Exhibit 13

                               TOYS "R" US [Logo]

                               [PHOTO OMITTED]

                               Annual Report 2001

Company Profile

Toys"R"Us,  Inc. -- The world's leading  resource for kids,  families and fun --
currently operates 1,599 stores; 701 TOYS"R"US stores in the United

States  and 507  international  toy  stores,  including  franchise  stores;  184
Kids"R"Us  stores,  165  Babies"R"Us  stores and 42  Imaginarium  stores.  Visit
www.toysrus.com, www.babiesrus.com and www.imaginarium.com.

                                    Toys"R"Us

                                    Toys"R"Us

                                  International

                                    Kids"R"Us

                                   Babies"R"Us

                                   Imaginarium

                                   Toysrus.com


<PAGE>

                             |financial highlights|

financial highlights
Toys"R"Us, Inc. and Subsidiaries

<TABLE>
<CAPTION>
(Dollars in millions, except per share data)                                                                    Fiscal Year Ended
------------------------------------------------------------------------------------------------------------------------------------
                               Feb. 2,   Feb. 3,   Jan. 29,  Jan. 30,    Jan. 31,   Feb. 1,   Feb. 3,  Jan. 28,  Jan. 29,  Jan. 30,
                                 2002      2001       2000      1999        1998      1997      1996      1995      1994      1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>        <C>         <C>       <C>        <C>       <C>       <C>       <C>
Operations
Total Enterprise Sales*       $12,630   $12,774   $12,118    $11,459     $11,315   $10,113    $9,498    $8,819    $8,018    $7,232
Net Sales                      11,019    11,332    11,862     11,170      11,038     9,932     9,427     8,746     7,946     7,169
Net Earnings/(Loss)                67       404       279       (132)        490       427       148       532       483       438
Basic Earnings/(Loss)
  Per Share                      0.34      1.92      1.14      (0.50)       1.72      1.56      0.54      1.88      1.66      1.51
Diluted Earnings/(Loss)
  Per Share                      0.33      1.88      1.14      (0.50)       1.70      1.54      0.53      1.85      1.63      1.47
Financial Position at
  Year End
Working Capital                $  631   $   556   $    35    $   106     $   579   $   619    $  326    $  484    $  633    $  797
Real Estate-Net                 2,313     2,348     2,342      2,354       2,435     2,411     2,336     2,271     2,036     1,877
Total Assets                    8,076     8,003     8,353      7,899       7,963     8,023     6,738     6,571     6,150     5,323
Long-Term Debt                  1,816     1,567     1,230      1,222         851       909       827       785       724       671
Stockholders' Equity            3,414     3,418     3,680      3,624       4,428     4,191     3,432     3,429     3,148     2,889
Common Shares Outstanding       196.7     197.5     239.3       250.6      282.4     287.8     273.1     279.8     289.5     293.1
Number of Stores at
  Year End
Toys"R"Us - U.S.                  701       710       710        704         700       682       653       618       581       540
Toys"R"Us - International         507       491       462        452         441       396       337       293       234       167
Kids"R"Us - U.S.                  184       198       205        212         215       212       213       204       217       211
Babies"R"Us - U.S.                165       145       131        113          98        82        --        --        --        --
Imaginarium - U.S.                 42        37        40         --          --        --        --        --        --        --
Total Stores                    1,599     1,581     1,548      1,481       1,454     1,372     1,203     1,115     1,032       918
</TABLE>

*     Total  enterprise  sales include sales by all stores,  whether operated by
      the company, by licensees, franchisees or under joint-venture agreements.

[PHOTO OMITTED]

contents

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

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

Divisional Highlights ..............................................  page 9

Management's Discussion and Analysis
of Results of Operations and Financial Condition ...................  page 23

Financial Statements ...............................................  page 30

Report of Management and
Report of Independent Auditors .....................................  page 42

Directors and Officers .............................................  page 43

Quarterly Financial Data and Market Information ....................  page 44

Store Locations, Corporate Data and
Corporate Citizenship ..............................................  page 45
<PAGE>

                               [PHOTO OMITTED]


<PAGE>

                             / shareholder letter /

on the move

Message to our shareholders

This  past  year was a  tumultuous  one for our  company,  along  with  many top
retailers.   Challenging  economic  conditions,  coupled  with  the  tragic  and
unprecedented  events of September 11, had a significant  negative impact on our
fiscal 2001 results.

We were not pleased with our sales performance nor with our earnings performance
in 2001.  While we can't change it, I want to assure you that we're committed to
delivering a solid 2002. We believe that's an achievable goal.

It's important to note that despite the difficult retail climate post-9/11,  the
successful  execution  of our  strategies  resulted  in a solid  fourth  quarter
performance.  We were able to increase net  earnings  before  restructuring  and
other  charges in that quarter by 13 percent to $284 million or $1.39 per share,
compared to $251 million or $1.23 per share in last year's  fourth  quarter.  In
addition,  our inventory  discipline was  excellent,  and we ended the year with
comparable  store  inventories  down in every  division.  In our U.S.  toy store
division,  comparable store inventories were down  approximately $200 million, a
13  percent  decrease.  Total  company  inventory  was down $266  million  or 12
percent.

While we saw a number of positive  developments in the fourth quarter,  we could
not overcome the weakness  exhibited during the prior three quarters.  Thus, for
the full year,  our total sales of $11 billion  were  essentially  flat with the
prior year excluding the sales of Toys"R"Us-Japan,  and our net earnings, before
the impact of the  restructuring  and other charges,  were $193 million or $0.94
per share,  compared to net earnings of $264 million or $1.23 per share in 2000,
excluding the gain from the IPO of Toys"R"Us-Japan  and the Amazon.com  alliance
non-recurring charges.

Nonetheless,  fueled by the momentum of our  customer-focused  strategic  growth
plan,  Toys"R"Us  reached several  milestones for building brand equity,  unique
content and guest satisfaction.  From the opening of our international  flagship
store in Times  Square to our new  marketing  campaign  featuring  Geoffrey  the
Giraffe, to improving vendor relationships,  to our solid holiday performance in
a very tenuous climate, all indications are that we are still very much on track
for  fulfilling the strategic  repositioning  we set out to accomplish two years
ago.

Responding from the heart

We were hard at work executing our strategies last year, and then came September
11. The most difficult times reveal the true nature of a company and its people.
Throughout  the days and weeks after  September  11, the "R"Us family  responded
with  extraordinary  kindness and generosity.  We took care of each other and we
helped many in our communities.

[PHOTO OMITTED]

John Eyler, Chairman and
Chief Executive Officer,
Toys"R"Us, Inc.


                                                                              3/
<PAGE>

                             / shareholder letter /

[PHOTO OMITTED]

Geoffrey has come
to life as our lovable,
wise-cracking
spokes-animal.

We mobilized to create various  fundraising  efforts including in-store point of
purchase programs, a create a flag program, and other initiatives,  all of which
benefited  organizations in support of the children and families affected by the
tragic  events on September  11. The  Toys"R"Us  Children's  Fund,  Inc.'s "9/11
Emergency Relief Fund" has to-date donated approximately $2 million to local and
national  organizations  supporting  groups  that  were  affected  by  9/11.  In
addition,  we made  available  a  workbook  titled,  "First  Aid for  Feelings,"
authored by childhood  grief  expert,  Denise  Daniels,  to guests in all of our
Toys"R"Us and Kids"R"Us stores nationwide, free of charge. I was extremely proud
of the way our company responded  throughout an unimaginable time, and I believe
our shareholders should be proud, too.

Moving forward, reenergizing stores

Despite  the turmoil  and stress of the past year,  we  remained  focused on our
business.  By the end of 2001,  433 of our U.S. toy stores had been converted to
the new Mission Possible format  highlighting  unique content, a fun and easy to
shop  environment  and  improved  service  for our  guests.  We  believe  in the
long-term  value of meeting  the needs of our  guests  through  unique  shopping
destinations that sell concepts,  ideas and exciting products with services that
help each guest  select the  perfect  gift -- and the  Mission  Possible  stores
achieve that goal.

Validating  the  underlying  vitality  of this  strategy  was a  store-for-store
increase  of more than 8 percent  for the last  five-week  period of the holiday
selling season among the entire portfolio of newly renovated stores completed in
2001 -- the best Toys"R"Us  U.S.  December  results in nearly a decade.  We will
complete  the  conversion  of the  balance  of our  stores to our new  format by
holiday 2002.

Celebrating the brand

Our award  winning  flagship  store in Times Square  opened in November to great
fanfare,  terrific  public  response,  tremendous  media coverage and sales that
exceeded our plans. Called a "unique entertainment  experience for the young and
young-at-heart,"  our flagship store  continues to be an ongoing  celebration of
the "R"Us brand as well as a landmark  destination that sets us apart from other
toy retailers.

This store also exemplifies our strong relationship with our key resources,  and
is an  excellent  example  of  partnership  at work.  The  flagship  serves as a
platform to support product introductions and exclusive licensing programs,  and
enhances our brand as well as the brands of our most valuable resources.

Also in 2001, our marketing  campaign  featuring  Geoffrey the Giraffe  garnered
rave reviews from  customers and was  recognized by USA Today as one of the most
effective  advertising  campaigns  in 2001 in  reaching  its  target  audiences,
according to their proprietary research.  In addition,  our independent consumer
research  showed  that in the top 21  markets  we had  the  highest  advertising
awareness of any of our largest  competitors at the holiday  season,  confirming
that our campaign truly resonates with customers.

Our strategic  partnerships,  licenses and alliances with exceptional brands and
companies infused exciting products and events into our stores.  Our own private
brand  business,  which provides higher margins to fuel the  revitalization  and
rebuilding of the "R"Us family of brands, reached an unprecedented $1 billion in
sales in the U.S., a fourfold increase in just a few short years.


/4
<PAGE>

                             / shareholder letter /

While  we  continue  to  focus  on  taking  aggressive  steps  to  separate  and
distinguish  our stores and  shopping  experience  from the  competition,  it is
important  that we listen to the  consumer.  And,  we are pleased by what we are
seeing...and  hearing. We have conducted  independent research for many years to
track how our guests feel about  Toys"R"Us.  We are encouraged that our research
shows that the population at large  understands  what we're trying to accomplish
through our  strategies.  Consumer  ratings show  improvement in how guests feel
about the content in our stores,  our better in stock  position,  overall  store
experience,  and  particularly  the  enhancement of guest  service.  This became
increasingly  evident during the highly competitive holiday selling season where
our  traffic  volume and  purchasing  records  showed  that we made  significant
inroads and gained market share in key strategic markets.

Growing the "R"Us family

Babies"R"Us,  often our  first  relationship  experience  with  young  families,
continues to be a high  performer,  opening 20 new stores as planned in 2001 and
posting a 15 percent  increase in operating  earnings for the full year. We will
continue to invest in  Babies"R"Us  by building 20 more new stores in 2002.  The
combination of authoritative  merchandise  assortments,  easy-to-shop  appealing
stores and  excellent  guest  service  define  the  Babies"R"Us  experience  and
represent the same strategic principals being implemented in all divisions.

We began the  repositioning of Kids"R"Us this past year.  Despite the effects of
September 11,  combined with an  unseasonably  mild winter,  the results of that
repositioning  were  reflected  in  improvement  of our sales  trend in the fall
season.  A major  highlight  was the  performance  by 11  prototype  stores that
generated solid double-digit increases. We plan to convert 30 more stores to the
new prototype this year, continuing to position Kids"R"Us as the best source for
"fashions that are trend-right at prices families can afford."

In the  International  division,  operating  earnings,  excluding  earnings from
Toys"R"Us-Japan for all periods,  reached an all-time high with an increase of 6
percent for the year. Our  International  business is working to reduce expenses
and  increase  efficiencies  throughout  its  global  operations.  International
continues  to  execute  many  of the  same  strategies  as the  U.S.  divisions,
including  the  addition  of  Universe  of  Imagination  -- known in the U.S. as
Imaginarium -- and Animal Alley departments in all Toys"R"Us stores worldwide.

The Toysrus.com  subsidiary emerged as the strongest player in its category, the
#1 most visited site for toys, video games and baby products. Sales increased by
54 percent  for the year  versus the 2000 fiscal  year.  Fiscal  2001  operating
losses at  Toysrus.com  were reduced by $42 million for the fiscal year,  versus
the same period in 2000,  after excluding  non-recurring  charges related to the
alliance  with  Amazon.com,  which were  recorded in the third  quarter of 2000.
Toysrus.com  launched   Babiesrus.com  and  Imaginarium.com  web  sites  on  the
Amazon.com  platform this year and had a very  successful  holiday season with a
high level of guest delight.

[PHOTO OMITTED]

An effective combination
of thoughtful strategy
and innovative vision
is inherent throughout
all divisions.


                                                                              5/
<PAGE>

                             / shareholder letter /

[PHOTO OMITTED]

Improved service for
our guests isn't just
about Mom & Dad...
it's about making our
store kid-friendly, too.

Through  unique,   high  quality  products  and  excellent   customer   service,
Imaginarium  continues  to  secure a  leading  position  for  Toys"R"Us  and its
divisions in the profitable specialty educational toy market, all from a winning
combination  of learning and play.  By October of 2002,  virtually all Toys"R"Us
stores in the United  States will have an  Imaginarium  presentation  within the
larger store.

Transforming our business and strengthening our financial position

Over the last two years, we have  thoroughly  assessed our business to determine
how best to reposition Toys"R"Us and its divisions for growth and profitability.
We have made solid progress,  and in January we announced a restructuring  which
will enable us to  concentrate  our  financial  resources  on those  formats and
stores that are most  productive.  The  announcement  detailed the closing of 64
stores and the related elimination of approximately 1,900 staff positions in our
stores and headquarters.

