**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

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**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended July 31, 2004**

**Commission file number 1-11609**

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**TOYS “R” US, INC.**

**(Exact name of registrant as specified in its charter)**

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| **Delaware**                                                       | **22-3260693**                                                   |
|--------------------------------------------------------------------|------------------------------------------------------------------|
| **(State or other jurisdiction of incorporation or organization)** | **(IRS Employer Identification Number)**                         |
| **          **   | **          ** |
| **One Geoffrey Way Wayne, New Jersey**                             | **07470**                                                        |
| **(Address of principal executive offices)**                       | **(Zip code)**                                                   |
| **          **   | **          ** |

**(973) 617-3500**

**(Registrant’s telephone number, including area code)**

----

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x      No  ̈

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes x      No  ̈

The number of shares of common stock, $0.10 par value per share, outstanding as of August 26, 2004 was 214,139,744.

 

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#####  

##### **INDEX**

|                                          |                                                                                                                                                                |                                                                                                                                                                                      |
|------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                                                                | **PAGE**                                                                                                                                                                             |
| **PART I – FINANCIAL INFORMATION** |                                                                                                                                                 |                                |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 1.  Financial Statements (unaudited)                                                                                                            |                                                                                                                                                                                      |  |
|                                     |                                                                                                                                                           |                                                                                                                                                                       |  |  |
|                                          |                                                                                                                                                                |                                                                                                                                                                                      | Condensed Consolidated Balance Sheets |  | 2 |
|                                     |                                                                                                                                                           |                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                           |                                                                                                                                                                                 | Condensed Consolidated Statements of Operations |  | 3 |
|                                     |                                                                                                                                                           |                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                           |                                                                                                                                                                                 | Condensed Consolidated Statements of Cash Flows |  | 4 |
|                                     |                                                                                                                                                           |                                                                                                                                                                       |  |  |
|                                     |                                                                                                                                                           |                                                                                                                                                                                 | Notes to the Condensed Consolidated Financial Statements |  | 5 |
|                                     |                                                                                                                                                           |                                                                                                                                                                       |  |  |
|                                     | Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations         |                                                                                                                                                                       | 15 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                          | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                                       |                                                                                                                                                                                      | 25 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 4.  Controls and Procedures                                                                                                                     |                                                                                                                                                                                      | 25 |
|                                     |                                                                                                                                                           |                                                                                                                                                                       |  |  |
|                      |                                                                                                                                                                |                                                                                                                                                                                      |
| **PART II – OTHER INFORMATION**    |                                                                                                                                                                |                                                                                                                                                                                      |
|                                          |                                                                                                                                                                |                                                                                                                                                                                      |  |
|                                     | Item 1.  Legal Proceedings                                                                                                                           |                                                                                                                                                                                      | 26 |
|                                          |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      |                                                                                                                                                                       | 26 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 3.  Defaults Upon Senior Securities                                                                                                                  |                                                                                                                                                                                      | 26 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 4.  Submission of Matters to a Vote of Security Holders                                                                                              |                                                                                                                                                                                      | 27 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 5.  Other Information                                                                                                                                |                                                                                                                                                                                      | 27 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 6.  Exhibits                                                                                                                                    |                                                                                                                                                                                      | 28 |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
| **SIGNATURE**                            |                                                                                                                                                 | 29                                                                                                                                                                                   |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
|                                |                                                                                                                                                                |                                                                                                                                                                                      |
|                                |                                                                                                                                                                |                                                                                                                                                                                      |

----

 

**PART I – FINANCIAL INFORMATION**

**Item 1. FinancialStatements****                                                                                                                            **

