 Kids "R"Us stores in the United States, the consolidation  of  3
distribution centers and various administrative  facilities in the United States
and Europe and the franchising of 9 toy stores in the Netherlands.

At January 31, 1998, the  Company  had  approximately $62 million of liabilities
remaining for its  restructuring  program  primarily relating to long-term lease
obligations and other commitments.  The  Company  believes  these  reserves  are
adequate to complete the restructuring program.

Interest expense decreased by 13.3% in 1997 as compared  to  1996, primarily due
to  lower  average short-term  borrowings  and  to  a  $325 million  medium-term
financing  late in the third quarter of 1996, which replaced borrowings carrying
higher interest rates.  Interest expense decreased  in  1996 as compared to 1995
due to the Company's  improved cash flow as a result of  increased earnings, the
benefits  from  its  worldwide  restructuring  program  and  the   $325  million
medium-term financing referred to above.

The Company's effective tax rate was 36.5% in 1997 and 1996,  and 44.2% in 1995.
The higher effective tax rate in 1995 was primarily due to the restructuring  of
its worldwide operations.

International  sales were  unfavorably  impacted  by  the  translation  of local
currency results into U.S.  dollars  by  approximately  $250  million  and  $150
million  in  1997  and 1996,  respectively.  In  1995  International  sales were
favorably  impacted  by  approximately  $140  million.  Neither  the translation
of local currency results into U.S. dollars nor inflation had a material  effect
on the Company's operating results for the last three years.


LIQUIDITY AND CAPITAL RESOURCES

The Company's impressive financial position is evidenced by its working  capital
and  cash  flows  provided  by  operating activities. Working capital at January
31,  1998,  and   February  1, 1997,  were  $579  million   and   $619  million,
respectively.



*References to 1997, 1996, and 1995 are for the 52 weeks  ended January 31, 1998
and February 1, 1997 and for the 53 weeks ended February 3, 1996.

                                        12
<PAGE>

The  Company's newest division, Babies"R"Us  opened  its first 6 stores in 1996.
The Company accelerated  the growth of this  division  with the  acquisition  of
Baby  Superstore, Inc. on February 3, 1997 for 13 million treasury shares of the
Company's  common stock valued at approximately  $376 million.  This acquisition
was accounted for  as  a  purchase  as of  February  1, 1997,  and the excess of
purchase  price over net assets  acquired in the amount of $365 million has been
recorded as goodwill and is being  amortized  over  40  years.  Baby Superstore,
with 76 stores primarily  in  the  southeast and midwest  United  States,  was a
leading   retailer  of  baby  and  young  children's  products.  The Company has
converted substantially all  of  the  existing  Baby  Superstore  stores  to the
Babies"R"Us operating format.

The Company's cash and cash  equivalents  have  decreased  to  $214  million  at
January  31,  1998  from  $761  million at  February 1, 1997.  This  decrease is
primarily attributable to the following factors:  lower levels of short-term and
long-term debt,  repurchase  of  shares  under  the  share  repurchase  program,
capital expenditures, and higher than planned inventory levels.

In 1998, the Company plans to open approximately 5  toy  stores  in  the  United
States and approximately 35 international  toy  stores,  including  15 franchise
stores. Our  newest  division,  Babies"R"Us,  will  open  approximately 15 to 20
stores in the United States. The  Company  opened  64  toy stores in 1997, 89 in
1996 and 80 in 1995. In addition to the stores closed in  1996  that  were  part
of  the   Company's worldwide restructuring  program,  the Company  closed 2 toy
stores from 1995 through 1997 which did not meet  expectations.  These  closures
did not have a significant impact on the Company's financial position.

For 1998, capital requirements for real estate, store and warehouse fixtures and
equipment,  leasehold improvements and other additions to property and equipment
are estimated at $450 million.

In January 1998, the Company announced an additional authorization of $1 billion
to repurchase shares of the Company's  outstanding  common  stock  over the next
several years. As of January 31, 1998, the Company had repurchased  29.5 million
shares of its common  stock for $947  million  under its prior $1 billion  share
repurchase program announced in January of 1994.

The  seasonal  nature  of the business (approximately 45% of sales take place in
the fourth quarter) typically causes cash to decline from the  beginning  of the
year through October as inventory  increases for the holiday  selling season and
funds are used for land purchases and construction of new stores,  which usually
open  in  the  first ten  months  of  the year.  The  Company  has a $1  billion
multi-currency   unsecured  committed  revolving  credit  facility  expiring  in
December 2002, from a syndicate of financial institutions.   Cash   requirements
for operations, capital expenditures, lease commitments and the share repurchase
program will be met primarily through operating activities, borrowings under the
revolving credit facility, issuance of short-term  commercial paper and/or other
bank borrowings for foreign subsidiaries.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to market  risk from change in interest rates and foreign
exchange  rates.  The Company  regularly evaluates these risks and has taken the
following measures to mitigate these risks: the countries in which  the  Company
owns assets and operates  stores are politically  stable;  the Company's foreign
exchange risk management  objectives are to stabilize cash flow from the effects
of foreign currency fluctuations;  the Company will, whenever  practical, offset
local  investments in foreign currencies with borrowings denominated in the same
currencies; the Company also enters into foreign exchange contracts or purchases
options to eliminate specific transaction  risk.  The  market  risk  related  to
these  derivative  contracts is offset by the changes in value of the underlying
items being hedged. Substantially all  of  the  Company's  long-term  debt is at
fixed interest rates and therefore,  the  fair value  is  affected by changes in
market interest rates. The Company believes the amount of risk and  the  use  of
derivative  financial  instruments  described  above  are  not  material  to the
Company's financial condition or results of operations.


IMPACT OF YEAR 2000

The Company is modifying  significant  portions of  its  software  so  that  its
computer systems will function properly with respect  to dates in the year  2000
and thereafter.  In addition,  the Company has initiated  formal  communications
with  all  of  its  significant  suppliers  to determine the extent to which the
Company's operations  are  vulnerable  to the failure of those third  parties to
remediate their own Year 2000 issues.  The  Company  is  utilizing both internal
and  external  resources  to  renovate  and test its  software  and  anticipates
substantially completing the project by the end of 1998.  The total cost for the
Year 2000  project  is  not  material  to any one year and is being  expensed as
incurred.

The  costs  of  the project  and the time frame in which the Company believes it
will complete the  Year  2000  modifications  are  based  on  management's  best
estimates; however,  there can be  no  guarantee  that these  estimates  will be
achieved  and  actual  results could  differ  materially from those anticipated.
Specific factors that might cause such material  differences  include  continued
availability  of  resources,  the  ability  of  third  parties to complete their
modification plans, and similar uncertainties.

