Exhibit 13

                               [LOGO] TOYS "R" US(R)

                                 Annual Report
                                      2002

                                 Shaping
                                   our future and
                                 our brands

<PAGE>

                              financial highlights

financial highlights
Toys"R"Us, Inc. and Subsidiaries
<TABLE>
<CAPTION>

(Dollars in millions, except per share data)                                                           Fiscal Year Ended
--------------------------------------------------------------------------------------------------------------------------
                           Feb. 1,  Feb. 2,    Feb. 3,  Jan. 29,  Jan. 30,  Jan. 31,   Feb. 1,   Feb. 3, Jan. 28, Jan. 29,
                             2003     2002       2001      2000      1999      1998      1997      1996     1995     1994
--------------------------------------------------------------------------------------------------------------------------
<S>                        <C>      <C>        <C>       <C>       <C>       <C>       <C>        <C>      <C>      <C>
Operations
Total Enterprise Sales*    $13,067  $12,630    $12,774   $12,118   $11,459   $11,315   $10,113    $9,498   $8,819   $8,018
Net Sales                   11,305   11,019     11,332    11,862    11,170    11,038     9,932     9,427    8,746    7,946
Net Earnings/(Loss)            229       67        404       279      (132)      490       427       148      532      483
Basic Earnings/(Loss)
  Per Share                   1.10     0.34       1.92      1.14     (0.50)     1.72      1.56      0.54     1.88     1.66
Diluted Earnings/(Loss)
  Per Share                   1.09     0.33       1.88      1.14     (0.50)     1.70      1.54      0.53     1.85     1.63

Financial Position at Year End
Working Capital            $ 1,182  $   657    $   575   $    35   $   106   $   579   $   619    $  326   $  484   $  633
Real Estate-Net              2,398    2,313      2,348     2,342     2,354     2,435     2,411     2,336    2,271    2,036
Total Assets                 9,397    8,076      8,003     8,353     7,899     7,963     8,023     6,738    6,571    6,150
Long-Term Debt               2,139    1,816      1,567     1,230     1,222       851       909       827      785      724
Stockholders' Equity         4,030    3,414      3,418     3,680     3,624     4,428     4,191     3,432    3,429    3,148
Common Shares Outstanding    212.5    196.7      197.5     239.3     250.6     282.4     287.8     273.1    279.8    289.5

Number of Stores at Year End
Toys"R"Us - U.S.               681      701        710       710       704       700       682       653      618      581
Toys"R"Us - International**    544      507        491       462       452       441       396       337      293      234
Babies"R"Us - U.S.             183      165        145       131       113        98        82        --       --       --
Kids"R"Us - U.S.               146      184        198       205       212       215       212       213      204      217
Imaginarium - U.S.              37       42         37        40        --        --        --        --       --       --
Geoffrey - U.S.                  4       --         --        --        --        --        --        --       --       --
Total Stores                 1,595    1,599      1,581     1,548     1,481     1,454     1,372     1,203    1,115    1,032
</TABLE>

 *    Total enterprise sales consist of all Toys "R" Us branded net sales, which
      include  net sales from all the  company's  stores and from the  company's
      internet businesses, in addition to net sales from licensed and franchised
      stores.

**    Includes licensed and franchised stores.

contents

Financial Highlights ..................................................   page 1

Letter to Our Shareholders ............................................   page 3

Divisional Highlights .................................................   page 7

Corporate Philanthropy and Corporate Responsibility ...................  page 19

Management's Discussion and Analysis
of Results of Operations and Financial Condition ......................  page 22

Financial Statements ..................................................  page 31

Report of Management and
Report of Independent Auditors ........................................  page 45

Directors and Officers ................................................  page 46

Quarterly Financial Data and Market Information .......................  page 48

Store Locations, Corporate Data
and Stockholder Information ...........................................  page 49


                                                                               1
<PAGE>

                                Building
                                    our portfolio of
                                 brands


[LOGO] TOYS"R"US(R)            [LOGO] KIDS R US(R)        [LOGO] BABIES"R"US(R)


<PAGE>

                           letter to our shareholders

                            Performance and Progress

[Photo Omitted]

John Eyler
Chairman and Chief
Executive Officer

A year in review

2002 was a year of encouraging progress,  but a time of disappointments as well.
Three  divisions  in  our  portfolio  of  businesses  -  Babies"R"Us,  Toys"R"Us
International  and Toysrus.com - enjoyed the best performances in their history.
Those results,  coupled with improved expense discipline  resulted in a 19% gain
in net earnings,  before restructuring and other charges in 2001, for Toys"R"Us,
Inc.  However,  weaker  results  in  Toys"R"Us  U.S.  and  Kids"R"Us  were  very
disappointing, despite progress in strategic execution in both divisions.

The  performance  of our U.S.  toy  stores  did not meet our  expectations.  Our
comparable  store sales  declined  1% for the year and,  in a  difficult  retail
environment, our operating earnings declined as well.

Nonetheless,  we were encouraged by the progress we made in the execution of our
strategy;  which we believe  further  strengthened  our  ability to improve  our
performance in 2003 and beyond. For example, by working closely with our vendors
last year,  we gained  market share in core toy,  defined as the Boys and Girls,
Learning  (i.e.  Imaginarium)  and  Preschool  categories.  Our core  toy  sales
outpaced toy industry performance,  as reported by the Toy Industry Association,
by 4% for the year.

We continued to improve our in-stock position, content, presentation and service
levels.  In  addition,  we  experienced  significant  improvements  in  customer
satisfaction scores related to pricing and value perception.  Both messages were
effectively   reinforced  through  our  award-winning   television   commercials
featuring our charismatic "spokesanimal," Geoffrey the Giraffe.

[Photo Omitted]

Geoffrey the Giraffe
helped boost consumer
awareness for
Toys"R"Us in 2002.

We enjoyed  historically  high levels of success in several of our  divisions in
2002.  Babies"R"Us  and Toys"R"Us  International  both turned in record- setting
operating  earnings for the fourth  quarter and full year of 2002.  In addition,
Toysrus.com achieved operating profitability in the fourth quarter - a full year
ahead of schedule. Our Kids"R"Us division has been struggling in its stand-alone
stores  for some  time now,  but we have seen  positive  results  from  sourcing
apparel  through   Kids"R"Us  for  our   Babies"R"Us   stores  as  well  as  our
Toys"R"Us/Kids"R"Us   combo  stores.   Currently,  our  total  apparel  business
represents  approximately  $900  million  in sales  per year,  at above  company
average profit margins,  and we expect continued  growth.  Approximately  65% of
these sales come from  exclusive  products  that  generate  higher  margins than
nationally  branded items. We'll talk about these divisions in greater detail in
this report.

[LOGO] Imaginarium(R)          [LOGO] TOYSRUS.COM(R)          [LOGO] Geoffrey(R)


<PAGE>

                           letter to our shareholders

We worked  diligently in 2002 to improve our  productivity,  reduce expenses and
enhance our financial strength.

We took steps to strengthen  our balance sheet and improve our  liquidity.  As a
result,  we had  substantial  excess  liquidity  in early  November  during  our
seasonal  borrowing peak, and ended the fiscal year with more than $1 billion in
cash.

We reduced capital spending significantly in 2002. Net capital expenditures were
$398 million in 2002 as compared to $705 million in 2001.

[Photo Omitted]

The customer
response to our
recently launched
Geoffrey stores
has been positive.

We made  solid  progress  on our  commitment  to  reduce  selling,  general  and
administrative  (SG&A)  expenses  by 200 basis  points by 2005.  We were able to
achieve a reduction of 70 basis points in 2002, so we're  approximately  a third
of the way to achieving our four-year objectives in the first year.

We will also continue to find ways to strengthen and expand our portfolio,  and,
in fact,  made progress in the  development  of new businesses for the future in
2002.  Our test of Toys"R"Us  ToyBox,  our store concept  within  grocery stores
which first opened in the summer of 2001, is generating positive results. By the
end of the year, we expanded our initial test to more than 30 stores, and we are
currently evaluating further expansion opportunities for 2003.

We also  launched  Geoffrey,  which is a  combination  Toys"R"Us,  Kids"R"Us and
Babies"R"Us  store, in four smaller  markets in 2002. The customer  response has
been positive,  and we've already  derived some key learnings from Geoffrey that
may be applicable to our other divisions. We plan to move forward carefully with
this concept, but we are encouraged by the results we've seen.

[Photo Omitted]

We will accelerate
execution of our
strategies in 2003.

Challenges for 2003

We are committed to doing all it takes to turn the U.S. toy stores around and to
expand further on the successes that we've seen. This progress clearly indicates
that we are on the  right  track  with our  strategies.  Our  challenge  and our
commitment is to build on what we've accomplished.  We will accelerate execution
of our merchandising,  presentation,  customer service,  pricing and advertising
efforts designed to drive traffic and increase profitable sales. Knowing that we
also need the support of our vendor community to succeed, we continue to work in
partnership  with them to build  excitement  for their brands and to re-energize
underperforming product categories.


4
<PAGE>

[Photo Omitted]

Babies"R"Us
registers more
expectant parents
than any other
retailer in the U.S.

We will also continue to improve our cost  effectiveness to reduce our SG&A even
further  in 2003.  In March,  we  reduced  our  national  headquarters  staff by
approximately 200 positions, or 10%. We also announced that we would combine our
Kids"R"Us  and  Babies"R"Us  management  teams  into one  group.  This will help
Kids"R"Us  reduce its  operating  costs.  In  addition,  we will ensure that our
balance sheet remains  strong and that we have ample  liquidity now and into the
future.

I think it truly says something about the strength of our portfolio that even in
a year  where we did not see the kind of  success  we  expected  in the  largest
division of our company,  we were still able to announce a  meaningful  earnings
increase. As we look to the future, I'm very proud of the steps that we've taken
to manage the business in an undeniably difficult operating environment.

Conclusion

As I write this letter,  our associates  from all divisions and all  disciplines
are  working  with  tremendous   commitment  to  make  ours  a  more  profitable
organization.  They share my absolute conviction that in 2003 we will seize upon
every  opportunity to drive sales and profits across every  division.  Given the
solid improvement in our earnings in 2002,  despite very difficult and uncertain
economic and world environments, we believe we have ample evidence that we're on
the right track.  We will build on that progress,  and we will not stop until we
can  deliver a better  value for your  investment  and repay  your  faith in our
company.

/s/ John H. Eyler, Jr.

John H. Eyler, Jr.
Chairman, President and Chief Executive Officer
March 29, 2003


                                                                               5
<PAGE>

Delighting
     our
  Guests



<PAGE>

                                    Toys"R"Us

                             Our Strategies at Work

Improving our guests' shopping experiences

A great deal of work during the last three years has gone into strengthening and
improving  our toy  stores in the United  States.  Improving  content  and store
layout,  developing  new and  exciting  merchandise,  building the brands of our
valued vendors,  and launching one of the most popular advertising  campaigns in
2002 all led to real progress.

We were not satisfied  with the comparable  store sales  performance of our U.S.
toy stores in 2002.  Our  seasonal,  video and juvenile  businesses  experienced
negative  comparable store sales,  which depressed our overall results.  However
our core toy sales,  which include Boys and Girls,  Learning and Preschool toys,
outpaced toy  industry  performance  by 4% for the year,  as reported by the Toy
Industry  Association.  This is consistent with reports provided by the majority
of our core toy vendors that we gained market share in 2002.

[Photo Omitted]

Our "Low Price Super
Stars" campaign has
successfully resonated
with customers.

We saw evidence in 2002 that our strategies are working. The U.S. toy stores are
delivering an appreciably better shopping  experience to our customers.  We know
this  from the  increases  we have  seen in both  average  transaction  size and
consumer  satisfaction  research  scores.  Specifically,  this year we  received
higher  marks  from  our   customers   for  our  service,   in-stock   position,
knowledgeable  associates,  and  competitive  pricing.  During the 2002  holiday
shopping season, we launched our new "Low Price Super Stars" campaign  including
an advertising  message that clearly  resonated with our customers.  We also had
our best  in-stock  position in more than a decade;  we were 97% in stock on our
top 1,500 items for much of the holiday selling season. And we did our utmost to
stay ahead of the curve,  setting  our store  assortment  presentations  for the
holiday selling season six weeks ahead of schedule,  which helped to insulate us
from the impact of the west coast dock strike.

[Three Photos Omitted]

In 2003, we'll
expand the Geoffrey
campaign beyond
the holiday season.

Geoffrey the Giraffe is a hit with guests

The completion of our Mission Possible renovations in October 2002 enabled us to
speak  about the new  Toys"R"Us  through  our  advertising  for the first  time.
Geoffrey the Giraffe, our charismatic "spokesanimal",  quickly won the hearts of
parents and children alike through a series of television commercials that aired
last  fall.  Three of our  commercials  ranked  among the top four for the year,
according to  Intermedia  Advertising  Group.  Our TV spot,  "Phone Call," which
showed Geoffrey touting our in-stock position, ranked #1 among 4,000 commercials
for the highest  brand recall of the year.  We were very proud that our Geoffrey
advertising  campaign  was  recognized  by  Advertising  Age and The Wall Street
Journal,  among  other  respected  sources,  as the most  successful  television
campaign of 2002 for all product  categories based on consumer brand recall.  We
plan to build on the success of this advertising  campaign in 2003 and expand it
beyond the holiday selling season.


                                                                               7
<PAGE>

                                    Toys"R"Us

[Two Photos Omitted]

Madeline and
Thomas & Friends
Wooden Railway
were two well-
received brands
in 2002.

Popular toys and growth opportunities

We continued to build our Imaginarium  learning  category and expanded it to all
of our stores in 2002. Items like Madeline(TM), LeapFrog(R) and Thomas & Friends
Wooden  Railway  System(TM)  were  well  received.   We'll  identify  additional
opportunities to expand that category even further.

Teentronics  did well and  continues  to  present a growth  opportunity  for us.
Portable  electronics,  in particular,  were strong as were licensed  electronic
goods  such as  Barbie(R)  televisions  and  Hello  Kitty(R)  phones.  Since age
compression continues to be an issue for the industry, Teentronics is an area we
will continue to develop and expand in 2003.

Other items such as Rescue Heroes(TM) and licensed plush like Chicken Dance Elmo
were  strong  among  the  pre-school  set.  Bratz(TM)  dolls,  Barbie(R),  Polly
Pocket(TM) and Disney(SM) Princess were among the "must have" dolls for girls in
2002.  Spider-Man(TM),  mini RC cars  and  Radio  Flyer(R)  were  hot for  boys.
Yu-Gi-Oh!(TM) and BeybladesTM also proved to be among the trendiest  products of
the year.

Our Times Square flagship store

Our Times Square  flagship store  celebrated  its one-year  anniversary in 2002.
According  to  NYC  &  Company,  New  York  City's  official  tourism  marketing
organization,   Toys"R"Us  Times  Square  is  one  of  the  city's  top  tourist
destinations. The new store is a must-see attraction for any family visiting New
York. Toys"R"Us Times Square has quickly established itself as The Center of the
Toy  Universe(TM),  hosting  launches for virtually every new toy, and a desired
venue for many special events.

In addition to being fresh and  ever-changing,  Toys"R"Us Times Square disproved
the myth that great  service  can't be found in  Manhattan.  The store saw great
success in its pursuit of customer service.  According to company  research,  it
led the Toys"R"Us stores in guest delight scores.

[Photo Omitted]

Our Times Square store
has become one of
New York City's top
tourist destinations.


8

<PAGE>

                                    Toys"R"Us

[Photo Omitted]

Former NYC Mayor
Rudy Giuliani celebrates
Trivial Pursuit(R) game's
20th Anniversary at
Toys"R"Us Times Square
with The Village People,
soccer star Mia Hamm
and The Sock Puppet.

Re-energizing categories

Our  primary  challenge  in our U.S.  toy  stores is to drive  traffic  into our
renovated stores. We plan to intensify our efforts in this direction in 2003. We
have analyzed the product  categories  that did not perform well in 2002, and we
have partnered with our vendors to re-energize  these  categories.  We intend to
increase the number of new product  launches at  Toys"R"Us in 2003,  building on
our Times Square store's reputation as the media center for the toy industry.

Encouraged  by our  momentum in the core toy  business in 2002,  we will work to
further  strengthen  it in 2003.  We  learned  from the launch of the "Low Price
Super Stars" campaign during the 2002 holiday season,  and we will fine tune our
pricing strategies in the coming year. In addition,  we are focused on improving
the experience of our customers inside our toy stores. We have taken a number of
steps to increase both the quantity and quality of sales help in our stores.  We
know that additional sales associate hours,  properly utilized,  will help us to
increase  conversion and average  transaction size. Thus, as we work to optimize
in-store performance and enhance our service capability, we will take additional
steps to maximize sales  associate hours and ensure that those hours are aligned
with customer shopping patterns.

[Photo Omitted]

We continue to
improve our in-store
performance, service
capability and overall
guest delight.

We have put in place a more solid  foundation for our future growth and improved
our ability to execute our strategy,  but we still have a lot of hard work ahead
of us. There is no higher  priority at Toys"R"Us,  Inc. than  improving our U.S.
toy store  performance.  While  gaining  market share is a  significant  sign of
progress,  we will not be satisfied  until we are  successful  in achieving  our
sales and profit goals as well.

"Everything was easy to find, because things were in-stock and organized."

Misty, Toys"R"Us Guest
Terre Haute, IN


                                                                               9
<PAGE>

                                   Building
                                        on our
                                     Strenghts


<PAGE>

                                  International

Our Global Brands

Another record performance in 2002

The Toys"R"Us International division achieved net sales of more than $2 billion,
and  operating  earnings of $160  million,  up from 2001's  record $131 million.
Operating  earnings were up 10%  excluding the impact of currency  fluctuations.
International's  6%  comparable  store sales  increase was the  strongest in the
company.

[Photo Omitted]

The "R"Zone
section in our
U.K. stores now
offers our customers
a wide selection
of family
entertainment
systems.

"We go the extra yard for the customer.  That's what distinguishes us from other
retailers."

Mathew, Store Associate
Toys"R"Us, Australia

The strong  performance of the International  business speaks to the vitality of
the "R"Us  brands  on a global  basis.  Toys"R"Us  International  now  operates,
licenses or franchises toy stores in 29 countries  outside the United States. As
of February 1, 2003, the International division was comprised of 544 stores: 289
wholly-owned stores, and 255 licensed and franchised stores. International added
45 new toy stores in 2002,  including licensed and franchised stores, and closed
8 stores.