We are closing 27 Toys"R"Us stores that, while cash-flow  positive,  do not meet
our return-on-investment objectives. In addition, we announced the closing of 37
Kids"R"Us stores. In almost all of these locations,  the nearest Toys"R"Us store
will be  converted to a combo store,  a Toys"R"Us  store with a Kids"R"Us  store
inside.  Toys"R"Us currently operates 273 combo stores which are performing very
well, and by the end of 2002 we expect to have approximately 375 combo stores in
our portfolio.

The  restructuring  also includes  consolidating our five separate store support
facilities throughout New Jersey into one central location in Wayne, New Jersey.
By moving to a shared  services  model  across a variety  of  corporate  support
functions such as finance and human resources,  we believe we will significantly
improve  the  effectiveness  and  efficiency  of our  company  while  materially
lowering SG&A expenses.

In this period of economic uncertainty, we believe it is important to strengthen
our balance sheet and enhance our  liquidity.  Therefore,  in 2001, we sold $466
million of 3-year Eurobonds,  $250 million of 5-year U.S. bonds and $500 million
of 10-year  U.S.  bonds.  We have also filed  registration  statements  with the
Securities  and Exchange  Commission  to issue $550 million of equity and equity
linked  securities in the form of $350 million of equity security units and $200
million of Toys"R"Us common stock.

Looking forward with excitement and energy

We are  optimistic  about 2002,  not only because we believe that our strategies
will be successful,  but also because our industry is becoming vibrant again. We
are more enthusiastic than ever about the exciting product lines our stores will
be offering,  and we will continue to execute our strategies with all the energy
and discipline at our command.

To that end, after a thorough  review of our 2001  performance,  we've concluded
that the "R"Us  organization  must focus all its  resources  and efforts on four
priorities that will provide our  shareholders the greatest return on investment
and position us solidly for success in 2002.


/6
<PAGE>

                             / shareholder letter /

First and foremost,  we must complete the  repositioning  of Toys"R"Us  U.S. and
deliver  significant  earnings  improvement.  We are  committed to driving sales
growth in the core toy business,  with disciplined expense and inventory control
essential  to  achieving  meaningful  earnings  improvement.  Nothing we do will
impact our company more  positively  than  showing  substantial  improvement  in
Toys"R"Us U.S., and therefore this is our most important priority.

Second,  we will focus on sales and earnings growth in all other  divisions.  We
have solid plans in place to grow sales and earnings  across all divisions,  and
we must  aggressively  execute  those  plans.  It's our job to make sure that we
increase sales and earnings every quarter of the fiscal year.

We must continue to find ways to drive costs out of our business when they don't
increase  sales or  earnings.  For that reason,  expense  reduction is our third
priority. We've already taken a significant step in that effort by consolidating
all  non-merchandise  purchasing  so that it can be  managed  effectively  while
leveraging our purchasing  power and creating  efficiencies.  This builds on the
solid expense  management we achieved in 2001 as well as the  reductions in SG&A
inherent in our recently announced restructuring.

And  finally,  our  fourth  priority  is to  continue  to  build  a  world-class
organization by developing our existing staff and by adding talented individuals
to  strengthen  our  capability.  We will  pursue our  efforts to build upon our
shared services model. We are also committed to developing  training programs in
support of building  skills at all  levels,  and we will  continue to  implement
programs that will recognize and reward superior results.

We are encouraged by the results of our strategic initiatives,  and we sincerely
appreciate  the patience of our  shareholders  as we continue to move forward in
unlocking the  potential in the "R"Us  business.  While our overall  performance
improvement  has  been  slower  than we had  hoped,  caused,  in some  part,  by
circumstances  that were unforeseen,  we are clearly on the right track. We have
developed  our plans and our expense  structures  conservatively,  and we expect
that in 2002 we will generate  meaningful  earnings  improvement and demonstrate
that  we are  moving  solidly  ahead  to a  stronger,  brighter  future  for our
shareholders.

[PHOTO OMITTED]

Exceptional guest service
is a top priority in
all of our divisions.


/s/ John H. Eyler, Jr.
------------------------------------
John H. Eyler, Jr.
Chairman and Chief Executive Officer
March  26,  2002


                                                                              7/
<PAGE>

                               [PHOTO OMITTED]


/8
<PAGE>

                                  / Toys"R"Us /

moving forward

Our U.S.  toy stores  exemplified  our  company's  progress and purpose in 2001.
While sales and earnings for the year were disappointing,  the sales performance
of the  strategically  repositioned  Mission  Possible  stores was  encouraging,
clearly validating our long-range strategic plan.

Offering exclusive merchandise

At Toys"R"Us, we know that successful merchandising is more than simply moving a
box from a shelf to the cash register.  As the headquarters for national brands,
and by increasing  the impact of our own exclusive  brands,  Toys"R"Us is at the
forefront of offering  what  families and kids want:  the best  selection of the
highest quality products at great value. Our position as a leader in toys, video
games,  educational and juvenile  products,  gives us the opportunity to benefit
from growth in these businesses.

Last year, we improved  merchandise  flow, worked more closely with suppliers to
deliver more of the  best-selling  products and refined  assortment and planning
strategies,  all to make sure we were in stock on the items kids want most. With
milestones like Bill Gates selling  Microsoft's  very first Xbox at the flagship
store in Times Square, or development of exclusive  merchandise  celebrating the
20th anniversary of E.T., the Extra-Terrestrial, Toys"R"Us leads the way.

Continually improving guest service

We  understand  how  critical  delighting  guests is to long-term  success.  Our
research  shows that 70 percent of our  customers are Moms. At our 2001 national
meeting,  more than 1,000 management  associates  listened to a panel of Moms to
better understand mothers' expectations and needs. Recent research revealed that
our investment is paying off in key aspects of guest satisfaction,  and further,
that satisfied guests were spending more,  staying longer and coming back to our
stores more often. In addition,  Toys"R"Us had high top-of-mind  awareness among
consumers going into the 2001 holiday season.

Building memorable stores

In  2001,  we  continued  to  transform  the  Toys"R"Us   store   experience  by
refurbishing our stores to our Mission  Possible format,  ending the year with a
total of 433  converted  stores  and  completing  21 major  markets.  The entire
portfolio of converted  stores posted an average increase of 8 percent per store
for the five weeks of  December,  validating  this  strategy in the  toughest of
times.  We continued to create stores,  called "combo  stores",  containing both
Toys"R"Us and a select assortment of Kids"R"Us merchandise.  By the end of 2002,
more than half of our stores will be converted to this  successful  format,  and
the majority of our stores will contain Imaginarium worlds. All of these changes
create more destination appeal and offer more shopping solutions for parents and
children.

[PHOTO OMITTED]

We continue to roll
out our easier to shop
Mission Possible
store formats.


                                                                              9/
<PAGE>

                               [PHOTO OMITTED]


/10
<PAGE>

                                  / Toys"R"Us /

Revitalizing the "R"Us brand

In 2001,  Toys"R"Us  reached new heights in reenergizing its brand. From opening
our  flagship  store  to  launching  a new  advertising  campaign  featuring  an
animatronic   Geoffrey  the  Giraffe,   to   establishing   key   alliances  and
partnerships, this year was a pivotal year for the "R"Us brand.

The Toys"R"Us  international  flagship  store in the heart of Times Square,  New
York, became the center of the toy universe the moment it opened on November 17,
2001. Combining an incredible assortment of toys and entertainment  attractions,
it is both a showplace and the ultimate shopping destination. It has been called
everything from "larger than life," a "combination of old-fashioned  thrills and
technical  innovations" to a "unique entertainment  experience for the young and
young-at-heart."

From  a  thrilling  ride  in our  60-foot  high  Ferris  Wheel  to  the  awesome
animatronic T-Rex, our five-ton, roaring dinosaur, guests encounter one exciting
attraction  after  another.  The flagship store will draw guests from around the
world to a vital  destination  in vibrant Times Square,  which already  attracts
more than 30 million visitors a year.

The opening of Toys"R"Us  Times Square is the  manifestation  of the excitement,
determination  and  vitality  of our  company  and the toy  industry.  The store
symbolizes  the changes that have occurred in Toys"R"Us over the past few years.
In addition to surpassing our sales plans, the responses from guests,  the media
and our  industry  have  also  exceeded  expectations.  The  flagship  store has
generated  extensive,  worldwide media  coverage,  including being named "Retail
Store of the Year" by Chain Store Age.  It's quickly  become the prime  location
for product  launches and where the media go when they need an expert opinion on
toys.

After 41 years as a two-dimensional cartoon character, Geoffrey the Giraffe came
to life in a new way in 2001, in a 60-second television  commercial that debuted
in October.  The new animatronic  Geoffrey,  created by legendary movie creature
expert Stan  Winston,  has more points of motion than the  dinosaurs of Jurassic
Park and  features  the  distinctive,  witty voice of Jim Hanks,  brother of Tom
Hanks. As the spokes-animal for the many positive changes at Toys"R"Us, Geoffrey
the Giraffe  starred in an  entirely  new  branding  campaign in the top 21 U.S.
markets.  Consumer  awareness of the advertising jumped more than 20 percent and
target audiences responded favorably to the ads. Toys"R"Us also received the Toy
Industry's award for the Best Marketing  Campaign of the Year. Look for Geoffrey
the Giraffe to play an important role as our resident lovable, wise-cracking toy
expert in 2002 and beyond.

Over the past few years,  Toys"R"Us has  strengthened  relationships  with brand
leaders,  major movie studios and intellectual  property  creators.  Promotional
alliances  and  licensing  relationships  with other great  companies are all in
keeping  with our growth  strategy of offering  exclusive  products and programs
that  can't be  found  elsewhere  and  further  support  our  brand's  wonderful
heritage.

The  challenge  for  Toys"R"Us  U.S. is to build on early  strategic  initiative
successes as we complete the transformation of this division in 2002. We believe
that the  return  on this  investment  will  begin to  unfold in 2002 and we are
committed to seeing a return to sales and earning  growth in Toys"R"Us U.S. this
coming year.

[PHOTO OMITTED]

Two of Times Square's
awesome features:
our 20-foot tall
animatronic T-Rex
and our two-story
Barbie(R)Dollhouse.

[PHOTO OMITTED]


                                                                             11/
<PAGE>

                               [PHOTO OMITTED]


/12
<PAGE>

                           / Toys"R"Us International /

expanding
      our world

Some things really are universal. While language and culture may vary around the
world, one constant remains:  Moms and Dads all want the best for their children
-- high quality products and toys that promote  learning,  spark imagination and
are just plain fun. This knowledge,  and our special relationships with families
around the world, is driving the impressive  growth of Toys"R"Us  International.
From Europe to Australia,  from Canada to Japan, wherever guests are shopping at
a Toys"R"Us international  location,  we're utilizing the same strategies as the
U.S. and doing  everything  possible to delight them with fun,  value and unique
products, in an exciting and guest-friendly store environment.

Growing bigger, getting better

In 2001, Toys"R"Us International achieved another year of record sales. In fact,
the International  division posted the highest store for store growth of all our
businesses.  At  year-end,  Toys"R"Us  International  operated  507 stores in 28
countries, including franchises and joint ventures. We opened 23 new stores last
year,  expanding our reach and accessibility to thousands of new families around
the world.  We rolled out the  successful  Imaginarium  concept to 185 Toys"R"Us
international  stores and  incorporated our proprietary  brand of plush,  Animal
Alley, worldwide.

Similar to our efforts in the U.S.,  many of our  International  locations  were
renovated  and  updated  to  offer  an  exciting,  pleasant  and  easy  shopping
experience for our guests.

Sharing excellence worldwide

The ability to leverage  our  worldwide  knowledge  in areas such as  marketing,
store operations and especially  merchandising,  gives our company a competitive
advantage.  This  free flow of  ideas,  experience  and  knowledge  enables  all
countries  to focus on proven  successes  and shorten the  timeline and learning
between  concept  and  execution,  which  is  a  true  advantage  for  a  global
organization.

Looking ahead with confidence

In 2002,  we'll  continue  to  reenergize  and grow our  worldwide  business  by
offering  innovative,  exclusive  merchandise  that  will set us apart  from the
competition and drive our business forward.  We will also strengthen our guests'
experience  by  remodeling  and  updating  many of our  stores,  based on global
learnings, to offer an unmatched, guest-friendly environment.

The universal appeal of our brand is unparalleled,  and Toys"R"Us  International
will  continue to be  instrumental  in evolving  our global  presence to delight
parents,  kids and other guests around the world.

[PHOTO OMITTED]

The Imaginarium
concept has been introduced
into many of our international
locations... delighting many of
our guests.

[PHOTO OMITTED]


                                                                             13/
<PAGE>

                               [PHOTO OMITTED]


/14
<PAGE>

International

                                 / Imaginarium /

soaring
      to new heights

Entering the world of Imaginarium, customers experience the finest learning toys
available,  presented in a welcoming,  nurturing  environment.  The  Imaginarium
magic,  a winning  combination  of learning  and play -- can now be found in 436
Imaginarium   worlds  within   Toys"R"Us  stores  as  well  as  42  freestanding
neighborhood stores in the U.S. Equally popular are our 185 locations within our
international stores,  sometimes called Universe of Imagination,  and the online
store, Imaginarium.com.

Driving  the  growth of the  Imaginarium  division  is the  universal  appeal of
learning  toys:  families  everywhere  are keenly  interested  in helping  their
children  develop  skills and abilities to prepare them for life.  Accomplishing
this through toys that combine play and learning has made  Imaginarium  a leader
in the specialty educational category.

Appealing to families in any environment

While its roots  are in Main  Street  U.S.A.,  the  Imaginarium  specialty-store
atmosphere  translates well in our Toys"R"Us stores and online.  This ability to
provide  customers  with unique  merchandise  in a variety of shopping  settings
enhances the company's presence in the specialty educational toy market.

In 2001, nearly 300 new Imaginarium  locations,  most of which were incorporated
in our Toys"R"Us stores, were opened in the U.S. By the end of 2002, Imaginarium
worlds  will be in the  majority  of  Toys"R"Us  stores in the  U.S.,  and we're
projecting more than 85 new  Imaginarium  and Universe of Imagination  locations
within international Toys"R"Us stores.