                                        13
<PAGE>

CONSOLIDATED STATEMENTS OF EARNINGS
--------------------------------------------------------------------------------
TOYS"R"US, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                           Year Ended
                                                            -----------------------------------------
                                                           January 31,    February 1,     February 3,
(In millions except per share data)                               1998           1997            1996
-----------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>             <C>     
Net Sales                                                      $11,038       $  9,932        $  9,427
Cost of sales                                                    7,710          6,892           6,592
-----------------------------------------------------------------------------------------------------
     Gross Profit                                                3,328          3,040           2,835
-----------------------------------------------------------------------------------------------------
Selling, advertising, general and administrative expenses        2,231          2,020           1,894
Depreciation, amortization and asset write-offs                    253            206             192
Other charges                                                        -             60             397
-----------------------------------------------------------------------------------------------------
     Total Operating Expenses                                    2,484          2,286           2,483
-----------------------------------------------------------------------------------------------------
     Operating Income                                              844            754             352

Interest expense                                                    85             98             103
Interest and other income                                          (13)           (17)            (17)
-----------------------------------------------------------------------------------------------------
     Interest Expense, Net                                          72             81              86
-----------------------------------------------------------------------------------------------------
Earnings Before Income Taxes                                       772            673             266
Income Taxes                                                       282            246             118
-----------------------------------------------------------------------------------------------------
Net Earnings                                                   $   490       $    427        $    148
-----------------------------------------------------------------------------------------------------
Basic Earnings Per Share                                       $  1.72       $   1.56        $   0.54
-----------------------------------------------------------------------------------------------------
Diluted Earnings Per Share                                     $  1.70       $   1.54        $   0.53
-----------------------------------------------------------------------------------------------------

</TABLE>

See notes to consolidated financial statements.

                                        14
<PAGE>

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
TOYS"R"US, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                            January 31,     February 1,
(In millions)                                                     1998            1997
--------------------------------------------------------------------------------------
<S>                                                          <C>            <C>       
ASSETS

Current Assets:

Cash and cash equivalents                                    $      214     $      761
Accounts and other receivables                                      175            142
Merchandise inventories                                           2,464          2,215
Prepaid expenses and other current assets                            51             42
--------------------------------------------------------------------------------------
 Total Current Assets                                             2,904          3,160

Property and Equipment:

Real estate, net                                                  2,435          2,411
Other, net                                                        1,777          1,636
--------------------------------------------------------------------------------------
 Total Property and Equipment                                     4,212          4,047

Goodwill, net                                                       356            365
Other Assets                                                        491            451
--------------------------------------------------------------------------------------
                                                             $    7,963     $    8,023
--------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term borrowings                                        $      134     $      304
Accounts payable                                                  1,280          1,346
Accrued expenses and other current liabilities                      680            720
Income taxes payable                                                231            171
--------------------------------------------------------------------------------------
 Total Current Liabilities                                        2,325          2,541

Long-Term Debt                                                      851            909
Deferred Income Taxes                                               219            222
Other Liabilities                                                   140            160

Stockholders' Equity:

Common stock                                                         30             30
Additional paid-in capital                                          467            489
Retained earnings                                                 4,610          4,120
Foreign currency translation adjustments                           (122)           (60)
Treasury shares, at cost                                           (557)          (388)
--------------------------------------------------------------------------------------
 Total Stockholders' Equity                                       4,428          4,191
--------------------------------------------------------------------------------------
                                                             $    7,963     $    8,023
--------------------------------------------------------------------------------------

</TABLE>

See notes to consolidated financial statements.

                                        15
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
TOYS"R"US, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                                                          Year Ended
                                                            -----------------------------------------
                                                           January 31,     February 1,   February 3,
(In millions)                                                     1998            1997          1996
-----------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>           <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings                                                     $ 490           $ 427         $ 148
Adjustments to reconcile net earnings to net cash
  provided by operating activities:
  Depreciation, amortization and asset write-offs                  253             206           192
  Deferred  income  taxes                                           18              23           (67)
  Other charges                                                      -               -           397
  Changes in  operating  assets and liabilities:
     Accounts and other receivables                                (40)            (14)          (11)
     Merchandise inventories                                      (265)           (195)         (193)
     Prepaid expenses and other operating assets                    (9)            (10)          (16)
     Accounts payable, accrued expenses and other liabilities       22             262          (151)
     Income taxes payable                                           40              44           (49)
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities                          509             743           250
-----------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net                                         (494)           (415)         (468)
Other assets                                                       (22)            (36)          (67)
Cash received with the acquisition of Baby Superstore                -              67             -
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities                             (516)           (384)         (535)
-----------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net                                        (142)            (10)          210
Long-term borrowings                                                11             326            82
Long-term debt repayments                                         (176)           (133)           (9)
Exercise of stock options                                           62              28            16
Share repurchase program                                          (253)              -          (200)
-----------------------------------------------------------------------------------------------------
Net cash (used in) / provided by financing activities             (498)            211            99
-----------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash and cash equivalents       (42)            (12)           19

CASH AND CASH EQUIVALENTS
(Decrease)/increase during year                                   (547)            558          (167)
Beginning of year                                                  761             203           370
-----------------------------------------------------------------------------------------------------
End of year                                                      $ 214           $ 761         $ 203
-----------------------------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income Tax Payments                                              $ 192           $ 177         $ 235
Interest Payments                                                $  83           $ 109         $ 118
-----------------------------------------------------------------------------------------------------

</TABLE>

See notes to consolidated financial statements.

                                        16
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
TOYS"R"US, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                                   
                                                                   Common Stock
                                                          ----------------------------------                                 Foreign
                                                              Issued           In Treasury     Additional                   currency
                                                          ----------------------------------      paid-in     Retained   translation
(In millions)                                             Shares   Amount    Shares   Amount      capital     earnings   adjustments
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>       <C>      <C>    <C>            <C>        <C>            <C>   
Balance, January 28, 1995                                  298.0     $ 30     (18.2) $ (642)        $ 521      $ 3,545        $ (25)

Net earnings for the year                                      -        -         -       -             -          148             -
Share repurchase program                                       -        -      (7.6)   (200)            -            -             -
Exercise of stock options, net                                 -        -       0.9      34           (16)           -             -
Corporate inversion                                          2.4        -      (2.4)    (38)           38            -             -
Foreign currency translation adjustments                       -        -         -       -             -            -           38
------------------------------------------------------------------------------------------------------------------------------------
Balance, February 3, 1996                                  300.4       30     (27.3)   (846)          543        3,693           13
------------------------------------------------------------------------------------------------------------------------------------

Net earnings for the year                                      -        -         -       -             -          427             -
Acquisition of Baby Superstore, Inc.                           -        -      13.0     400           (24)           -             -
Exercise of stock options, net                                 -        -       1.7      58           (30)           -             -
Foreign currency translation adjustments                       -        -         -       -             -            -          (73)
------------------------------------------------------------------------------------------------------------------------------------
Balance, February 1, 1997                                  300.4       30     (12.6)   (388)          489        4,120          (60)
------------------------------------------------------------------------------------------------------------------------------------

Net earnings for the year                                      -        -         -       -             -          490             -
Share  repurchase  program                                     -        -      (8.2)   (253)            -            -             -
Exercise of stock options, net                                 -        -       2.8      84           (22)           -             -
Foreign currency translation adjustments                       -        -         -       -             -            -          (62)
------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998                                  300.4     $ 30     (18.0) $ (557)        $ 467      $ 4,610       $ (122)
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

See notes to consolidated financial statements.