Our International  business builds on the global strength of our brands and then
adds a local flavor tailored to each country.  The International  stores feature
many of the  elements  that have helped to  differentiate  our U.S. toy stores -
Universe of  Imagination  (learning  and  educational  products),  Animal  Alley
(plush),   Teentronics  (electronic   entertainment  products)  and  Babies"R"Us
(newborn and infant  products).  In  addition,  the R-Zone area of the store has
been expanded in several major International  markets to include multi-media and
family-friendly  computers along with the core video game systems.  We have also
enjoyed  considerable  success  with our  proprietary  product  offerings in the
International  arena and the proportion of exclusive  product sales continues to
grow.

[Photo Omitted]

A new stand-alone
Babies"R"Us store
in Japan meets new
parents' needs.

Leading the company

The  International  division often leads the company in important ways. Our U.K.
division has been a pioneer in the  promotion of value  multi-packs,  as well as
the development of sales and customer service training for store associates.  In
addition, our Iberian team is a leader in the development of operating controls,
contributing to the best return on sales across the division.  Toys"R"Us  Japan,
which is 48% owned by Toys"R"Us,  Inc., often serves as a beacon to identify hot
new  product  trends,  such as  karaoke,  Beyblades(TM)  and  Yu-Gi-Oh!(TM)  The
International  team  continues to leverage best  practices and creative ideas to
drive growth around the world.

This promises to be another  exciting year for the  International  division.  We
intend to add approximately 30 new toy stores in 2003,  including  approximately
25  licensed  or  franchised  stores.  We will build on the success of our first
stand-alone Babies"R"Us store in Japan by opening additional stand-alone stores.
And,  again,  we will work hard to drive  sales,  control  expenses  and aim for
another year of record sales and earnings.


                                                                              11
<PAGE>

Embracing
    our
  Strategies


<PAGE>

                                   Babies"R"Us

                             A Formula for Success

[Photo Omitted]

The Babies"R"Us mission: To be the
authority for newborns and infants worldwide

That commitment and focus has made Babies"R"Us the leader in the juvenile market
today with a Baby Registry that registers more expectant  parents than any other
retailer in the U.S.

It's also the formula that has led Babies"R"Us to its sustained record of growth
over the past five years.  In 2002,  Babies"R"Us  marked another  record-setting
year posting a 12% increase in total sales for the year,  with a 26% increase in
operating  earnings and a 10.9%  operating  margin,  the highest in its history.
Babies"R"Us  also had the highest guest delight scores of any "R"Us division and
opened 19 new stores last year.  All in all, 2002 proved to be another good year
for a chain that has already turned its focus to delivering an improved 2003.

[Photo Omitted]

Private label
and exclusive
merchandise, like
the Koala Baby
brand, differentiates
Babies"R"Us from
its competition.

Key priorities in 2003

Babies"R"Us plans to energize same store sales,  continue earnings growth, drive
new store  growth,  and  commence  an  aggressive  strategy of  renovations  and
refurbishment of existing stores. Babies"R"Us is well aware of the role it plays
in the "R"Us  organization  --  particularly  in the first three quarters of the
year.  That's  why it's  continuing  to ramp up its  ongoing  efforts to develop
unique  merchandise  concepts  that  provide  better  margins and  differentiate
Babies"R"Us from the competition.  Much of this exclusive merchandise also helps
the  division to create a high-end  cachet while still  maintaining  competitive
pricing.  Private label and exclusive  products already  represent a significant
percentage of Babies"R"Us  offerings.  Labels such as Koala Baby, Especially for
Baby and Baby Trend are a few examples of unique product lines available only at
Babies"R"Us, and plans are in place to broaden offerings like those even further
in 2003.

The division is also looking at further  enhancing  its store layout design with
new,  innovative  concepts  this  year,  as well as  building  on its  marketing
programs.  Marketing  efforts  such as Baby  Fest  weekends,  which  highlighted
products and services,  received a positive  response from customers in 2002, as
did a new program targeted specifically for grandparents.  Plans are also on the
horizon to add some new complements to the highly successful Baby Registry.

Finally,  Babies"R"Us  is on  track  to open  up to 20 new  stores  in 2003  and
anticipates the refreshment of a number of existing locations.  On schedule,  on
budget and  continually  looking for ways to build the business,  Babies"R"Us is
living up to its reputation as "The Baby Superstore."

"I love the store.  They have so much  variety.  Anything I need for the baby is
there."

Linda, Babies"R"Us Guest
Louisville, KY


                                                                              13
<PAGE>

Cultivating
    our
  Business


<PAGE>

                                    Kids"R"Us

Our Apparel Business

[Photo Omitted]

Kids"R"Us leverages
its buying power to
drive additional
apparel sales in
Babies"R"Us
and Toys"R"Us
combo stores.

Apparel: a $900 million business for the "R"Us organization

Kids"R"Us has the  responsibility  for the apparel selection for 183 Babies"R"Us
stores, 376  Toys"R"Us/Kids"R"Us  combo stores and the 146 stand-alone Kids"R"Us
stores.  We  experienced  solid  growth of  apparel in the  Toys"R"Us  combo and
Babies"R"Us  stores in 2002, and as a portfolio,  the apparel business performed
well. In fact, the company saw improved  apparel margins in all three businesses
last  year,  and  approximately  65% of the $900  million  in sales  represented
exclusive products that have higher margins than branded products.

[Photo Omitted]

As a separate and distinct  business,  Kids"R"Us has struggled,  but it has also
seen some progress. The chain's 41 "R"Generation  prototype stores feature a new
layout and merchandise.  Although their  performance was better than that of our
unrenovated  stores,  we are not yet satisfied with the absolute  performance of
the new prototype.

A year ago, the division  introduced a lifestyle  concept in some of its stores;
today, most stores feature this concept which comprises everything for a child's
bedroom  including  bedding and accessories in a fun and  interactive  area. The
lifestyle  area met the  division's  plan for the year,  and it will be expanded
further in 2003.

Kids"R"Us has also moved toward a better blend of trend-right merchandise, along
with making  strides in visual  presentation  within a friendlier,  easy-to-shop
layout. The expansion of higher margin  non-sportswear  businesses such as coats
and dresses has also helped make  Kids"R"Us a more  compelling  destination  for
moms despite the current tough economic climate.

[Photo Omitted]

Kids"R"Us offers
trend-right
merchandise
in a friendly,
easy-to-shop store
layout.

In 2003,  Kids"R"Us  will  continue  its  efforts to drive  more  sales  through
trend-right  merchandise that is competitively priced across all three divisions
- Toys"R"Us combo stores,  Babies"R"Us and Kids"R"Us.  At the beginning of 2003,
Kids"R"Us  management  combined with the  Babies"R"Us  division,  enabling it to
reduce costs and leverage operational efficiencies. This will allow the division
to focus on driving its business  further with lower  operating  costs,  and the
chain will continue to identify ways to derive additional savings while building
growth in the apparel business.

"I found everything I wanted at a great price."

Kwesiann, Kids"R"Us Guest
Pembroke Pines, FL


                                                                              15
<PAGE>

Creating
    New & Exciting
Shopping
 Experiences


<PAGE>

                                   Toysrus.com

A Milestone Year

[Photo Omitted]

Toysrus.com
achieved its first
operating profit in
the fourth quarter -
a full year ahead
of schedule.

Our dot.com future is bright

2002 was a watershed  year for  Toysrus.com  as the division  achieved its first
operating  profit  in the  fourth  quarter  - a full  year  ahead  of  schedule.
Toysrus.com's  2002 sales  totaled  $340  million,  an increase of 23% from 2001
sales of $277 million.  Sales at Toysrus.com  have grown  seven-fold in the last
three years from $49 million in 1999, and we see  significant  growth ahead.  In
addition to our  original  website -  www.toysrus.com  - we now operate  through
three additional sites: www.babiesrus.com,  www.imaginarium.com,  and our newest
site, www.giftsrus.com. The Giftsrus.com on-line store offers personalized gifts
for all ages. It opened in November 2002.  Customers can choose from hundreds of
products ranging from exclusive stuffed animals, toys, clothing, home decor, and
keepsakes and have them personalized with messages, monogrammed, hand-painted or
engraved, gift wrapped and then delivered.

Toysrus.com  recorded its first operating profit of $3 million during the fourth
quarter of 2002 versus an operating  loss of $(17)  million for the prior year's
fourth  quarter.  Total  operating  losses for fiscal 2002 were reduced to $(37)
million,  a 51% improvement  over the operating loss of $(76) million for fiscal
year 2001. A number of factors  contributed to this  significant  improvement in
operating  performance  including  higher  merchandise  margins due to effective
bundled  offerings and growth in  Babiesrus.com  and  Imaginarium.com,  diligent
expense control,  reduced inventory levels,  and increased  integration  between
Babiesrus.com and the Babies"R"Us stores.

We are extremely  pleased with the performance of the dot.com  business in 2002.
Achieving  profitability  in the fourth quarter of 2002  reinforces our optimism
about our prospects for 2003 and beyond.  Although we do not expect  Toysrus.com
to be profitable for the full year in 2003, we anticipate an increase in profits
in the  fourth  quarter of 2003,  and we have  increased  confidence  we will be
profitable for the full year in 2004. We will also continue to work closely with
our strategic  alliance partners at Amazon.com to increase the efficiency of our
operations while reducing costs.

The future is bright for Toysrus.com. We plan to pursue a variety of initiatives
to increase the integration  between Toysrus.com and our U.S. toy stores in 2003
and beyond. Our overall goal is to serve our customers as they wish to be served
- through  websites,  stores and often  through some  combination  of the two. A
significant  percentage  of our  multi-channel  customers - our most  profitable
customers,  incidentally  - already use  Toysrus.com  to prepare for a Toys"R"Us
store visit.  We believe we have numerous  opportunities  to realize more "click
and brick"  synergy,  which will help us to improve  the  profitability  of both
Toysrus.com and our U.S. toy stores.

"It was the best online experience I've ever had."

Margaret, Toysrus.com Guest
Dublin, OH

                [LOGO] TOYSRUS.COM         [LOGO] BABIESRUS.COM
                [LOGO] Imaginarium.com     [LOGO] GiftsRUs.Com


                                                                              17
<PAGE>

Enriching
    the lives of
      Children


<PAGE>

                             corporate philanthropy

A Commitment to Children

[Photo Omitted]

The Toys"R"Us Children's Fund

Giving back to children and the  communities  in which they live is important to
our company and our associates.  Toys"R"Us, Inc. is an active corporate citizen,
supporting a wide-range of national, regional and local charities.

As part of its effort to nurture  and  enrich the lives of  children,  Toys"R"Us
established The Toys"R"Us  Children's  Fund, Inc. in 1992. The Fund raises money
for charities  dedicated to meeting the needs of children in the U.S. This year,
The Fund will make contributions to more than 150 charities including hospitals,
educational   programs  and  organizations  that  help  children  lead  happier,
healthier  lives.  To date,  The  Fund has  contributed  more  than $47  million
dollars.

[Photo Omitted]

A new partnership
with Starlight will
help The Fund
expand its Kids'
Playroom program
in hospitals and
medical settings.

In addition to this  ongoing  support of  children's  charities,  The  Toys"R"Us
Children's  Fund  entered  into a new  partnership  in 2002  with the  Starlight
Children's  Foundation to continue  development  of the Kids'  Playroom  Program
begun by Toys"R"Us,  Inc. in 1989. There are currently 49 playrooms in hospitals
and  medical  settings in 17 states  where young  patients  are  distracted  and
comforted through the magic of play.

The Fund's newest signature program is called Reading Ready:  Preparing Children
to be Lifelong  Readers.  Reading Ready  approaches the problem of illiteracy in
two ways.  Through  initiatives to donate  supplies to pre-K programs in at-risk
communities,  The Fund is helping prepare children to better  participate in the
lifelong  pleasure of reading.  Funding is also  provided for programs that help
parents  learn how to encourage  and  stimulate  their  children's  literacy and
language skills.

[Photo Omitted]

READING
READY

Since 2001, The Toys"R"Us  Children's  Fund, Inc. has partnered with ABC's "Good
Morning  America"  and the Boys and Girls  Clubs of America to sponsor a holiday
toy drive which  provides  toys to needy  children  throughout  the U.S.  and to
children on military bases.

Keeping in mind that our children are our best and most  rewarding  investments,
The Toys"R"Us Children's Fund, Inc. continues to seek innovative ways to improve
their health and well-being.

For more  information  about The Toys "R" Us Children's  Fund,  Inc., log on to:
www.toysrusinc.com and refer to Corporate Philanthropy under "About Us" or write
to: The Toys "R" Us Children's Fund, Inc., 461 From Road, Paramus, NJ 07652.


                                                                              19
<PAGE>

Responding
     to our
       World


<PAGE>

                            corporate responsibility

The Demand for Corporate Responsibility

Corporate Governance
Corporate governance is a joint responsibility  requiring the involvement of and
interaction  between the Board of  Directors  and the senior  management  of the
company.

Toys"R"Us,  Inc. is fortunate to have a talented Board of Directors committed to
the success of the  company.  For  example,  during  fiscal year 2002,  11 Board
meetings and 34 additional Board committee meetings were held. At several of the
Board  meetings,  the Board met in  executive  session,  outside the presence of
senior  management,  to further  discuss and examine issues of importance to the
company.

After many months of careful  research,  investigation  and  thought,  the Board
adopted Corporate Governance  Guidelines of the company in March 2002 to reflect
the   Board's   commitment   to  monitor   the   effectiveness   of  policy  and
decision-making,  both  at the  Board  and  management  level,  and  to  enhance
stockholder  value over the long term. Those  Guidelines  covered such issues as
conflicts of interest, the compensation of the company's Chief Executive Officer
and other Board  members,  the process and criteria for selecting  Board members
and  the  requirements  that  the  Audit,   Compensation  and  former  Corporate
Governance  Committees be comprised solely of independent Board members and that
independent Board members constitute a substantial majority of the Board.

In the  past  year,  the  Board  has  adopted  Amended  and  Restated  Corporate
Governance Guidelines of the company that further address those issues and cover
such issues as director  orientation  and  continuing  education and the Board's
retention  of  independent  advisors,  as well as the  requirement  that the new
Corporate Governance and Nominating Committee be comprised solely of independent
Board members.  The current  Guidelines and committee  charters are published in
the company's proxy materials filed with the SEC in 2003.

The  Toys"R"Us  Board  of  Directors  is fully  engaged  in and  focused  on the
strategic  issues facing our business.  Each year, the Board devotes one meeting
to  develop,  discuss and refine the  company's  long-range  operating  plan and
overall corporate strategy.  Following the Board's annual strategic meeting, the
Board  reviews  the  progress  of one or  more  strategic  initiatives  at  each
scheduled meeting.  Through the established  procedures,  the Board,  consistent
with good corporate governance,  encourages the long-term success of the company
by exercising  sound and independent  business  judgment on the strategic issues
that are important to the company's business.

Code of Conduct for Suppliers
There is growing  concern in the global  community  about working  conditions in
many  nations,  including  the  United  States,  which may fall  below the basic
standards  of fair and humane  treatment.  In an effort to source  products in a
manner  that  is both  socially  responsible  and  profitable,  Toys"R"Us,  Inc.
developed its Code of Conduct for Suppliers program in 1997.

Implementation of the Code and the use of SA8000(R),  an independent  monitoring
and factory certification program,  enable the company and its business partners
to continually  improve their performance in relation to workers' rights,  labor
standards and other human rights issues integral to the manufacturing process.

Developed by Social Accountability  International (SAI) in 1998 and currently in
use by businesses and governments  around the world,  SA8000(R)  assessments are
widely  recognized  by trade  unions  and  non-governmental  organizations  as a
powerful  tool for  creating  environments  where both  workers  and  management
benefit.  Facilities  in more  than  20  nations  and 15  industries  have  been
SA8000(R) certified.

Participation  in the Toys"R"Us Code of Conduct  program and compliance with all
of its  provisions is mandatory for all  suppliers  who sell  products,  for the
purpose of resale, to any Toys"R"Us,  Inc. division.  The company will terminate
its business  relationship  with any supplier that elects not to  participate in
the Code of Conduct program or fails to abide by any of its stated provisions.

The Toys"R"Us Code of Conduct includes provisions covering the following issues:
Child   Labor,   Forced   Labor,   Worker   Environment,   Working   Conditions,
Discrimination, Wages & Hours, and Freedom of Association.

Suppliers  must post copies of the Toys"R"Us  Code of Conduct for all workers to
view.  The company also  encourages  suppliers  to  implement  their own Code of
Conduct that meets or exceeds the provisions of the Toys"R"Us, Inc. program.

Inquiries about the Toys "R" Us Code of Conduct can be directed to: Vice
President of Product Development, Safety Assurance & Imports, Toys "R" Us, Inc.,
461 From Road, Paramus, NJ 07652.


                                                                              21
<PAGE>

                      management's discussion and analysis

Management's Discussion and Analysis
of Results of Operations and Financial Condition

RESULTS OF OPERATIONS
Comparison of Fiscal Year 2002 to 2001
We reported consolidated net sales of $11.3 billion for the 52-week fiscal year
ended February 1, 2003 versus $11.0 billion for the 52-week fiscal year ended
February 2, 2002, or a 3% increase in consolidated net sales. Our consolidated
net sales were $11.2 billion for 2002, after excluding the impact of foreign
currency translation, representing a 1% increase over 2001 net sales.

Total enterprise sales consist of all Toys"R"Us branded net sales from all of
our stores and from our internet businesses, and the net sales from
international licensed and franchised stores. We believe that enterprise sales
are useful in analyzing the worldwide strength of our family of brands:

(In billions)                          2002           2001           2000
--------------------------------------------------------------------------------
  Consolidated net sales            $  11.3         $ 11.0         $ 11.3

  Licensed and franchised               1.8            1.6            1.5
  net sales

--------------------------------------------------------------------------------
Total enterprise sales               $ 13.1         $ 12.6         $ 12.8
--------------------------------------------------------------------------------

Our consolidated comparable store sales, in local currencies, were flat for the
fourth quarter and the fiscal year. Comparable store sales for our U.S. toy
store division declined 1% for both the fourth quarter and the full year. Video
game sales, which include sales of video hardware, software and accessories,
were the primary factor contributing to these decreases. The video game category
posted an 18% decline for the fourth quarter and a 13% decline for the year. The
introduction of three video platforms (X-Box, Gamecube and Gameboy Advance)
drove strong video sales in 2001. The performance of the video game category was
also negatively impacted by significant reductions in the retail prices of video
game platforms this year, such as the reduction in retail price from $299 to
$199 for X-Box and PlayStation 2, and a reduction in retail price from $199 to
$149 for Gamecube. Video game sales accounted for approximately 19% of our total
U.S. toy store sales, excluding apparel sales, in the fourth quarter of 2002,
down from 22% in 2001. Juvenile product sales in our U.S. toy stores declined 8%
for the full year, mainly due to a shift of some sales to Babies"R"Us stores in
the same markets. However, our core toy sales, which include boys and girls,
learning and preschool toy categories, increased 3% in 2002.