Back to Index

**TOYS “R” US, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(In millions)**

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   | **July 31, 2004**              |                                                                                                        | August 2, 2003 (As restated for   EITF 03-10) |                                                              | January 31, 2004 (As restated for EITF 03-10)                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|--------------------------------|--------------------------------------------------------------------------------------------------------|----------------------------------------------------|--------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                    |                                |                                                      |                                                    |            |                                                                                                        |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |  |  |
| *Current Assets:*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                   |       |                   |                                                    |                                     |                   |  |       |                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Cash and cash equivalents                         |                                | **$**                                                                                                  | **1,063**                                          |                                                              | $                                                                                                      | 925 |  | $ | 2,003 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Restricted cash                                   |                                |                                                                                                        |  -                                       |                                                              |                                                                                                        | 53 |  |  |  -  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Accounts and other receivables                    |                                |                                                                                                        | **130**                                            |                                                              |                                                                                                        | 183 |  |  | 146 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Merchandise inventories                           |                                |                                                                                                        | **2,102**                                          |                                                              |                                                                                                        | 2,458 |  |  | 2,080 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Property assets held for sale                     |                                |                                                                                                        | **61**                                             |                                                              |                                                                                                        |  -  |  |  | 163 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Income tax benefit                                |                                | ** **                                                                                             | **98**                                             |                                                              |                                                                                                        |  -  |  |  |  -  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Prepaid expenses and other current assets         |                                | ** **                                                                                             | **99**                                             |                                                              |                                                                                                   | 117 |  |   | 249 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     Total current assets      |                           | ** **                                                                                             | **3,553**                                          |                                                         |                                                                                                   | 3,736 |   |   | 4,641 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |  |  |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                   |                                | **4,465**                                                                                              |                                                    |                                                              | 4,701                                                                                                  |  |  | 4,572 |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                   |                                | **348**                                                                                                |                                                    |                                                              | 348                                                                                                    |  |  | 348 |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                              | ** **                     | **576**                                                                                                |                                               |                                                         | 699                                                                                                    |   |   | 613 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                              |                                |                                                                                                   |                                                    |                                                         |                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                           | **$**                                                                                                  | **8,942**                                          |                                                         | $                                                                                                      | 9,484 |   | $ | 10,174 |
|                                                                                                      |                                              |                                |                                                                                                   |                                                    |                                                         |                                                                                                        |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |  |  |
| *Current Liabilities:*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Short-term borrowings                             |                                | **$**                                                                                                  |  -                                            |                                                              | $                                                                                                      |  -  |  | $ |  -  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Accounts payable                                  |                                |                                                                                                        | **827**                                            |                                                              |                                                                                                        | 957 |  |  | 991 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Accrued expenses and other current liabilities    |                                |                                                                                                        | **693**                                            |                                                              |                                                                                                        | 590 |  |  | 894 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Income tax payable                                |                                |                                                                                                        |  -                                       |                                                              |                                                                                                        | 220 |  |  | 214 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Current portion of long-term debt                 |                                |                                                                                                        | **33**                                             |                                                              |                                                                                                        | 944 |  |  | 657 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     Total current liabilities |                           | ** **                                                                                             | **1,553**                                          |                                                         |                                                                                                   | 2,711 |   |   | 2,756 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |  |  |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                   |                                | **2,268**                                                                                              |                                                    |                                                              | 1,907                                                                                                  |  |  | 2,349 |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                   |                                | **538**                                                                                                |                                                    |                                                              | 564                                                                                                    |  |  | 538 |
| Other non-current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                              | ** **                     | **346**                                                                                                |                                               |                                                         | 279                                                                                                    |   |   | 328 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |  |  |
| Minority interest in Toysrus.com                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              | ** **                     | **5**                                                                                                  |                                               |                                                         | 7                                                                                                      |   |   | 9 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                   |                                |                                                                                                        |                                                    |                                                              |                                                                                                        |  |  |  |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                              | ** **                     | **4,232**                                                                                              |                                               |                                                         | 4,016                                                                                                  |   |   | 4,194 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                              |                                |                                                                                                   |                                                    |                                                         |                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                           | **$**                                                                                                  | **8,942**                                          |                                                         | $                                                                                                      | 9,484 |   | $ | 10,174 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                              |                                |                                                                                                   |                                                    |                                                         |                                                                                                        |

See accompanying notes to the condensed consolidated financial statements.

**2**

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**TOYS “R” US, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(In millions, except per share data)**

 