                                        17
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Amounts in millions except per share data)
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES


Fiscal Year

The Company's  fiscal year ends on the Saturday nearest to January 31. Reference
to 1997,  1996 and 1995 are for the 52 weeks ended January 31, 1998 and February
1, 1997, and for the 53 weeks ended February 3, 1996, respectively.


Principles of Consolidation

The  consolidated  financial  statements include the accounts of the Company and
its  subsidiaries.  The 1996  consolidated  balance  sheet and statement of cash
flows  also  reflect  the  acquisition  of Baby  Superstore,  Inc.  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. Translation  gains  or  losses are shown as a
separate component of stockholders' equity.


Cash and Cash Equivalents

The Company considers its highly liquid investments  purchased  as part of daily
cash management activities to be cash equivalents.


Merchandise Inventories

Merchandise  inventories for the U.S.A.  toy store  operations,  which represent
over  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.  If
inventories had been valued at the lower of FIFO  (first-in,  first-out) cost or
market,  inventories  would show no change at January  31,  1998 or  February 1,
1997. All other merchandise  inventories are stated at the lower of FIFO cost or
market as determined by the retail inventory method.


Property and Equipment

Property and equipment are recorded at cost.  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.

The Company recognizes  impairment losses relating to long-lived assets based on
several factors including,  but not limited to,  management's  plans  for future
operations, recent operating results and projected cash flows.


Preopening Costs

Preopening costs, which consist primarily of advertising,  occupancy and payroll
expenses,  are amortized  over  expected  sales to the end of the fiscal year in
which the store opens.


Financial  Instruments

The  carrying  amounts  reported   in  the  balance  sheets  for cash  and  cash
equivalents and short-term borrowings approximate their fair market values.


Forward Foreign Exchange Contracts

The Company enters into forward foreign exchange contracts to eliminate the risk
associated with currency movement  relating to its short-term  intercompany loan
program with foreign subsidiaries and inventory purchases denominated in foreign
currency.  Gains  and  losses,  which  offset  the  movement  in the  underlying
transactions,  are  recognized  as  part of such  transactions.  Gross  deferred
unrealized gains and losses on the forward contracts were not material at either
January  31,  1998 or February  1, 1997.  The  related  receivable,  payable and
deferred  gain or loss are  included  on a net basis in the balance  sheet.  The
Company had $439 and $205 of short term outstanding forward contracts at January
31, 1998 and February 1, 1997,  maturing in 1998 and 1997,  respectively.  These
contracts are entered into with counterparties that have high credit ratings and
with  which  the  Company  has the  contractual  right to net  forward  currency
settlements.  In  addition,  the Company  had a $325  currency  swap  obligation
outstanding at January 31, 1998 related to its (pound)200 note payable due 2001.


Accounting Pronouncements

In June 1997, the Financial Accounting  Standards  Board issued  SFAS No.  130 -
Reporting  Comprehensive  Income,  which requires the separate  reporting of all
changes to stockholders'  equity,  and SFAS No. 131 - Disclosures About Segments
of an  Enterprise  and Related Information,  which revises  existing  guidelines
about  the  level of   financial   disclosure  of a Company's  operations.  Both
statements  are  effective  for financial  statements  issued  for  fiscal years
beginning  after  December  15,  1997.  The Company has determined  that the new
standards will not have any impact on the Company's financial statements.


Use of Estimates

The preparation of financial statements  in  conformity  with generally accepted
accounting  principles 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.

                                        18
<PAGE>

PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                  Useful Life    January 31,   February 1,
                                                  (in years)            1998          1997
------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>           <C>     
Land                                                                $    817      $    821
Buildings                                               45-50          1,849         1,834
Furniture and equipment                                  5-20          1,711         1,522
Leaseholds and
  leasehold improvements                            12 1\2-35          1,158         1,060
Construction in progress                                                  46            37
Leased property
  under capital leases                                                    29            31
------------------------------------------------------------------------------------------
                                                                       5,610         5,305
Less accumulated depreciation
  and amortization                                                     1,398         1,258
------------------------------------------------------------------------------------------
                                                                     $ 4,212       $ 4,047
------------------------------------------------------------------------------------------

</TABLE>

SEASONAL FINANCING
AND LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                 January 31,   February 1,
                                                                        1998          1997
------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C> 
5.78% (pound)200 note payable,
  due 2001(a)                                                         $  325        $  325
8 3\4% debentures, due 2021,
  net of expenses                                                        198           198
Japanese yen loans with interest payable
at annual rates from 2.80% to 6.47%,
  due in varying amounts through 2012                                    123           150
8 1\4% sinking fund debentures,
  due 2017, net of discounts                                              89            89
Industrial revenue bonds,
  net of expenses (b)                                                     60            70
7% British pound sterling loan payable,
  due quarterly through 2001(c)                                           49            67
Mortgage notes payable at annual
  interest rates from 10.13% to 11.00% (d)                                14            13
Obligations under capital leases                                          14            17
4 7\8 % notes payable (e)                                                  -           115
------------------------------------------------------------------------------------------
                                                                         872         1,044
Less current portion (f)                                                  21           135
------------------------------------------------------------------------------------------
                                                                      $  851        $  909
------------------------------------------------------------------------------------------

</TABLE>

(a) Supported  by a (pound)200  bank  letter  of  credit.  This  note  has  been
converted  by  an  interest rate and currency swap to a floating rate, US dollar
obligation at 3 month LIBOR less approximately 93 basis points.

(b) Bank letters of credit of $41,  expiring in 1999,  support  certain of these
industrial  revenue bonds. The Company expects that the  bank  letters of credit
will be renewed.  The  bonds  have  fixed  or  variable  interest  rates with an
average rate of 3.5% at January 31, 1998.

(c) Collateralized  by property with a  carrying  value  of  $161 at January 31,
1998.

(d) Collateralized  by property  and  equipment with an aggregate carrying value
of $18 at January 31, 1998.

(e) Obligation of Baby  Superstore. Convertible into  shares  of  the  Company's
common stock at the conversion price of $66.34.  These  notes  were  redeemed on
April 16, 1997.

(f) Included  in  accrued  expenses  and  other  current   liabilities   on  the
consolidated  balance sheets.


The fair  market value of the Company's  long-term debt at January 31,  1998 was
approximately  $1,004.  The fair market value was estimated  using quoted market
rates for publicly traded debt and estimated interest rates for non-public debt.

The Company  has a $1 billion  unsecured  committed  revolving  credit  facility
expiring in December 2002. This  multi-currency  facility permits the Company to
borrow at the lower of LIBOR  plus a fixed  spread or a rate set by  competitive
auction.  The  facility  is  available  to  support  domestic  commercial  paper
borrowings and to meet worldwide cash  requirements.