Our International division reported comparable toy store sales increases, in
local currencies, of 5% for the fourth quarter and 6% for the full year. These
increases were primarily driven by the strong performance of our toy stores in
the United Kingdom and Spain. We continued to expand the presence of in-store
shops, such as Universe of Imagination (learning and educational products),
Animal Alley (plush), Teentronics (electronic entertainment products) and
Babies"R"Us (newborn and infant products). In addition, the penetration of
exclusive products in the International division continues to grow, and, as a
result, contributed to the improvement of our gross margin in this division.

Our Babies"R"Us division reported 12% net sales growth for the full year,
primarily driven by the opening of 19 new Babies"R"Us stores in the United
States this year. This division reported a 2% increase in comparable store sales
for the fourth quarter and a 3% increase for the full year. A variety of
initiatives helped to drive sales and guest traffic, including the rollout of
extended apparel sizing to all stores and the addition of in-store photo studios
in 21 Babies"R"Us stores.

Toysrus.com reported a net sales increase of 11% for the fourth quarter and 23%
for the full year. Growth in the on-line toy business and the Babiesrus.com
(baby products), Imaginarium.com (learning products) and the new Giftsrus.com
(personalized gifts) on-line stores were factors in the sales performance of
Toysrus.com.

We record the costs associated with operating our distribution network as a part
of selling, general and administrative expenses (SG&A), including those costs
that primarily relate to moving merchandise from distribution centers to stores.
Therefore, our consolidated gross margin may not be comparable to some other
retailers which include similar costs in their cost of sales. Our consolidated
gross margin, as a percentage of sales, increased by 0.4% for the fourth quarter
and was flat at 31.0% for the full year. Our consolidated gross margin for the
fourth quarter of 2001 included $27 million of store closing markdowns, which
were recorded as part of the restructuring and other charges announced in
January 2002. Credits and allowances from vendors, which are netted against our
cost of sales, have a positive impact on our consolidated gross margin. These
credits and allowances increased our consolidated gross margin by 0.4% for the
year, primarily in support of our increased promotional activities. Our U.S. toy
store division reported a 0.7% decline in gross margin for the fourth quarter
and a 0.8% decline for the full year. These declines were primarily attributed
to the impact of increased promotional activity, such as our "Low Price Super
Stars" pricing campaign, as well as the impact of higher markdowns recorded to
keep our inventories fresh. Our International toy store division reported a 0.3%
increase in gross margin to 32.2% for the year, primarily due to our continued
emphasis on exclusive products which carry higher margins. Our Babies"R"Us
division reported a 1.0% improvement in gross margin to 36.0%, primarily due to
a shift in sales mix to higher margin import product. Gross margin for
Toysrus.com improved 2.7% to 24.8%, reflecting an ongoing mix shift toward
higher margin juvenile and learning products, as well as lower markdowns due to
decreased inventory levels this year.

Our consolidated SG&A, as a percentage of net sales, increased 0.3% to 18.3% for
the fourth quarter of 2002. This increase was primarily due to an increase in
net advertising expense as a result of our decision to defer certain of our
advertising activities to this year's fourth quarter. Our consolidated SG&A, as
a percentage of sales, decreased 0.7% to 24.0% for the full year, primarily as a
result of our continued focus on expense control. During 2002, we implemented
shared services in a variety of functional groups, which, along with other
efforts, helped us to achieve the overall reduction in SG&A as a percentage of
sales. Advertising allowances, which are netted against


22

<PAGE>

                      management's discussion and analysis

SG&A and have a positive impact on our SG&A, did not significantly vary year
over year. SG&A for our U.S. toy store division decreased in absolute dollars,
however it remained flat as a percentage of sales at 22.6% for the year. SG&A
for the Babies"R"Us division decreased 0.2% to 23.6% for the year, primarily as
a function of expense control coupled with higher sales productivity. SG&A for
our International toy store business was reduced by 0.2% to 22.6% for the year.
SG&A for Toysrus.com decreased for the year, due to lower fulfillment costs
associated with product bundling, and a reduction in net advertising costs. The
SG&A decrease, as well as an increase in Toysrus.com's net sales for the year,
contributed to the overall reduction in consolidated SG&A, as a percentage of
sales.

Depreciation and amortization increased by $9 million to $317 million for the
year. Depreciation and amortization for 2001 included $13 million related to the
amortization of goodwill. We ceased amortizing this goodwill on February 3, 2002
when we adopted the provisions of Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets,"(SFAS No. 142) (see the section
"Recent Accounting Pronouncements"). Therefore, excluding the 2001 goodwill
amortization, depreciation and amortization increased by $22 million for the
year. This increase was primarily due to our Mission Possible store remodeling
program, new store openings, and strategic investments to improve our management
information systems. These increases were partially offset by the impact of
closed stores. As part of the restructuring initiatives announced in January
2002, we closed 37 Kids"R"Us stores and 27 Toys"R"Us stores in the United
States.

Interest expense, net of interest income, increased by $4 million to $23 million
for the fourth quarter of 2002 and increased by $1 million to $110 million for
the full year. These increases in net interest expense are mainly attributable
to increased long-term borrowings, partly offset by increased cash investments,
lower short-term borrowings and a decrease in interest rates.

Our effective tax rate was 36.5% versus 26.9% in the prior year. Our 2001
effective tax rate was impacted by the reversal of prior years' charges included
in restructuring and other charges recorded in 2001.

Foreign currency translation had a 3% favorable impact on our consolidated net
earnings for the fourth quarter of 2002 and a 4% favorable impact on our
consolidated net earnings for the full year of 2002. Inflation did not have a
significant impact on our full year consolidated net earnings for 2002.

Fourth Quarter Results
Our business is highly seasonal, with net sales and net earnings typically
highest in the fourth quarter due to the inclusion of the holiday selling
season. Fourth quarter 2002 net earnings were $278 million compared with $158
million in 2001. Diluted earnings per share were $1.30 for the fourth quarter of
2002 compared with $0.78 in 2001. Total consolidated comparable store sales, in
local currencies, were flat in the fourth quarter of 2002 compared with an
increase of 2% in 2001. Our results for 2001 included restructuring and other
charges of $213 million ($126 million, net of taxes). Excluding the impact of
these charges, net earnings were $284 million and diluted earnings per share
were $1.39 for the fourth quarter of 2001.

Fourth Quarter Net Sales by Segment
--------------------------------------------------------------------------------
(In millions)                             2002              2001           2000
--------------------------------------------------------------------------------

Toys"R"Us - U.S.                        $3,114            $3,202         $3,270
Toys"R"Us - International                1,069               915            907
Babies"R"Us                                381               342            335
Toysrus.com(1)                             193               174            140
Other(2)                                   112               126            147

--------------------------------------------------------------------------------
Total                                   $4,869            $4,759         $4,799
--------------------------------------------------------------------------------

Fourth Quarter Operating Earnings by Segment
--------------------------------------------------------------------------------
(In millions)                             2002              2001           2000
--------------------------------------------------------------------------------
Toys"R"Us - U.S.(3)                      $ 271             $ 331          $ 335
Toys"R"Us - International                  157               131            128
Babies"R"Us                                 40                29             29
Toysrus.com, net of
   minority interest(4)                      3               (17)           (54)
Other(3), (5)                               (9)              (35)           (13)
Restructuring and
   other charges                            --              (186)            --
--------------------------------------------------------------------------------
Total                                    $ 462             $ 253          $ 425
--------------------------------------------------------------------------------

(1) Includes the sales of Toysrus.com - Japan.

(2) Includes the sales of the Kids"R"Us and Geoffrey divisions.

(3) Includes markdowns related to the store closings announced as part of the
restructuring in 2001.

(4) Includes the operations of Toysrus.com - Japan, net of minority interest.

(5) Includes corporate expenses, the operating results of the KidsOROUs and
Geoffrey divisions and the equity in net earnings of Toys "R" Us - Japan, Ltd.
(Toys - Japan).


                                                                              23
<PAGE>

                      management's discussion and analysis

Comparison of Fiscal Year 2001 to 2000
We reported consolidated net sales of $11.0 billion for the 52-week fiscal year
ended February 2, 2002 versus $11.3 billion for the 53-week fiscal year ended
February 3, 2001. Net sales of Toys - Japan, which has been accounted for on the
"equity method" since its initial public offering, are included in our
consolidated net sales in the first quarter of 2000 and excluded from our net
sales thereafter. Our consolidated net sales were $11.0 billion for both years,
after excluding sales of Toys - Japan. Currency translation did not have a
significant impact on our consolidated net sales in 2001.

Total enterprise sales, which consist of all Toys"R"Us branded net sales from
all of our stores and from our internet businesses, and the net sales from
international licensed and franchised stores, were $12.6 billion in 2001 versus
$12.8 billion in 2000.

Our consolidated comparable store sales, in local currencies, declined 1%.
Comparable store sales for our U.S. toy store division increased 2% for the
fourth quarter and declined 1% for the fiscal year. Video game sales were the
primary drivers of the fourth quarter increase due to the introduction of X-Box,
Gamecube and Gameboy Advance in the latter half of the year. Video game sales
accounted for approximately 22% of our total U.S. toy store sales, excluding
apparel sales, in the fourth quarter of 2001 as compared to 18% in the fourth
quarter of the prior year. We had 433 stores in the Mission Possible format by
the start of the 2001 holiday season, which also contributed to the comparable
store sales increase in the fourth quarter. This gain partially offset the
negative impact of 268 stores under construction during the first nine months of
2001 that were retrofitted to the Mission Possible format, as well as the
negative impact resulting from the events of the September 11th terrorist
attacks. Our International division reported comparable toy store sales
increases of 5%, in local currencies, primarily driven by the performance of our
toy stores in the United Kingdom, which reported double-digit comparable store
sales growth. Our Babies"R"Us division reported 8% net sales growth, primarily
driven by the opening of 20 new Babies"R"Us stores in the United States this
year, as well as a 2% comparable store sales increase. Toysrus.com reported a
net sales increase of 24% for the fourth quarter and 54% for the full year,
which continued to reflect increases in its market share and the impact of the
Toysrus.com alliance with Amazon.com that began in 2000.

Our consolidated gross margin, as a percentage of net sales, remained flat at
31.0%. Our consolidated margin for 2001 included $27 million of store closing
markdowns, which were recorded as part of the restructuring and other charges
announced in January 2002, and our consolidated margin for 2000 included $10
million of markdowns resulting from the alliance between Toysrus.com and
Amazon.com. Excluding the impact of these items, our consolidated gross margin
would have increased from 31.0% to 31.2%. Credits and allowances from our
vendors, which are netted against our gross margin and have a positive impact on
our cost of sales, did not vary significantly. Gross margin for the U.S. toy
store division decreased 0.2% to 30.1% due to the impact of $15 million in store
closing markdowns, that we recorded with the 2001 restructuring and other
charges. The Babies"R"Us division reported a 1.2% improvement in gross margin to
35.0%, primarily due to a favorable sales shift to higher margin juvenile import
and proprietary product. Our International toy store business reported a 0.2%
increase in gross margin to 31.9%, primarily due to our continued emphasis on
exclusive products.

Our consolidated SG&A, as a percentage of net sales, remained flat at 24.7% for
the full year. Our consolidated SG&A for 2000 included $85 million of
non-recurring charges related to the alliance between Toysrus.com and
Amazon.com. Excluding these charges, our 2000 consolidated SG&A would have been
24.0% of sales. A reduction in advertising allowances, which are netted against
SG&A and have a positive impact on SG&A, accounted for 0.3% of the increase in
consolidated SG&A. SG&A for our U.S. toy store division increased 1.1% to 22.6%,
reflecting the strategic investments we made in our business, including the
renovation of our U.S. toy stores to the Mission Possible format and certain
guest focused initiatives, both of which accounted for approximately 1.0% of
this increase. Additional SG&A expenses resulting from the September 11th events
accounted for approximately 0.1% of this increase. SG&A for our International
toy store business increased 0.1% to 22.8%. SG&A for the Babies"R"Us division
increased 0.4% to 23.8%, primarily attributable to increased payroll costs to
support our emphasis on guest focused initiatives.

Depreciation and amortization increased by $18 million, primarily due to the
Mission Possible store remodeling program, continued new store expansion and
strategic investments to improve our management information systems.

Interest expense decreased by $10 million, primarily due to lower interest
rates, partially offset by the impact of higher average total debt outstanding
during the year. Interest and other income decreased by $15 million, primarily
due to lower average investments outstanding, as well as lower interest rates.

Our effective tax rate declined to 26.9% from 36.5%. The reduction in our
effective tax rate was due to the impact of the restructuring and other charges
recorded in 2001.

Neither foreign currency exchange nor inflation had a significant impact on our
consolidated net earnings in 2001.

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

As part of this plan, we eliminated approximately 1,700 staff positions in our
stores and our headquarters. In addition, these plans included the costs of
consolidating five of our store support center facilities into our new
headquarters in Wayne, New Jersey, in 2003.

The costs associated with the facilities' consolidation, elimination of
positions, and other actions designed to improve efficiency in support functions
were $79 million, of which $15 million related to severance. The costs
associated with store closings were $73 million for Kids"R"Us and $85 million
for Toys"R"Us, of which $27 million was recorded in


24

<PAGE>

                      management's discussion and analysis

cost of sales. The fair value of the facilities to be consolidated and stores
identified for closure were obtained from third party appraisals. We also
reversed $24 million of previously accrued charges ($11 million from the 1998
charge and $13 million from the 1995 charge) that we determined to be no longer
needed. Accordingly, based on these actions, we recorded $213 million of pre-tax
($126 million after-tax) restructuring and other charges in the fourth quarter
of the fiscal year ending February 2, 2002. Details on the components of the
charges are as follows:

<TABLE>
<CAPTION>
                                              Reserve               Adjustments       Reserve
Description         Initial    Utilized    balance at     Utilized    to charge    balance at
(in millions)        charge     in 2001       2/02/02      in 2002      in 2002       2/01/03
---------------------------------------------------------------------------------------------
<S>                   <C>      <C>             <C>          <C>            <C>          <C>
Store closing:

  Lease
  commitments         $  52    $     --        $   52       $  (11)        $ --         $  41

  Severance               4          --             4           (4)          --            --

  Write-down of
  property and
  equipment              75         (75)           --           --           --            --

  Markdowns              27          --            27          (27)          --            --

Store support
center consolidation:

  Lease
  commitments            28          --            28           --           11*           39

  Write-down of
  property and
  equipment              29         (29)           --           --           --            --

  Severance              15          --            15           (9)          (1)            5

  Other                   7          (7)           --           --           --            --
---------------------------------------------------------------------------------------------

Total restructuring
and other charges      $237       $(111)         $126        $ (51)        $ 10          $ 85
---------------------------------------------------------------------------------------------
</TABLE>

*In the fourth quarter of 2002, we determined that the reserve for lease costs
for the disposition of one of our store support center facilities needed to be
increased and, accordingly, recorded an additional charge of $11 million.

In 2000, Toysrus.com, our internet subsidiary, recorded $118 million in
non-recurring charges as a result of the transition to its co-branded on-line
store with Amazon.com, of which $10 million was included in cost of sales and
$108 million was included in SG&A. These costs and charges related primarily to
the closure of three distribution centers, as well as web-site asset write-offs
and other costs. We had remaining lease commitment reserves of $3 million at
February 1, 2003, that will be utilized in 2003 and thereafter.

We previously announced strategic initiatives to reposition our worldwide
business and recorded related restructuring and other charges of $698 million in
1998 and $396 million in 1995 to complete these initiatives. As of February 1,
2003, we substantially completed all announced initiatives. We reversed reserves
of $10 million in the fourth quarter of 2002 that were determined to no longer
be needed. We also reversed reserves of $29 million in 2001, $24 million of
which were reversed in the fourth quarter of 2001 and is discussed above, and
$11 million in 2000 that were determined to no longer be needed. We had $42
million of reserves remaining at February 1, 2003, primarily for long-term lease
commitments that will be utilized in 2003 and thereafter.

We believe that the remaining reserves at February 1, 2003 are reasonable
estimates of what is required to complete all remaining initiatives.

Liquidity and Capital Resources
Our contractual obligations mainly consist of operating leases related to real
estate used in the operation of our business and long-term debt. The table below
shows the amounts we are obligated to pay for operating leases and principal
amounts due under long-term debt issuances by fiscal period:

Contractual Obligations at February 1, 2003 (in millions)
--------------------------------------------------------------------------------

                                     Amounts      Amounts
                        Amounts       due in       due in      Amounts
                         due in  Fiscal 2004  Fiscal 2006          due
                         Fiscal   and Fiscal   and Fiscal   subsequent
                           2003         2005         2007      to 2007     Total
--------------------------------------------------------------------------------
Operating
leases*                  $  317       $  615       $  552      $ 1,786    $3,270

Sub-leases
to third parties             17           26           20           40       103
--------------------------------------------------------------------------------

Net operating
lease obligations           300          589          532        1,746     3,167

Capital lease
obligations                   6            9            2            1        18

Long-term debt              367          541          697***       723     2,328
Minimum

royalty obligations          14            7           --           --        21
Other obligations             2            4           --           --         6
--------------------------------------------------------------------------------

Total
contractual
obligations              $  689       $1,150       $1,231      $ 2,470   $ 5,540
--------------------------------------------------------------------------------

*Includes synthetic lease obligation for our new headquarters facility in Wayne,
New Jersey as described in the section "Critical Accounting Policies" and the
note to our consolidated financial statements entitled "Leases."

**Includes $390 million of equity security units, due 2007, which we are
obligated to remarket in 2005. See the section "Financing Activities" and the
note to our consolidated financial statements entitled "ISSUANCE OF COMMON STOCK
AND EQUITY UNITS."

We are in compliance with all covenants associated with the above contractual
obligations. The covenants include, among other things, requirements to provide
financial information and public filings, and to comply with specified financial
ratios. Non-compliance with associated covenants could give rise to accelerated
payments, requirements to provide collateral, or changes in terms contained in
the respective agreements.

At February 1, 2003, we had available over $1 billion of cash and cash
equivalents. Our current portion of long-term debt of $379 million at February
1, 2003 includes a 475 million Swiss Franc note, due on January 28, 2004. In
addition, our long-term debt at February 1, 2003 includes a 500 million Euro
bond, due on February 13, 2004. See the section "Other Matters" and the note to
our consolidated financial statements entitled "SUBSEQUENT EVENTS" for a
discussion regarding the registration of $800 million of debt securities in
March 2003 and the sale and issuance of $400 million of notes in April 2003.