|                                                                                                                                                                                                                                                                                                                                                        |                          | Quarter Ended      |                   | Six Months Ended                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|--------------------|-------------------|------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                        |                          |                    |                   |                                                                              |
|                                                                                                                                                                                                                                                                                                                                                        |           |     | **July 31, 2004** |                                                               | August 2, 2003 (As restated for   EITF 03-10) |        |      | **July 31, 2004** |     | August 2, 2003 (As restated for   EITF 03-10) |     |
|                                                                                                                                                                                                                                                                                                                                                        |                          |                    |                   |                                                                              |  |  |  |  |  |  |  |
| Net sales                                                                                                                                                                                                                                                                                                                                              |                     |                    | **$**             | **2,022**                                                                    |  |  | $ | 2,104 |   |  |  | **$** | **4,080** |  |  | $ | 4,217 |  |  |
| Cost of sales                                                                                                                                                                                                                                                                                                                                          |                     | **  **   |                   | **1,441**                                                                    |  |    |  | 1,368 |   |  |  |  | **2,771** |  |  |  | 2,761 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                               | Gross margin             |               | ** **        |                                                                              | **581** |  |   |  | 736 |   |  |  |  | **1,309** |  |  |  | 1,456 |  |  |
|                                                           |                          |                    |                   | **            ** |  |  |  |             |  |  |  |  | **           ** |  |  |  |             |  |  |
| Selling, general and administrative expenses                                                                                                                                                                                                                                                                                                           |                     | ** **         |                   | **656**                                                                      |  |   |  | 641 |   |  |  |  | **1,303** |  |  |  | 1,293 |  |  |
| Depreciation and amortization                                                                                                                                                                                                                                                                                                                          |                     | ** **         |                   | **79**                                                                       |  |   |  | 81 |   |  |  |  | **160** |  |  |  | 161 |  |  |
| Restructuring and other charges                                                                                                                                                                                                                                                                                                                        |                          |                    |                   | **38**                                                                       |  |  |  |  -  |  |  |  |  | **53** |  |  |  |  -  |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                               | Total operating expenses |               | ** **        |                                                                              | **773** |  |   |  | 722 |  |  |  |  | **1,516** |  |  |  | 1,454 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
| Operating (loss) / earnings                                                                                                                                                                                                                                                                                                                            |                     | ** **         |                   | **(192**                                                                     | **)** |   |  | 14 |  |  |  |  | **(207** | **)** |  |  | 2 |  |  |
|                                                           |                          |                    |                   | **            ** |  |  |  |             |  |  |  |  | **           ** |  |  |  |             |  |  |
| Interest expense - net                                                                                                                                                                                                                                                                                                                                 |                     | ** **         |                   | **(27**                                                                      | **)** |   |  | (32 | ) |  |  |  | **(56** | **)** |  |  | (61 | ) |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
| Loss before income taxes                                                                                                                                                                                                                                                                                                                               |                          |                    |                   | **(219**                                                                     | **)** |  |  | (18 | ) |  |  |  | **(263** | **)** |  |  | (59 | ) |  |
|                                                           |                          |                    |                   | **            ** |  |  |  |             |  |  |  |  | **           ** |  |  |  |             |  |  |
| Income tax benefit                                                                                                                                                                                                                                                                                                                                     |                     | ** **         |                   | **280**                                                                      |  |   |  | 7 |  |  |  |  | **296** |  |  |  | 22 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
| Net earnings / (loss)                                                                                                                                                                                                                                                                                                                                  |                     |                    | **$**             | **61**                                                                       |  |  | $ | (11 | ) |  |  | **$** | **33** |  |  | $ | (37 | ) |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
| Basic earnings / (loss) per share                                                                                                                                                                                                                                                                                                                      |                     |                    | **$**             | **0.28**                                                                     |  |  | $ | (0.05 | ) |  |  | **$** | **0.15** |  |  | $ | (0.17 | ) |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
| Diluted earnings / (loss) per share                                                                                                                                                                                                                                                                                                                    |                     |                    | **$**             | **0.28**                                                                     |  |  | $ | (0.05 | ) |  |  | **$** | **0.15** |  |  | $ | (0.17 | ) |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
| Average basic shares outstanding                                                                                                                                                                                                                                                                                                                       |                          |                    |                   | **214.2**                                                                    |  |  |  | 213.3 |  |  |  |  | **214.0** |  |  |  | 213.1 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |
| Average diluted shares outstanding                                                                                                                                                                                                                                                                                                                     |                          |                    |                   | **217.5**                                                                    |  |  |  | 213.3 |  |  |  |  | **217.3** |  |  |  | 213.1 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                   |                                                                         |  |  |  |  |  |  |  |

See accompanying notes to the condensed consolidated financial statements.

**3**

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**TOYS “R” US, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In millions)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       | Six Months Ended                                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       | **July 31, 2004**                                                    |               | August 2, 2003 (As restated for EITF 03-10) |
|                                                                                                                |                                                                                                                                                       |                                                                      |  |  |
| **Cash Flows from Operating Activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                  | ** **                                                           | ** ** | ** ** |  |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Net earnings / (loss)                                                                                                                                 |                                                                      | **$** | **33** |  |  | $ | (37 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Adjustments to reconcile net earnings / (loss) to net cash used in operating            activities: |                                        |       |               |    |  |       |               |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |     Depreciation and amortization                |   | ** ** | **160** |  |  |  | 161 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |     Other                                        |   | ** ** | **12** |  |  |  | (6 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |     Changes in operating assets and liabilities: |   | ** ** |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |        Merchandise inventories |   | ** ** | **(29** | **)** |  |  | (251 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |        Prepaid expenses and other operating assets |  |  | **10** |  |  |  | (5 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |        Accrued expenses and other liabilities |  |  | **(196** | **)** |  |  | (273 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |        Accounts payable |  |  | **(156** | **)** |  |  | 61 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |        Income taxes payable / receivable |  |  | **(312** | **)** |  |  | (36 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |   |       Net cash used in operating activities |   | ** ** | **(478** | **)** |  |  | (386 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
| **Cash Flows from Investing Activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                  | ** **                                                           |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Capital expenditures, net                                                                                                                             |                                                                 | ** ** | **(82** | **)** |  |  | (71 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Proceeds from sale of fixed assets                                                                                                                    |                                                                      |  | **103** |  |  |  |  -  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |   |       Net cash provided by / (used in) investing activities |   | ** ** | **21** |  |  |  | (71 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
| **Cash Flows from Financing Activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                  | ** **                                                           |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Long-term debt borrowings                                                                                                                             |                                                                      |  |  -  |  |  |  | 393 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Long-term debt repayment                                                                                                                              |                                                                 | ** ** | **(491** | **)** |  |  | (17 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Other                                                                                                                                                 |                                                                 | ** ** | **5** |  |  |  |  -  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |   |       Net cash (used in) / provided by financing activities |   | ** ** | **(486** | **)** |  |  | 376 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                       |                                                                      |  |  |
| Effect of exchange rate changes on cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                  | ** **                                                           | **3** |  |  |  | (17 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                       |                                                                      |  |  |
| **Cash and cash equivalents: **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Net decrease during period                                                                                                                      |                                                                 | ** ** | **(940** | **)** |  |  | (98 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Cash and cash equivalents at beginning of period                                                                                                |                                                                 |  | **2,003** |  |  |  | 1,023 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Cash and cash equivalents at end of period                                                                                                      |                                                                 | **$** | **1,063** |  |  | $ | 925 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |  |  |
| **Supplemental disclosures of cash flow information:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                       |                                                                      |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Net income taxes paid                                                                                                                           |                                                                 | **$** | **1** |  |  | $ | 12 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Interest paid                                                                                                                                   |                                                                 | **$** | **91** |  |  | $ | 96 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |

See accompanying notes to the condensed consolidated financial statements.

**4**

----

**TOYS “R” US, INC. AND SUBSIDIARIESNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

Back to Index

**1.  Basis of presentation**Except as expressly indicated or unless the context otherwise requires, as used herein, the “company,” “we,” “us,” or “our” means Toys “R” Us, Inc. and its subsidiaries.  We are a worldwide specialtyretailer of toys, baby products and children’s apparel.  Our interim condensed consolidated financial statements are unaudited and are subject to year-end adjustments.  However, in our opinion, all known adjustments (which consist primarily of normal,recurring accruals, and estimates that impact the carrying values of assets and liabilities) have been made and the interim financial statements present fairly the consolidated financial condition and operating results for the unaudited periods.  Ultimateoutcomes could materially differ from our estimates.  Because of the seasonal nature of our business, results for interim periods are not indicative of results to be expected for a full fiscal year.  The financial statements included herein should be readin conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2004. Unless otherwise stated, all per share figures refer to diluted per share amounts. Certain prior period amounts have been reclassified to conform to the current periodpresentation.

**2.  Changes in accounting**In the first quarter of 2004, we applied the provisions of Emerging Issues Task Force (EITF) Issue No. 03-10, “‘Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,’ by Resellers to Sales IncentivesOffered to Consumers by Manufacturers” (EITF 03-10).  Beginning in the first quarter of 2004, sales have been recorded net of coupons that were redeemed.  Under the provisions of EITF 03-10, when we receive credits and allowances from vendors forcoupons related to events that meet the direct offset requirements of EITF 03-10, we will recognize in cost of sales the related reimbursement as an offset to coupon expense during the period of redemption.  Credits and allowances received from vendors that donot meet the direct offset requirements of EITF 03-10 will be recorded as a reduction of product costs in accordance with EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (EITF02-16), which we applied at the beginning of 2003. Our 2003 condensed consolidated financial statements have been restated to the current year’s presentation, as permitted by the provisions of EITF 03-10. 

The following table outlines the unfavorable impact of the adoption of EITF 02-16 and restatement for EITF 03-10 on our 2003 earnings / (loss) before income taxes:

|                                                                                                                                                                                      |       | EITF                                  |                         | Source of change         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|---------------------------------------|--------------------------------------------------|--------------------------|
| (In millions)                                                                                                                                                                        |       | 02-16 Adoption                        |                                                  | 03-10 Restatement        |  | Total |  | Implementation |  | Current Period |
|                                                                                                                                                                                      |                                |                                       |                                                  |                          |
| Second quarter ended August 2, 2003                                                                                                                                                  |                                |       $ | 9                                                |      |     |       $ | 1 |      |     |       $ | 10 |      |     |       $ | 14 |      |     |       $ | (4 | ) |
|                                |                                |                                       |          |                          |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          |  |
| Six months ended August 2, 2003                                                                                                                                                      |                                |       $ | 23                                               |      |     |       $ | 31 |      |     |       $ | 54 |      |     |       $ | 27 |      |     |       $ | 27 |      |
|                                |                                |                                       |          |                          |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          |  |
| Year ended January 31, 2004                                                                                                                                                          |                                |       $ | 50                                               |                          |  |       $ | 43 |  |  |       $ | 93 |  |  |       $ | 74 |  |  |       $ | 19 |      |