Additionally,  the Company also has lines of credit with  various  banks to meet
the  short-term  financing needs  of  its  foreign  subsidiaries.  The  weighted
average interest rate on short-term  borrowings  outstanding at January 31, 1998
and February 1, 1997 was 5.0%  and 3.1%, respectively.

The annual maturities of long-term debt at January 31, 1998 are as follows:

<TABLE>
<CAPTION>

---------------------------------
<S>                       <C>    
1998                      $    21
1999                           24
2000                           21
2001                          332
2002                            6
2003 and subsequent           468
---------------------------------
                          $   872
---------------------------------

</TABLE>


LEASES

The Company  leases a portion of the real estate  used in its  operations.  Most
leases  require the Company to pay real estate  taxes and other  expenses;  some
require  additional  amounts  based on  percentages  of  sales.

Minimum rental commitments under noncancelable operating leases having a term of
more than one year as of January 31, 1998 are as follows:

<TABLE>
<CAPTION>

                            Gross                   Net
                          minimum   Sublease    minimum
                          rentals     income    rentals
-------------------------------------------------------
<S>                       <C>          <C>      <C>    
1998                      $   338      $  17    $   321
1999                          334         16        318
2000                          330         14        316
2001                          327         13        314
2002                          321         10        311
2003 and subsequent         3,098         57      3,041
-------------------------------------------------------
                          $ 4,748      $ 127    $ 4,621
-------------------------------------------------------

</TABLE>

Total rent expense, net of sublease income was $309, $282 and $273 in 1997, 1996
and 1995, respectively.

                                        19
<PAGE>

STOCKHOLDERS' EQUITY

The common shares of the Company, par value $.10 per share, were as follows:
<TABLE>
<CAPTION>
                                    January 31,   February 1,
                                           1998          1997
-------------------------------------------------------------
<S>                                       <C>           <C>  
Authorized shares                         650.0         650.0
-------------------------------------------------------------
Issued shares                             300.4         300.4
-------------------------------------------------------------
Treasury shares                            18.0          12.6
-------------------------------------------------------------
Issued and outstanding shares             282.4         287.8
-------------------------------------------------------------

</TABLE>

Effective  January  1, 1996,  the  Company  formed  a  new  parent  company (the
"Surviving  Company")  thus making the former parent  company (the  "Predecessor
Company"),  a wholly-owned  subsidiary of the Surviving  Company. As a result of
this corporate inversion, each share of common stock  of the Predecessor Company
was converted into one share of common stock of the Surviving Company.


EARNINGS PER SHARE
In 1997,  the Financial Accounting Standards Board issued SFAS No. 128, Earnings
per Share. This statement replaced the  calculation of primary and fully diluted
earnings per share with basic and diluted  earnings  per  share.  Unlike primary
earnings per share,  basic earnings per share  excludes any dilutive  effects of
options,  warrants and  convertible securities.  Diluted  earnings per share  is
very similar to the previously reported  fully diluted  earnings per share.  All
earnings  per  share  amounts  for  all  periods  have  been  presented  and  no
restatement was needed to conform to SFAS No. 128 requirements.

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>

                                          1997           1996           1995
----------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>
Numerator:
Net income available to
  common stockholders                   $  490         $  427         $  148

Denominator for basic earnings
  per share - weighted average
  shares                                 285.3          274.0          275.0

Effect of diluted securities:
  Stock options, etc.                      3.1            3.5            1.9
Denominator for diluted
  earnings per share - adjusted
  weighted average shares                288.4          277.5          276.9
----------------------------------------------------------------------------
Basic Earnings per share                $ 1.72         $ 1.56         $ 0.54
----------------------------------------------------------------------------
Diluted Earnings per share              $ 1.70         $ 1.54         $ 0.53
----------------------------------------------------------------------------

</TABLE>

Options to purchase  approximately  6.0 shares of common stock were  outstanding
during 1997, but were not included in the  computation  of diluted  earnings per
share because the options'  exercise prices were greater than the average market
price of the common shares, and, therefore, the effect would be antidilutive.


TAXES ON INCOME

<TABLE>
The provisions for income taxes consist of the following:
 
                                          1997           1996         1995
---------------------------------------------------------------------------
<S>                                      <C>            <C>          <C>
Current:
  Federal                                $ 199          $ 136        $ 137
  Foreign                                   35             57           27
  State                                     30             30           21
---------------------------------------------------------------------------
                                           264            223          185
---------------------------------------------------------------------------
Deferred:
  Federal                                   32             58          (22)
  Foreign                                  (17)           (39)         (42)
  State                                      3              4           (3)
---------------------------------------------------------------------------
                                            18             23          (67)
---------------------------------------------------------------------------
Total tax provision                      $ 282          $ 246        $ 118
---------------------------------------------------------------------------

</TABLE>

The tax effects of temporary  differences  and  carryforwards  that give rise to
significant  portions  of  deferred  tax assets and  liabilities  consist of the
following:

<TABLE>
<CAPTION>
                                          1997           1996         1995
--------------------------------------------------------------------------
<S>                                      <C>            <C>          <C>
Deferred tax assets:
  Net operating loss carryforwards       $ 214          $ 155        $ 109
  Restructuring                             20             53          122
  Other                                     42             32           21
---------------------------------------------------------------------------
  Gross deferred tax assets                276            240          252
  Valuation allowance                      (43)           (37)         (29)
---------------------------------------------------------------------------
                                         $ 233          $ 203        $ 223
---------------------------------------------------------------------------

Deferred tax liabilities:
  Property, plant and equipment            277            249          245
  LIFO inventory                            88             64           64
  Other tax                                  -              4            5
---------------------------------------------------------------------------
Gross deferred tax liabilities           $ 365          $ 317        $ 314
---------------------------------------------------------------------------
Net deferred tax liability               $ 132          $ 114        $  91
---------------------------------------------------------------------------

</TABLE>

A reconciliation  of the federal  statutory tax rate with the effective tax rate
follows:

<TABLE>
<CAPTION>
                                          1997           1996         1995
---------------------------------------------------------------------------
<S>                                       <C>            <C>          <C>
Statutory tax rate                        35.0%          35.0%        35.0%
State income taxes, net of
  federal income tax benefit               3.2            3.7          3.4
Foreign                                   (2.3)          (2.3)        (1.3)
Amortization of goodwill                   0.4              -            -
Restructuring and other charges              -              -          7.2
Other, net                                 0.2            0.1         (0.1)
---------------------------------------------------------------------------
Effective tax rate                        36.5%          36.5%        44.2%
---------------------------------------------------------------------------

</TABLE>

Deferred  income  taxes are not  provided  on  unremitted  earnings  of  foreign
subsidiaries  that  are  intended  to be  indefinitely  invested.  Exclusive  of
amounts,  that if remitted  would result in little or no tax under  current U.S.
tax laws,  unremitted  earnings were approximately $455 at January 31, 1998. Net
income taxes of  approximately  $139 would be due if these  earnings  were to be
remitted.