We have $985 million in unsecured committed revolving credit facilities from a
syndicate of financial institutions. These credit facilities are available for
seasonal borrowings. There were no outstanding balances under these credit
facilities at the end of fiscal 2002, 2001 or 2000. Additionally, we have lines
of credit with various banks to meet certain of the short-term financing needs
of our foreign subsidiaries. The following table shows our commercial
commitments with their related expirations and availability:


                                                                              25
<PAGE>

                      management's discussion and analysis

<TABLE>
<CAPTION>
Commercial Commitments at February 1, 2003 (in millions)
---------------------------------------------------------------------------------------------------------------------------
                                                         Amount of commitment expiration per fiscal period
---------------------------------------------------------------------------------------------------------------------------
                                         Total                 Fiscal 2004    Fiscal 2006    Fiscal 2008            Amounts
                                       amounts                         and            and            and       available at
                                     committed   Fiscal 2003   Fiscal 2005    Fiscal 2007     subsequent   February 1, 2003
---------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>             <C>          <C>              <C>              <C>
Unsecured revolving credit facilities:

Facility expiring in
September 2006                         $   685       $    --         $  --        $   685          $  --            $   685

364-day facility
expiring August 25, 2003                   300           300            --             --             --                300
---------------------------------------------------------------------------------------------------------------------------

Total unsecured
revolving credit facilities            $   985        $  300         $  --        $   685          $  --            $   985
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Cash requirements for operating and investing activities will be met primarily
through use of our exisiting cash and cash equivalents, cash flows from
operating activities, and utilization of our unsecured committed revolving
credit facilities. At February 1, 2003, we had in place stand-by letters of
credit of $360 million, primarily as a guarantee for a debt obligation and $75
million of outstanding letters of credit related to import merchandise.

Credit Ratings
--------------------------------------------------------------------------------

                           Moody's             Standard & Poor's
--------------------------------------------------------------------------------

Long-term debt             Baa3                BBB-

Commercial paper           P-3                 A-3

Outlook                    Negative            Stable

Date of last rating
update                     March 19, 2003      March 5, 2003
--------------------------------------------------------------------------------

Our debt instruments do not contain provisions requiring acceleration of payment
upon a debt rating downgrade. We continue to be confident in our ability to
refinance maturing debt. Other credit ratings for our debt are available;
however we disclosed above only ratings of the two largest nationally recognized
statistical rating organizations because we believe these are the most relevant
to our business.

The seasonal nature of our business typically causes cash balances to decline
from the beginning of the year through October as inventory increases for the
holiday selling season and funds are used for construction of new stores,
remodeling and other initiatives that normally occur in this period. The fourth
quarter, including the holiday season, accounts for more than 40% of our net
sales and substantially all of our operating earnings.

Operating Activities
Our net cash inflows from operating activities increased to $574 million in 2002
from net cash inflows of $504 million in 2001 and net cash outflows of $151 in
2000. Net earnings, as adjusted for non-cash items, of $600 million in 2002 and
$425 million in 2001 were the primary drivers of the net cash inflows from
operations in those years. The net cash outflows from operations in 2000 were
primarily driven by an increase in merchandise inventories of $486 million, and
a net decrease in accounts payable, accrued expenses and other liabilities of
$178 million, and was partially offset by net earnings, as adjusted for non-cash
items, of $444 million for that year.

Investing Activities
Capital expenditures, net of dispositions, were $398 million in 2002, $705
million in 2001 and $402 million in 2000. Capital expenditures during these
periods include investments to: open 55 new Babies"R"Us stores in the United
States; open 18 new Toys"R"Us stores internationally; reformat our existing
Toys"R"Us store base in the United States to our Mission Possible format and
remodel 41 existing Kids"R"Us stores to our R-Generation store format; convert
286 existing Toys"R"Us stores into Toys"R"Us/Kids"R"Us combo stores; improve and
enhance our management information systems.

During 2003, we plan to reduce our capital expenditures for our business to less
than $350 million. We plan to open approximately 20 new Babies"R"Us stores in
the United States and approximately five new international Toys"R"Us stores, and
we also plan to continue to improve and enhance our management information
systems in 2003.

Financing Activities
Net cash inflows from financing activities were $613 million in 2002, primarily
driven by net long-term borrowings of $407 million, as well as proceeds received
from the issuance of our common stock and contracts to purchase common stock
totaling $266 million. In May 2002, we issued 14,950,000 shares of our common
stock at a price of $17.65 per share and received net proceeds of $253 million.
On the same date, we issued 8,050,000 equity security units with a stated amount
of $50 per unit and received net proceeds of $390 million. Each security unit
consists of a contract to purchase, for $50, a specified number of shares of
Toys"R"Us common stock in August 2005, and a senior note due in 2007 with a
principal amount of $50. The fair value of the contract to purchase shares of
Toys"R"Us common stock was estimated at $1.77 per equity security unit. The fair
value of the senior note was estimated at $48.23 per equity security unit.
Interest on the senior notes is payable quarterly at an initial rate of 6.25%.
We are obligated to remarket the notes in May 2005 at the then prevailing
interest rate for similar notes. If the remarketing were not to be successful,
we would be entitled to take possession of the senior notes, and the holder's
obligation under the contracts to purchase shares of our common stock would be
deemed to have been satisfied. The net proceeds from these public offerings were
used to refinance short-term borrowings and for other general corporate
purposes.


26

<PAGE>

                      management's discussion and analysis

Net cash inflows from financing activities were $191 million in 2001, primarily
as a result of net borrowings of $216 million during the year. In July 2001, we
issued and sold $750 million of notes, comprised of $500 million of notes
bearing interest at 7.625% per annum, maturing in 2011, and $250 million of
notes bearing interest at 6.875% per annum, maturing in 2006. The proceeds from
these notes were used to reduce outstanding commercial paper obligations.
Simultaneously with the sale of the notes, we entered into interest rate swap
agreements. As a result of the interest rate swap agreements, interest on the
$500 million notes accrues at an effective rate of LIBOR plus 1.5120% and
interest on the $250 million notes accrues at an effective rate of LIBOR plus
1.1515%. In October 2002, we terminated a portion of the interest rate swap
agreeements and received a payment of $27 million, which is being amortized over
the remaining lives of the related notes. Concurrently, we entered into new
interest rate swap agreements. Of the $500 million notes, $200 million accrues
interest at an effective rate of LIBOR plus 3.06%, and $125 million of the $250
million notes accrues interest at an effective rate of LIBOR plus 3.54%.
Interest is payable on both notes semi-annually on February 1 and August 1 of
each year. In February 2001, we borrowed 500 million EURO through the public
issuance of a EURO bond bearing interest at 6.375% per annum. The obligation was
swapped into a $466 million fixed rate obligation with an effective rate of
7.43% per annum with interest payments due annually and principal due February
13, 2004.

Net cash outflows from financing activities were $2 million for 2000. Net
borrowings for 2000 were $521 million and were used primarily to repurchase 42
million shares of our common stock, to fund increased inventory levels, and to
fund our Toysrus.com internet subsidiary. In 2000, we received a total of $97
million from SOFTBANK Venture Capital and affiliates representing their 20%
minority interest investment in Toysrus.com.

Other Matters
On March 24, 2003, we filed a "shelf" registration statement with the Securities
and Exchange Commission giving us the capability to sell up to $800 million of
debt securities that would be used to repay outstanding debt and for general
corporate purposes. In April 2003, we sold and issued $400 million in notes
bearing interest at a coupon rate of 7.875%, maturing on April 15, 2013. The
notes were sold at a price of 98.305%, resulting in an effective yield of
8.125%. Simultaneously with the sale of the notes, we entered into interest rate
swap agreements. As a result of these swap agreements, interest will accrue at
the effective rate of LIBOR plus 3.622%. Interest is payable semi-annually
commencing on October 15, 2003. We plan to use the proceeds from these notes for
the repayment of indebtedness maturing in the 2004 calendar year, and pending
such repayment, for working capital needs and other general corporate purposes.

In August 2000, eleven purported class action lawsuits were filed (six in the
United States District Court for the District of New Jersey, three in the United
States District Court for the Northern District of California, one in the United
States District Court for the Western District of Texas and one in the Superior
Court of the State of California, County of San Bernardino), against us and our
affiliates Toysrus.com, Inc. and Toysrus.com, LLC. In September 2000, three
additional purported class action lawsuits were filed (two in the United States
District Court for the District of New Jersey and one in the United States
District Court for the Western District of Texas). These actions generally
purport to bring claims under federal privacy and computer fraud statutes, as
well as under state statutory and common law, on behalf of all persons who have
visited one or more of our web-sites and either made an online purchase or
allegedly had information about them unlawfully "intercepted," "monitored,"
"transmitted," or "used." All the suits (except one filed in the United States
District Court for the District of New Jersey) also named Coremetrics, Inc.
(Coremetrics) as a defendant. Coremetrics is an internet marketing company with
whom we have an agreement. These suits seek damages in unspecified amounts and
other relief under state and federal law.

With Coremetrics, we filed a joint application with the Multidistrict litigation
panel which resulted in all of the federal actions being consolidated and
transferred to the United States District Court for the Northern District of
California. Plaintiffs voluntarily dismissed the action in the Superior Court of
the State of California, County of San Bernardino without prejudice. On October
16, 2001, plaintiffs filed an amended complaint in the United States District
Court for the Northern District of California. We believe that we have
substantial defenses to all of these claims. On November 13, 2002, we entered
into a settlement agreement with plaintiffs in connection with all causes of
action. This settlement agreement is subject to the court's review and approval
and will not have a material impact on our consolidated financial statements.

We are party to certain other litigation, which, in our judgment, based in part
on the opinion of legal counsel, will not have a material adverse effect on our
consolidated financial statements.

In August 2000, Toysrus.com entered into a 10-year strategic alliance with
Amazon.com to operate a co-branded toy and video game on-line store, which was
launched in the third quarter of 2000. In addition, a co-branded baby products
on-line store was launched in May 2001 and a co-branded creative and learning
products on-line store was launched in July 2001. Under this alliance,
Toysrus.com and Amazon.com are responsible for specific aspects of the on-line
stores. Toysrus.com is responsible for merchandising, marketing and content for
the co-branded store. Toysrus.com also identifies, buys, owns and manages the
inventory. Amazon.com handles web-site development, order fulfillment, guest
service, and the housing of Toysrus.com's inventory in Amazon.com's U.S.
distribution centers. Also in August 2000, Amazon.com was granted a warrant
entitling it to acquire up to 5% (subject to dilution under certain
circumstances) of the capital of Toysrus.com at the then market value. This
warrant has not been exercised.

We recorded a non-operating gain of $315 million ($200 million net of taxes)
resulting from the initial public offering of shares of Toys - Japan, which was
completed in April 2000. Of this gain, $91 million resulted from an adjustment
to the basis of our investment in Toys - Japan, and $224 million was related to
the sale of a portion of company-owned common stock of Toys - Japan, for which
we received net cash proceeds of $267 million. In connection with this
transaction, we


                                                                              27
<PAGE>

                      management's discussion and analysis

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

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

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

We are faced with interest rate risks resulting from interest rate fluctuations.
We have a variety of fixed and variable rate debt instruments. In an effort to
manage interest rate exposures, we strive to achieve an acceptable balance
between fixed and variable rate debt and have entered into interest rate swaps
to maintain that balance. For interest rate derivative instruments, market risk
is determined by calculating the impact to fair value of an assumed one-time
change in interest rates across all maturities. Fair values were estimated based
on market prices, where available, or dealer quotes. A change in interest rates
on variable rate debt is assumed to impact earnings and cash flow, but not the
fair value of debt. A change in interest rates on fixed rate debt is assumed to
impact the fair value of debt, but not earnings and cash flow. Based on our
overall interest rate exposure at February 1, 2003 and February 2, 2002, a 1%
increase in interest rates would have decreased pre-tax earnings by $15 million
in 2002 and $11 million in 2001, respectively. A 1% decrease in interest rates
would have increased pre-tax earnings by $15 million in 2002 and $11 million in
2001. A 1% increase in interest rates would decrease the fair value of our
long-term debt at February 1, 2003 and February 2, 2002 by approximately $90
million and $79 million, respectively. A 1% decrease in interest rates would
increase the fair value of our long-term debt at February 1, 2003 and February
2, 2002 by approximately $98 million and $87 million, respectively.

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

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

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

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

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


28

<PAGE>

                      management's discussion and analysis

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

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

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

Insurance Risks:
We insure a substantial portion of our general liability and workers'
compensation risks through a wholly-owned insurance subsidiary, in addition to
third party insurance coverage. Provisions for losses related to self-insured
risks are based upon independent actuarially determined estimates. While we
believe these provisions for losses to be adequate, the ultimate liabilities may
be in excess of, or less than, the amounts recorded.

Stock Options:
We account for stock options under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", which does not require compensation
costs related to stock options to be recorded in net income, as all options
granted under the various stock option plans had an exercise price equal to the
market value of the underlying common stock at grant date. SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS No. 123," provides guidance on acceptable approaches to the
implementation of SFAS No. 123, and requires more prominent disclosures of pro
forma net earnings and earnings per share determined as if the fair value method
of accounting for stock options had been applied in measuring compensation cost.
Stock options are further detailed in the note to our consolidated financial
statements entitled "STOCK OPTIONS."

Synthetic Lease:
Our new corporate headquarters facility, located in Wayne, New Jersey, is
financed under a lease arrangement commonly referred to as a "synthetic lease."
Under this lease, unrelated third parties, arranged by Wachovia Development
Corporation, a multi-purpose real estate investment company, will fund up to
$125 million for the acquisition and construction of the facility. Upon
completion of the construction, which is expected to be in 2003, we will begin
to pay rent on the facility until the lease expires in 2011. The rent will be
based on a mix of fixed and variable interest rates, which will be applied
against the final amount funded. Upon expiration of the lease, we would expect
to either: renew the lease arrangement; purchase the facility from the lessor;
or remarket the property on behalf of the owner. The lease agreement provides
the lessor with a residual value guarantee equal to the funding for the
acquisition and construction of the facility. Under accounting principles
generally accepted in the United States, this arrangement is required to be
treated as an operating lease for accounting purposes and as a financing for tax
purposes.

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

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


                                                                              29
<PAGE>

                      management's discussion and analysis

beginning after June 15, 2003. Our new corporate headquarters facility, located
in Wayne, New Jersey, is leased from unrelated third parties, arranged by a
multi-purpose real estate investment company that we do not control. In
addition, we do not have the majority of the associated risks or rewards.
Accordingly, we believe that FIN 46 will have no impact on the accounting for
this synthetic lease. The synthetic lease is discussed above and in the note to
our consolidated financial statements entitled "LEASES." We believe that FIN 46
will not have a material impact on our consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), which imposes new disclosure and
liability-recognition requirements for financial guarantees, performance
guarantees, indemnifications and indirect guarantees of the indebtedness of
others. FIN 45 requires certain guarantees to be recorded at fair value. This is
different from previous practice, where a liability would typically be recorded
only when a loss is probable and reasonably estimable. The initial recognition
and initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. FIN 45 also requires new
disclosures, even when the likelihood of making any payments under the guarantee
is remote. The disclosure requirements are effective for interim and annual
periods ending after December 15, 2002. We have procedures to identify
guarantees contained in the various legal documents and agreements that have
been executed, and those to be executed in the future, that fall within the
scope of FIN 45. We expect that FIN 45 will not have a material impact on our
consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146), which addresses the
recognition, measurement, and reporting of costs associated with exit or
disposal activities and supercedes Emerging Issues Task Force issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),"
(EITF No. 94-3). The fundamental difference between SFAS No. 146 and EITF No.
94-3 is the requirement that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred rather than at
the date an entity commits to an exit plan. A fundamental conclusion of SFAS No.
146 is that an entity's commitment to a plan, by itself, does not create an
obligation that meets the definition of a liability. SFAS No. 146 also
establishes that the initial measurement of a liability recognized be recorded
at fair value. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. We believe that the adoption of this pronouncement will
not have a significant effect on our consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." We adopted SFAS No. 144 as of February
3, 2002 and the adoption did not have a significant effect on our consolidated
financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142), which is effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment only approach. We adopted this
pronouncement on February 3, 2002. As a result of this adoption, amortization of
$348 million of goodwill, which was to be amortized ratably through 2037,
ceased. Based on the historical and projected operating results of the reporting
units to which the goodwill relates, we determined that no impairment of this
goodwill exists. Application of the non-amortization provisions of SFAS No. 142
resulted in an increase in net earnings of $2 million for the fourth quarter of
2002 and $8 million for the 2002 fiscal year.

Forward Looking Statements
This annual report contains "forward looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. All statements that are not historical facts, including
statements about our beliefs or expectations, are forward-looking statements. We
generally identify these statements by words or phrases such as "anticipate,"
"estimate," "plan," "expect," "believe," "intend," "foresee," "will," "may," and
similar words or phrases. These statements discuss, among other things, our
strategy, store openings and renovations, future performance and anticipated
cost savings, results of our restructuring, anticipated international
development and other goals and targets. Such statements involve risks and
uncertainties that exist in our operations and business environment that could
render actual outcomes and results materially different than predicted. Our
forward-looking statements are based on assumptions about many factors,
including, but not limited to, ongoing competitive pressures in the retail
industry, changes in consumer spending and consumer preferences, general
economic conditions in the United States and other jurisdictions in which we
conduct our business (such as interest rates, currency exchange rates and
consumer confidence) and normal business uncertainty. While we believe that our
assumptions are reasonable at the time forward-looking statements were made, we
caution that it is impossible to predict the actual outcome of numerous factors
and, therefore, readers should not place undue reliance on such statements.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update such statements in light of new information or
future events that involve inherent risks and uncertainties. Actual results may
differ materially from those contained in any forward-looking statement.