Delivering unique products and outstanding service

From its beginnings,  Imaginarium has offered exclusive product lines as well as
classic and  breakthrough  brands.  With the expansion of Imaginarium  worlds in
Toys"R"Us locations, private brand merchandise has been expanded.

First  Discoveries(TM)  is an Imaginarium  exclusive line of developmental  toys
that are ideal for enhancing early learning in children. Imaginarium Railway(TM)
is an  Imaginarium  exclusive  line of wooden  trains  and  accessories.  Wooden
railway systems  encourage  imaginative play, which is an important play pattern
for a child's social and emotional development. Imaginarium also features Thomas
& Friends Wooden Railway System(TM), LEGO(R) and many other brands that children
and parents have come to know and love.

Outstanding guest relationships

At Imaginarium,  our sales associates receive special training and are dedicated
to  communicating  the  unique  benefits  of each  product  toward  the  child's
development  and play skills.  Imaginarium has many innovative ways to help Moms
and Dads  select  the best  toys for each  developmental  stage  and age  group.
Through the  Imaginarium  Learning  System(TM),  our private label  products are
evaluated for shoppers  according to seven  important  characteristics.  Each of
those qualities is represented by an icon displayed on the product packaging, so
parents  can see at a glance  the skills  the toy will help  their  children  to
develop.

Now a whole  new  generation  of smart  families  know  what we knew all  along:
Imaginarium  is a magical  place  where  toys  inspire,  challenge  and  delight
children of all ages. With this momentum,  Imaginarium will continue to help the
"R"Us family maintain its leading place in the specialty educational toy market.

[PHOTO OMITTED]

Imaginarium shops are
the destination for creative
play and learning.

[PHOTO OMITTED]


15/
<PAGE>

[PHOTO OMITTED]


/16
<PAGE>

                                 / Toysrus.com /

seizing
      new opportunities

By focusing on three guiding  principles -- attracting guests to the Toysrus.com
site,  converting  visits  to  sales  and  providing  the best  online  shopping
experiences -- Toysrus.com remains one of the strongest players in the space. In
2001,  Toysrus.com  was the #1 most visited site for toys,  video games and baby
products,  attracting  more than 66 million  visitors and expanding its customer
base to nearly six million.

Growing the online family of sites

This past year some new and  exciting  features  were  added to the  Toysrus.com
shopping  experience,  along with major upgrades to existing sites.  Significant
enhancements to the Toysrus.com site have been developed,  including a fresh new
look  and  easier-to-use  navigation  features.  Customers  can now shop by age,
category, brand, advertised specials,  product reviews and much more. To further
develop  relationships  with families,  Babiesrus.com and  Imaginarium.com  were
added to the existing family of sites.

Delivering great products and features

In May, Babiesrus.com was launched. The groundbreaking Babies"R"Us Baby Registry
has proven to be as popular online as it has been in stores.  Expectant  parents
can instantly create or update their registries online. The registry also allows
relatives  or  friends  to shop  and  send  the  perfect  gift,  right  from the
convenience of their own homes.

In July,  Imaginarium.com  was  launched.  The  site  offers  the same  exciting
features found in Imaginarium stores: exclusive learning toys and the innovative
Imaginarium  Learning  System(TM),  a powerful  search  engine that helps guests
easily identify and shop for appropriate toys according to learning  values.  In
addition,  useful advice from Toyologist Experts and the Viewpoints On Parenting
newsletter provide added value and help build relationships with parents.

Continuing the momentum in the future

Despite a difficult  retail  environment,  sales grew by more than 54 percent --
from $180  million to $277  million -- in 2001.  In the  second  quarter,  sales
nearly quadrupled, and Toysrus.com had a strong holiday season.

Led by  strong  demand  for toy  and  video  game  products,  hot  entertainment
properties and expansion into new categories,  Toysrus.com is looking forward to
impressive  growth in 2002. As Internet usage increases  worldwide,  Toysrus.com
will continue to strengthen its online presence.

[PHOTO OMITTED]

Toysrus.com consistently
ranks in consumer
surveys as the best
overall toy site.

[PHOTO OMITTED]


                                                                             17/
<PAGE>

[PHOTO OMITTED]


/18
<PAGE>

                                  / Kids"R"Us /

energizing
      the brand

In 2001,  Kids"R"Us made major progress on redefining  and  differentiating  our
brand. From producing more of our own merchandise to updating stores, to our new
distinctive  brand design,  we are  positioning  Kids"R"Us as the source for the
styles kids want at the value families demand. With our updated K.R.U. brand and
one-stop shopping  destination for major national brands, we offer our customers
the best of both worlds.

Fulfilling our mission

Our mission at  Kids"R"Us  is to be the  preferred  destination  for trend right
ready-to-wear  and accessories  that are right for parents and cool for kids. We
offer great  value to our guests  through  our  private  brand and our  national
brands, which are sold at great everyday prices.

In 2001,  we made great  strides  toward  achieving a better  balance of fun and
value, of style and fashion basics. We also made the decision to consolidate our
stores,  redesigned  our own label and extended our presence into a total of 273
combo Toys"R"Us/Kids"R"Us stores.

Updating our stores

Our 11  prototype  stores,  which are  totally  updated,  feature  more  stylish
displays,  a generous assortment of fashion right clothes,  lifestyle trends and
interactive areas for kids. The prototypes significantly  outperformed our other
Kids"R"Us stores last year with  double-digit  sales growth. In 2002, we plan to
convert 30 more Kids"R"Us  stores to this new format,  which is proving  popular
with both parents and kids. This investment has resulted in a greater  frequency
of visits, a greater average spend per guest and the return of former guests.

We've given families an additional  reason to come to Kids"R"Us by introducing a
lifestyle shop. What started as a concept in 2000 became a reality in 2001, with
104 stores now offering a shop-within-a-shop  filled with an exciting assortment
of non-apparel  merchandise.  Guests, who have been giving the shops high marks,
can  browse and select  from such  items as fashion  accessories,  bath and body
products, cosmetics, home decor, electronics, stationery and plush product.

Leading the way to tomorrow

By the end of 2002, all 41 remodeled stores will have our new branding in place,
and a select  assortment of Kids"R"Us  merchandise  will be located in more than
375 combo stores.  We will add enhanced  customer service training and have more
of our  associates  spend time on the sales floor,  where they can assist guests
and build relationships.  Through operational efficiencies,  we will become more
cost-effective  as a  division  and  maximize  our  role  as  supplier  for  all
ready-to-wear across the "R"Us family.

Kids"R"Us is determined to be ahead of the curve not only in product  selection,
store design and shopping experience, but also in helping families and kids plan
their purchases. Last August, all Kids"R"Us stores in the U.S. -- along with the
combo stores -- presented the latest  back-to-school  fashions  through  fashion
shows  nationwide.  Our first major fashion show in every market attracted media
attention  across the country and gave  parents and kids one more reason to shop
at our stores.

[PHOTO OMITTED]

Just look at us now!
Kids"R"Us has a new
look...and a whole
new attitude.

[PHOTO OMITTED]


                                                                             19/
<PAGE>

                               [PHOTO OMITTED]


/20
<PAGE>

                                   /Babies"R"Us/

growing
      by leaps and bounds

In just six years -- and with 165 stores -- Babies"R"Us has grown quickly to its
current status as one of the premier baby product retailers in America.

In 2001, the division posted an impressive 15 percent  operating  profit growth.
We  opened  20 new  stores  and  remodeled  many  existing  Babies"R"Us  stores,
continuing to create the most rewarding shopping experience  possible.  Our 2002
plans  call for 20 more  stores  that will  intensify  our market  presence  and
innovative  product  offerings  that will provide  consistent  growth across all
categories.

Building lasting relationships with families

Babies"R"Us  is always  focused on the needs of our guests,  especially  new and
expectant  parents.  Our  buyers  continually  ensure  that we offer  innovative
products,  many of which -- like the  Exersaucer(TM)  and Diaper Genie(R) -- are
groundbreaking.  Our generous  merchandise  assortment  and three  private brand
product  lines -- Especially  for Baby(R),  Koala Baby(R) and Baby Trend -- have
babies  covered,  from nursery  furniture to car seats,  from safety products to
baby clothing and accessories.

New  product  developments  for  Babies"R"Us  in 2001  included  our  innovative
adjustable  Baby Trend  High Chair and our  exclusive  high  quality  Koala Baby
sheets  and  bedding.  We also  introduced  a new,  "lifestyle"  design  for our
Babies"R"Us Baby Registry program.

The look and feel of our stores  reflect the changing  needs of our customers as
well. In 2001, we developed an exciting new store  prototype --  incorporating a
welcoming warmth of color,  design and ambience -- which will be incorporated in
our new stores this year.

Introducing shopping innovations and benefits

Making  shopping  for baby items  easy,  convenient  and  pleasant  is a primary
mission of Babies"R"Us,  and one we ensure through benefits like free gift wrap,
special  orders  and our low price  guarantee.  And we never take  anything  for
granted.  Services  like  our  Baby  Registry,   continuity  program  (pre-  and
post-natal age targeted,  educational  mailers),  highly trained  associates and
comfortable Mother's Room all help delight our guests.

Continuing to renovate, innovate and grow

To meet the needs of  different  communities  and  customers,  we operate  three
distinct store sizes,  each tailored to the specific market it serves.  In 2002,
we will introduce four of the smaller,  24,000-square foot prototype stores, two
of which will include new design elements to delight customers.

At the same time, we will continue to invest in existing stores,  renovating and
improving our  Babies"R"Us  portfolio.  By offering the best product  selection,
memorable  shopping  experience  and  responsive  guest  service in the juvenile
retail industry, we will strengthen our position as the foremost baby authority.

[PHOTO OMITTED]

Our new Baby Registry
area is warmer and more
inviting than ever!

[PHOTO OMITTED]


                                                                             21/
<PAGE>

                               [PHOTO OMITTED]


/22
<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 2001 to 2000

We  reported  net  sales of $11.0  billion  for the 52 week  fiscal  year  ended
February 2, 2002 and $11.3 billion for the 53 week fiscal year ended February 3,
2001.  Net sales of  Toys"R"Us - Japan,  Ltd.  ("Toys - Japan"),  which has been
accounted for on the "equity  method"  since its initial  public  offering,  are
included in our net sales in the first quarter of 2000 and excluded from our net
sales  thereafter.  Our net sales were $11.0  billion  for both  fiscal 2001 and
fiscal 2000, after excluding sales of Toys - Japan. Currency translation did not
have a significant impact on our net sales for fiscal 2001. Our total enterprise
sales, which include the net sales of all our brand stores,  whether operated by
us, by licensees,  franchisees  or under  joint-venture  agreements,  were $12.6
billion versus $12.8 billion.

Our  consolidated  comparable  store sales,  in local  currencies,  declined 1%.
Comparable  store  sales for our U.S.  toy store  division  declined  1% for the
fiscal year and  increased 2% for the fourth  quarter.  Video sales,  due to the
introduction  of XBox,  Gamecube  and Gameboy  Advance in the latter half of the
year, were the primary drivers of the fourth quarter  increase.  Video accounted
for  approximately 22% of our U.S. toy store 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,  which  were  being  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 net sales increases of 54% for the
full year and 24% for the fourth quarter,  which continues to reflect  increases
in its market share and the impact of the  Toysrus.com  alliance with Amazon.com
that began in 2000.

In the fourth  quarter of 2001, we recorded  restructuring  and other charges of
$213 million  (pre-tax)  which are  discussed  in further  detail in the section
"Restructuring  and Other Charges" in this report. In addition,  our fiscal 2000
results  include the impact of the initial  public  offering of Toys - Japan and
the  non-recurring  costs and  charges  relating  to the  Toysrus.com/Amazon.com
alliance,  both of which are discussed in further  detail in the section  "Other
Matters" in this report. For comparability purposes, the remaining discussion of
our results of operations  for 2001,  2000 and 1999 excludes the impact of these
items, unless otherwise noted.

Our consolidated  gross margin,  as a percentage of sales,  improved by 10 basis
points to 31.2%. This increase was primarily driven by our Babies"R"Us  division
which  reported a 1.2%  improvement  in gross margin to 35%,  primarily due to a
favorable sales shift to higher margin juvenile import and proprietary  product.
Gross  margin  for the U.S.  toy  store  division  remained  constant  at 30.3%,
reflecting our continued emphasis on higher margin exclusive product,  which was
offset by the impact of lower margin video product.  Our International toy store
business  contributed  to the  improvement  of our  consolidated  gross  margin,
reporting a 20 basis point  increase to 31.9%,  primarily  due to our  continued
emphasis on exclusive products.

Our  consolidated  SG&A, as a percentage of sales,  increased 70 basis points to
25.0%.  SG&A for our U.S.  toy store  division,  increased  110 basis  points to
22.6%,  reflecting  the  strategic  investments  we are  making in our  business
including the renovation of our U.S. toy stores to the Mission  Possible  format
and certain  guest  focused  initiatives,  as well as  additional  SG&A expenses
resulting from the September 11th events.  SG&A for our  international toy store
business  increased 10 basis points to 22.8%. SG&A for the Babies"R"Us  division
increased 40 basis points 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 before restructuring and other charges remained unchanged
at 36.5%.  However,  the  impact  of the 2001  restructuring  and other  charges
reduced our tax rate to 26.9%.