                                        20
<PAGE>

STOCK OPTIONS

The Company has Stock Option Plans (the "Plans")  which provide for the granting
of options to purchase the Company's common stock to substantially all employees
and non-employee directors of the Company. Included in the Plans is the adoption
of an  additional  15.0 and 0.3  shares,  in 1997,  for the  issuance to Company
employees (other than officers) and non-employee  directors,  respectively.  The
Plans  provide  for the  issuance  of  non-qualified  options,  incentive  stock
options,  performance  share  options,  performance  units,  stock  appreciation
rights,  restricted  shares,  restricted units and unrestricted  shares.  Of the
total number of shares reserved for the Plans,  3.0 shares of Company stock have
been  reserved  for  the  issuance  of  restricted  shares,   restricted  units,
performance  units, and unrestricted  shares. The Plans provide for a variety of
vesting dates with the majority of the options vesting  approximately five years
from the date of grant.  The  options  granted  to  non-employee  directors  are
exercisable  20% each year on a cumulative  basis  commencing  one year from the
date of grant.

In addition to the  aforementioned  plans, 2.2 stock  options  were  granted  to
certain  senior  executives  during  the  period  from 1989 to  1996 pursuant to
stockholder  approved individual plans. Of this total, 1.6 options vest 20% each
year on a cumulative  basis  commencing one year from the date of grant with the
balance of the options vesting five years from the date of grant.

The exercise price per share of all options  granted has been the average of the
high and low market  price of the  Company's  common stock on the date of grant.
Most  options  must be  exercised  within ten years  from the date of grant.

At January 31, 1998, an aggregate of 47.7 shares of authorized common stock were
reserved  for all of the Plans noted  above,  of which 23.7 were  available  for
future grants. All outstanding  options expire at dates ranging from May 2, 1998
to February 2, 2008.

Stock option transactions are summarized as follows:

<TABLE>
<CAPTION>
                                                  Weighted-Average
                                         Shares     Exercise Price
------------------------------------------------------------------
<S>                                        <C>             <C>
Outstanding February 1, 1997               23.2            $ 25.82
Granted                                     6.8              34.74
Exercised                                  (3.3)             22.11
Canceled                                   (2.6)             28.82
------------------------------------------------------------------
Outstanding January 31, 1998               24.1            $ 29.12
------------------------------------------------------------------
Options exercisable
  at January 31, 1998                       8.4            $ 26.38
------------------------------------------------------------------

</TABLE>

The Company  utilizes a restoration  feature to encourage the early  exercise of
options and retention of shares, thereby promoting increased employee ownership.
This feature  provides for the grant of new options when previously owned shares
of Company  stock are used to  exercise  existing  options.  Restoration  option
grants are non-dilutive as they do not increase  the  combined  number of shares
of Company  stock and options  held by an employee  prior to  exercise.  The new
options are granted at a price equal to the fair market value on the date of the
new grant,  and generally  expire on the same date as the original  options that
were  exercised.

The  Company  has  adopted  the  disclosure  only  provisions  of  SFAS No. 123,
Accounting for  Stock-Based  Compensation, issued in October 1995. In accordance
with the provisions of  SFAS No. 123, the  Company  applies  APB  Opinion 25 and
related   interpretations   in  accounting  for  its  stock  option  plans  and,
accordingly, does not recognize compensation cost. If the Company had elected to
recognize  compensation  cost based on the fair value of the options  granted at
grant date as  prescribed  by SFAS No. 123,  net income and  earnings  per share
would have been reduced to the pro forma amounts indicated in the table below:

<TABLE>
<CAPTION>

                                          1997           1996         1995
--------------------------------------------------------------------------
<S>                                      <C>            <C>           <C> 
Net income-as reported                   $ 490          $ 427         $148
Net income-pro forma                       470            411          140

Basic earnings per share-as reported      1.72           1.56         0.54
Basic earnings per share-pro forma        1.65           1.50         0.51

Diluted earnings per share-as reported    1.70           1.54         0.53
Diluted earnings per share-pro forma      1.63           1.48         0.50
--------------------------------------------------------------------------

</TABLE>

The  weighted-average  fair value at date of grant for options  granted in 1997,
1996 and 1995 were $33.92, $31.49, and $24.58,  respectively.  The fair value of
each option  grant is  estimated  on the date of grant  using the  Black-Scholes
option pricing model. As there were a number of options granted during the years
of 1995 through 1997, a range of assumptions are provided below:

<TABLE>
<CAPTION>
                                          1997           1996         1995
------------------------------------------------------------------------------
<S>                                    <C>            <C>          <C>
Expected stock price volatility        .294 - .334    .284 - .328  .241 - .308
Risk-free interest rate                5.0% - 6.9%    5.0% - 6.8%  5.6% - 7.1%
Weighted average
    expected  life of options          6 years        6 years       6 years
------------------------------------------------------------------------------

</TABLE>

The  effects  of  applying SFAS No. 123 and the results obtained through the use
of the  Black-Scholes option pricing model  are  not  necessarily  indicative of
future values.


PROFIT SHARING PLAN

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 $39,  $31 and $32 have been  charged to  earnings in
1997, 1996, and 1995, respectively.

                                        21
<PAGE>

FOREIGN OPERATIONS

Certain  information relating to the Company's foreign  operations  is set forth
below.  Corporate assets include all cash and cash equivalents and other related
assets.

<TABLE>
<CAPTION>
                                                                Year ended
---------------------------------------------------------------------------
                                   January 31,    February 1,  February 3,
                                          1998           1997         1996
---------------------------------------------------------------------------
<S>                                   <C>             <C>         <C>
Sales
  Domestic                            $  8,171        $ 7,151     $  6,792
  Foreign                                2,867          2,781        2,635
---------------------------------------------------------------------------
Total                                 $ 11,038        $ 9,932     $  9,427
---------------------------------------------------------------------------
Operating Profit
  Domestic                            $    688        $   692     $    433(b)
  Foreign                                  168            131          (74)(c)
General corporate
  expenses                                 (12)           (69)(a)       (7)
Interest expense, net                      (72)           (81)         (86)
---------------------------------------------------------------------------
Earnings before taxes
  on income                           $    772        $   673     $    266
---------------------------------------------------------------------------
Identifiable Assets
  Domestic                            $  5,432        $ 4,878     $  4,013
  Foreign                                2,282          2,345        2,483
  Corporate                                249            800          242
---------------------------------------------------------------------------
Total                                 $  7,963        $ 8,023     $  6,738
---------------------------------------------------------------------------

</TABLE>

(a) After an arbitration award charge of $60.
(b) After restructuring and other charges of $209.
(c) After restructuring and other charges of $188.


ACQUISITION

On February 3, 1997, the Company acquired all of the outstanding  common  shares
of Baby  Superstore, Inc.  ("Baby Superstore") for  13  million  shares  of  its
treasury stock valued at approximately $376. This acquisition was accounted  for
as a purchase as at February 1, 1997.  The  excess  of  purchase  price over net
assets acquired of $365 has been recorded as goodwill and is being amortized  on
a straight-line basis over 40 years.