 

The provisions of EITF 02-16 and EITF 03-10 did not permit adoption through a cumulative effect adjustment at the beginning of 2003.  As noted above, if we had been permitted to record a cumulative effect adjustment at the beginning of 2003,the unfavorable impact on 2003 earnings / (loss) before taxes would have been reduced by $14 million for the second quarter, $27 million for the first six months of 2003, and $74 million for the full year.  The recognition of credits and allowances received fromvendors for the current period effect noted above, and for all periods subsequent to 2003, will be driven by changes in vendor agreements, the amount of credits and allowances received from vendors, and changes in sales and inventory levels.  The adoption ofEITF 02-16 and EITF 03-10 had no net impact on our condensed consolidated statements of cash flows.

**5**

----

Refer to the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details regarding the restatement made to our condensed consolidated statement of operations for the secondquarter and the six months ended August 2, 2003.

**3.  Restructuring and other charges**Our condensed consolidated financial statements for the six-month period ended July 31, 2004 included the following pre-tax charges related to restructuring initiatives from current and prior years, and are as follows:

| (In millions)Restructuring        and other chargesDepreciation        and amortizationCost of SalesSG&A**Total**
2004 Initiatives$   11$   -$   -$   3**$   14**
2003 Initiatives     22     3     10**     -****     35**
2001 Initiatives     13     -**     -****     -****     13**
1998 and 1995 Initiatives           7     -**     -****     -****            7**
Total$   53$**  **3$   10$   3**$   69**
Restructuring and other charges totaled $38 million and $53 million for the second quarter and the six months ended July 31, 2004, respectively.

At July 31, 2004, we have total remaining reserves of $131 million to complete all of these restructuring initiatives.  We believe that remaining reserves at July 31, 2004 are adequate to complete these initiatives and commitments.  Seebelow for a further discussion of individual restructuring initiatives and related charges and reserves.

***2004 Initiatives***On August 11, 2004, we announced that our Board of Directors has decided to pursue a separation of the Toys “R” Us and Babies “R” Us businesses.  In addition, we announced our intention to restructure thecompany’s corporate headquarter operations in Wayne, New Jersey.  We recorded termination benefits of $14 million associated with this action in the second quarter of 2004.  Of these charges, $3 million were recorded in selling, general andadministrative expenses, and were related to compensation benefits for associates terminated in the second quarter.  As of July 31, 2004, the entire $14 million of reserves for termination benefits remain for this initiative. We anticipate that additionaltermination benefits will be incurred in subsequent quarters relating to the restructuring of the company’s corporate headquarters.

***2003 Initiatives***On November 17, 2003, we announced our decision to close all 146 of our free-standing Kids “R” Us stores and all 36 of our free-standing Imaginarium stores, as well as three distribution centers that support these stores.  A majority of thesefacilities were closed on or before January 31, 2004, and all but 6 have been closed at July 31, 2004.  We expect the remaining stores will close later this year.

On March 2, 2004, we entered into an agreement under which Office Depot, Inc. agreed to acquire 124 of the former Kids “R” Us stores for $197 million in cash, before commissions and fees, plus the assumption of lease payments and otherobligations.  Certain properties have subsequently been excluded from this agreement and are being separately marketed for disposition. We currently expect to receive approximately $180 million in cash, before commissions and fees, from Office Depot, Inc. (orits designee) plus the assumption of lease payments and other obligations.  Those stores that will not be acquired by Office Depot, Inc. (or its designee) either had leases that ended, will be converted to Babies “R” Us stores, or are being marketedfor disposition.  More than half of the closings were completed at July 31, 2004 and cash proceeds of more than $100 million have been received.  We anticipate that the remaining closings will be completed in phases and the resulting gain recorded over thenext several months as the transaction is concluded.

**6**

We recorded charges of $147 million in the fourth quarter of 2003 related to the closing of these facilities.  These charges included $49 million of inventory markdowns recorded in cost of sales and $24 million of depreciation that wasaccelerated through the closing periods of the Kids “R” Us stores.  The remaining $74 million of charges were included in restructuring and other charges.

As outlined in the summary table above, we recorded charges of $20 million and $35 million during the second quarter and the first six months of 2004, respectively, for the closing of the free-standing Kids “R” Us stores.  Includedin the $20 million and $35 million of charges, are inventory markdowns related to this initiative of $7 million, for the second quarter of 2004, and $10 million for the six month ended July 31, 2004, that were recorded in cost of sales. Also included in these chargesare $13 million, for the second quarter of 2004, and $22 million, for the first six months of 2004, of asset impairment, lease obligations, and vacancy-related costs for the closed facilities recorded as restructuring and other charges. In addition, these chargesinclude $3 million of accelerated depreciation recorded in the first six months of 2004. We expect to record additional charges for the remaining stores that will close later this year, as well as for vacancy related costs for closed facilities until theirdisposition.