30

<PAGE>

                       consolidated financial statements

Consolidated Statements of Earnings
Toys"R"Us, Inc. and Subsidiaries

<TABLE>
<CAPTION>

                                                                                  Year Ended
                                                    ------------------------------------------
                                                    February 1,     February 2,   February 3,
(in millions, except per share data)                      2003            2002           2001
----------------------------------------------------------------------------------------------

<S>                                                 <C>           <C>               <C>
Net sales                                           $   11,305    $     11,019      $  11,332
Cost of sales                                            7,799           7,604          7,815
----------------------------------------------------------------------------------------------
     Gross margin                                        3,506           3,415          3,517
----------------------------------------------------------------------------------------------

Selling, general and administrative expenses             2,718           2,721          2,801
Depreciation and amortization                              317             308            290
Restructuring and other charges                             --             186             --
----------------------------------------------------------------------------------------------
     Total operating expenses                            3,035           3,215          3,091

----------------------------------------------------------------------------------------------
     Operating earnings                                    471             200            426

Other (expense) income:
     Interest expense                                     (119)           (117)          (127)
     Interest and other income                               9               8             23
     Gain from IPO of Toys - Japan                          --              --            315
----------------------------------------------------------------------------------------------

Earnings before income taxes                               361              91            637
Income taxes                                               132              24            233
----------------------------------------------------------------------------------------------
Net earnings                                        $      229      $       67      $      404
----------------------------------------------------------------------------------------------

Basic earnings per share                            $     1.10      $     0.34      $    1.92
----------------------------------------------------------------------------------------------
Diluted earnings per share                          $     1.09      $     0.33      $    1.88
----------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.


31

<PAGE>

                       consolidated financial statements

Consolidated Balance Sheets
Toys"R"Us, Inc. and Subsidiaries

                                                    February 1,      February 2,
(In millions)                                             2003             2002
--------------------------------------------------------------------------------

Assets

Current Assets:

Cash and cash equivalents                          $     1,023        $     283
Restricted cash                                             60               --
Accounts and other receivables                             202              210
Merchandise inventories                                  2,190            2,041
Prepaid expenses and other current assets                   85               97
--------------------------------------------------------------------------------
      Total current assets                               3,560            2,631

Property and Equipment:

Real estate, net                                         2,398            2,313
Other, net                                               2,365            2,231
--------------------------------------------------------------------------------
      Total property and equipment                       4,763            4,544

Goodwill, net                                              348              348
Derivative assets                                          158               42
Other assets                                               568              511
--------------------------------------------------------------------------------
                                                   $     9,397         $  8,076
--------------------------------------------------------------------------------

Liabilities and Stockholders' Equity

Current Liabilities:

Short-term borrowings                              $        --         $     --
Accounts payable                                           896              878
Accrued expenses and other current liabilities             824              738
Income taxes payable                                       279              319
Current portion of long-term debt                          379               39
--------------------------------------------------------------------------------
      Total current liabilities                          2,378            1,974

Long-term debt                                           2,139            1,816
Deferred income taxes                                      545              447
Derivative liabilities                                      10              122
Other liabilities                                          282              276

Minority interest in Toysrus.com                            13               27

Stockholders' Equity:

Common stock                                                30               30
Additional paid-in capital                                 414              444
Retained earnings                                        5,457            5,228
Accumulated other comprehensive loss                      (149)            (267)
Treasury shares, at cost                                (1,722)          (2,021)
--------------------------------------------------------------------------------
Total stockholders' equity                               4,030            3,414
--------------------------------------------------------------------------------
                                                   $     9,397         $  8,076
--------------------------------------------------------------------------------

See notes to consolidated financial statements.


32

<PAGE>

                       consolidated financial statements

Consolidated Statements of Cash Flows
Toys"R"Us, Inc. and Subsidiaries
<TABLE>
<CAPTION>

                                                                                               Year Ended
                                                                 -----------------------------------------
                                                                 February 1,    February 2,    February 3,
(In millions)                                                          2003           2002           2001
----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>              <C>
Cash Flows from Operating Activities

Net earnings                                                        $   229        $    67          $  404
Adjustments to reconcile net earnings to net cash
from operating activities:
      Depreciation and amortization                                     317            308             290
      Deferred income taxes                                              99             (6)             67
      Minority interest in Toysrus.com                                  (14)           (24)            (52)
      Other non-cash items                                              (31)           (29)             50
      Restructuring and other charges                                    --            109              --
      Gain from initial public offering of Toys - Japan                  --             --            (315)
Changes in operating assets and liabilities:
      Accounts and other receivables                                      8             15             (69)
      Merchandise inventories                                          (100)           217            (486)
      Prepaid expenses and other operating assets                       (18)            36             (54)
      Accounts payable, accrued expenses and other liabilities          112           (241)           (178)
      Income taxes payable                                              (28)            52             192
----------------------------------------------------------------------------------------------------------
Net cash from operating activities                                      574            504            (151)
----------------------------------------------------------------------------------------------------------

Cash Flows from Investing Activities
Capital expenditures, net                                              (398)          (705)           (402)
Net proceeds from sale of Toys - Japan common stock                       -             --             267
Reduction in cash due to deconsolidation of Toys - Japan                  -             --             (15)
----------------------------------------------------------------------------------------------------------
Net cash from investing activities                                     (398)          (705)           (150)
----------------------------------------------------------------------------------------------------------

Cash Flows from Financing Activities
Short-term borrowings, net                                               --           (588)            419
Long-term borrowings                                                    548          1,214             147
Long-term debt repayment                                               (141)          (410)            (45)
Proceeds from issuance of stock and contracts to purchase stock         266             --              --
Increase in restricted cash                                             (60)            --              --
Exercise of stock options                                                --             19               2
Proceeds received from investors in Toysrus.com                          --             --              97
Share repurchase program                                                 --            (44)           (632)
Issuance of stock warrants                                               --             --              10
----------------------------------------------------------------------------------------------------------
Net cash from financing activities                                      613            191              (2)
----------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash and cash equivalents            (49)            18              (6)

Cash and Cash Equivalents
Increase/(decrease) during year                                         740              8            (309)
Beginning of year                                                       283            275             584
----------------------------------------------------------------------------------------------------------
End of year                                                         $ 1,023        $   283          $  275
----------------------------------------------------------------------------------------------------------

Supplemental Disclosures of Cash Flow Information
Income tax payments (refunds), net                                  $    32        $   (22)         $   (2)
----------------------------------------------------------------------------------------------------------
Interest payments                                                   $    93        $    85          $  128
----------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.


                                                                              33
<PAGE>

                       consolidated financial statements

Consolidated Statements of Stockholders' Equity
Toys"R"Us, Inc. and Subsidiaries
<TABLE>
<CAPTION>

                                              Common Stock
                                 -------------------------------------                 Accumulated
                                      Issued             In Treasury    Additional           other                    Total
                                 -----------------   ------------------    paid-in   comprehensive  Retained  stockholders'
(In millions)                    Shares     Amount   Shares      Amount    capital            loss  earnings         equity
---------------------------------------------------------------------------------------------------------------------------
<S>                               <C>        <C>      <C>     <C>           <C>           <C>        <C>           <C>
Balance, January 29, 2000         300.4      $  30    (61.1)  $ (1,423)     $  453        $  (137)   $ 4,757      $  3,680
---------------------------------------------------------------------------------------------------------------------------
Net earnings for the year            --         --       --          --         --             --        404            404
Foreign currency translation
   adjustments                       --         --       --          --         --            (74)        --            (74)
                                                                                                                  ---------
   Comprehensive income                                                                                                 330
Share repurchase program             --         --    (42.1)      (632)         --             --         --           (632)
Issuance of restricted stock, net    --         --       --         50         (21)            --         --             29
Exercise of stock options, net       --         --      0.3          4          (3)            --         --              1
Issuance of stock warrants           --         --       --         --          10             --         --             10
---------------------------------------------------------------------------------------------------------------------------
Balance, February 3, 2001         300.4      $  30   (102.9)  $ (2,001)     $  439        $  (211)   $ 5,161       $  3,418
---------------------------------------------------------------------------------------------------------------------------
Net earnings for the year            --         --       --          --         --             --         67             67
Foreign currency translation
   adjustments                       --         --       --          --         --            (55)        --            (55)
Unrealized loss on
   hedged transactions               --         --       --          --         --             (1)        --             (1)
                                                                                                                  ---------
   Comprehensive income                                                                                                  11
Share repurchase program             --         --     (2.1)       (44)         --             --         --            (44)
Issuance of restricted stock, net    --         --      0.5          5           4             --         --              9
Exercise of stock options, net       --         --      0.8         19           1             --         --             20
---------------------------------------------------------------------------------------------------------------------------
Balance, February 2, 2002         300.4      $  30   (103.7)  $ (2,021)     $  444        $  (267)   $ 5,228      $   3,414
---------------------------------------------------------------------------------------------------------------------------
Net earnings for the year            --         --       --         --          --             --        229            229
Foreign currency translation
   adjustments                       --         --       --         --          --            127         --            127
Unrealized loss on
   hedged transactions               --         --       --         --          --             (9)        --             (9)
                                                                                                                  ---------
   Comprehensive income                                                                                                 347
Common stock equity offering         --         --     14.9        301         (35)            --         --            266
Issuance of restricted stock, net    --         --      0.9         (2)          5             --         --              3
---------------------------------------------------------------------------------------------------------------------------
Balance, February 1, 2003         300.4      $  30    (87.9)  $ (1,722)     $ 414         $ (149)    $5,457       $   4,030
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.


34

<PAGE>

                   notes to consolidated financial statements

Notes to Consolidated Financial Statements
Toys"R"Us, Inc. and Subsidiaries

(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. References
to 2002, 2001, and 2000 are for the 52 weeks ended February 1, 2003 and February
2, 2002 and the 53 weeks ended February 3, 2001.

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

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

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

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

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

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

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

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

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

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

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

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


                                                                              35
<PAGE>

                   notes to consolidated financial statements

spent on computer software projects. Costs associated with preliminary stage
activities, training, maintenance and all other post-implementation stage
activities are expensed as incurred. All costs capitalized in connection with
internal use computer software projects are amortized on a straight-line basis
over a useful life of five years.

Financial Instruments
The company adopted the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended, effective February 4, 2001, as discussed
in the footnote entitled "Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be recorded on the balance sheet at fair
value and that changes in fair value be recognized currently in earnings unless
specific hedge accounting criteria is met.

The company enters into forward foreign exchange contracts to minimize the risk
associated with currency movement relating to its short-term intercompany loan
program with foreign subsidiaries. Gains and losses, which offset the movement
in the underlying transactions, are recognized as part of such transactions.
Gross deferred unrealized losses on the forward contracts were not material at
either February 1, 2003 or at February 2, 2002. The related receivable, payable
and deferred gain or loss are included on a net basis in the balance sheet. The
company had $205 and $108 of short-term outstanding forward contracts at
February 1, 2003 and February 2, 2002, maturing in 2003 and 2002, respectively.
These contracts are entered into with counter-parties that have high credit
ratings and with which the company has the contractual right to net forward
currency settlements.

Stock Options
The company accounts for stock options in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Options Issued
to Employees" (APB 25). The company has adopted the disclosure only provisions
of SFAS No. 123 "Accounting for Stock Based Compensation" (FAS 123), issued in
1995.

In accordance with the provisions of SFAS No. 123, the company applies APB
Opinion No. 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 earnings and earnings
per share would have been reduced to the pro forma amounts indicated in the
following table:

                                         2002          2001          2000
--------------------------------------------------------------------------------
Net earnings - as reported             $  229        $   67        $  404
Net earnings - pro forma                  190            28           385
Basic earnings per share -
  as reported                            1.10          0.34          1.92
Basic earnings per share -
  pro forma                              0.92          0.14          1.83
Diluted earnings per share -
  as reported                            1.09          0.33          1.88
Diluted earnings per share -
  pro forma                              0.91          0.14          1.79
--------------------------------------------------------------------------------

The weighted-average fair value at the date of grant for options granted in
2002, 2001, 2000 was $6.42, $9.16 and $5.88, 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 2000 through 2002, a range of assumptions are provided below:

                                         2002          2001          2000
--------------------------------------------------------------------------------
Expected stock price volatility      .407 - .507   .407 - .567    .434 - .585
Risk-free interest rate              2.6% - 5.0%   3.6% - 5.1%    5.0% - 6.8%
Weighted average
  expected life of options             5 years       5 years        5 years
--------------------------------------------------------------------------------

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.

RESTRICTED CASH
The company had restricted cash of $60 at February 1, 2003. Included in this
amount is $45 being used as support for a letter of credit in exchange for
reduced letter of credit fees. This letter of credit partially supports the
company's 475 Swiss Franc note, due January 28, 2004. The remaining $15 relates
to a pending real estate transaction that is expected to close in 2003.

MERCHANDISE INVENTORIES
Merchandise inventories for the U.S. toy store division are stated at the lower
of LIFO (last-in, first-out) cost or market. If inventories had been valued at
the lower of FIFO (first-in, first-out) cost or market, inventories would show
no change at February 1, 2003 or February 2, 2002.

                                        February 1,                  February 2,
                                              2003                         2002
--------------------------------------------------------------------------------
Toys"R"Us - U.S.                          $  1,387                     $  1,328
Toys"R"Us - International                      362                          278
Babies"R"Us                                    287                          282
Toysrus.com                                     34                           52
Other                                          120                          101
--------------------------------------------------------------------------------
                                          $  2,190                     $  2,041
--------------------------------------------------------------------------------


36

<PAGE>

                   notes to consolidated financial statements

PROPERTY AND EQUIPMENT

                                 Useful life      February 1,     February 2,
                                  (in years)            2003            2002
--------------------------------------------------------------------------------
Land                                               $     825        $    811
Buildings                              45-50           2,009           1,980
Furniture and equipment                 5-20           1,786           1,800
Leasehold improvements              121/2-35           1,726           1,542
Costs of computer software                 5             192             127
Construction in progress                                  33              41
Leased property and equipment
  under capital lease                                     53              53
--------------------------------------------------------------------------------
                                                       6,624           6,354
Less accumulated depreciation
  and amortization                                     1,861           1,810
--------------------------------------------------------------------------------
                                                   $   4,763        $  4,544
--------------------------------------------------------------------------------

GOODWILL
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which is effective
for fiscal years beginning after December 15, 2001. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment only
approach. The company adopted this pronouncement on February 3, 2002. As a
result of this adoption, amortization of $348 of goodwill, which was to be
amortized ratably through 2037, ceased. The carrying amount of goodwill at
February 1, 2003 relates to the acquisition of Baby Super Stores, Inc. in 1997
($319), which is now part of the Babies"R"Us division, and the acquisition of
Imaginarium Toy Centers, Inc. in 1999 ($29), which is part of the Toys"R"Us -
U.S. division. Based on the estimated fair market values (calculated using
historical operating results of the reporting units to which the goodwill
relates and relative industry multiples) of these divisions compared with the
related book values, the company has determined that no impairment of this
goodwill exists. Application of the non-amortization provisions of SFAS No. 142
resulted in an increase in net earnings of $8 for 2002. Had the non-amortization
provisions of SFAS No. 142 been applied for 2001 and 2000, the company would
have reported net earnings of $75 and $412, respectively, and diluted earnings
per share of $0.36 and $1.92, respectively.

INVESTMENT IN TOYS - JAPAN
The company is accounting for its 48% ownership investment in the common stock
of Toys - Japan on the "equity method" of accounting since the initial public
offering in April 2000. Toys - Japan operates as a licensee of the company. As
part of the initial public offering, Toys - Japan issued 1.3 shares of common
stock to the public at a price of 12,000 yen or $113.95 per share. In November
2001, the common stock of Toys - Japan split 3 for 1. The company's accounting
policy for the sales of subsidiaries' stock is to recognize gains or losses for
value received in excess of or less than its basis in such subsidiary. No
similar issuances of subsidiaries' stock are contemplated at this time. The
carrying value of the investment is reflected on the consolidated balance sheets
as part of "Other Assets" and was $140 and $123 at February 1, 2003 and February
2, 2002, respectively. At February 1, 2003, the quoted market value of the
company's investment was $188, which exceeds the carrying value of the
investment. The valuation represents a mathematical calculation based on the
closing quotation published by the Tokyo over-the-counter market and is not
necessarily indicative of the amount that could be realized upon sale. The
company is a guarantor of 80% of a 10 billion yen ($84) loan from third parties
in Japan with an annual rate of 6.47%, due in 2012, for which Toys - Japan is
the borrower.

SEASONAL FINANCING AND LONG-TERM DEBT

                                                      February 1,    February 2,
                                                            2003           2002
--------------------------------------------------------------------------------
7.625% notes, due fiscal 2011                           $    554       $    505
6.875% notes, due fiscal 2006                                267            254
500 Euro bond, due February 13, 2004                         538            431
475 Swiss Franc note, due January 28, 2004(a)                348            277
Equity Security Units                                        408             --
8 3/4% debentures, due fiscal 2021, net of expenses(b)       198            198
Note at an effective cost
  of 2.32% due in semi-annual installments
  through fiscal 2008(c)                                     158            126
Industrial revenue bonds, net of expenses                     21             34
Obligation under capital leases                               18             21
Mortgage notes at annual interest rates
  from 10.16% to 11.00%                                        8              9
--------------------------------------------------------------------------------
                                                           2,518          1,855
--------------------------------------------------------------------------------
Less current portion                                         379             39
--------------------------------------------------------------------------------
                                                         $ 2,139        $ 1,816
--------------------------------------------------------------------------------

Long-term debt balances as of February 1, 2003 and February 2, 2002 have been
impacted by certain interest rate and currency swaps that have been designated
as fair value and cash flow hedges, as discussed in the note entitled,
"DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES."

(a) Supported by a 475 Swiss Franc bank letter of credit. This note has been
converted by an interest rate and currency swap to a floating rate, U.S. dollar
obligation at 3 month LIBOR.

(b) Fair value was $192 and $204 at February 1, 2003 and February 2, 2002,
respectively. The fair value was estimated using quoted market rates for
publicly traded debt and estimated interest rates for non-public debt.

(c) Amortizing note secured by the expected future yen cash flows from license
fees due from Toys - Japan.

On May 28, 2002, the company completed public offerings of Toys"R"Us common
stock and equity security units, as described in the note entitled "Issuance of
Common Stock and Equity Security units."

In February 2001, the company issued and sold 500 EURO through the public
issuance of a EURO bond bearing interest at 6.375% per annum. Through the use of
derivative instruments, this obligation was swapped into a $466 fixed rate
obligation at an effective rate of 7.43% per annum with interest payments due
annually and principal due on February 13, 2004.

In July 2001, the company issued and sold $750 of notes comprised of $500 of
notes bearing interest at 7.625% per annum, maturing in August 2011, and $250 of
notes bearing interest at 6.875% per annum, maturing in August 2006.
Simultaneously with the issuance of these notes, the company entered into
interest rate swap


                                                                              37
<PAGE>

                   notes to consolidated financial statements

agreements. As a result of the interest rate swap agreements, interest on the
$500 notes will accrue at the rate of LIBOR plus 1.5120% per annum and interest
on the $250 notes accrues at the rate of LIBOR plus 1.1515% per annum. Interest
is payable on both notes semi-annually on February 1 and August 1, commencing on
February 1, 2002. In October 2002, the company terminated a portion of the
interest rate swap agreements and received a payment of $27, which is being
amortized over the lives of the related notes. Concurrently, the company entered
into new interest rate swap agreements. Of the $500 notes, $200 accrues interest
at the rate of LIBOR plus 3.06%, and $125 of the $250 notes accrues interest at
the rate of LIBOR plus 3.54%.