OTHER CHARGES

On  July 12,  1996, an  arbitrator  rendered  an  award  against  the Company in
connection  with a dispute  involving rights under a 1982 license agreement  for
toy store  operations  in the Middle East.  Accordingly, the Company  recorded a
provision  of  $60  during  1996,  ($38  after  tax  or  $.14 cents  per share),
representing all costs in connection with this matter.

On February 1, 1996, the Company recorded charges of $397 ($269after tax or $.98
cents per share) to restructure its  worldwide  operations (the "restructuring")
and to adopt SFAS No. 121,  Accounting  for the Impairment of Long-Lived  Assets
and  Long-Lived Assets to be Disposed Of. The restructuring charge included $184
related to strategic inventory  repositioning,  $84 related  to  the  closing or
franchising  of  25 stores,  $72  for  the  consolidation  of three distribution
centers  and  seven  administrative  facilities  and  $33 of other costs.  Total
restructuring and other charges were comprised  of $209  relating  to operations
in the United States and $188 for international operations.  The charge to adopt
SFAS  No.121  was $24, primarily related to a write down of certain store assets
to fair value,  based on discounted cash flows. At January 31, 1998, the Company
had  approximately  $62 of  liabilities remaining for its restructuring  program
primarily  relating to long-term  lease  obligations and other commitments.  The
Company  believes  these  reserves  are  adequate to complete the  restructuring
program.


OTHER MATTERS

On May 22, 1996, the Staff of the Federal  Trade Commission (the "FTC") filed an
administrative  complaint against the Company alleging  that the  Company  is in
violation  of Section 5 of the Federal Trade Commission Act  for  its  practices
relating to warehouse clubs. The complaint  alleges  that  the  Company  reached
understandings with various suppliers that such suppliers  not sell to the clubs
the same items that they sell to the Company.   The   complaint   also   alleges
that the Company "facilitated understandings" among the manufacturers  that such
manufacturers  not sell to clubs.  The complaint seeks an order that the Company
cease  and  desist  from  this  practice.   The  matter  was  tried  before   an
administrative law judge in the  period  from  March  through  May  of  1997. On
September 30, 1997,  the  administrative  law judge  filed  an Initial  Decision
upholding the FTC's complaint against the Company.

The Company has appealed the Initial Decision to  the  Commissioners of the FTC.
That  appeal was argued on February  19,  1998.  The Company will be entitled to
have the United States Court of Appeals review any adverse  decision by the FTC.

After the filing of the FTC  complaint,  several class action suits  were  filed
against the Company in State courts in Alabama and California, alleging that the
Company has  violated  certain  state  competition  laws as a consequence of the
behavior  alleged in the FTC  complaint.  After the Initial Decision was  handed
down, more than thirty purported class actions were filed in  federal  and state
courts in various jurisdictions  alleging that  the  Company  has  violated  the
federal  antitrust laws as a consequence of  the  behavior  alleged  in  the FTC
complaint.  In addition,  the  attorneys  general  of  thirty-eight  states, the
District of Columbia  and Puerto Rico have filed a suit against the  Company  in
their capacity as representatives of the  consumers  of  their  states, alleging
that the Company has violated  federal and state antitrust laws as a consequence
of the  behavior  alleged in the FTC  complaint.  These  suits  seek  damages in
unspecified amounts and other relief under state and/or federal law.

The Company believes that both its policy and its conduct in connection with the
foregoing are within the law.  The Company also believes that these actions will
not  have  a  material  adverse  effect on its financial  condition,  results of
operations or cash flows.

                                        22
<PAGE>

REPORT  OF  MANAGEMENT

Responsibility for the  integrity  and objectivity of the financial  information
presented in this Annual Report rests with  the  management  of  Toys"R"Us.  The
accompanying  financial  statements have been  prepared from accounting  records
which  management  believes  fairly and accurately reflect  the  operations  and
financial  position  of  the  Company.  Management  has  established a system of
internal  controls to provide  reasonable
assurance that assets are  maintained and accounted for, in accordance  with its
policies and that  transactions  are recorded  accurately on the Company's books
and records.

The  Company's  comprehensive  internal  audit  program  provides  for  constant
evaluation of the adequacy of the adherence to management's established policies
and  procedures.  The Company has distributed to key employees  its policies for
conducting business affairs in a lawful and ethical manner.

The  Audit  Committee  of  the  Board of Directors, which is comprised solely of
outside  directors,  provides  oversight  to  the  financial  reporting  process
through periodic meetings with  our independent auditors,  internal auditors and
management.

The financial statements of the Company have been audited  by Ernst & Young LLP,
independent  auditors, in accordance with generally accepted auditing standards,
including  a review of financial reporting matters and internal controls  to the
extent necessary to express an opinion on the consolidated financial statements.


/s/ Robert C. Nakasone         /s/Louis Lipschitz
Robert C. Nakasone             Louis Lipschitz
Chief Executive Officer        Executive Vice President
                               and Chief Financial Officer



REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Toys"R"Us, Inc.

We have audited the accompanying  consolidated balance sheets of Toys"R"Us, Inc.
and  subsidiaries  as of January 31, 1998 and February 1, 1997,  and the related
consolidated  statements  of earnings,  stockholders'  equity and cash flows for
each of the three years in the period ended  January 31, 1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally  accepted   auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence  supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles  used  and  significant  estimates  made  by
management,  as well as evaluating the overall financial statement presentation.
We believe  that our audits  provide a reasonable basis for our opinion.

In our opinion, the  financial  statements referred to above present fairly,  in
all  material  respects, the consolidated financial position of Toys"R"Us,  Inc.
and  subsidiaries at January 31, 1998 and February 1, 1997, and the consolidated
results of their  operations and their cash flows for each of the three years in
the period  ended  January  31,  1998,  in  conformity  with  generally accepted
accounting principles.


                                   /s/ Ernst & Young LLP

New York, New York
March 11, 1998

                                        23
<PAGE>


DIRECTORS, OFFICERS AND GENERAL MANAGERS
--------------------------------------------------------------------------------

DIRECTORS

Charles Lazarus
Chairman Emeritus of the Company

Michael Goldstein
Chairman of the Board of the Company

Robert A. Bernhard
Real Estate Developer

RoAnn Costin
President, Reservoir Capital Management, Inc.