Details on the activity of charges and reserves for the six-month period ended July 31, 2004 are as follows:

 

(In millions)

Balance at January 31, 2004

   

Adjustments

   

Utilized

**Balance at July 31, 2004**

Inventory markdowns

**           **$

  21

      $

  10

      $

  (31

)

**           $**

** - **

Asset impairment

 - 

6

(6

)

** - **

Real estate and lease commitments

   

13

          

16

       

(17

)

      

**  12**

**          **

Termination benefits

11

 - 

(8

)

      

**3**

Accelerated depreciation

 - 

      

3

(3

)

      

** - **

Total remaining restructuring reserves

   

**           **$

45

          

      $

35

      $

(65

)

      

**           $**

**15**

**          **

***2001 Initiatives***In 2001, we recorded charges to close a number of stores, to eliminate a number of staff positions, and to consolidate five store support center facilities into our Global Store Support Center facility in Wayne, New Jersey.  These actions resulted in totalpre-tax charges of $237 million, which were partially offset by the reversal of $24 million of previously accrued charges ($11 million from the 1998 charge and $13 million from the 1995 charge) that we determined to be no longer needed.  Therefore, we recordednet charges of $213 million in the fourth quarter of 2001, of which $27 million of charges were recorded in cost of sales.  During the second quarter and the first six months of 2004, we recorded an additional $12 million and $13 million of charges related tolease commitments on idle facilities, respectively.

Details on the activity of charges and reserves for the six-month period ended July 31, 2004 are as follows:

(In millions)

Balance at January 31, 2004

   

Adjustments

   

 

Utilized

**Balance at July 31, 2004**

Real estate and lease commitments

**           **

      

     

     

     

     

Store closings

   

$

  25

          

$

  (2

)

$

  (4

)

      

**           $**

**19**

Store support center consolidation

44

13

  (6

)

      

**51**

**          **

Asset write-down

 - 

2

  (2

)

 - 

Total remaining restructuring reserves

   

**           **$

69

          

      $

13

      $

  (12

)

      

**           $**

**  70**

**          **

**7**

***Other Prior Year Initiatives***We had $32 million of reserves remaining at July 31, 2004 from charges previously recorded in 1998 and 1995, primarily for long-term lease commitments, that will be utilized in 2004 and thereafter.  In addition, we have recorded additional charges of $7 millionduring the first six months of 2004 related to properties included in these restructuring initiatives, of which $2 million were recorded in the second quarter of 2004.

***Property Assets Held for Sale***We have included certain real estate assets as current assets in our condensed consolidated balance sheets as they are being held for sale.  Property assets held for sale at July 31, 2004 included former Kids “R” Us real estate assets as discussedabove, as well as our former store support center facility in Montvale, New Jersey.

**4.  Stock-based compensation**We account for stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Options Issued to Employees” (APB 25).  We have adopted the disclosure-only provisions of SFAS No. 123,“Accounting for Stock Based Compensation” (SFAS No. 123), issued in 1995.

In accordance with the provisions of SFAS No. 123, we apply APB 25 and related interpretations in accounting for our stock option plans and, accordingly, do not recognize compensation expense.  If we had elected to recognize compensationexpense based on the fair value of the options granted at the date of grant as prescribed by SFAS No. 123, net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the following table:

 

Quarter Ended

Six Months Ended

(In millions, except per share data)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

Net earnings / (loss) – as reported

**$**

**61**

$

(11

)

**$**

**33**

$

(37

)

Net earnings / (loss) – pro forma

**$**

**58**

$

(21

)

**$**

**24**

$

(56

)

Basic and diluted earnings / (loss) per share – as reported

   

**$**

**0.28**

   

$

(0.05

)

   

**$**

**0.15**

   

$

(0.17

)

Basic and diluted earnings / (loss) per share – pro forma

**$**

**0.27**

$

(0.10

)

**$**

**0.11**

$

(0.26

)

The weighted-average fair value at the date of grant for options granted in the second quarter of 2004 and 2003 was $5.65 and $4.16 per option, respectively. The weighted-average fair value at the date of grant for options granted in the first sixmonths of 2004 and 2003 was $4.95 per option and $2.75 per option, 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 six months periods ended July 31, 2004 and August 2, 2003, a range of assumptions are provided below:

 

Quarter Ended

Six Months Ended

**July 31, 2004**

August 2, 2003

**July 31, 2004**

August 2, 2003

Expected stock price volatility

**0.453**

  

0.518 – 0.548

  

**0.416 – 0.458**

  

0.481 – 0.548

Risk-free interest rate

**3.9%**

2.3% - 3.0%

**2.7% - 3.9%**

2.3% - 3.0%

Weighted average expected life of options

**5 years**

5 years

**5 years**

5 years

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

**8**

**5.  Credits and allowances received from vendors**We receive credits and allowances from vendors that are related to formal agreements negotiated with such vendors.  These credits and allowances, predominantly for cooperative advertising, promotions, and volume-related purchases, are recognized in cost of salesand have a positive impact on our consolidated gross margin.