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


                                                                             23/
<PAGE>

                    / management's discussion and analysis /

Comparison of Fiscal Year 2000 to 1999

We reported net sales of $11.3 billion and $11.9  billion.  Excluding the impact
of Toys - Japan in both  periods,  our net sales  increased 4% to $11.0  billion
from  $10.7  billion.  Further,   excluding  the  negative  impact  of  currency
translation  of $172 million,  our net sales  increased 5%. The net sales growth
was primarily  driven by a 2% increase in comparable store sales, as well as new
store growth in the Babies"R"Us  division.  Comparable  store sales for the U.S.
toy  store  division   increased  1%,   reflecting  the  strength  of  its  core
merchandise,  improved  guest service and instock  inventory  position,  despite
acute shortages in video product.  Comparable store sales for the  International
toy store division,  on a local currency  basis,  increased 6% mainly due to the
implementation  of strategies  similar to those being  implemented  in the U.S.,
along with  adding/improving  Babies"R"Us shops within its toy stores. Net sales
for the Babies"R"Us  division increased 26% and comparable store sales grew at a
double-digit  rate.  These  increases  were  driven  by  strong  sales  in  most
merchandise  categories and continued guest acceptance of the Babies"R"Us brand.
Toysrus.com  reported  net sales of $180  million,  up from $49 million in 1999,
reflecting  increased market share and the benefits from its strategic  alliance
with  Amazon.com,  which  combined  the two  companies'  expertise  to  create a
compelling online shopping experience.

Our consolidated gross margin, as a percentage of sales,  improved to 31.1% from
29.9%. This increase was primarily attributable to shifts in the merchandise mix
and growth in higher margin categories,  primarily  exclusive product offerings,
as well as the  implementation of a new strategic  pricing system.  Gross margin
for the U.S.  toy store  division  increased  to 30.3% from  28.4%,  while gross
margin for the Babies"R"Us  division grew to 33.8% from 32.8%. The International
toy store division reported gross margin of 31.7% versus 30.8%.

Our consolidated SG&A, as a percentage of sales,  increased to 24.3% from 23.1%.
SG&A for the U.S.  toy  store  division  increased  to 21.5%  from  19.8%.  This
increase  is  primarily   due  to  increased   payroll   costs  related  to  the
implementation of our new guest-focused initiatives,  higher distribution center
costs due to changes in the handling and amount of inventory,  costs  associated
with actions being taken to improve store  ambiance,  and systems  enhancements.
SG&A for the  International  toy store  division  decreased to 22.7% from 23.4%.
This  improvement  was  primarily a result of the  strategic  store  closures in
Central Europe and France, which have improved the overall profitability of this
division.  The Babies"R"Us  division  reported SG&A of 23.4% versus 24.0%.  This
improvement was primarily due to leveraging against sales growth.

Depreciation and amortization  increased to $290 million from $278 million. This
increase is primarily due to our continued store  expansion,  remodels and front
end conversions, strategic investments to improve management information systems
and  amortization  of goodwill  related to our  acquisition of  Imaginarium  Toy
Centers, Inc. in the second half of 1999.

Interest  expense  - net,  increased  to $104  million  from $80  million.  This
increase is mainly  attributable to the funding of our stock repurchase program,
higher interest rates, and the funding of Toysrus.com.

International operating earnings were unfavorably impacted by the translation of
local  currency  into U.S.  dollars by  approximately  $14 million in 2000.  The
effect of inflation had no material effect on our operating results for 2000.

Our effective tax rate remained unchanged at 36.5%.

Restructuring and Other Charges

On January 28,  2002,  we  announced  a series of steps  designed to enhance our
future  cash  flows  and  operating  earnings  and to  continue  to  allow us to
concentrate  our  financial  resources on those stores and store formats that we
believe are most  productive.  We are closing 37 Kids"R"Us stores and, in almost
all of these  locations,  we are  converting the nearest  Toys"R"Us  stores into
Toys"R"Us/Kids"R"Us combo stores in tandem with the Kids"R"Us store closings. We
are also closing 27 non-Mission  Possible format Toys"R"Us  stores,  eliminating
approximately   1,900  staff   positions   at  stores  and   headquarters,   and
consolidating  our store support center  facilities into our new headquarters in
Wayne, New Jersey, which we intend to fully occupy by the summer of 2003.

The costs  associated with facilities  consolidation,  elimination of positions,
and other actions designed to improve  efficiency in our support  functions were
$79 million,  of which $15 million  related to severance.  The costs  associated
with store closings are $73 million for Kids"R"Us and $85 million for Toys"R"Us,
of which $27 million was recorded in cost of sales.  We are currently  marketing
all of the stores and store support center facilities  included in this plan and
will close all stores included in this plan by the end of 2002. We also reversed
$24 million of previously accrued charges ($11 million from the 1998 program and
$13 million from the 1995 program) that have been deemed no longer  needed.  See
below for further details regarding the reversal of these reserves.

These  actions are expected to increase free cash flow in 2002 and beyond and to
yield improvements to pre-tax earnings of approximately $25 million in 2002, and
approximately $45 million annually beginning in 2003. Payroll savings associated
with changes in support functions are expected to account for $30 million of the
$45 million annual savings.


/24
<PAGE>

                    / management's discussion and analysis /

Accordingly,  based on all of these actions, we recorded $213 million of pre-tax
($126 million  after-tax)  restructuring and other charges in the fourth quarter
of our fiscal year ended  February  2, 2002.  Details on the  components  of the
charges are as follows:

                                                  Reserve
                           Initial    Utilized    balance
Description                 charge     in 2001    2/02/02
---------------------------------------------------------
Store Closings:

  Lease commitments        $   52     $    --       $  52

  Severance                     4          --           4

  Write-down of
  property and
  equipment                    75          75          --

  Markdowns                    27          --          27

Store Support Center
Consolidation:

  Lease commitments            28          --          28

  Severance                    15          --          15

  Write-down of
  property and
  equipment                    29          29          --

Other                           7           7          --
---------------------------------------------------------

Total restructuring
and other charges           $ 237       $ 111       $ 126
=========================================================

During 1998, we announced  strategic  initiatives to reposition our business and
other charges  including the  guest-focused  reformatting of our toy stores into
our  new  store  format,  as  well  as  a  restructuring  of  our  international
operations,  all of which  resulted in a charge of $353 million.  Details on the
components  of the  charges  are  described  in the  notes  to the  consolidated
financial statements and are as follows:

                             Reserve   Utilized/   Reserve   Utilized/   Reserve
                    Initial  balance   reversed    balance   reversed    balance
Description          charge  1/29/00    in 2000    2/03/01    in 2001    2/02/02
--------------------------------------------------------------------------------
Store Closings:

  Lease
  commitments          $ 81     $ 62       $ 13       $ 49       $ 24       $ 25

  Severance
  and other
  closing costs          29       14          6          8          2          6

  Write-down of
  property and
  equipment             155       --         --         --         --         --

  Other                  29       11         11         --         --         --

--------------------------------------------------------------------------------
Total
restructuring          $294     $ 87       $ 30       $ 57       $ 26       $ 31

================================================================================
Provisions
for legal
settlements            $ 59     $ 30       $ 19       $ 11       $ 11       $ --
================================================================================

In the fourth quarter of 2001, we determined that $11 million of unused reserves
for the closing of under-performing  stores in central Europe would no longer be
needed and accordingly,  reversed these reserves.  In the third quarter of 2001,
we completed the  satisfaction  of certain legal  obligations  and  accordingly,
reversed the  remaining  unused  reserve of $5 million.  In the third quarter of
2000, we determined that an $11 million unused reserve would no longer be needed
and accordingly,  reversed this reserve. Remaining reserves at February 2, 2002,
primarily long-term lease commitment reserves,  will be utilized during 2002 and
thereafter.

In 1998,  we also recorded  markdowns  and other charges of $345 million,  which
included  $253 million for  markdowns  required to clear excess  inventory  from
stores,  $29 million for markdowns related to store closings and $63 million for
charges  to cost of sales  for  inventory  system  refinements  and  changes  in
accounting estimates.

In 1995, we announced certain initiatives to restructure our worldwide business.
In the fourth quarter of 2001, we determined that unused reserves of $13 million
for the  restructuring of our  international  business would no longer be needed
and accordingly,  reversed these reserves.  We have substantially  completed the
remainder of this  program,  with the  exception of long-term  lease  commitment
reserves that will be utilized during 2002 and thereafter.

We believe that unused  reserves  remaining  at February 2, 2002 are  reasonable
estimates of what is required to complete all remaining initiatives.

Liquidity and Capital Resources

We have a $975 million  unsecured  committed  revolving  credit  facility from a
syndicate of financial institutions. The credit facility includes a $650 million
5-year facility  expiring in September 2006 and a $325 million 364-day  facility
expiring in September 2002.  This facility is available for seasonal  borrowings
and  to  support  our  domestic  commercial  paper  borrowings.  There  were  no
outstanding balances under any of these committed revolvers at the end of fiscal
2001, 2000 or 1999. Additionally,  we have lines of credit with various banks to
meet short-term financing needs of our foreign  subsidiaries.  Cash requirements
for operations, capital expenditures and lease commitments will be met primarily
through operating activities and issuance of equity and/or debt.

On March 13, 2002,  Moody's  revised our  long-term  debt and  commercial  paper
rating to "Baa3/P-3,"  with a stable outlook.  Our long-term debt and commercial
paper is currently rated  "BBB+/A-2" by Standard & Poor's.  However,  Standard &
Poor's  has  placed  our  long-term  debt on watch for  possible  downgrade.  We
continue to be confident in our ability to refinance  maturing  debt, as well as
to provide for new capital.

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 a significant portion of our operating earnings.


                                                                             25/
<PAGE>

                    / management's discussion and analysis /

Operating Activities

Net cash provided by operating  activities  was $504 million in 2001,  which was
primarily  driven by net  income  adjusted  for  non-cash  items,  as well as an
increase in income taxes  payable.  Net cash used in operations was $151 million
in 2000,  primarily due to an increase in  merchandise  inventories,  which more
than offset net  earnings  adjusted  for non-cash  items.  Net cash  provided by
operations  was $865 million in 1999,  which was primarily  driven by net income
adjusted  for  non-cash  items,  as well as an increase in accounts  payable and
accrued expenses.

Investing Activities

Capital  expenditures  - net of  dispositions,  were $705 million in 2001,  $402
million in 2000 and $533  million in 1999.  Capital  expenditures  during  these
periods  include  investments:  to open new stores,  to reformat  certain of our
existing  store base to new store formats and combo  stores,  and to improve and
enhance our management information systems. We reformatted 268 existing U.S. toy
stores to the Mission  Possible format,  and converted  another 94 existing U.S.
toy  stores  to  Toys"R"Us/Kids"R"Us  combo  stores  in 2001.  In  addition,  we
converted 10 Kids"R"Us  stores to our new store  prototype.  Also,  in 2001,  we
opened 39 new stores  worldwide,  opened our new Flagship store in the center of
Times Square,  New York City,  and opened our new state of the art  distribution
center in Texas.  The significant  decrease in capital  expenditures,  net, from
1999 to 2000 was primarily due to the disposal of distribution centers and other
facilities in 2000. During 2002, we plan on investing approximately $475 million
in  capital to open  approximately  30 new  stores,  primarily  Babies"R"Us  and
International  stores,  to convert the  remainder of our U.S. toy store chain to
the Mission Possible format (approximately 240 stores), to convert approximately
102 existing  U.S. toy stores to combo  stores and to convert  approximately  30
existing Kids"R"Us stores into our new store prototype.

Investing  activities for 2000 included $267 million of cash proceeds related to
the initial public offering of shares of Toys - Japan, which is discussed in the
section "Other Matters" in this report.  Investing  activities for 1999 included
net cash expended to acquire all of the outstanding  common stock of Imaginarium
Toy Centers, Inc, which is also described further in the section "Other Matters"
in this report.

Financing Activities

Net cash from  financing  activities  was $191  million in 2001,  primarily as a
result of net  borrowings of $216 million  during the year. On July 19, 2001, we
issued  and sold $500  million  of notes  bearing  interest  at 7.625% per annum
maturing on August 1, 2011,  and also  borrowed  $250  million of notes  bearing
interest  at 6.875% per annum  maturing  on August 1, 2006.  Simultaneously,  we
entered into  interest  rate swap  agreements.  As a result of the interest rate
swap  agreements,  interest on the $500 million notes will accrue at the rate of
LIBOR plus  1.5120% and  interest on the $250  million  notes will accrue at the
rate of LIBOR plus 1.1515%.  Interest is payable on both notes  semi-annually on
February  1 and August 1 of each  year,  commencing  on  February  1,  2002.  On
February 13, 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.  The
proceeds  were  used  to  reduce   outstanding   commercial  paper  obligations.
Accordingly,  we have  reclassified  $466 million from short-term  borrowings to
long-term debt at February 3, 2001.

Net cash used for financing  activities  was $2 million for 2000. Net borrowings
for 2000 were $521  million,  primarily  driven by the  repurchase of 42 million
shares of our  common  stock,  increased  inventory  levels  and the  funding of
Toysrus.com.  In 2000, we received a total of $97 million from SOFTBANK  Venture
Capital and  affiliates  ("SOFTBANK")  relating to our 20% minority  interest in
Toysrus.com, which is discussed in further detail in the section "Other Matters"
in this report.

Net cash used for  financing  activities  were $102 million for 1999,  which was
principally  driven by the  repurchase of 12 million shares of our common stock,
partially offset by net borrowings of $84 million.

[PHOTO OMITTED]


/26
<PAGE>

                    / management's discussion and analysis /

Other Matters

On March 19,  2002,  we  refinanced  our note  payable  originally  due 2005 and
increased  the  amount  outstanding  to $160  million  from $100  million.  This
borrowing is repayable in semi-annual  installments,  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.

On March 13, 2002, we filed  registration  statements  with the  Securities  and
Exchange Commission indicating our intention to issue $550 million of equity and
equity-linked  securities.  These  securities  take the form of $350  million of
equity  security  units and $200 million of Toys"R"Us  common stock.  We plan to
issue these securities  promptly after the registration  statements are declared
effective.  We will use the net proceeds from these  offerings as an alternative
to short-term borrowings and for other general corporate purposes.