Calvin Hill
Consultant

Shirley Strum Kenny
President, State University of
New York at Stony Brook

Bruce W. Krysiak
President and Chief Operating Officer
of the Company*

Norman S. Matthews
Consultant

Howard W. Moore
Consultant

Robert C. Nakasone
Chief Executive Officer of the Company

Arthur B. Newman
Senior Managing Director,
Blackstone Group


OFFICERS - CORPORATE AND ADMINISTRATIVE

Robert C. Nakasone
Chief Executive Officer

Bruce W. Krysiak*
President and Chief Operating Officer

Louis Lipschitz
Executive Vice President
and Chief Financial Officer

Roger C. Gaston
Senior Vice President -
Human Resources

Michael P. Miller
Senior Vice President - Real Estate

Thomas J. Reinebach
Senior Vice President and
Chief Information Officer

Gayle C. Aertker
Vice President - Real Estate

Dan Booher
Vice President -
Architecture and Construction

Rebecca A. Caruso
Vice President -
Corporate Communications

Michael J. Corrigan
Vice President -
Compensation and Benefits

Eileen C. Gabriel
Vice President - Information Systems

Elizabeth S. Jordan
Vice President - Organizational Development

Jon W. Kimmins
Vice President - Treasurer

Joseph J. Lombardi
Vice President - Controller

Matthew J. Lombardi
Vice President - Information Technology

Dion C. Rooney
Vice President - Systems Development

Michael L. Tumolo
Vice President - Counsel

Peter W. Weiss
Vice President - Taxes

Robert S. Zarra
Vice President - Internal Audit

Andre Weiss
Secretary -
Partner-Schulte Roth & Zabel, LLP


TOYS"R"US UNITED STATES - OFFICERS

Bruce W. Krysiak*
President

Michael J. Madden
President - Store Operations

Keith C. Van Beek
President -

Merchandising and Marketing
Robert J. Weinberg
Senior Vice President -
General Merchandise Manager

Ernest V. Speranza
Senior Vice President - Advertising/Marketing

Van H. Butler
Senior Vice President -
Divisional Merchandise Manager

Joel D. Anderson
Vice President - Toys "R" Us Direct

David M. Brewi
Vice President -
Divisional Merchandise Manager

Kristopher M. Brown
Vice President - Distribution and Traffic

Richard N. Cudrin
Vice President - Human Resources
and Associate Relations

Thomas F. DeLuca
Vice President - Imports, Product Development and Safety
Assurance

Harvey J. Finkel
Vice President - Regional Operations

Philip S. Foussekis
Vice President - Loss Prevention

Andrew R. Gatto
Vice President -
Product Development

Jerel G. Hollens
Vice President -
PIPS Integration

Marianita Howard
Vice President -
Creative Services

Mitchell B. Loukota
Vice President -
Divisional Merchandise Manager

Charlene Mady
Vice President -
Area Merchandise Planning

Gerald S. Parker
Vice President -
Regional Operations

Debra M. Rood
Vice President -
Toys"R"Us Direct Fulfillment

Timothy J. Slade
Vice President - Operations Development

William A. Stephenson
Vice President -
Merchandise Planning and Allocation

John P. Sullivan
Vice President -
Divisional Merchandise Manager

Gregg Treadway
Vice President -
Store Planning

Dennis J. Williams
Vice President - Regional Operations






*Effective April 15, 1998

                                        24
<PAGE>


TOYS"R"US INTERNATIONAL - OFFICERS AND COUNTRY MANAGEMENT

Gregory R. Staley
President

Bruno A. Roqueplo
Senior Vice President -
Finance and Administration

Joan W. Donovan
Vice President -
General Merchandise Manager

Joseph Giamelli
Vice President - Information Systems

Jeff Handler
Vice President - Advertising

Larry S. Johnson
Vice President - Franchise Markets

Lawrence H. Meyer
Vice President - Business Development

Michael C. Taylor
Vice President - Logistics

David Rurka
Managing Director -
Toys"R"Us United Kingdom and Chairman of the European Management
Board

Johannes Dercks
President -
Toys"R"Us Central Europe

Jacques LeFoll
President -
Toys"R"Us France/Belgium

John Schryver
Managing Director -
Toys"R"Us Australia

Manabu Tazaki
President -
Toys"R"Us Japan

Antonio Urcelay
Managing Director -
Toys"R"Us Iberia

Keith C. Van Beek
Acting President -
Toys "R" Us Canada

Larry D. Gardner
Vice President -
Toys"R"Us Asia

Scott W.K. Chen
General Manager -
Toys"R"Us Taiwan

Joe Tang
General Manager -
Toys"R"Us Hong Kong

Michael S.M. Yeo
General Manager - Toys"R"Us Singapore


KIDS"R"US/BABIES"R"US - OFFICERS*

Richard L. Markee
President -
Kids"R"Us and Babies"R"Us

Gwen Manto
Senior Vice President -
General Merchandise Manager

James G. Parros
Senior Vice President -
Stores and Distribution Center Operations

Martin E. Fogelman
Vice President - Divisional Merchandise Manager - Babies"R"Us

Jonathan M. Friedman
Vice President - Chief Financial Officer -
Kids"R"Us and Babies"R"Us

James L. Easton
Vice President -
Divisional Merchandise Manager

William K. Farrell
Vice President - Physical Distribution

Christopher M. Scherm
Vice President -
Divisional Merchandise Manager

David E. Schoenbeck
Vice President -
Operations - Babies "R" Us

David S. Walker
Vice President - Advertising


*Kids"R"Us Officer, unless otherwise indicated.



TOYS"R"US UNITED STATES - GENERAL MANAGERS

Barbara A. Fitzgerald
Vice President -
New York/Northern New Jersey

Robert F. Price
Vice President -
Southern California/
Arizona/Nevada/Hawaii

Thomas A. Drugan
Illinois/Wisconsin/Minnesota

Cathy Filion
Michigan/N.W. Ohio

Mark H. Haag
Pacific Northwest/Alaska

Truvillus Hall
Northern California/Utah

Michael K. Heffner
Alabama/Georgia/South Carolina/Tennessee

Daniel D. Hlavaty
Central Ohio/Indiana/Kentucky

Samuel M. Martin
North Texas/Oklahoma/New Mexico

Richard A. Moyer
S.Texas/Louisiana/Mississippi

John J. Prawlocki
Florida/Puerto Rico

Edward F. Siegler
Maryland/Virginia/North Carolina

Carl P. Spaulding
New England

Kevin VanDerGriend
N.E. Ohio/W. Pennsylvania/
W. New York

                                        25
<PAGE>

QUARTERLY FINANCIAL DATA AND MARKET INFORMATION
--------------------------------------------------------------------------------

QUARTERLY FINANCIAL DATA
--------------------------------------------------------------------------------

(In millions except per share data)

The  following   table  sets  forth  certain   unaudited   quarterly   financial
information.