Credits and allowances from vendors for coupons related to events that meet the direct offset requirements of EITF 03-10 are recognized as an offset to coupon expense, in cost of sales, during the period of redemption (see Note 2 to the condensedconsolidated financial statements for further discussion related to EITF 03-10).

Credits and allowances from vendors not meeting the direct offset requirements of EITF 03-10, along with other credits and allowances from vendors, are recorded as a reduction of product costs in accordance with EITF 02-16 that are recognized whenthe related merchandise inventories are sold.

**6.  Cost of sales and selling, general and administrative expenses**The following table illustrates types of costs included in each category:

 

“Cost of sales”

“SG&A”

 ● 

The cost to acquire merchandise from vendors;

     

 ● 

Store payroll and related payroll benefits;

 ● 

Freight in;

   

 ● 

Rent and other store operating expenses;

 ● 

Markdowns;

   

 ● 

Advertising expenses;

 ●   ●  

Credits and allowances from merchandise vendors; and

Provision for inventory shortages.

 ● 

Costs associated with operating our distribution network that primarily relate to moving merchandise from distribution centers to stores; and

  

 ● 

Other corporate related expenses.

 

**7.  Comprehensive income / (loss)**Comprehensive income / (loss) is calculated in accordance with SFAS No. 130, “Reporting Comprehensive Income” (SFAS No. 130).  SFAS No. 130 requires that comprehensive income include net income, foreign currency translation adjustments, unrealizedgains / (losses) on hedged transactions, and minimum pension liability adjustments, which are reported separately on the consolidated statements of stockholders’ equity in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.  Thecomponents of comprehensive income / (loss) are as follows:

 

Quarter Ended

Six Months Ended

(In millions, net of tax)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

Net earnings / (loss)

**$**

**61**

  

$

(11

)

  

**$**

**33**

  

$

(37

)

Foreign currency translation adjustments

**10**

(4

)

**(10**

**)**

12

Unrealized gain / (loss) on hedged transactions

**(1**

**)**

2

**3**

1

Minimum pension liability adjustments (1)

**(1**

**)**

 - 

 - 

Comprehensive income / (loss)

**$**

**69**

$

(13

)

**$**

**26**

$

(24

)
(1)We sponsor defined benefit pension plans covering certain international employees.  Minimum pension liability adjustments refer solely to our foreign plans.  For further details on ourdefined benefit pension plans, refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
**9**

**8.  Segments**A summary of operations by reportable segment is as follows:

 

Quarter Ended

Six Months Ended

(In millions)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

Net sales

    

  

            

  

     

  

           

  

      

**  **

             

     

            

  

   

Toys “R” Us – U.S.

**$**

**1,044**

$

1,123

**$**

**2,115**

$

2,256

   

Toys “R” Us – International

**472**

432

**888**

808

   

Babies “R” Us

**454**

429

**945**

877

   

Toysrus.com

**51**

51

**104**

108

   

Kids “R” Us (1)

 

**1**

69

**28**

168

Total net sales

 

**$**

**2,022**

$

2,104

**$**

**4,080**

$

4,217

Operating (loss) / earnings (2)

  

  

            

  

   

  

           

  

   

**  **

             

   

            

  

   

Toys “R” Us – U.S.

**$**

**(138**

**)**

$

9

**$**

**(152**

**)**

$

(2

)

   

Toys “R” Us – International

**6**

4

**(8**

**)**

(8

)

   

Babies “R” Us

**54**

46

**117**

100

   

Toysrus.com, net of minority interest

**(5**

**)**

(9

)

**(9**

**)**

(17

)

   

Kids “R” Us

 

**(8**

**)**

(15

)

**(8**

**)**

(23

)

   

Other (3)

**(63**

**)**

(21

)

**(94**

**)**

(48

)

   

Restructuring and other charges

**(38**

**)**

 - 

**(53**

**)**

 - 

 

 

Operating (loss) / earnings

**(192**

**)**

14

**(207**

**)**

2

                                                                 

**     **

     

**     **

     

  

Interest expense, net

 

**(27**

**)**

(32

)

**(56**

**)**

(61

)

Loss before income taxes

 

**$**

**(219**

**)**

$

(18

)

**$**

**(263**

**)**

$

(59

)

(1) We expect the remaining free-standing stores will close later this year.  See Note 3 to the condensed consolidated financial statements for a further discussion.