On February 24, 2000, we entered into an agreement with SOFTBANK, which included
an  investment  by SOFTBANK of $60 million in  Toysrus.com  for a 20%  ownership
interest.  Accordingly,  we have  recorded a 20%  minority  interest  in the net
losses of  Toysrus.com  in selling,  general  and  administrative  expenses.  In
addition,  Toysrus.com received additional capital  contributions of $37 million
from SOFTBANK  representing its proportionate  share of funding required for the
operation of Toysrus.com.

In connection  with the  agreement  with  SOFTBANK,  we issued 1.2 million stock
purchase  warrants 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. These warrants
have not been exercised.

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  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.

In the third quarter of 2000, Toysrus.com recorded $118 million in non-recurring
costs and  charges as a result of the  transition  to the  co-branded  site,  of
which, $10 million were included in cost of sales and $108 million were included
in selling, general and administrative expenses. These costs and charges related
primarily  to the  closure of three  distribution  centers  and  web-site  asset
write-offs,   as  well  as  other  costs  associated  with  migrating  data  and
merchandise to the new site and facilities.  At the end of 2001, Toysrus.com had
remaining  reserves of approximately $42 million,  primarily for the exit of its
Memphis Tennessee  distribution  center,  which is being actively  marketed.  We
believe that these  remaining  reserves  are adequate to complete all  remaining
action plans.

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  related to the
sale of a portion of  company-owned  common stock of Toys - Japan. In connection
with this  transaction,  we also  received net cash proceeds of $267 million and
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.

In August 1999, we acquired all of the capital stock of Imaginarium Toy Centers,
Inc.  for  approximately  $43  million  in cash and the  assumption  of  certain
liabilities.  In addition  to  currently  operating  42  Imaginarium  toy stores
throughout  the U.S.,  we have  incorporated  the  Imaginarium  learning  center
concept  in  our  Mission  Possible  store  format.  The  operating  results  of
Imaginarium were not material to our overall results or financial condition.

In August 1999,  Robert C. Nakasone  resigned as our Chief Executive Officer and
as a director.  We entered  into a  Separation  and Release  Agreement  with Mr.
Nakasone  providing for cash  payments,  the  immediate  vesting of all unvested
options and unvested profit shares held by Mr. Nakasone, as well as the prorated
vesting of other unvested  equity based awards on the second  anniversary of the
termination  date. We accrued all costs related to this matter as of January 29,
2000.  These  amounts  were not  material  to our overall  results or  financial
condition.

Quantitative and Qualitative
Disclosures About Market Risks

We are  exposed to market  risk from  potential  changes in  interest  rates and
foreign  exchange  rates.  We regularly  evaluate these risks and have taken the
following measures to mitigate these risks: the countries in which we own assets
and operate stores are politically  stable; 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  borrowings
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,  and  Australia.  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


                                                                             27/
<PAGE>

                    / management's discussion and analysis /

any 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 2, 2002, a 10%  appreciation of the U.S. dollar would have increased
pre-tax  earnings by $13 million,  while a 10%  depreciation  of the U.S. dollar
would have decreased pre-tax earnings by $13 million. Comparatively, considering
our derivative  instruments  outstanding at February 3, 2001, a 10% appreciation
of the U.S. dollar would have increased pre-tax earnings by $9 million,  while a
10% depreciation of the U.S. dollar would have decreased pre-tax earnings by $10
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 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 2, 2002 and February 3, 2001, a 100
basis  point  change in interest  rates would not have a material  effect on our
earnings or cash flows over a one-year  period.  A 100 basis  point  increase in
interest  rates would  decrease the fair value of our long-term debt at February
2, 2002 and  February 3, 2001 by  approximately  $79  million  and $29  million,
respectively.  A 100 basis point  decrease in interest  rates would increase the
fair value of our  long-term  debt at February  2, 2002 and  February 3, 2001 by
approximately $87 million and $34 million, respectively.

See the notes to the consolidated financial statements for additional discussion
of our outstanding derivative financial instruments at February 2, 2002.

Critical Accounting Policies

Our  discussion  and  analysis  of our  financial  condition  and results of our
operations is based upon the consolidated financial statements,  which 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
various  other   assumptions   that  we  believe  to  be  reasonable  under  the
circumstances.  Actual results may differ  materially from these estimates under
different assumptions or conditions.

We  believe  the  following  critical   accounting   policies  affect  our  more
significant  judgments and estimates used in the preparation of our consolidated
financial statements.

Inventories:

Merchandise  inventories  for the  U.S.  toy  store  division,  which  represent
approximately 70% 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 as determined by the retail inventory
method.  We record  adjustments to the value of inventory  based upon forecasted
plans and marketing events to sell merchandise  inventories.  These  adjustments
are estimates which could vary  significantly,  either favorably or unfavorably,
from actual results if future economic conditions, consumer preference trends or
competitive conditions differ from our expectations.

We receive various types of merchandise  allowances from our vendors,  which are
based  primarily 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  historical  and current
available  data and other  factors  and are  adjusted  to actual  amounts at the
completion  of  our  physical   inventories  and   finalization  of  all  vendor
allowances.  Although we believe that these  estimates  are adequate and proper,
the actual amounts could vary.

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 2, 2002,  we have  recorded  deferred  tax assets,  net of valuation
allowances,  of $289 million. We believe it is more likely than not that we will
be able to realize these assets through  reduction of future taxable income.  We
base this belief upon the levels of taxable income historically generated by our
business,  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 income 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 Derivatives  Instruments and Hedging  Activities," and we record
the fair value of these


/28
<PAGE>

                    / management's discussion and analysis /

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  2, 2002,  we have  reduced the  carrying
amount of our long-term debt by $84 million, representing the carrying amount of
the debt in excess of fair value on that date. Also at February 2, 2002, we have
recorded  derivative  assets of $42 million and  derivative  liabilities of $122
million.  While  we  intend  to  continue  to  meet  the  conditions  for  hedge
accounting,  if hedges were not to be highly  effective in achieving  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  financial
position or results of operations.

Insurance Risks:

We  insure  a  substantial   portion  of  our  general   liability  and  workers
compensation risks through a wholly-owned  insurance subsidiary.  Provisions for
losses related to these 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.

Synthetic Lease:

Our new corporate headquarters facility,  located in Wayne, New Jersey, which we
intend to fully occupy by the summer of 2003,  is being  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 paying 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.  Under  accounting  principles  generally  accepted  in the
United States,  this arrangement is required to be treated as an operating lease
for accounting purposes and will be treated as a financing for tax purposes.

Recent Accounting Pronouncements

In August 2001, the Financial  Accounting  Standards  Board issued SFAS No. 144,
"Accounting  for  the  Impairment  or  Disposal  of  Long-Lived  Assets,"  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." SFAS No. 144 is
effective for fiscal years  beginning  after  December 15, 2001. We have adopted
SFAS No. 144 as of February 3, 2002 and we do not expect that this adoption will
have a significant effect on our consolidated  financial  condition,  results of
operations or cash flow.

In July 2001,  the  Financial  Accounting  Standards  Board issued SFAS No. 142,
"Goodwill  and Other  Intangible  Assets,"  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 have
adopted this  pronouncement  on February 3, 2002. As a result of this  adoption,
$348 million of unamortized goodwill,  which was to be amortized ratably through
2037,  will  no  longer  be  amortized.   Application  of  the  non-amortization
provisions of SFAS No. 142 is expected to result in an increase in net income of
approximately $8 million per year.

SFAS No. 142 also  requires  that  goodwill be tested  annually for  impairment.
Intangible  assets  deemed  to have  an  indefinite  life  will  be  tested  for
impairment  using a  one-step  process  which  compares  the  fair  value to the
carrying  amount  of the  asset as of the  beginning  of the  fiscal  year.  Our
unamortized  goodwill  at February 2, 2002  relates to the  acquisition  of Baby
Super Stores, Inc. in 1997 ($319 million),  which is now part of our Babies"R"Us
division,  and the  acquisition  of Imaginarium  Toy Centers,  Inc. in 1999 ($29
million),  which  is now  part of our  U.S.  toy  store  division.  Based on the
historical and projected  operating  results of these  reporting  units, we have
determined that no impairment of our goodwill exists. Therefore, the adoption of
this  SFAS  No.  142  is  not  anticipated  to  have a  material  impact  on our
consolidated financial condition, results of operations or cash flows.

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," "forsee," "will," "may," and
similar words or phrases. These statements discuss, among other things, expected
growth,  strategy,  store  openings  and  renovations,  future  performance  and
anticipated cost savings and results of our 2001 restructuring.  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 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.


                                                                             29/
<PAGE>

                      / consolidated financial statements /

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

<TABLE>
<CAPTION>
                                                                                                     Year Ended
                                                            ---------------------------------------------------
                                                            February 2,          February 3,        January 29,
(In millions, except per share data)                              2002                 2001                2000
---------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>                 <C>
Net sales                                                     $ 11,019             $ 11,332            $ 11,862
Cost of sales                                                    7,604                7,815               8,321
---------------------------------------------------------------------------------------------------------------
     Gross Margin                                                3,415                3,517               3,541
---------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses                     2,750                2,832               2,743
Depreciation and amortization                                      308                  290                 278
Equity in net earnings of Toys - Japan                             (29)                 (31)                 --
Restructuring and other charges                                    186                   --                  --
---------------------------------------------------------------------------------------------------------------
     Total Operating Expenses                                    3,215                3,091               3,021
---------------------------------------------------------------------------------------------------------------

     Operating Earnings                                            200                  426                 520

Other income (expense):
     Interest expense                                             (117)                (127)                (91)
     Interest and other income                                       8                   23                  11
     Gain from IPO of Toys - Japan                                  --                  315                  --
---------------------------------------------------------------------------------------------------------------

Earnings before income taxes                                        91                  637                 440
Income taxes                                                        24                  233                 161
---------------------------------------------------------------------------------------------------------------
Net earnings                                                  $     67             $    404            $    279
===============================================================================================================

Basic earnings per share                                      $   0.34             $   1.92            $   1.14
===============================================================================================================
Diluted earnings per share                                    $   0.33             $   1.88            $   1.14
===============================================================================================================
</TABLE>

See notes to consolidated financial statements.

[PHOTO OMITTED]


/30
<PAGE>

                      / consolidated financial statements /

Consolidated Balance Sheets

Toys"R"Us, Inc. and Subsidiaries

<TABLE>
<CAPTION>
                                                            February 2,       February 3,
(In millions)                                                      2002             2001
-----------------------------------------------------------------------------------------
<S>                                                            <C>              <C>
Assets

Current Assets:

Cash and cash equivalents                                      $    283         $    275
Accounts and other receivables                                      210              225
Merchandise inventories                                           2,041            2,307
Prepaid expenses and other current assets                            97              100
-----------------------------------------------------------------------------------------
      Total current assets                                        2,631            2,907

Property and Equipment:

Real estate, net                                                  2,313            2,348
Other, net                                                        2,231            1,909
-----------------------------------------------------------------------------------------
      Total property and equipment                                4,544            4,257

Investment in Toys - Japan                                          123              108
Goodwill, net                                                       348              361
Derivative assets                                                    42               --
Other assets                                                        388              370
-----------------------------------------------------------------------------------------
                                                               $  8,076         $  8,003
=========================================================================================

Liabilities and Stockholders' Equity

Current Liabilities:

Short-term borrowings                                          $     --         $    121
Accounts payable                                                    878            1,152
Accrued expenses and other current liabilities                      777              837
Income taxes payable                                                345              241
-----------------------------------------------------------------------------------------
      Total current liabilities                                   2,000            2,351

Long-term debt                                                    1,816            1,567
Deferred income taxes                                               395              402
Derivative liabilities                                              122               --
Other liabilities                                                   276              195

Minority interest in Toysrus.com                                     53               70

Stockholders' Equity:

Common stock                                                         30               30
Additional paid-in capital                                          444              439
Retained earnings                                                 5,228            5,161
Accumulated other comprehensive loss                               (267)            (211)
Treasury shares, at cost                                         (2,021)          (2,001)
-----------------------------------------------------------------------------------------
      Total stockholders' equity                                  3,414            3,418
-----------------------------------------------------------------------------------------
                                                               $  8,076         $  8,003
=========================================================================================
</TABLE>

See notes to consolidated financial statements.

[PHOTO OMITTED]


                                                                             31/
<PAGE>

                      / consolidated financial statements /

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

<TABLE>
<CAPTION>
                                                                                                          Year Ended
                                                                      ----------------------------------------------
                                                                      February 2,      February 3,       January 29,
(In millions)                                                               2002             2001              2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>              <C>              <C>
Cash Flows from Operating Activities

Net earnings                                                             $    67          $   404          $   279
Adjustments to reconcile net earnings to net cash
from operating activities:
      Depreciation and amortization                                          308              290              278
      Deferred income taxes                                                  (58)              67              156
      Minority interest in Toysrus.com                                       (24)             (33)              --
      Equity in net earnings of Toys - Japan                                 (29)             (31)              --
      Restructuring and other charges                                        109               --               --
      Gain from initial public offering of Toys - Japan                       --             (315)              --
      Toysrus.com related non-cash costs and charges                          --               81               --
Changes in operating assets and liabilities:
      Accounts and other receivables                                          15              (69)              35
      Merchandise inventories                                                217             (486)            (192)
      Prepaid expenses and other operating assets                             36              (54)             (69)
      Accounts payable, accrued expenses and other liabilities              (241)            (178)             497
      Income taxes payable                                                   104              173             (119)
--------------------------------------------------------------------------------------------------------------------
Net cash from operating activities                                           504             (151)             865
====================================================================================================================

Cash Flows from Investing Activities

Capital expenditures, net                                                   (705)            (402)            (533)
Net proceeds from sale of Toys - Japan common stock                           --              267               --
Reduction in cash due to deconsolidation of Toys - Japan                      --              (15)              --
Purchase of Imaginarium, net of cash acquired                                 --               --              (43)
Other assets                                                                  --               --              (28)
--------------------------------------------------------------------------------------------------------------------
Net cash from investing activities                                          (705)            (150)            (604)
====================================================================================================================

Cash Flows from Financing Activities

Short-term borrowings, net                                                  (588)             419               95
Long-term borrowings                                                       1,214              147              593
Long-term debt repayments                                                   (410)             (45)            (604)
Exercise of stock options                                                     19                2               14
Share repurchase program                                                     (44)            (632)            (200)
Proceeds received from investors in Toysrus.com                               --               97               --
Issuance of stock warrants                                                    --               10               --
--------------------------------------------------------------------------------------------------------------------
Net cash from financing activities                                           191               (2)            (102)
====================================================================================================================

Effect of exchange rate changes on cash and cash equivalents                  18               (6)              15

Cash and Cash Equivalents

Increase/(decrease) during year                                                8             (309)             174
Beginning of year                                                            275              584              410
--------------------------------------------------------------------------------------------------------------------
End of year                                                              $   283          $   275          $   584
====================================================================================================================
Supplemental Disclosures of Cash Flow Information

Income tax (refunds) payments, net                                       $   (22)         $    (2)         $   126
====================================================================================================================
Interest payments                                                        $    85          $   128          $    92
====================================================================================================================
</TABLE>

See notes to consolidated financial statements.