As of February 1, 2003, the company had $985 in unsecured committed revolving
credit facilities from a syndicate of financial institutions. These credit
facilities consist of a $685 facility expiring September 2006 and a $300
facility expiring on August 25, 2003. The facilities are used for seasonal
borrowings and to support the company's domestic commercial paper borrowings. As
of February 1, 2003, all of the $685 facility expiring September 2006 and all of
the $300 facility expiring on August 25, 2003 were available.

The annual maturities of long-term debt at February 1, 2003 are as follows:

                                                              Annual maturities,
                                             Fair value     including fair value
                                 Annual         hedging                 hedging
                             maturities      adjustment              adjustment
--------------------------------------------------------------------------------
2003                           $    373         $     6               $     379
2004                                499              75                     574
2005                                 51              --                      51
2006                                279              17                     296
2007                               420*              19                     439
2008 and
subsequent                          724              55                     779
--------------------------------------------------------------------------------
                               $  2,346          $  172                $  2,518
--------------------------------------------------------------------------------

Long-term debt balances as of February 1, 2003 have been impacted by certain
interest rate and currency swaps that have been designated as fair value and
cash flow hedges, as discussed in the note entitled, "DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES."

*Includes $390 of equity security units, due 2007, which the company is
obligated to remarket in 2005. See the note entitled "ISSUANCE OF COMMON STOCK
AND EQUITY SECURITY UNITS."

DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES
The company is exposed to market risk from potential changes in interest rates
and foreign exchange rates. The company continues to regularly evaluate these
risks and continues to take measures to mitigate these risks, including, among
other measures, entering into derivative financial instruments to hedge a
variety of risk exposures including interest rate and currency risks. The
company enters into forward exchange contracts to minimize and manage the
currency risks related to its import merchandise purchase program. The company
enters into interest rate swaps to manage interest rate risk and strives to
achieve what it believes is an acceptable balance between fixed and variable
rate debt.

The company purchases forward exchange contracts to minimize and manage the
foreign currency risks related to its import merchandise purchase program. The
counter-parties to these contracts are highly rated financial institutions and
the company does not have significant exposure to any one counter-party. These
forward exchange contracts are designated as cash flow hedges, as defined by
SFAS No. 133, and are effective as hedges. Accordingly, changes in the effective
portion of the fair value of these forward exchange contracts are included in
other comprehensive income. Once the hedged transactions are completed, or when
merchandise is sold, the unrealized gains and losses on the forward contracts
are reclassified from accumulated other comprehensive income and recognized in
earnings. The unrealized losses related to the import merchandise purchase
program contracts, that were recorded in other comprehensive income, were not
material at February 1, 2003 or February 2, 2002.

The company is faced with interest rate risks resulting from interest rate
fluctuations. The company has a variety of fixed and variable rate debt
instruments. In an effort to manage interest rate exposures, the company strives
to achieve an acceptable balance between fixed and variable rate debt and has
entered into interest rate swaps to maintain that balance.

On May 28, 2002, the company entered into an interest rate swap agreement on its
Equity-Linked Securities. Under the agreement, the company will pay interest at
a variable rate in exchange for fixed rate payments, effectively transforming
these debentures to floating rate obligations. This swap is designated as a
highly effective fair value hedge, as defined by SFAS No. 133. Changes in the
fair value of the interest rate swap offset changes in the fair value of the
fixed rate debt due to changes in market interest rates with some
ineffectiveness present. The amount of ineffectiveness did not have a material
effect on earnings.

On March 19, 2002, the company refinanced a note payable originally due in 2005
and increased the amount outstanding to $160 from $100. This borrowing is
repayable in semi-annual installments of principal and interest, with the final
installment due on February 20, 2008. The effective cost of this borrowing is
2.23% and is secured by expected future cash flows from license fees due from
Toys - Japan. The company also entered into a contract to swap yen to U.S.
dollars, within exact terms of the loan. This cross currency swap has been
designated as a foreign currency cash flow hedge, as defined by SFAS No. 133,
and is effective as a hedge.

In July 2001, the company entered into interest rate swap agreements on its
7.625% $500 notes, due August 1, 2011, and its 6.875% $250 notes, due August 1,
2006. Under these agreements, the company will pay interest at a variable rate
in exchange for fixed rate payments, effectively transforming the debentures to
floating rate obligations. These swaps are designated as highly effective fair
value hedges, as defined by SFAS No. 133. Changes in the fair value of the
interest rate swaps perfectly offset changes in the fair value of the fixed rate
debt due to changes in market interest rates. As such, there were no ineffective
hedge portions recognized in earnings during 2001.


38

<PAGE>

                   notes to consolidated financial statements

In February 2001, the company issued and sold 500 EURO through the public
issuance of a EURO bond bearing interest at 6.375% per annum. The obligation was
swapped into a $466 fixed rate obligation with an effective rate of 7.43% per
annum with interest payments due annually and principal due February 13, 2004.
This cross currency swap is designated as a cash flow hedge, as defined by SFAS
No. 133, and is effective as a hedge. The portion of the fair value of the swap
attributable to changes in the spot rate is matched in earnings against changes
in the fair value of debt.

The company entered into a Swiss Franc floating rate loan with a financial
institution in January 1999, due January, 28 2004. The company also entered into
a contract to swap U.S. dollars to Swiss Francs, within exact terms of the loan.
This cross currency swap has been designated as a foreign currency fair value
hedge, as defined by SFAS No. 133, and is effective as a hedge.

The company increased the carrying amount of its long-term debt by $172 at
February 1, 2003, representing the fair value of debt in excess of the carrying
amount on that date. Also at February 1, 2003, the company recorded derivative
assets of $158 and derivative liabilities of $10, representing the fair value of
these derivatives at that date.

ISSUANCE OF COMMON STOCK
AND EQUITY SECURITy units
On May 28, 2002, the company completed public offerings of Toys"R"Us common
stock and equity security units. On that date, the company issued 15.0 shares of
its common stock at a price of $17.65 per share and received net proceeds of
$253. Also on that date, the company issued 8.0 equity security units with a
stated amount of $50 per unit and received net proceeds of $390. Each security
unit consists of a contract to purchase, for $50, a specified number of shares
of Toys"R"Us common stock in August 2005, and a senior note due in 2007 with a
principal amount of $50. The fair value of the contract to purchase shares of
Toys"R"Us common stock was estimated at $1.77 per equity security unit. The fair
value of the senior note was estimated at $48.23 per equity security unit.
Interest on the senior notes is payable quarterly at an initial rate of 6.25%,
which commenced in August 2002. The company is obligated to remarket the notes
in May 2005 at the then prevailing market interest rate for similar notes. If
the remarketing were not to be successful, the company would be entitled to take
possession of the senior notes, and the holder's obligation under the contracts
to purchase shares of Toys"R"Us common stock would be deemed to have been
satisfied. The proceeds allocated to the purchase contracts were recorded in
stockholders' equity on the consolidated balance sheet. The fair value of the
senior notes is reflected as long-term debt on the consolidated balance sheet.
The net proceeds from the public offerings were used to refinance short-term
borrowings and for other general corporate purposes. As a result of the interest
rate swap agreements, interest on the senior notes will accrue at the rate of
LIBOR plus 3.43% per annum. Interest is payable quarterly each year, beginning
in August 2002.

STOCKHOLDERS' EQUITY
The common shares of the company, par value $0.10 per share, were as follows:

                                                  February 1,        February 2,
                                                        2003               2002
--------------------------------------------------------------------------------
Authorized shares                                      650.0              650.0
--------------------------------------------------------------------------------
Issued shares                                          300.4              300.4
--------------------------------------------------------------------------------
Treasury shares                                         87.9              103.7
--------------------------------------------------------------------------------
Issued and outstanding shares                          212.5              196.7
--------------------------------------------------------------------------------

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

                                     2002               2001               2000
--------------------------------------------------------------------------------
Numerator:
Net earnings available to
  common stockholders               $ 229            $    67            $   404
--------------------------------------------------------------------------------
Denominator for basic earnings
  per share - weighted average
  shares                            207.6              197.6              210.9
Impact of dilutive securities         2.0                8.4                4.1
Denominator for diluted
  earnings per share -
  weighted average shares           209.6              206.0              215.0
--------------------------------------------------------------------------------
Basic earnings per share         $   1.10            $  0.34            $  1.92
--------------------------------------------------------------------------------
Diluted earnings per share       $   1.09            $  0.33            $  1.88
--------------------------------------------------------------------------------

Options to purchase approximately 32.5, 10.3 and 3.0 shares of common stock were
outstanding during 2002, 2001 and 2000, respectively, but were not included in
the computation of diluted earnings per share because the option exercise prices
were greater than the average market price of the common shares.

STOCK PURCHASE WARRANTS
The company issued 1.2 stock purchase warrants to SOFTBANK Venture Capital and
affiliates ("SOFTBANK") for $8.33 per warrant. Each warrant gives the holder
thereof the right to purchase one share of Toys"R"Us common stock at an exercise
price of $13 per share, until the expiration date of February 24, 2010. In
addition, the company granted a warrant on August 9, 2000 entitling Amazon.com
to acquire up to 5% (subject to dilution under certain circumstances) of the
capital of Toysrus.com at the then market value. As of February 1, 2003, none of
these warrants have been exercised.


                                                                              39
<PAGE>

                   notes to consolidated financial statements

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 February 1, 2003 are as follows:

                                      Gross                                Net
                                    minimum         Sublease           minimum
                                    rentals           income           rentals
--------------------------------------------------------------------------------
2003                                $   317           $   17           $   300
2004                                    314               14               300
2005                                    301               12               289
2006                                    285               11               274
2007                                    267                9               258
2008 and subsequent                   1,786               40             1,746
--------------------------------------------------------------------------------
                                    $ 3,270            $ 103           $ 3,167
--------------------------------------------------------------------------------

Total rent expense, net of sublease income, was $267, $261 and $291 in 2002,
2001 and 2000, respectively. The company remains contingently liable for lease
payments related to the sub-lease of locations to third parties. To the extent
that sub-lessees fail to perform, the company's total net rent expense would be
increased.

The company's new corporate headquarters facility, located in Wayne, New Jersey,
is financed under a lease arrangement commonly referred to as a "synthetic
lease." Under this lease, unrelated third parties, arranged by Wachovia
Development Corporation, a multi-purpose real estate investment company, will
fund up to $125 for the acquisition and construction of the facility. Upon
completion of the construction, which is expected to be in 2003, the company
will begin to pay rent on the facility until the lease expires in 2011. The rent
will be based on a mix of fixed and variable interest rates that will be applied
against the final amount funded. Upon expiration of the lease, the company would
expect to either: renew the lease arrangement; purchase the facility from the
lessor; or remarket the property on behalf of the owner. The lease agreement
provides the lessor with a residual value guarantee equal to the funding for the
acquisition and construction of the facility. Under accounting principles
generally accepted in the United States, this arrangement is required to be
treated as an operating lease for accounting purposes and as a financing for tax
purposes.

TAXES ON INCOME
The provisions for income taxes consist of the following:

                                                  2002        2001        2000
--------------------------------------------------------------------------------
Current:
  Federal                                      $     4       $  63      $  120
  Foreign                                           31          10          36
  State                                             (2)          9          10
--------------------------------------------------------------------------------
                                               $    33       $  82     $   166
--------------------------------------------------------------------------------
Deferred:
  Federal                                           62         (61)         50
  Foreign                                           23          16          13
  State                                             14         (13)          4
--------------------------------------------------------------------------------
                                                    99         (58)         67
--------------------------------------------------------------------------------
Total tax provision                             $  132       $  24      $  233
--------------------------------------------------------------------------------

At February 1, 2003 and February 2, 2002, the company had gross deferred tax
assets, before valuation allowances, of $612 and $576, respectively, and gross
deferred tax liabilities of $600 and $484, respectively. Deferred tax assets of
$32 and $45 were included in "Prepaid Expenses and Other Current Assets" at
February 1, 2003 and February 2, 2002, respectively. Deferred tax assets, net of
valuation allowances, of $285 and $245 were included in "Other Assets" at
February 1, 2003 and February 2, 2002, respectively. Deferred tax liabilities of
$55 and $36 were included in "Accrued Expenses and Other Current Liabilities" at
February 1, 2003 and February 2, 2002, respectively. The tax effects of
temporary differences and carryforwards that give rise to significant portions
of deferred tax assets and liabilities consist of the following:

                                      February 1, 2003         February 2, 2002
--------------------------------------------------------------------------------
Deferred tax assets:
Foreign loss carryforwards                      $  305                    $ 296
Restructuring                                      116                      131
Other                                              143                      115
Depreciation and amortization                       30                       22
Derivative instruments and hedging activities       11                       --
LIFO reserves                                        7                       12
Valuation allowances,
  related to foreign loss carryforwards           (295)                    (287)
--------------------------------------------------------------------------------
                                                $  317                   $  289
--------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization                   $ (404)                  $ (344)
Other                                             (169)                    (131)
LIFO reserves                                      (27)                      (9)
--------------------------------------------------------------------------------
                                                $ (600)                  $ (484)
--------------------------------------------------------------------------------
Net deferred liabilities                        $ (283)                  $ (195)
--------------------------------------------------------------------------------

On February 1, 2003, the company had foreign loss carryforwards available to
reduce future taxable income of certain foreign subsidiaries. The foreign loss
carryforwards, as well as the related tax benefits associated with the foreign
loss carryforwards, will expire as follows:

                                         Net operating
Expiration                          loss carryforwards              Tax benefit
--------------------------------------------------------------------------------
1 - 5 years                                      $ 208                    $  71
6 - 7 years                                          9                        4
Indefinitely                                       572                      230
--------------------------------------------------------------------------------
                                                 $ 789                    $ 305
--------------------------------------------------------------------------------

At February 1, 2003, the company had valuation allowances of $295 against the
tax benefit of foreign loss carryforwards of $305.

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

                                                   2002        2001        2000
--------------------------------------------------------------------------------
Statutory tax rate                                 35.0%        35.0%      35.0%
State income taxes, net of
  federal income tax benefit                        1.4         1.8         1.4
Foreign taxes, net of valuation allowance          (2.4)        (9.4)       1.1
Reversal of deferred tax asset                      --         (6.5)        --
Subpart F income                                   1.5          5.4         0.6
Amortization of goodwill                            --          3.5         0.5
Other, net                                         1.0         (2.9)       (2.1)
Effective tax rate                                36.5%        26.9%       36.5%
--------------------------------------------------------------------------------


40

<PAGE>

                   notes to consolidated financial statements

Deferred income taxes are not provided on un-remitted 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 $607 at February 1, 2003. Net income
taxes of approximately $120 would be due if these earnings were remitted.

STOCK OPTIONS
The company has stock option plans (the "Plans") that provide for the granting
of options to purchase the company's common stock. The Plans cover employees and
directors of the company and 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. The Plans provide for a variety of vesting dates with the majority of
the options vesting approximately three years from the date of grant, 50% over
the first two years and the remaining 50% over three years. Options granted to
directors are exercisable one-third on a cumulative basis commencing on the
third, fourth and fifth anniversaries from the date of the 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.
All options must be exercised within ten years from the date of grant.

At February 1, 2003, an aggregate of 47.7 shares of authorized common stock were
reserved for all of the Plans noted above, including 1.6 shares reserved for the
future issuance of restricted shares, restricted units, performance units,
unrestricted shares and 2 shares reserved for the restricted shares of units
granted but not yet vested. Of these amounts, 11.5 were available for future
grants. All outstanding options expire at dates ranging from February 17, 2003
to December 30, 2012.

Stock option transactions are summarized as follows:

                                              Exercise price  Weighted-average
                                   Shares        per share     exercise price
--------------------------------------------------------------------------------
Outstanding at January 29, 2000      39.8     $11.69 - $40.94      $24.59
--------------------------------------------------------------------------------
  Granted                             7.5      10.25 -  26.25       15.29
  Exercised                          (0.4)     14.78 -  22.06       18.96
  Canceled                          (22.2)     14.63 -  40.94       28.60
--------------------------------------------------------------------------------
Outstanding at February 3, 2001      24.7     $10.25 - $40.94      $18.36
--------------------------------------------------------------------------------
  Granted                             8.6      15.53 - 38.36        28.03
  Exercised                          (1.1)     14.63 - 25.44        16.21
  Canceled                           (1.6)     11.50 - 39.88        24.26
--------------------------------------------------------------------------------
Outstanding at February 2, 2002      30.6     $10.25 - $40.94      $20.39
--------------------------------------------------------------------------------
  Granted                             6.0       9.83 - 20.41        20.08
  Exercised                           0.0       0.00 -  0.00         0.00
  Canceled                           (4.0)     10.25 - 38.19        19.62
--------------------------------------------------------------------------------
Outstanding at February 1, 2003      32.6     $ 9.83 - $40.94      $20.43
--------------------------------------------------------------------------------


The following table summarizes information about stock options outstanding at
February 1, 2003:

                              Outstanding                   Exercisable (Vested)
                  --------------------------------------------------------------
                           Weighted average                            Weighted
     Range         Number   remaining years    Weighted      Number     average
      of             of     of contractual      average        of       exercise
exercise prices   options        life       exercise price   options     price
--------------------------------------------------------------------------------
$ 9.83 - $14.99     2.0           6             $12.83          1.9      $12.84
$15.00 - $19.99    15.2           6             $17.60         12.6      $17.81
$20.00 - $24.99     7.3           8             $21.00          3.4      $21.47
$25.00 - $29.99     7.1           7             $25.85          3.7      $26.08
$30.00 - $40.94     1.0           4             $35.57          1.0      $35.57
--------------------------------------------------------------------------------
Outstanding
at February 1,
2003               32.6           7             $20.43         22.6      $20.07
--------------------------------------------------------------------------------

Options exercisable and the weighted-average exercise prices were 11.3 and
$19.60 at February 3, 2001; 16.1 and $20.74 at February 2, 2002; and 22.6 and
$20.07 at February 1, 2003, respectively.

At February 1, 2003 and February 2, 2002, Toysrus.com, the company's internet
subsidiary, had approximately 11.3 stock options outstanding to both employees
and non-employees of the company. This represents approximately 11% of the
authorized common stock of Toysrus.com at February 1, 2003 and February 2, 2002.
These outstanding options, with exercise prices ranging between $0.30 and $2.25
per share, entitle each option holder the right to purchase one share of the
common stock of Toysrus.com.