<TABLE>
<CAPTION>
                               First     Second     Third     Fourth
                             Quarter    Quarter   Quarter    Quarter
--------------------------------------------------------------------
1997
--------------------------------------------------------------------
<S>                          <C>        <C>       <C>        <C>
Net Sales                    $ 1,924    $ 1,989   $ 2,142    $ 4,983

Cost of Sales                  1,326      1,355     1,455      3,574
Net Earnings                      29         37        46        378
Basic Earnings per Share     $  0.10    $  0.13   $  0.16    $  1.33

Diluted Earnings per Share   $  0.10    $  0.13   $  0.16    $  1.32


1996
--------------------------------------------------------------------
Net Sales                    $ 1,645    $ 1,736   $ 1,883    $ 4,668
Cost of Sales                  1,124      1,177     1,281      3,310
Other Charges                      -         55         -          5
Net Earnings (Loss)               19         (8)       33        383
Basic Earnings (Loss)
  per Share                  $  0.07    $ (0.03)  $  0.12    $  1.39
Diluted Earnings (Loss)
  per Share                  $  0.07    $ (0.03)  $  0.12    $  1.37

</TABLE>


MARKET INFORMATION
--------------------------------------------------------------------------------

The Company's common stock  is  listed  on  the  New  York  Stock  Exchange. The
following  table  reflects  the  high  and  low  prices  (rounded to the nearest
one-sixteenth) based on New York Stock Exchange trading since February  3, 1996.

The Company has not paid any cash dividends, however,  the Board of Directors of
the Company reviews this policy annually.

The Company had approximately 31,700 Stockholders of Record on March 10, 1998.

<TABLE>
<CAPTION>

                                                High        Low
---------------------------------------------------------------
<S>  <C>                                      <C>        <C>
1996 1st Quarter                              29 7/8     21 7/8
     2nd Quarter                              30 7/8     23 3/4
     3rd Quarter                              34 1/16    25 7/8
     4th Quarter                              37 5/8     24 3/8
---------------------------------------------------------------
1997 1st Quarter                              29 7/8     24 1/2
     2nd Quarter                              34 13/16   28 1/4
     3rd Quarter                              37 1/8     29 1/8
     4th Quarter                              35 7/16    24 7/8

</TABLE>

                                        26
<PAGE>

STORE LOCATIONS AND CORPORATE DATA
--------------------------------------------------------------------------------

STORES ACROSS THE UNITED STATES
-------------------------------

<TABLE>
<CAPTION>

                          Toys      Kids      Babies
----------------------------------------------------
<S>                       <C>       <C>         <C>
Alabama                     8         1          2
Alaska                      1         -          -
Arizona                    11         -          1
Arkansas                    4         -          -
California                 86        24          5
Colorado                   11         -          2
Connecticut                11         7          -
Delaware                    2         1          1
Florida                    46        10         10
Georgia                    18         4          6
Hawaii                      1         -          -
Idaho                       2         -          -
Illinois                   35        20          5
Indiana                    12         7          2
Iowa                        8         1          -
Kansas                      5         1          1
Kentucky                    8         -          1
Louisiana                  11         -          1
Maine                       2         1          1
Maryland                   19         9          3
Massachusetts              19         6          -
Michigan                   25        13          2
Minnesota                  12         2          1
Mississippi                 5         -          -
Missouri                   13         5          3
Montana                     1         -          -
Nebraska                    3         1          -
Nevada                      4         -          2
New Hampshire               5         2          -
New Jersey                 26*       18          6
New Mexico                  4         -          -
New York                   46        23          3
North Carolina             16         1          5
North Dakota                1         -          -
Ohio                       33        18          5
Oklahoma                    5         -          1
Oregon                      8         -          -
Pennsylvania               33        15          2
Rhode Island                1         1          -
South Carolina              8         -          3
South Dakota                2         -          -
Tennessee                  14         2          4
Texas                      53         9         13
Utah                        6         3          -
Vermont                     1         -          -
Virginia                   22*        7          7
Washington                 14         -          -
West Virginia               5         -          -
Wisconsin                  10         3          -

Puerto Rico                 4         -          -
--------------------------------------------------
                          700       215         98
--------------------------------------------------

</TABLE>

*Includes a KidsWorld location.


TOYS"R"US INTERNATIONAL - 441
-----------------------------

Australia  - 24
Austria - 8
Belgium - 3
Canada - 62
Denmark - 9 (a)
France - 44
Germany - 58
Hong Kong - 4 (a)
Indonesia  - 3 (a)
Israel - 5 (a)
Italy - 12 (a)
Japan - 64 (b)
Luxembourg - 1
Malaysia - 6 (a)
Netherlands - 9 (a)
Portugal - 5
Saudi Arabia - 1 (a)
Singapore - 4
South Africa - 8 (a)
Spain - 29
Sweden - 4
Switzerland  - 5
Taiwan - 6 (a)
Turkey - 3 (a)
United Arab Emirates - 4 (a)
United Kingdom - 60

(a) Franchise or joint venture
(b) 80% owned



ANNUAL MEETING
--------------

The Annual Meeting  of  the  Stockholders  of  Toys"R"Us  will  be  held at  the
Toys"R"Us  Distribution  Center,  703 Bartley - Chester Road,  in Flanders,  New
Jersey on Wednesday,  June 3, 1998 at 10:00 A.M.


THE OFFICE OF THE
COMPANY IS LOCATED AT
---------------------

461 From Road
Paramus,  New Jersey 07652
Telephone:  201-262-7800


GENERAL COUNSEL
---------------

Schulte Roth & Zabel,  LLP
900 Third Avenue  New York,  New York  10022


INDEPENDENT AUDITORS
--------------------

Ernst & Young LLP
787 Seventh Avenue
New York,  New York 10019


REGISTRAR AND
TRANSFER AGENT
--------------

American Stock Transfer
and Trust Company
40 Wall Street,
New York, New York 10005
Telephone: 718-921-8200


COMMON STOCK LISTED
-------------------

New York Stock Exchange, Symbol: TOY


STOCKHOLDER INFORMATION
-----------------------

The Company will supply to any owner of Common Stock, upon  written  request  to
Mr. Louis Lipschitz of the Company at the above address  and  without  charge, a
copy of the Annual Report  on  Form 10-K  for the year ended January  31,  1998,
which has been filed with the Securities  and  Exchange Commission.

Stockholder information, including  quarterly  earnings and other corporate news
releases, can be obtained by calling 800-785-TOYS,  or at our web site  on   the
internet  at www.toysrus.com

Significant news releases are anticipated to be available as follows:

CALL AFTER...FOR THE FOLLOWING...
---------------------------------
May 20, 1998   1st Quarter Results
Aug. 17, 1998  2nd Quarter Results
Nov. 16, 1998  3rd Quarter Results
Jan. 7, 1999   Holiday Sales Results
Mar. 10, 1999  1998 Results


CORPORATE CITIZENSHIP
---------------------

Toys"R"Us maintains a company-wide  giving  program  focused  on  improving  the
health  care  needs  of  children  by  supporting  many  national  and  regional
children's health care organizations.  The Counsel on Economic Priority  awarded
Toys"R"Us the Pioneer Award in Global Ethics.  This award was the direct  result
of the implementation of our Code of Conduct for suppliers  which  outlines  the
Company's  position against child labor and unsafe working conditions.  In order
for a vendor's  product to be sold in any of our stores,  they must  comply with
our Code of Conduct. If you would like to receive more information on Toys"R"Us'
corporate citizenship please write to Mr. Roger  Gaston  of  the  Company at the
Company's address.

Visit us on the internet at www.toysrus.com.

                                        27

<PAGE>