/32
<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>         <C>            <C>
Balance, January 30, 1999             300.4    $    30    (49.8)  $(1,243)      $   459         $  (100)    $ 4,478        $ 3,624
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings for the year                --         --     --          --            --              --         279            279

Foreign currency translation
   adjustments                           --         --     --          --            --             (37)         --            (37)

   Comprehensive income                                                                                                        242

Share repurchase program                 --         --    (12.0)     (200)           --              --          --           (200)

Issuance of restricted stock, net        --         --     --           3            (4)             --          --             (1)

Exercise of stock options, net           --         --      0.7        17            (2)             --          --             15
-----------------------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================================
</TABLE>

See notes to consolidated financial statements.

[PHOTO OMITTED]


                                                                             33/
<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 2001,  2000,  and 1999 are for the 52 weeks ended  February  2, 2002,  the 53
weeks  ended  February  3,  2001  and  the 52  weeks  ended  January  29,  2000,
respectively.

Reclassification

Certain  amounts in 2000 and 1999 have been  reclassified to conform to the 2001
presentation.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of 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  retail sales at the time the guest takes  possession of
merchandise  or the  point of sale.  Revenues  from the sale of gift  cards  and
issuance of store credits are recognized when they are utilized or 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  $166,  $135,  and  $125  for  2001,  2000  and  1999,
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  70% of  total  inventories,  are  stated  at the  lower  of  LIFO
(last-in,  first-out)  cost or market,  as  determined  by the retail  inventory
method.  If  inventories  had  been  valued  at the  lower  of  FIFO  (first-in,
first-out) cost or market,  inventories would show no change at February 2, 2002
or February 3, 2001. All other  merchandise  inventories are stated at the lower
of FIFO cost or market as determined by the retail inventory method.

Property and Equipment

Property and equipment are recorded at cost.  Depreciation  and amortization are
provided using the  straight-line  method over the estimated useful lives of the
assets or, where applicable,  the terms of the respective  leases,  whichever is
shorter.  The company evaluates the need to recognize impairment losses relating
to long-lived  assets based on several  factors  including,  but not limited to,
management's plans for future operations, recent operating results and projected
cash flows.

Financial Instruments

The  company  adopted  the  provisions  of  Statement  of  Financial  Accounting
Standards ("SFAS") No. 133,  "Accounting for Derivative  Instruments and Hedging
Activities,"  as  amended,  effective  February  4, 2001,  as  discussed  in the
footnote  "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  gains and losses on the forward  contracts were not
material at either February 2, 2002 or February 3, 2001. The related receivable,
payable  and  deferred  gain or loss are  included on a net basis in the balance
sheet. The company had $158 and $95 of short-term  outstanding forward contracts
at  February  2,  2002  and  February  3,  2001,  maturing  in  2002  and  2001,
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.

Property and Equipment

                                 Useful Life      February 2,      February 3,
                                  (in years)            2002            2001
--------------------------------------------------------------------------------
Land                                                $    811        $    810
Buildings                              45-50           1,980           1,849
Furniture and equipment                 5-20           1,927           2,218
Leaseholds and
  leasehold improvements           12 1/2-35           1,542           1,291
Construction in progress                                  41              97
Leased property and equipment
  under capital lease                                     53              56
--------------------------------------------------------------------------------
                                                       6,354           6,321
Less accumulated depreciation
  and amortization                                     1,810           2,064
================================================================================
                                                     $ 4,544         $ 4,257
================================================================================

Included in accumulated  depreciation and amortization is approximately  $26 and
$24 related to assets  under  capital  lease at February 2, 2002 and February 3,
2001, respectively.


/34
<PAGE>

                 / notes to consolidated financial statements /

Seasonal Financing and Long-Term Debt

                                                        February 2,  February 3,
                                                              2002         2001
--------------------------------------------------------------------------------
7.625% notes, due fiscal 2011                              $   500     $    --
6.875% notes, due fiscal 2006                                  250          --
500 Euro Bond, due fiscal 2004                                 466          --
475 Swiss franc note payable, due fiscal 2003(a)               342         342
8 3/4% debentures, due fiscal 2021, net of expenses(b)         198         198
Note payable at an effective cost
  of 2.32% due in semi-annual installments
  through fiscal 2005(c)                                       119         147
Industrial revenue bonds, net of expenses(d)                    34          41
Obligation under capital leases                                 21          32
Mortgage notes payable at annual interest rates
  from 10.16% to 11.00%(e)                                       9           9
Commercial paper, interest rates from 6.37%                     --         834
  to 6.75% for 2000(f)
Fair value hedging adjustment                                  (84)         --
--------------------------------------------------------------------------------
                                                             1,855       1,603
Less current portion(g)                                         39          36
================================================================================
                                                           $ 1,816     $ 1,567
================================================================================

(a)  Supported  by a 406 Swiss franc bank  letter of credit.  This note has been
converted by an interest  rate and currency  swap to a floating  rate, US dollar
obligation at 3 month LIBOR less  approximately 121 basis points.

(b) Fair value was $204 and $209 at February 2, 2002 and  February 3, 2001.  The
fair market 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.

(d) Bank letters of credit of $14,  expiring in 2003,  support  certain of these
industrial  revenue bonds. The bonds have fixed or variable  interest rates with
an  average  rate of 1.5% and 5.5% at  February  2, 2002 and  February  3, 2001,
respectively.

(e) Collateralized by property and equipment with an aggregate carrying value of
$6 and $9 at February 2, 2002 and February 3, 2001,  respectively.

(f)  Included in this amount is the EURO  equivalent  of $466 used to  refinance
outstanding  commercial paper obligations.

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

On February  13, 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.  Accordingly,  the company
reclassified  $466 from  short-term  borrowings to long-term debt at February 3,
2001.

On July 19, 2001, the company issued and sold $500 of notes bearing  interest at
7.625% per annum  maturing on August 1, 2011 and $250 of notes bearing  interest
at 6.875% per annum  maturing  on August 1, 2006.  Simultaneously,  the  company
entered into  interest  rate swap  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 will accrue at the rate of
LIBOR plus 1.1515% per annum. Interest is payable on both notes semi-annually on
February 1 and August 1 of each year, commencing on February 1, 2002.

Long-term  debt  balances as of February 2, 2002 have been  impacted by currency
and interest  rate swaps  entered into during  fiscal 2001,  as discussed in the
footnote "Derivative Instruments and Hedging Activities."

The company has a $975  unsecured  committed  revolving  credit  facility from a
syndicate of financial institutions.  The credit facility includes a $650 5-Year
facility  expiring in  September  2006 and a $325 364-Day  facility  expiring in
September  2002.  This  facility is  available  for seasonal  borrowings  and to
support  the  company's  domestic  commercial  paper  borrowings.  There were no
outstanding balances under any of these committed revolvers at the end of fiscal
2001, 2000 or 1999.  Additionally,  the company has lines of credit with various
banks to meet  short-term  financing  needs of its  foreign  subsidiaries.  Cash
requirements for operations,  capital expenditures and lease commitments will be
met primarily through operating activities and issuance of equity and/or debt.

During 2000, the company  classified $368 of commercial paper as long-term debt,
as the company maintained  long-term  committed credit agreements,  as described
above, to support these borrowings and intended to refinance them on a long-term
basis.  This amount was repaid out of the proceeds of the 7.625% notes discussed
above.

The  weighted-average  interest rate on  short-term  borrowings  outstanding  at
February 3, 2001 was 6.6%.  There were no short-term  borrowings  outstanding at
February 2, 2002.

The annual maturities of long-term debt at February 2, 2002 are as follows:

--------------------------------------------------------------
2002                                                   $    39
2003                                                       378
2004                                                       503
2005                                                        54
2006                                                       252
2007 and subsequent                                        713
Fair value hedging adjustment                              (84)
==============================================================
                                                       $ 1,855
==============================================================

Derivative Instruments
and Hedging Activities

The company is exposed to market risk from  potential  changes in interest rates
and foreign exchange rates. The company regularly  evaluates these risks and has
taken the following measures to mitigate these risks: the countries in which the
company owns assets and operates  stores are politically  stable;  the company's
foreign exchange risk management  objectives are to stabilize cash flow from the
effects of foreign  currency  fluctuations;  the company does not participate in
speculative  hedges;  and the company  will,  whenever  practical,  offset local
investments  in  foreign  currencies  with  borrowings  denominated  in the same
currencies.  The company also enters into  derivative  financial  instruments to
hedge a variety of risk exposures including interest rate and currency risks.


                                                                             35/
<PAGE>

                 / notes to consolidated financial statements /

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  counter-party.  These
forward exchange  contracts are designated as dual purpose hedges, as defined by
SFAS No. 133, and are effective as hedges.  The forward  exchange  contracts are
designated  as cash flow  hedges  from the  inception  of the  forward  exchange
contract  until the import  merchandise  is received  and the  related  accounts
payable is recorded.  Accordingly,  changes in the effective portion of the fair
value of these  forward  exchange  contracts  during this period are included in
other comprehensive income. Once merchandise is received, these forward exchange
contracts are then  designated as fair value hedges until the  settlement of the
import merchandise  accounts payable.  Accordingly,  related gains and losses on
these  forward  contracts  offset the foreign  currency  gains and losses on the
underlying  transactions.  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 to earnings.  The
company did not realize any material gain or loss related to these  transactions
in 2001. The unrealized loss recorded in other comprehensive  income at February
2, 2002 was not material to the company's consolidated financial condition.

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.

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.  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 perfectly  offset changes in the fair value of the fixed rate
debt due to changes in market interest rates. As such,  there was no ineffective
hedge portion recognized in earnings during 2001.

On February  13, 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 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  entered  into a note payable for $147 with a syndicate of financial
institutions in July 2000, repayable in semi-annual installments, with the final
installment  due August  2005.  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.

The  company has reduced the  carrying  amount of its  long-term  debt by $84 at
February 2, 2002, representing the carrying amount of the debt in excess of fair
value  on that  date.  Also at  February  2,  2002,  the  company  has  recorded
derivative  assets of $42 and derivative  liabilities of $122,  representing the
fair value of these derivatives at that date.

These  transactions  did not have a material impact on the company's  results of
operations or cash flows.

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 2, 2002 are as follows:

                                 Gross                     Net
                               minimum    Sublease     minimum
                               rentals      income     rentals
--------------------------------------------------------------
2002                           $   286       $  24     $   262
2003                               286          20         266
2004                               280          17         263
2005                               268          14         254
2006                               255          13         242
2007 and subsequent              1,960          62       1,898
==============================================================
                               $ 3,335       $ 150     $ 3,185
==============================================================

Total rent expense,  net of sublease  income,  was $261,  $291 and $350 in 2001,
2000 and 1999, respectively.

The company's new corporate headquarters facility, located in Wayne, New Jersey,
which  the  company  intends  to fully  occupy by the  summer of 2003,  is being
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 paying
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,  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.  Under  accounting  principles
generally  accepted in the United  States,  this  arrangement  is required to be
treated as an operating  lease for accounting  purposes and will be treated as a
financing for tax purposes.


/36
<PAGE>

                 / notes to consolidated financial statements /

Stockholders' Equity

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

                                        February 2,   February 3,
                                              2002          2001
-----------------------------------------------------------------
Authorized shares                            650.0         650.0
-----------------------------------------------------------------
Issued shares                                300.4         300.4
-----------------------------------------------------------------
Treasury shares                              103.7         102.9
-----------------------------------------------------------------
Issued and outstanding shares                196.7         197.5
=================================================================

Earnings Per Share

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

                                             2001         2000         1999
------------------------------------------------------------------------------
Numerator:
Net earnings available to
  common stockholders                   $      67      $   404      $   279

Denominator for basic earnings
  per share - weighted average
  shares                                    197.6        210.9        244.8

Effect of dilutive securities:
  Stock options, etc                          8.4          4.1          0.6

Denominator for diluted
  earnings per share -
  weighted average shares                   206.0        215.0        245.4
------------------------------------------------------------------------------
Basic earnings per share                $    0.34     $   1.92     $   1.14
==============================================================================
Diluted earnings per share              $    0.33     $   1.88     $   1.14
==============================================================================

Options to purchase approximately 10.3, 3.0 and 38.7 shares of common stock were
outstanding during 2001, 2000 and 1999,  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. As of
February 2, 2002,  these  warrants  have not been  exercised.  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 2, 2002,  this warrant has
not been exercised.

Investment in Toys - Japan

The company  accounts  for its  investment  in the common  stock of Toys - Japan
under the "equity  method" of accounting  since the initial  public  offering on
April 24, 2000.  The quoted market value of the  company's  investment in Toys -
Japan was $283 at February 2, 2002.  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.