The company utilizes a restoration feature to encourage the early exercise of
certain 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.

REPLACEMENT OF CERTAIN STOCK
OPTION GRANTS WITH RESTRICTED STOCK
In 2000, the company authorized the exchange of certain stock options having an
exercise price above $22 per share for an economically equivalent grant of
restricted stock. The exchange, which was voluntary, replaced approximately 14.4
options with approximately 1.7 restricted shares. Shares of restricted stock
resulting from the exchange vest over a period of three years. One-half of the
grant vested on April 1, 2002 and the remainder vests on April 1, 2003.
Accordingly, the company recognizes compensation expense throughout the vesting
period of the restricted stock. The company recorded $3 in compensation expense
related to this restricted stock in 2002 and $8 in both 2001 and 2000.


                                                                              41
<PAGE>

                   notes to consolidated financial statements

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

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

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

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

In February 2000, the company entered into an agreement with SOFTBANK that
included an investment of $60 by SOFTBANK in Toysrus.com. Accordingly, the
company records a 20% minority interest in the net losses of Toysrus.com in
selling, general and administrative expenses. Toysrus.com received additional
capital contributions of $37 from SOFTBANK, representing its proportionate share
of funding required for the operations of Toysrus.com.

SEGMENTS
The company's reportable segments are Toys"R"Us - U.S., which operates toy
stores in 49 states and Puerto Rico; Toys"R"Us - International, which operates,
licenses or franchises toy stores in 29 countries outside the United States;
Babies"R"Us, which operates stores in 35 states; and Toysrus.com, the company's
internet subsidiary.

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

                                           February 1,  February 2,  February 3,
                                              2003         2002         2001
--------------------------------------------------------------------------------
Net sales
  Toys"R"Us - U.S.                         $  6,743      $  6,877      $  7,073
  Toys"R"Us - International                   2,161         1,889         1,872
  Babies"R"Us                                 1,595         1,421         1,310
  Toysrus.com(1)                                340           277           180
  Other(2)                                      466           555           897
--------------------------------------------------------------------------------
Total                                      $ 11,305      $ 11,019      $ 11,332
================================================================================
Operating earnings
  Toys"R"Us - U.S.(3)                      $    280      $    308      $    431
  Toys"R"Us - International                     160           131           124
  Babies"R"Us                                   174           138           120
  Toysrus.com,
    net of minority interest(4)                 (37)          (76)         (212)
  Other(3), (5)                                (106)         (115)          (37)
Restructuring and other charges                  --          (186)           --
--------------------------------------------------------------------------------
Operating earnings                         $    471      $    200      $    426
  Interest expense, net                        (110)         (109)         (104)
  Gain from IPO of Toys - Japan                  --            --           315
--------------------------------------------------------------------------------
Earning before income taxes                $    361      $     91      $    637
================================================================================
Identifiable assets
  Toys"R"Us - U.S.                         $  5,513      $  5,412      $  5,384
  Toys"R"Us - International                   1,430         1,146         1,235
  Babies"R"Us                                   758           574           486
  Toysrus.com                                    58            84           141
  Other(6)                                    1,638           860           757
--------------------------------------------------------------------------------
Total                                      $  9,397      $  8,076      $  8,003
================================================================================
Depreciation and amortization
  Toys"R"Us - U.S.                         $    176      $    166      $    143
  Toys"R"Us - International                      49            41            42
  Babies"R"Us                                    24            29            26
  Toysrus.com                                     4             6             6
  Other(6)                                       64            66            73
--------------------------------------------------------------------------------
Total                                      $    317      $    308      $    290
================================================================================

(1) Includes the net sales of Toysrus.com - Japan.

(2) Includes the net sales of the KidsOROUs and Geoffrey divisions, and the net
sales of the Toys - Japan division prior to its initial public offering on April
24, 2000.

(3) Includes markdowns related to the store closings announced as part of the
restructuring in 2001.

(4) Includes the operations of Toysrus.com - Japan, net of minority interest.

(5) Includes corporate expenses, the operating results of the KidsOROUs and
Geoffrey divisions, and the equity in net earnings of Toys - Japan.

(6) Includes the KidsOROUs and Geoffrey divisions, as well as corporate assets
and related depreciation.

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


42
<PAGE>

                   notes to consolidated financial statements

As part of this plan, the company eliminated approximately 1,700 staff positions
in its stores and its headquarters. In addition, these plans include the cost of
consolidating five of the company's store support center facilities into its new
headquarters in Wayne, New Jersey in 2003.

The costs associated with the facilities consolidation, elimination of
positions, and other actions designed to improve efficiency in support functions
were $79, of which $15 related to severance. The costs associated with store
closings were $73 for Kids"R"Us and $85 for Toys"R"Us, of which $27 was recorded
in cost of sales. The fair value of the facilities to be consolidated and store
closings were obtained from third party appraisals. The company also reversed
$24 of previously accrued charges ($11 from the 1998 charge and $13 from the
1995 charge) that the company determined to be no longer needed. Accordingly,
based on these actions, the company recorded $213 million of pre-tax ($126
after-tax) restructuring and other charges in the fourth quarter of its fiscal
year ending February 2, 2002. Details on the components of the charges are as
follows:

<TABLE>
<CAPTION>
                                               Reserve               Adjustments       Reserve
                       Initial   Utilized   balance at   Utilized      to charge    balance at
Description             charge    in 2001      2/02/02    in 2002        in 2002       2/01/03
----------------------------------------------------------------------------------------------
<S>                       <C>      <C>          <C>          <C>         <C>             <C>
Store closing:

  Lease
  commitments             $ 52     $  --        $ 52         $(11)       $  --           $41

  Severance                  4        --           4           (4)          --            --

  Write-down of
  property and
  equipment                 75       (75)         --           --           --            --

  Markdowns                 27        --          27          (27)          --            --

Store support
center consolidation:

  Lease
  commitments               28        --          28           --           11*           39

  Write-down of
  property and
  equipment                 29       (29)         --           --           --            --

  Severance                 15        --          15           (9)          (1)            5

  Other                      7        (7)         --           --           --            --
----------------------------------------------------------------------------------------------
Total restructuring
and other charges         $237     $(111)       $126         $(51)       $  10           $85
==============================================================================================
</TABLE>

*In the fourth quarter of 2002, we determined that a reserve for lease costs for
the disposition of one of our store support center facilities was no longer
adequate and, accordingly, recorded an additional charge of $11 million.

In 2000, Toysrus.com the company's internet subsidiary, recorded $118 in
non-recurring charges as a result of the transition to its co-branded on-line
store with Amazon.com, of which, $10 were included in cost of sales and $108
were included in selling, general and administrative expenses. These costs and
charges related primarily to the closure of three distribution centers, as well
as web-site asset write-offs and other costs. The company had remaining lease
commitment reserves of $3 at February 1, 2003, that will be utilized in 2003 and
thereafter.

The company previously announced strategic initiatives to reposition its
worldwide business and recorded related restructuring and other charges of $698
in 1998 and $396 in 1995 to complete these initiatives. As of February 1, 2003,
the company had substantially completed all announced initiatives. The company
reversed unused reserves of $10 in the fourth quarter of 2002, and also reversed
unused reserves of $29 in 2001, $24 of which were reversed in the fourth quarter
of 2001 and are discussed above, and $11 in 2000, as these reserves were
concluded to be no longer necessary. The company had $42 of reserves remaining
at February 1, 2003, primarily for long-term lease commitments that will be
utilized in 2003 and thereafter. The company believes that remaining reserves at
February 1, 2003 are reasonable estimates of what is required to complete all
remaining initiatives.

GAIN FROM INITIAL PUBLIC
OFFERING OF TOYS - JAPAN
The company recorded a pre-tax non-operating gain of $315 ($200 net of taxes) in
the first quarter of fiscal 2000 resulting from the initial public offering of
shares of Toys - Japan. Of this gain, $91 resulted from an adjustment to the
basis of the company's investment in Toys - Japan and $224 was related to the
sale of a portion of the company-owned common stock of Toys - Japan, for which
the company received net cash proceeds of $267. In connection with this
transaction, the company recorded a provision for current income taxes of $82
and a provision for deferred income taxes of $33, respectively. As a result of
this transaction, the company's ownership percentage in the common stock of Toys
- Japan was reduced from 80% to 48%. Toys - Japan is a licensee of the company.

SUBSEQUENT EVENTS
On March 24, 2003, the company filed a "shelf" registration statement with the
Securities and Exchange Commission, giving the company the capability to sell up
to $800 of debt securities that would be used to repay outstanding debt and for
general corporate purposes. In April 2003, the company sold and issued $400
million in notes bearing interest at a coupon rate of 7.875%, maturing on April
15, 2013. The notes were sold at a price of 98.305%, resulting in an effective
yield of 8.125%. Simultaneously with the sale of the notes, we entered into
interest rate swap agreements. As a result of these swap agreements, interest
will accrue at the rate of LIBOR plus 3.622%. Interest is payable semi-annually
commencing on October 15, 2003. The company plans to use the proceeds from these
notes for the repayment of indebtedness maturing in the 2004 calendar year, and
pending such repayment, for working capital needs and other general corporate
purposes.

On March 5, 2003 the company announced that it would be eliminating
approximately 200 positions in its store support facilities in 2003,
representing approximately 10% of total headquarters staff.

OTHER MATTERS
In August 2000, eleven purported class action lawsuits were filed (six in the
United States District Court for the District of New Jersey, three in the United
States District Court for the Northern District of California, one in the United
States District Court for the Western District of Texas and one in the Superior
Court of the State of California, County of San Bernardino), against the company
and our affiliates Toysrus.com, Inc. and Toysrus.com, LLC. In September 2000,
three additional purported class action lawsuits were filed (two in the United


                                                                              43
<PAGE>

                   notes to consolidated financial statements

States District Court for the District of New Jersey and one in the United
States District Court for the Western District of Texas). These actions
generally purport to bring claims under federal privacy and computer fraud
statutes, as well as under state statutory and common law, on behalf of all
persons who have visited one or more of the company's web sites and either made
an online purchase or allegedly had information about them unlawfully
"intercepted," "monitored," "transmitted," or "used." All the suits (except one
filed in the United States District Court for the District of New Jersey) also
named Coremetrics, Inc. ("Coremetrics"), as a defendant. Coremetrics is an
internet marketing company with whom the company has an agreement. These suits
seek damages in unspecified amounts and other relief under state and federal
law.

With Coremetrics the company filed a joint application with the Multidistrict
litigation panel which resulted in all of the federal actions being consolidated
and transferred to the United States District Court for the Northern District of
California. Plaintiffs voluntarily dismissed the action in the Superior Court of
the State of California, County of San Bernardino without prejudice. On October
16, 2001, plaintiffs filed an amended complaint in the United States District
Court for the Northern District of California. The company believes that it has
substantial defenses to all of these claims. On November 13, 2002, the company
entered into a settlement agreement with plaintiffs in connection with all
causes of action. This settlement agreement is subject to the court's review and
approval and will not have a material impact on the company's consolidated
financial statements.

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

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which will require the consolidation of
entities that are controlled by a company through interests other than voting
interests. Under the requirements of this interpretation, an entity that
maintains a majority of the risks or rewards associated with Variable Interest
Entities ("VIEs"), commonly known as special purpose entities, is effectively in
the same position as the parent in a parent-subsidiary relationship. Disclosure
requirements of VIEs are effective in all financial statements issued after
January 31, 2003. The consolidation requirements apply to all VIEs created after
January 31, 2003. FIN 46 requires public companies to apply the consolidation
requirements to VIEs that existed prior to February 1, 2003 and remained in
existence as of the beginning of annual or interim periods beginning after June
15, 2003. The company's new corporate headquarters facility, located in Wayne,
New Jersey, is leased from unrelated third parties, arranged by a multi-purpose
real estate investment company that the company does not control. In addition
the company does not have the majority of the associated risks or rewards.
Accordingly, the company believes that FIN 46 will have no impact on the
accounting for the synthetic lease for such facility. The synthetic lease is
discussed in the note entitled "LEASES." The company believes that FIN 46 will
not have a material impact on its consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), which imposes new disclosure and
liability-recognition requirements for financial guarantees, performance
guarantees, indemnifications and indirect guarantees of the indebtedness of
others. FIN 45 requires certain guarantees to be recorded at fair value. This is
different from previous practice, where a liability would typically be recorded
only when a loss was probable and reasonably estimable. The initial recognition
and initial measurements provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. FIN 45 also requires
additional disclosures, even when the likelihood of making any payments under
the guarantee is remote. The disclosure requirements are effective for interim
and annual periods ending after December 15, 2002. The company instituted
procedures to identify guarantees contained in the various legal documents and
agreements, already executed and those to be executed in the future that fall
within the scope of FIN 45. The company expects that FIN 45 will not have a
material impact on its consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS No. 146), which addresses the recognition,
measurement, and reporting of costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" (EITF No. 94.3). The
fundamental difference between SFAS No. 146 and EITF No. 94-3 is the requirement
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date an entity
commits to an exit plan. A fundamental conclusion of SFAS No. 146 is that an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. SFAS No. 146 also establishes that the
initial measurement of a liability recognized be recorded at fair value. The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
company believes that adoption of this pronouncement will not have a significant
effect on the company's consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The company adopted SFAS No. 144 as of
February 3, 2002. The adoption did not have a significant effect on the
company's consolidated financial statements.


44
<PAGE>

                                     reports

Report of Management

Responsibility for the integrity and objectivity of the financial information
presented in this Annual Report resides 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 disclosure controls provide reasonable assurance that
appropriate information is accumulated and communicated to senior management to
allow decisions regarding accurate, complete and timely financial disclosures.

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 of 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,
the company's independent auditors, in accordance with auditing standards
generally accepted in the United States, including a review of financial
reporting matters and internal controls to the extent necessary to express an
opinion on the consolidated financial statements.

/s/ John H. Eyler, Jr.                             /s/ Louis Lipschitz
-----------------------------                      -----------------------------
John H. Eyler, Jr.                                 Louis Lipschitz
Chairman, President and                            Executive Vice President
Chief Executive Officer                            and Chief Financial Officer
March 5, 2003

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 February 1, 2003 and February 2, 2002, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended February 1, 2003. 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 auditing standards generally accepted
in the United States. 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 February 1, 2003 and February 2, 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 1, 2003, in conformity with accounting principles
generally accepted in the United States.

As discussed in the note entitled "Goodwill", the company adopted SFAS No. 142,
Goodwill and Other Intangible Assets, effective February 3, 2002.

/s/ Ernst & Young LLP
-----------------------------
Ernst & Young LLP
New York, New York
March 5, 2003


                                                                              45
<PAGE>

                               board of directors

The Board of Directors

Charles Lazarus
Chairman Emeritus and founder
Toys "R" Us, Inc.
Board member since 1969

Charles Lazarus, founder of Toys"R"Us, Inc., is a pioneer of off-price specialty
retailing. He opened his first retail establishment totally dedicated to
children's needs in 1948 in Washington D.C. Mr. Lazarus continued to lead
Toys"R"Us, Inc. as Chairman of the Board and Chief Executive Officer until 1994.
Under his leadership, the company expanded internationally and launched its
Kids"R"Us and Babies"R"Us brands. Mr. Lazarus remained Chairman of the Board
from 1994 until 1998 when he became Chairman Emeritus.

Mr. Lazarus is a Director of Loral Space Systems and has served on the boards of
Wal-Mart and Automatic Data Processing. He also served on the Advisory Board for
Trade Policy under both President George Bush and President Bill Clinton. He is
a member of the Toy Industry Hall of Fame.

John H. Eyler, Jr.(1)
Chairman, President and
Chief Executive Officer
Toys "R" Us, Inc.
Board member since 2000

John H. Eyler Jr. joined Toys"R"Us, Inc. as President and Chief Executive
Officer in January 2000. He was named Chairman of the Board in 2001. Prior to
joining the company, Mr. Eyler was Chairman and Chief Executive Officer of FAO
Schwarz in New York, where he had been employed since 1992.

Mr. Eyler's previous positions include Chief Executive Officer of Chicago's
Hartmarx retail subsidiary, and Chairman and Chief Executive Officer of
MainStreet, a division of Federated Department Stores, Inc.

He serves on the Board of Directors for the National Retail Federation and The
Andre Agassi Charitable Foundation. Mr. Eyler is also on the Board of NYC 2012,
an effort to bring the 2012 Olympic Games to New York City. He holds a degree in
Finance from the University of Washington and an M.B.A. from Harvard Business
School.

RoAnn Costin(2)
President
Reservoir Capital Management, Inc.
Board member since 1996

RoAnn Costin is the President of Reservoir Capital Management, Inc., an
investment advisory firm. She has worked in investment management since 1981,
holding the position of Senior Vice President, Investment Manager for The Putnam
Companies and Portfolio Manager for State Street Research and Management, Inc.

Ms. Costin holds an M.B.A. from the Stanford University Graduate School of
Business and a B.A. in Government from Harvard University. In addition to
Toys"R"Us, Inc., she serves on the Board of Directors for the Paul Taylor Dance
Company in New York and on the Board of Trustees for The Boston Conservatory.

Roger N. Farah (1)(4)
President and Chief Operating Officer Polo Ralph Lauren
Board member since 2001

Roger N. Farah, has been President and Chief Operating Officer of Polo Ralph
Lauren and a member of its Board of Directors since 2000.

From 1994 to 2000, Mr. Farah was Chairman of the Board and Chief Executive
Officer of Venator Group, Inc. Prior to that, he held positions as President and
Chief Operating Officer of Macy's Inc., Chairman and Chief Executive Officer of
Federated Merchandising Services, and Chairman and Chief Executive Officer of
Rich's Department Stores. From 1998 until 2000, he served on the Board of
Directors at Liz Claiborne, Inc.

Mr. Farah received his B.S. in Economics from the University of Pennsylvania,
Wharton School. He currently serves on the Wharton School's Board of Directors.

Peter A. Georgescu (2)(4)
Chairman Emeritus
Young & Rubicam, Inc.
Board member since 2001

Peter A. Georgescu is Chairman Emeritus of Young & Rubicam, Inc. where he served
as the company's Chairman and CEO from 1994 until 2000. He also served as
President of Young and Rubicam Advertising and President of the company's former
International division. Under Mr. Georgescu's tenure, Young & Rubicam
transformed from a private to a publicly-held company and built an extensive
database for global branding.