Taxes on Income

The provisions for income taxes consist of the following:
                                   2001           2000          1999
----------------------------------------------------------------------
Current:
  Federal                         $  63          $ 120         $ (12)
  Foreign                            10             36            17
  State                               9             10            --
----------------------------------------------------------------------
                                     82            166             5
----------------------------------------------------------------------
Deferred:
  Federal                           (60)            50            31
  Foreign                            16             13           124
  State                             (14)             4             1
----------------------------------------------------------------------
                                    (58)            67           156
======================================================================
Total tax provision               $  24          $ 233         $ 161
======================================================================

At February 2, 2002 and  February 3, 2001,  the company had gross  deferred  tax
assets, before valuation allowances,  of $576 and $486, respectively,  and gross
deferred tax liabilities of $484 and $461, respectively.  Deferred tax assets of
$45 were included in "Prepaid  expenses and other current assets" at February 2,
2002 and February 3, 2001.  Deferred tax assets, net of valuation  allowances of
$244 and $175 were  included in "Other  assets" at February 2, 2002 and February
3, 2001.  Deferred  tax  liabilities  of $36 and $59 were  included  in "Accrued
expenses  and other  current  liabilities"  at February 2, 2002 and  February 3,
2001. 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 2,       February 3,
                                                     2002             2001
-----------------------------------------------------------------------------
Net deferred tax assets/(liabilities):

Foreign loss carryforwards                          $ 296             $ 290

Valuation allowances, primarily related
  to foreign loss carryforwards                      (287)             (266)

Restructuring                                         131                42

Property, plant and equipment                        (322)             (316)

LIFO inventory                                          3               (16)

Other                                                 (16)               25
=============================================================================
Net deferred tax liability                          $(195)            $(241)
=============================================================================

On February 2, 2002, the company had $772 of foreign loss carryforwards of which
$224 must be utilized  within the next seven  years and $548 over an  indefinite
period.

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

                                                  2001       2000       1999
--------------------------------------------------------------------------------
Statutory tax rate                                35.0%      35.0%      35.0%

State income taxes, net of
  federal income tax benefit                       1.8        1.4        0.6

Foreign taxes, net of valuation allowance         (9.4)      (1.2)      25.8

Reversal of deferred tax asset                    (6.5)        --         --

Tax benefit of branch election                      --       (1.4)     (22.5)

Subpart F income                                   5.4        0.6        1.0

Tax on previously unremitted earnings               --        3.7         --

Amortization of goodwill                           3.5        0.5        0.7

Other, net                                        (2.9)      (2.1)      (4.1)
--------------------------------------------------------------------------------
Effective tax rate                                26.9%      36.5%      36.5%
================================================================================


                                                                             37/
<PAGE>

                 / notes to consolidated financial statements /

Deferred  income  taxes are not  provided  on  unremitted  earnings  of  foreign
subsidiaries that are intended to be indefinitely invested. Exclusive of amounts
that, if remitted, would result in little or no tax under current U.S. tax laws,
unremitted  earnings  were  approximately  $506 at February 2, 2002.  Net income
taxes of approximately $108 would be due if these earnings were remitted.

In 2000, the company elected to treat one of its foreign  subsidiaries as a U.S.
branch,  claimed  deductions for its investment in this subsidiary,  and reduced
its current tax expense.  In 1999,  the company also elected to treat two of its
other  foreign  subsidiaries  as U.S.  branches.  Income earned by these foreign
subsidiaries can be offset by foreign loss  carryforwards but will be subject to
current U.S. income tax.

Stock Options

The company has stock option plans (the "Plans")  which provide for the granting
of options to purchase the company's common stock. The Plans cover substantially
all  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.
Prior to June 10, 1999,  options  granted to directors are  exercisable 20% each
year on a cumulative basis commencing one year from the date of grant. Effective
June 10, 1999, the options granted to directors are  exercisable  one-third on a
cumulative basis commencing on the third,  fourth and fifth  anniversaries  from
the date of grant.

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

At February 2, 2002, an aggregate of 48.9 shares of authorized common stock were
reserved for all of the Plans noted above, including 5.0 shares reserved for the
issuance  of  restricted  shares,   restricted  units,  performance  units,  and
unrestricted  shares.  Of these amounts,  15.4 were available for future grants.
All  outstanding  options  expire  at dates  ranging  from  November  2, 2002 to
December 31, 2011.

Stock option transactions are summarized as follows:

                                              Exercise Price    Weighted-Average
                                   Shares        Per Share       Exercise Price
--------------------------------------------------------------------------------
Outstanding at January 30, 1999     36.8     $ 14.78 - $ 40.94      $ 26.02
--------------------------------------------------------------------------------
Granted                              9.7       11.69 -   24.22        18.63
Exercised                           (1.3)      18.16 -   25.44        17.71
Canceled                            (5.4)      18.16 -   39.88        25.34
--------------------------------------------------------------------------------
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
================================================================================

Options  exercisable  and the  weighted-average  exercise  prices  were 20.7 and
$23.94 at January 29, 2000, and 11.3 and $19.60 at February 3, 2001 and 16.1 and
$20.74 at February 2, 2002, respectively.

At February 2, 2002 and February 3, 2001,  the  company's  Toysrus.com  internet
subsidiary  had  approximately  11.3 and 15.0 stock options  outstanding to both
employees and non-employees of the company,  representing  approximately 12% and
15% of the  authorized  common  stock of  Toysrus.com  at  February  2, 2002 and
February 3, 2001, respectively.  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.

The  company  has  adopted  the  disclosure  only  provisions  of SFAS No.  123,
"Accounting for Stock-Based Compensation," issued in October 1995. In accordance
with the provisions of SFAS No. 123, the company  applies APB Opinion 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 table below:


/38
<PAGE>

                 / notes to consolidated financial statements /

                                  2001        2000        1999
---------------------------------------------------------------
Net earnings - as reported       $  67       $ 404       $ 279

Net earnings - pro forma            28         385         232

Basic earnings per share -
  reported                        0.34        1.92        1.14

Basic earnings per share -
  pro forma                       0.14        1.83        0.95

Diluted earnings per share -
  as reported                     0.33        1.88        1.14

Diluted earnings per share -
  pro forma                       0.14        1.79        0.95
===============================================================

The  weighted-average  fair value at date of grant for options  granted in 2001,
2000 and 1999 was $9.16, $5.88 and $6.26,  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
1999 through 2001, a range of assumptions are provided below:

                                2001        2000        1999
--------------------------------------------------------------------------------
Expected  stock  price  volatility  .407 - .567    .434 - .585     .351 - .568

Risk-free interest rate              3.6% - 5.1%    5.0% - 6.8%     4.7% - 6.7%

Weighted average
  expected life of options             5 years        5 years         6 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.

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,  with one-half of
the grant vesting on April 1, 2002 and the  remainder  vesting on April 1, 2003.
Accordingly,  the company recognizes compensation expense throughout the vesting
period of the restricted stock. The company recorded $8 in compensation  expense
related to this restricted stock in both 2002 and 2001.

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 $46,  $50 and $48 have been  charged to  earnings in
2001, 2000 and 1999, respectively.

Toysrus.com

The company entered into an agreement with SOFTBANK which included an investment
by SOFTBANK of $60 in Toysrus.com for a 20% ownership interest. Accordingly, the
company has recorded 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.  In connection with the
agreement  with SOFTBANK,  the company  issued 1.2 stock  purchase  warrants 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. As of February 2, 2002, none of these
warrants have been exercised.

Toysrus.com  entered into a 10-year strategic alliance with Amazon.com to create
a co-branded toy and video game on-line  store,  which was launched in the third
quarter 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
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 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,  guest services,  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.  As of February  2, 2002,  this  warrant has not been
exercised.

In the third quarter of 2000,  Toysrus.com recorded $118 in non- recurring costs
and charges as a result of the transition to the co-branded  site, 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 and web-site asset write-offs,  as well as
other costs  associated  with migrating data and merchandise to the new site and
facilities.   At  the  end  of  2001,  Toysrus.com  had  remaining  reserves  of
approximately $42, primarily for the exit of its Memphis Tennessee  distribution
center,  which is being  actively  marketed.  The  company  believes  that these
remaining reserves are adequate to complete all remaining action plans.

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 28 countries  outside the
United States, Babies"R"Us, which operates stores in 34 states, and Toysrus.com,
the company's internet subsidiary.


                                                                             39/
<PAGE>

                 / notes to consolidated financial statements /

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

                                        February 2,   February 3,    January 29,
                                             2002          2001           2000
-------------------------------------------------------------------------------
Net sales
  Toys"R"Us - U.S.                       $  6,877      $  7,073      $  6,911
  Toys"R"Us - International                 1,889         1,872         1,990
  Babies"R"Us                               1,421         1,310         1,036
  Toysrus.com                                 277           180            49
  Other(a)                                    555           897         1,876
-------------------------------------------------------------------------------
Total                                    $ 11,019      $ 11,332      $ 11,862
===============================================================================
Operating earnings
  Toys"R"Us - U.S.(b)                    $    308      $    431      $    432
  Toys"R"Us - International                   131           124           102
  Babies"R"Us                                 138           120            78
  Toysrus.com,
    net of minority interest                  (76)         (212)          (86)
  Other(b),(c)                               (115)          (37)           (6)
Restructuring and other charges              (186)           --            --
-------------------------------------------------------------------------------
Operating earnings                       $    200      $    426      $    520
  Interest expense, net                      (109)         (104)          (80)
  Gain from IPO of Toys - Japan                --           315            --
-------------------------------------------------------------------------------
Earning before income taxes              $     91      $    637      $    440
===============================================================================
Identifiable assets
  Toys"R"Us - U.S.                       $  5,412      $  5,384      $  4,801
  Toys"R"Us - International                 1,146         1,235         1,274
  Babies"R"Us                                 574           486           389
  Toysrus.com                                  84           141            65
  Other                                       860           757         1,824
-------------------------------------------------------------------------------
Total                                    $  8,076      $  8,003      $  8,353
===============================================================================
Depreciation and amortization
  Toys"R"Us - U.S.                       $    212      $    193      $    172
  Toys"R"Us - International                    41            42            47
  Babies"R"Us                                  29            26            22
  Toysrus.com                                   6             6             2
  Other                                        20            23            35
-------------------------------------------------------------------------------
Total                                    $    308      $    290      $    278
===============================================================================

(a) Includes the net sales of Kids"R"Us  division and the Toys - Japan  division
prior to its initial public  offering on April 24, 2000.

(b)  Includes  markdowns  related  to the store  closings  announced  as part of
restructuring.

(c) Includes the results of the Kids"R"Us  division and the  company's  share of
the net earnings of Toys - Japan, as well as other corporate related items.

Restructuring and Other Charges

On January 28, 2002, the company announced a series of steps designed to enhance
its future cash flow and operating earnings and to allow the company to continue
to  concentrate  its financial  resources on those stores and store formats that
are most  productive.  The company is closing 37 Kids"R"Us stores and, in almost
all of these  locations,  is  converting  the  nearest  Toys"R"Us  store  into a
Toys"R"Us/Kids"R"Us combo store in tandem with the Kids"R"Us store closings. The
company  is also  closing  27  non-Mission  Possible  format  Toys"R"Us  stores,
eliminating approximately 1,900 staff positions at stores and headquarters,  and
consolidating its store support center facilities for its intended move into its
new headquarters in Wayne, New Jersey, which the company intends to fully occupy
by the summer of 2003. The five New Jersey  facilities to be  consolidated  into
the new  headquarters in Wayne,  New Jersey,  include two locations in Montvale,
and one facility each in Paramus, East Hanover, and Fort Lee.

The costs  associated with 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 values of facilities to be consolidated and store closings were
obtained from third party  appraisals.  The company also reversed $24 million of
previously  accrued  charges  ($11  from the 1998  charge  and $13 from the 1995
charge) that have been deemed no longer  needed.  See below for further  details
regarding  the reversal of these  reserves.  Accordingly,  based on all of these
actions,  the company recorded $213 million of pre-tax ($126 million  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:

                                                                       Reserve
                                             Initial     Utilized      Balance
Description                                   Charge      In 2001      2/02/02
--------------------------------------------------------------------------------
Store Closings:
  Lease commitments                             $ 52         $ --         $ 52
  Severance                                        4           --            4
  Write-down of property
  and equipment                                   75           75           --
  Markdowns                                       27           --           27
Store Support Center Consolidation:
  Lease commitments                               28           --           28
  Write-down of property
  and equipment                                   29           29           --
  Severance                                       15           --           15
Other                                              7            7           --
--------------------------------------------------------------------------------
Total restructuring and other charges          $ 237         $111         $126
================================================================================

In 1998, the company announced strategic initiatives to reposition its worldwide
business,  and recorded  restructuring  and other  charges of $353,  including a
restructuring  charge  of $294 to close  and/or  downsize  stores,  distribution
centers and administrative  functions.  This worldwide plan included the closing
of 50 toy stores in the  International  division,  predominately  in continental
Europe,  and 9 in the United  States and the closing of 31 Kids"R"Us  stores and
conversion of 28 nearby U.S. toy stores into  Toys"R"Us/Kids"R"Us  combo stores.
Other  charges  consisted  primarily  of changes  in  accounting  estimates  and
provisions  for legal  settlements  of $59  recorded  in  selling,  general  and
administrative  expenses.  The remaining  reserves related to these charges were
$31 at the end of 2001.

In the  fourth  quarter  of 2001,  the  company  determined  that $11 of  unused
reserves for the closing of  under-performing  stores in central Europe would no
longer be needed and reversed these reserves.  In the third quarter of 2001, the
company completed the satisfaction of certain legal obligations and reversed the
remaining  unused  reserve of $5  million.  In the third  quarter  of 2000,  the
company determined


/40
<PAGE>

                 / notes to consolidated financial statements /

that an $11 million reserve would no longer be needed and reversed this reserve.
These remaining  reserves,  primarily for long-term lease  commitments,  will be
utilized during 2002 and thereafter.

In 1998,  the company also recorded  markdowns and other charges of $345,  which
included $253 for markdowns  required to clear excess inventory from stores, $29
for markdowns related to the store closings and $63 for charges to cost of sales
for inventory system refinements and changes in accounting estimates.

In 1995, the company announced certain initiatives to restructure its world-wide
business.  In the fourth  quarter of 2001,  the company  determined  that unused
reserves of $13 for the  restructuring  of its  international  business would no
longer be needed and  accordingly,  reversed  these  reserves.  The  company has
substantially  completed the  remainder of this  program,  with the exception of
long-term lease  commitment  reserves that will be utilized  throughout 2002 and
thereafter.

The  company  believes  that  unused  reserves  existing at February 2, 2002 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 related to the sale
of a portion of  company-owned  common stock of Toys - Japan. In connection with
this  transaction  the  company  also  received  net cash  proceeds  of $267 and
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 19, 2002, the company refinanced its note payable originally  repayable
through fiscal 2005 and increased the amount outstanding to $160 from $100. This
borrowing is repayable in semi-annual  installments,  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.

On March 13, 2002, the company filed registration statements with the Securities
and Exchange  Commission  indicating  the  company's  intention to issue $550 of
Toys"R"Us equity and equity-linked securities. These securities take the form of
$350 of equity  security units and $200 of Toys"R"Us  common stock.  The company
plans to issue these securities  promptly after the registration  statements are
declared effective. The net proceeds from these offerings will be utilized as an
alternative to short-term borrowings and other general corporate purposes.

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 Bernadino),  against the company
and its 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 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"), an internet marketing company, as a defendant.

These  lawsuits  assert  various  claims under the federal  privacy and computer
fraud statutes,  as well as under state statutory and common law, arising out of
an  agreement  between the company and  Coremetrics,  alleging  that the company
tracks its web site users'  activities  online and shares that  information with
third parties in violation of the law.  These suits seek damages in  unspecified
amounts and other relief under state and federal law.

The company and Coremetrics  filed a joint  application  with the  Multidistrict
litigation panel to have all of the federal actions consolidated and transferred
to the United States District Court for the Northern  District of California.  A
hearing on that  application was held on November 17, 2000, and all matters have
now been  consolidated  in the United  States  District  Court for the  Northern
District of California.

The company moved for a stay of the action in the Superior Court of the State of
California,  County of San Bernadino pending  resolution of the actions filed in
federal court.  The court granted the company's motion for stay on May 22, 2001.
Plaintiffs subsequently voluntarily dismissed the action without prejudice.

The company filed a motion to dismiss  plaintiffs'  federal  causes of action on
August 3, 2001. On October 9, 2001, the United States District  Court,  Northern
California District,  granted in part and denied in part the company's motion to
dismiss. The court's order dismissed one cause of action without leave to amend,
dismissed a second cause of action with leave to amend and denied the  company's
motion as to the third cause of action. On October 16, 2001, plaintiffs filed an
amended  complaint  to remedy  the  defects  in the  cause of action  previously
dismissed with leave to amend.

The company believes that it has substantial  defenses to these claims and plans
to vigorously defend these lawsuits.

The  company  is  party to  certain  other  litigation  which,  in  management's
judgement,  based  in part on the  opinion  of  legal  counsel,  will not have a
material adverse effect on the company's financial position.


                                                                             41/
<PAGE>

                                   / reports /

Report of Management

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

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

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

The financial  statements of the company have been audited by Ernst & Young LLP,
independent  auditors,  in accordance with 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 and                    Executive Vice President
Chief Executive Officer         and Chief Financial Officer

Report of Independent Auditors

The Board of Directors and Stockholders
Toys"R"Us, Inc.

We have audited the accompanying  consolidated balance sheets of Toys"R"Us, Inc.
and  subsidiaries  as of February 2, 2002 and February 3, 2001,  and the related
consolidated  statements  of earnings,  stockholders'  equity and cash flows for
each of the three years in the period ended  February 2, 2002.  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 2, 2002 and February 3, 2001, and the consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  February 2, 2002, in  conformity  with  accounting  principles
generally accepted in the United States.

Ernst & Young LLP
-----------------------
New York, New York
March 14, 2002

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<PAGE>

                           / directors and officers /

Directors

Charles Lazarus
Chairman Emeritus of the company

John H. Eyler, Jr.
Chairman and
Chief Executive Officer
of the company

RoAnn Costin
President, Reservoir Capital
Management, Inc.

Roger N. Farah
President and
Chief Operating Officer,
Polo Ralph Lauren

Peter A. Georgescu
Chairman Emeritus,
Young & Rubicam, Inc.

Michael Goldstein
Chairman, The Toys"R"Us
Children's Fund, Inc.

Calvin Hill
Consultant

Nancy Karch
Retired Senior Partner,
McKinsey & Company

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

Norman S. Matthews
Consultant and former
Vice Chairman of the Board
and President of Federated
Department Stores

Arthur B. Newman
Senior Managing Director,
Blackstone Group

Corporate and Administrative Officers

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

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

Michael D'Ambrose
Executive Vice President -
Human Resources

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

Warren F. Kornblum
Executive Vice President -
Chief Marketing Officer

Louis Lipschitz
Executive Vice President -
Chief Financial Officer

John Holohan
Senior Vice President -
Chief Information Officer

Jon W. Kimmins
Senior Vice President -
Treasurer

Dorvin D. Lively
Senior Vice President -
Corporate Controller

Peter W. Weiss
Senior Vice President - Taxes

Rebecca A. Caruso
Vice President -
Corporate Communications

Ursula H. Moran
Vice President -
Investor Relations

Divisional Officers

Raymond L. Arthur
President - Toysrus.com

John Barbour
President -
Toys"R"Us International

Janet L. Emerson
President - Kids"R"Us
and Imaginarium

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

Richard L. Markee
President - Specialty Businesses
and International Operations

Gregory R. Staley
President - Toys"R"Us U.S.

James R. Bodemuller
Senior Vice President -
Planning and Allocation,
Toys"R"Us U.S.

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

Martin E. Fogelman
Senior Vice President -
General Merchandise Manager,
Juvenile Babies"R"Us

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

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

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

James G. Parros
Senior Vice President -
Stores and Distribution Center
Operations, Kids"R"Us

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

Ernest V. Speranza
Senior Vice President -
Marketing, Toys"R"Us International

Pamela B. Wallack
Senior Vice President -
General Merchandise Manager,
Kids"R"Us

International Country Presidents and Managing Directors

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

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
Acting President -
Toys"R"Us Central Europe

Antonio Urcelay
Managing Director -
Toys"R"Us Iberia

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                                                                             43/
<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
--------------------------------------------------------------------------------
2001
--------------------------------------------------------------------------------
Net Sales                     $ 2,061       $ 2,021    $ 2,178       $ 4,759

Gross Margin                      665           661        710         1,379

Net Earnings/(loss)               (18)          (29)       (44)          158(a)

Basic Earnings
   per Share/(loss)           $ (0.09)      $ (0.15)   $ (0.22)      $  0.80(a)

Diluted Earnings
   per Share/(loss)           $ (0.09)      $ (0.15)   $ (0.22)      $  0.78(a)

2000
--------------------------------------------------------------------------------
Net Sales                     $ 2,319       $ 1,994    $ 2,220       $ 4,799

Gross Margin                      718           636        698         1,465

Net Earnings/(Loss)               215(b)          3        (65)(c)       251

Basic Earnings/(Loss)
   per Share                  $  0.93(b)    $  0.01    $ (0.32)(c)   $  1.27

Diluted Earnings/(Loss)
   per Share                  $  0.93(b)    $  0.01    $ (0.32)(c)   $  1.23


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

(b)   Includes a  non-operating  gain from the initial public offering of Toys -
      Japan of $315 ($200 net of tax, or $0.87 per share).

(c)   Includes Toysrus.com/Amazon.com alliance non-recurring charges of $94 ($60
      net of tax, or $0.30 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 January 29, 2000.

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

The company had approximately 30,269 Stockholders of Record on March 13, 2002.

                                  High             Low
-------------------------------------------------------------
2000   1st  Quarter             $ 15.50          $ 10.06
       2nd  Quarter               18.00            13.44
       3rd  Quarter               19.25            14.88
       4th  Quarter               26.69            14.50
-------------------------------------------------------------
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

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/44
<PAGE>

Store Locations

                     Stores Across the U.S. at Feb. 2, 2002

                                     Toys        Kids       Babies   Imaginarium
--------------------------------------------------------------------------------
Alabama                                8           1           3          --
Alaska                                 3          --          --          --
Arizona                               12          --           3           1
Arkansas                               2          --          --          --
California                            84          18          18          11
Colorado                               8          --           4          --
Connecticut                           10           5           2           4
Delaware                               2           1           1          --
Florida                               46          10          12          --
Georgia                               20           3           7          --
Hawaii                                 1          --          --          --
Idaho                                  2          --          --          --
Illinois                              36          16          10           3
Indiana                               13           6           4          --
Iowa                                   8          --          --          --
Kansas                                 5           1           1          --
Kentucky                               8          --           2           1
Louisiana                             11          --           1          --
Maine                                  2           1          --          --
Maryland                              19           6           4           3
Massachusetts 19                       5           3           1
Michigan                              26          13           6          --
Minnesota                             10           2           2           1
Mississippi                            5          --          --          --
Missouri                              13           3           5          --
Montana                                1          --          --          --
Nebraska                               3          --          --          --
Nevada                                 4          --           2          --
New Hampshire                          5           2          --          --
New Jersey                            26          18           8           7
New Mexico                             4          --           1          --
New York                              46          21          10           5
North Carolina16                       1           6          --
North Dakota                           1          --          --          --
Ohio                                  33          17           9           2
Oklahoma                               5          --           2          --
Oregon                                 8          --           2          --
Pennsylvania                          34          14           5          --
Rhode Island                           1           1           1          --
South Carolina 9                      --           3          --
South Dakota                           2          --          --          --
Tennessee                             15           2           4          --
Texas                                 53           6          15          --
Utah                                   6           3           1          --
Vermont                                1          --          --          --
Virginia                              22           5           6           3
Washington                            15          --           2          --
West Virginia                          4          --          --          --
Wisconsin                             10           3          --          --
Puerto Rico                            4          --          --          --
--------------------------------------------------------------------------------
                                     701         184         165          42
--------------------------------------------------------------------------------

                         Toys"R"Us International - 507

Australia                            25
Austria                               9
Bahrain                               1*
Canada                               63
Denmark                              10*
Egypt                                 1*
France                               31
Germany                              49
Hong Kong                             6*
Indonesia                             3*
Israel                               19*
Japan                               120**
Malaysia                              4*
Mauritius                             1*
Netherlands                          13*
Norway                                2*
Portugal                              6
Qatar                                 1*
Saudi Arabia                          4*
Singapore                             4*
South Africa                          7*
Spain                                32
Sweden                               11*
Switzerland                           4
Taiwan                                6*
Turkey                               10*
United Arab
Emirates                              2*
United Kingdom 63

*     Franchise or joint venture.
**    48% owned.

Corporate Data

Annual Meeting

The Annual Meeting of the  Stockholders  of Toys"R"Us,  Inc. will be held at The
200 Fifth Club,  200 Fifth Avenue,  New York,  New York, on June 5, 2002 at 9:00
a.m.

The Offices of The
Company are Located at

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

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

General Counsel

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

Independent Auditors

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

Registrar and Transfer Agent

American Stock Transfer and Trust Company
59 Maiden Lane New York, New York 10038
Telephone: 877-777-0800

Common Stock Listed

New York Stock Exchange, Symbol: TOY

Stockholder Information

The company will supply to any owner of its common stock,  upon written  request
to Ms. Ursula H. Moran of the company at the above address and without charge, a
copy of the  annual  report on Form 10-K for the year  ended  February  2, 2002,
which has been filed with the Securities and Exchange Commission.

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

Significant news releases are anticipated
to be available as follows:

Call after...     For the following...

May 20, 2002      1st Quarter Results
Aug. 19, 2002     2nd Quarter Results
Nov. 18, 2002     3rd Quarter Results
Jan. 9, 2003      Holiday Sales Results
Mar. 5, 2003      2002 Results

Corporate Citizenship

Giving back to children and the  communities  in which they live is important to
the "R"Us Family. Toys"R"Us, Inc. is an active corporate citizen that supports a
wide-range of national, regional and local charities that nurture and enrich the
lives of children.  The company established The Toys"R"Us  Children's Fund, Inc.
in 1992 to raise money for charities dedicated to supporting children across the
country.  Since then, the Fund has contributed  millions of dollars to more than
200 charities, including hospitals,  educational programs and organizations that
make the lives of children happier and healthier.

In addition to our ongoing  support of  children's  charities,  Toys"R"Us,  Inc.
partnered with child life specialists to develop the Kids Playroom  program,  an
initiative  that builds and monitors  safe play havens in  hospitals  across the
country.  The  fun-filled  playrooms,  currently in more than 50 hospitals in 17
states,  help comfort  children through the magic of play. The warm and inviting
settings bring laughter and joy to young patients and their visitors.

During the 2001 holiday season,  The Toys"R"Us  Children's Fund, Inc.  partnered
with "Good Morning  America" and the Boys and Girls Clubs of America to kick off
the first ever "A Time for Smiles" toy drive,  which  provided  200,000  toys to
needy children throughout the country.

If you would like to receive more information  about Toys"R"Us,  Inc.  corporate
citizenship, please write to the Vice President of Corporate Philanthropy at 461
From Road, Paramus, NJ 07652.

Visit www.toysrus.com, www.babiesrus.com and www.imaginarium.com.


<PAGE>

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