Mr. Georgescu also serves on the Board of Directors for EMI Group PLC,
International Flavors & Fragrances Inc. and Levi Strauss & Co. He is Vice
Chairman/Director of New York Presbyterian Hospital and a Director of A Better
Chance. He received his B.A. from Princeton and an M.B.A. from the Stanford
Business School. He was elected to the Advertising Hall of Fame in 2001.

Michael Goldstein(1)
Chairman, The Toys "R" Us
Children's Fund, Inc.
Board member since 1989

Michael Goldstein is Chairman of The Toys"R"Us Children's Fund, Inc. and
Toys"R"Us.com, Inc. He has spent 19 years with Toys"R"Us, Inc. serving as both
Chairman of the Board and Chief Executive Officer. Prior to 1983, Mr. Goldstein
held positions as Sr. Executive Vice President-Operations & Finance with Lerner
Stores Corporation and as a Partner with Ernst & Young.

Mr. Goldstein is a Director of Finlay Enterprises, Inc., United Retail Group, 4
Kids Entertainment, Inc. and Columbia House. He is President-elect of the 92nd
Street Y, a Director of The Special Contributions Fund of the NAACP, and serves
on the Advisory Boards of the For All Kids Foundation, USA Tennis Foundation and
the New York Restoration Project. Mr. Goldstein is President and Director of the
Northside Center for Child Development. He serves on the Board and Executive
Committee of Reading is Fundamental and on the Board and Executive Committee of
the Queens College Foundation. He is an inductee into the Toy Industry Hall of
Fame and was appointed by President George W. Bush to serve on the Advisory
Committee for Trade Policy and Negotiation. He is a graduate of Queens College
with a B.S. in Economics.

Calvin Hill(3)
Consultant
Board member since 1997

Calvin Hill is a consultant to The Dallas Cowboys Football Club, Mental Health
Management, Inc., Fleet Financial Services and Alexander & Associates, Inc. Mr.
Hill was Vice President with the Baltimore Orioles from 1987 to 1994, also
serving on its Board of Directors. From 1993 to 2000, he served on President
Bill Clinton's Council on Physical Fitness.

Mr. Hill currently serves on the Boards of the Rand Corporation Drug Policy and
Research Center, the NCAA Foundation, Duke Divinity School, and International
Special Olympics. He launched his professional athletic career with the Dallas
Cowboys in 1969 and has played professional football in both the World Football
League and the NFL. He is a graduate of Yale University.

Nancy Karch(2)(4)
Senior Partner (retired)
McKinsey & Company
Board member since 2000

Nancy Karch is a retired Director of the international consulting firm McKinsey
& Company and a member of the McKinsey Advisory Council, comprised of former
partners who provide advice to the firm. During 26 years with McKinsey, she held
several leadership positions, including Managing Partner of the Retail and
Consumer Industries Sector, and Managing Partner of McKinsey Southeast United
States.

Ms. Karch is a recognized expert in the field of general merchandise retailing
and an active speaker in the retailing and consumer goods fields. She also
serves on the Board of Directors of Liz Claiborne, Inc., Gillette, and the
Corporate Executive Board, a business research firm. Ms. Karch holds a B.A. in
mathematics from Cornell University, an M.S. in mathematics from Northeastern
University, and an M.B.A. from Harvard Business School.


46
<PAGE>

                                company officers

Norman S. Matthews(1)(3)(4)
Consultant
Board member since 1996

Norman S. Matthews has worked in consulting and venture capital since 1989.
Prior to that he held various executive positions with Federated Department
stores, including President, Vice Chairman and Executive Vice President. He was
also Chairman of Federated's Gold Circle Stores Division.

In addition to Toys"R"Us, Inc., Mr. Matthews serves on the Board of Directors
for The Progressive Corporation, Sunoco, Eye Care Centers of America, Finlay
Enterprises, Inc., Galyan's Trading Company, and Henry Schein, Inc. He holds a
B.A. degree from Princeton University and an M.B.A. from Harvard Business
School.

Arthur B. Newman(1)(2)(3)
Senior Managing Director,
The Blackstone Group, L.P.
Board member since 1997

Arthur B. Newman has been a Senior Managing Director and head of The
Restructuring Group of The Blackstone Group, L.P., a private investment bank,
since 1991. Previously, Mr. Newman was a Managing Director and head of the
Restructuring and Reorganization Group of Chemical Bank and a senior partner at
Ernst & Young. Mr. Newman has been an advisor in many of this country's largest
reorganizations, including AMF Bowling, Arch Wireless, The Charter Company,
Chiquita Banana, Dow Corning Corporation, Eastern Airlines, Exide Technologies,
Global Crossing, Iridium, LTV Corporation, Levitz Furniture, Macy's, Manville
Corporation, Mobile Media Corporation, Montgomery Ward, Texaco, Inc., White
Motor Corporation and the Wickes Corporation.

Mr. Newman is a member of the America College of Bankruptcy and was the
recipient of the 1990 award by the Bankruptcy & Reorganization Group, Lawyers
Division of UJA-Federation. Mr. Newman holds a B.S. degree in economics and an
M.B.A. from Rutgers University. He is a certified public accountant in New York.

(1) Executive Committee

(2) Audit Committee

(3) Compensation & Organizational Development Committee

(4) Corporate Governance and Nominating Committee

Corporate and Administrative Officers

John H. Eyler, Jr.
Chairman, President and
Chief Executive Officer

Francesca L. Brockett
Executive Vice President --
Strategic Planning &
Business Development

Michael D'Ambrose
Executive Vice President --
Human Resources

Karen Duvall
Executive Vice President --
Supply Chain

John Holohan
Executive Vice President --
Chief Information Officer

Christopher K. Kay
Executive Vice President --
Operations & General Counsel, Corporate Secretary

Warren F. Kornblum
Executive Vice President --
Chief Marketing Officer

Louis Lipschitz
Executive Vice President --
Chief Financial Officer

Jon W. Kimmins
Sr. Vice President -- Treasurer

Dorvin D. Lively
Sr. Vice President -
Corporate Controller

Peter W. Weiss
Sr. Vice President -- Taxes

Rebecca A. Caruso
Vice President --
Corporate Communications

Ursula H. Moran
Vice President --
Investor Relations

Divisional Officers

Richard L. Markee
Executive Vice President and
President -- Specialty Businesses
and International Operations

Raymond L. Arthur
President -- Toysrus.com

John Barbour
Executive Vice President and
President -- Toys "R" Us International

James E. Feldt
Executive Vice President and
President -- Merchandising
and Marketing, Toys "R" Us U.S.

Elliott Wahle
President -- Babies"R"Us & Kids"R"Us

Joan W. Donovan
Sr. Vice President --
General Merchandise Manager,
Toys "R" Us International

Jonathan M. Friedman
Sr. Vice President --
Chief Financial Officer,
Toys "R" Us U.S.

Andrew R. Gatto
Sr. Vice President --
Product Development,
Toys "R" Us U.S.

Steven J. Krajewski
Sr. Vice President --
Operations, Toys "R" Us U.S.

James G. Parros
Sr. Vice President --
Stores & Distributions Center Operations, KidsOROUs

David Schoenbeck
Sr. Vice President --
Operations, Babies"R"Us

Pamela B. Wallack
Sr. Vice President --
General Merchandise Manager,
Babies"R"Us & Kids"R"Us

International Country Presidents and Managing Directors

David Rurka
Managing Director --
Toys "R" Us U.K.

Jacques LeFoll
President -- Toys "R" Us France

Monika Merz
President -- Toys "R" Us Canada

John Schryver
Managing Director --
Toys "R" Us Australia

Michael C. Taylor
Managing Director --
Toys "R" Us Central Europe

Antonio Urcelay
Managing Director --
Toys "R" Us Iberia

--------------------------------------------------------------------------------
A Heartfelt Tribute

After decades of much appreciated leadership and service, Charles Lazarus and
Michael Goldstein will be leaving the Board at the end of this year's
(2002-2003) term. Charles and Mike have both served many years as Chief
Executive Officer and as Chairman of the Board of Directors of Toys"R"Us, Inc.,
where they both played significant roles in the growth of the company.
Thereafter, they served the company with distinction as members of the Board of
Directors. We are extremely grateful for their leadership, their inspiration,
their compassion and their commitment to the Toys"R"Us family of stockholders,
colleagues and guests.
--------------------------------------------------------------------------------


                                                                              47
<PAGE>

                                 financial data

Quarterly Financial Data and Market Information
Toys"R"Us, Inc. and Subsidiaries

Quarterly Financial Data
(In millions except per share data)

The following table sets forth certain unaudited quarterly financial
information:

                              First        Second          Third         Fourth
                            Quarter       Quarter        Quarter        Quarter
--------------------------------------------------------------------------------
Year Ended February 1, 2003
--------------------------------------------------------------------------------
Net Sales                    $2,095         $2,070         $2,271        $4,869
Gross Margin                    682            670            722         1,432
Net (Loss)/Earnings              (4)           (17)           (28)          278
Basic (Loss)/
   Earnings per Share        $(0.02)        $(0.08)        $(0.13)       $ 1.31
Diluted (Loss)/
   Earnings per Share        $(0.02)        $(0.08)        $(0.13)       $ 1.30


                              First        Second          Third          Fourth
                            Quarter       Quarter        Quarter      Quarter(a)
--------------------------------------------------------------------------------
Year Ended February 2, 2002
--------------------------------------------------------------------------------
Net Sales                    $2,061        $2,021          $2,178        $4,759
Gross Margin                    665           661             710         1,379
Net (Loss)/Earnings             (18)          (29)            (44)          158
Basic (Loss)/
   Earnings per Share        $(0.09)       $(0.15)         $(0.22)       $ 0.80
Diluted (Loss)/
   Earnings per Share        $(0.09)       $(0.15)         $(0.22)       $ 0.78

(a)   Includes restructuring and other charges of $213 ($126 net of tax, or
      $0.61 per share).

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
hundredth) based on New York Stock Exchange trading since February 3, 2001.

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

The company had approximately 30,736 Stockholders of Record on March 12, 2003.

                                               High                     Low
--------------------------------------------------------------------------------
2001   1st  Quarter                           $26.52                   $23.00
       2nd  Quarter                            31.00                    22.30
       3rd  Quarter                            25.10                    16.81
       4th  Quarter                            24.00                    18.25
--------------------------------------------------------------------------------
2002   1st  Quarter                           $20.31                   $16.18
       2nd  Quarter                            18.28                    12.58
       3rd  Quarter                            14.09                     8.70
       4th  Quarter                            13.81                     9.04
--------------------------------------------------------------------------------


48
<PAGE>

                                 corporate data

Store Locations

Stores Across the U.S. at Feb. 1, 2003

                            Toys       Babies       Kids   Imaginarium  Geoffrey
--------------------------------------------------------------------------------
Alabama                       8           3           1         --         --
Alaska                        3          --          --         --         --
Arizona                      12           3          --          1         --
Arkansas                      2          --          --         --         --
California                   81          19          14         12         --
Colorado                      8           4          --         --         --
Connecticut                  10           3           5          3         --
Delaware                      2           1           1         --         --
Florida                      46          13           8         --         --
Georgia                      19           8           3         --         --
Hawaii                        1          --          --         --         --
Idaho                         2          --          --         --         --
Illinois                     33          10          13          2         --
Indiana                      13           4           4         --         --
Iowa                          8          --          --         --         --
Kansas                        5           1           1         --         --
Kentucky                      8           2          --         --         --
Louisiana                    10           1          --         --         --
Maine                         2          --           1         --         --
Maryland                     19           4           6          3         --
Massachusetts                19           5           5          1         --
Michigan                     25           8           9         --         --
Minnesota                    10           2          --         --         --
Mississippi                   5          --          --         --          1
Missouri                     13           5          --         --         --
Montana                       1          --          --         --         --
Nebraska                      3          --          --         --         --
Nevada                        4           3          --         --         --
New Hampshire                 5           1           2         --         --
New Jersey                   26           8          18          5         --
New Mexico                    4           1          --         --         --
New York                     45          12          17          6         --
North Carolina               14           7           1         --          1
North Dakota                  1          --          --         --         --
Ohio                         32          10          12          1         --
Oklahoma                      5           2          --         --         --
Oregon                        8           2          --         --         --
Pennsylvania                 34           8          14         --         --
Rhode Island                  1           1           1         --         --
South Carolina                9           3          --         --         --
South Dakota                  2          --          --         --         --
Tennessee                    14           4           1         --         --
Texas                        48          15           1         --          1
Utah                          6           1           3         --         --
Vermont                       1          --          --         --         --
Virginia                     22           7           5          3         --
Washington                   15           2          --         --         --
West Virginia                 4          --          --         --         --
Wisconsin                     9          --          --         --          1
Puerto Rico                   4          --          --         --         --
--------------------------------------------------------------------------------
                            681         183         146         37          4
--------------------------------------------------------------------------------

Toys "R" Us International - 544

Australia                                       29
Austria                                          9
Bahrain                                          1*
Canada                                          63
Denmark                                         10*
Egypt                                            1*
France                                          32
Germany                                         49
Hong Kong                                        6*
Indonesia                                        3*
Israel                                          19*
Japan                                          134**
Kuwait                                           1*
Malaysia                                         5*
Mauritius                                        1*
Netherlands                                     13*
Norway                                           4*
Portugal                                         8
Qatar                                            1*
Saudi Arabia                                     5*
Singapore                                        4*
South Africa                                    10*
Spain                                           31
Sweden                                          11*
Switzerland                                      4
Taiwan                                           6*
Turkey                                          17*
United Arab
Emirates                                         3*
United Kingdom                                  64

 * Franchise or licensee.
** 48% owned.

                            Stockholder Information

Company Offices
461 From Road
Paramus, New Jersey 07652
201-262-7800

225 Summit Avenue
Montvale, New Jersey 07645
201-802-5000

Annual Meeting
The Annual Meeting of Toys"R"Us, Inc. stockholders will be held at 9:00 a.m. on
June 4, 2003 at The 200 Fifth Club, 200 Fifth Avenue, New York, NY. A formal
notice of the meeting was mailed to stockholders with this report.

Common Stock Listed
New York Stock Exchange, Symbol: TOY

General Counsel
Christopher K. Kay
Executive Vice President of the company
461 From Road, Paramus, New Jersey 07652

Registrar and Transfer Agent
American Stock Transfer and Trust Company
59 Maiden Lane New York, NY 10038
877-777-0800

Independent Auditors
Ernst & Young LLP
5 Times Square, New York, NY 10036

Stockholder Information
The company will supply to any owner of its common stock, without charge, a copy
of the annual report on Form 10-K, for the year ended February 1, 2003, which
has been filed with the Securities and Exchange Commission. Requests must be
made in writing to: Investor Relations, Toys"R"Us Inc., 225 Summit Avenue,
Montvale, NJ 07645.

Stockholder information, including quarterly earnings and other corporate news
releases, can be obtained on the internet at www.toysrusinc.com or by calling
800-TOYS R US. A version of the Toys"R"Us, Inc. 2002 Annual Report will be
available at www.toysrusinc.com by May 2003.

Significant news releases are anticipated
to be available as follows:
Call on or after...     For the following...

May 19, 2003            1st Quarter Results
Aug. 18, 2003           2nd Quarter Results
Nov. 17, 2003           3rd Quarter Results
Jan. 8, 2004            Holiday Sales Results
Mar. 3, 2004            2003 Results


                                                                              49
<PAGE>

                               [GRAPHIC OMITTED]

Company Profile

We are one of the world's leading retailers of toys, children's apparel and baby
products based on our consolidated net sales in 2002. As of February 1, 2003, we
operated  1,595 "R"Us retail  stores  worldwide.  These  consist of 1,051 United
States  locations  comprised of 681 toy stores under the name  "Toys"R"Us",  183
infant-toddler  stores under the name  "Babies"R"Us",  146  children's  clothing
stores under the name  "Kids"R"Us",  37 educational  specialty  stores under the
name "Imaginarium" and 4 "Geoffrey" stores that include products from Toys"R"Us,
Kids"R"Us and Babies"R"Us as well as many interactive  events.  Internationally,
as of  February  1,  2003,  we  operated  544  stores,  including  licensed  and
franchised  stores,  under the "R"Us  name.  We also  sell  merchandise  through
Internet sites at www.toysrus.com,  www.babiesrus.com,  www.imaginarium.com  and
www.giftsrus.com. Toys"R"Us, Inc. is incorporated in the state of Delaware.

Our History

Toys"R"Us  got its  start in 1948 when  founder  Charles  Lazarus  opened a baby
furniture  store,  Children's  Bargain Town, in Washington D.C.  Lazarus quickly
realized the potential of fulfilling  customer's requests for baby toys and toys
for older children.

In 1957,  Lazarus  introduced a "supermarket  environment."  That same year, the
Toys"R"Us name made its debut,  complete with a backwards "R". By 1966,  Lazarus
had four stores with  approximately  $12  million in annual  sales.  Around this
time,  Lazarus  sold his stores to retail  conglomerate  Interstate  Stores.  He
maintained  responsibility  for  running  Toys"R"Us,  which  continued  to  grow
profitably.  Interstate,  however,  faced major  difficulties  and was forced to
declare  bankruptcy.  During this critical period,  Lazarus led and restructured
the company.  In 1978,  when  Interstate  emerged from bankruptcy it was renamed
Toys"R"Us, Inc.

The 1980s  were a time of major  expansion  for  Toys"R"Us,  Inc.  In 1983,  the
company had 169 toy stores in 26 states and had added four stores  under its new
Kids"R"Us brand. The company opened its first international  stores in Singapore
and Canada in 1984. Just 10 years later,  the company  completed its 1993 fiscal
year  with  581  U.S.  toy  stores,  217  Kids"R"Us  stores  and 234  stores  in
international  locations.  In 2001, Toys"R"Us opened its flagship store in Times
Square.

In 1996, the company opened its first Babies"R"Us store. The acquisition of Baby
Superstore  in 1997  added  76  locations  and  helped  Babies"R"Us  become  the
undisputed  leader in the juvenile  market.  Imaginarium was acquired in 1998 to
bring the learning and  educational toy categories to the "R"Us family of retail
stores.  Between  2000 and 2002,  Imaginarium  boutiques  were added to U.S. toy
stores as part of the  division's  Mission  Possible  renovation.  In  addition,
Imaginarium also operates 37 freestanding locations.

Geoffrey the Giraffe was first  introduced in 1960.  However,  he didn't receive
his name until 1970 when a contest  was held among  company  associates  to name
him. In 2000, Geoffrey was reintroduced, in his current animatronic form, as the
company's  lovable  wisecracking  "spokesanimal."  Today he's one of the world's
most recognized icons by kids and grown-ups alike, representative of a worldwide
chain of stores that has forever changed the way the world shops for toys.


<PAGE>

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