(2) Consolidated operating loss for the quarter and the six months ended July 31, 2004 included pre-tax charges of  $190 million and $193 million, respectively.   Ofthese charges, we recorded inventory markdowns related the Toys “R” Us - U.S. and Toys “R” Us - International divisions of  $132 million, $15 million, respectively for the second quarter and the six months ended July 31, 2004.  Forthe Kids “R” Us division, we recorded inventory markdowns of $7 million and $10 million for the second quarter and the six months ended July 31, 2004, respectively.  Included in “other” are charges for the second quarter and the sixmonths ended July 31, 2004, related to reserves established for termination benefits and unclaimed property. 

(3) Includes corporate expenses, the operating results of Toy Box, and the equity earnings of Toys “R” Us – Japan, a licensee of ours.

**10**

**9.  Merchandise inventories**Merchandise inventory for our domestic stores, excluding apparel, is stated at the lower of LIFO (Last-In, First Out) cost or market.  If inventories had been valued at the lower of FIFO (First-In, First-Out) cost or market, inventories would show no change atJuly 31, 2004, August 2, 2003, or January 31, 2004.  Apparel inventory and inventory for our International and Toysrus.com divisions are stated at the lower of FIFO cost or market.  Details on the components of our consolidated merchandise inventories areas follows:

(In millions)

**July 31, 2004 (1)**

August 2, 2003(As restated for EITF 03-10)

January 31, 2004(As restated for EITF 03-10)

Toys “R” Us – U.S.

**$**

**1,252**

$

1,512

$

1,314

Toys “R” Us – International

**496**

  ** **

492

  ** **

392

  ** **

Babies “R” Us

      ** **

**302**

      ** **

293

      ** **

328

Toysrus.com

**52**

58

42

Kids “R” Us

**-**

103

4

** $**

**2,102**

 $

2,458

 $

2,080
(1) 2004 inventorybalances include the unfavorable impact of $147 million in inventory markdowns primarily to liquidate selected older toy-store inventory and therefore enhance store productivity and supply chain efficiency.
**10.  Long-term debt and issuance of common stock**On the maturity date of February 13, 2004, we paid a total of $506 million, including interest, to retire our 500 million euro-denominated bond bearing an original interest rate of 6.375% per annum.  In 2001, this obligation was swapped into a $466 million fixedrate obligation with an effective interest rate of 7.43% per annum, interest payments due annually, and principal due on February 13, 2004.

In March 2003, we filed a “shelf” registration statement with the Securities and Exchange Commission giving us the capability to sell up to $800 million of debt securities.  In April 2003, we sold and issued $400 million in notesbearing interest at a coupon rate of 7.875% per annum, maturing on April 15, 2013.  The notes were sold at a price of 98.3% of the principal amount, resulting in an effective yield of 8.125% per annum, and we received net proceeds of $390 million. Simultaneously with the sale of the notes, we entered into interest rate swap agreements.  As a result of these swap agreements, interest accrues at the rate of LIBOR plus 3.6% per annum.  Interest is payable semi-annually and commenced on October 15,2003.  In September 2003, we sold an additional $400 million in notes bearing interest at a coupon rate of 7.375% per annum, maturing on October 15, 2018, which fully utilized our capacity to issue debt under the “shelf” registration statement. The notes were sold at a price of 99.6% of the principal amount, resulting in an effective yield of 7.424% per annum, and we received net proceeds of $395 million.  Simultaneously with the sale of the notes, we entered into interest rate swap agreements. As a result of these swap agreements, interest accrues at the rate of LIBOR plus 2.3% per annum.  Interest is payable semi-annually and commenced on April 15, 2004.  We used the net proceeds from these notes for the repayment of debt that matured in 2004and for other general corporate purposes.  These swaps are designated as highly effective fair value hedges, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133).  Changes in the fair value ofthe interest rate swap offset changes in the fair value of the fixed rate debt due to changes in market interest rates.

In May 2002, we completed public offerings of Toys “R” Us common stock and equity security units. On that date, we issued approximately 15.0 million shares of our common stock at a price of $17.65 per share and received net proceeds of$253 million. Also on that date, we issued approximately 8.0 million equity security units with a stated amount of $50 per unit and received net proceeds of $390 million.

**11**

Each equity security unit consists of a contract to purchase, for $50, a specified number of shares of Toys “R” Us common stock in August 2005, and a senior note due in 2007 with a principal amount of $50. The senior notes are initiallypledged to secure the holder’s obligation to purchase our common stock under the related purchase contract. When the purchase contracts are settled in 2005, we will issue common stock. We will issue a minimum of approximately 18.7 million shares and up to amaximum of 22.8 million shares on the settlement date, depending on our average stock price.

In May 2005, we are obligated to remarket the senior notes at the then prevailing market interest rate for similar notes in order to provide the holders of the units with the cash to settle their purchase contracts. If the senior notes aresuccessfully remarketed, they will pay interest at the reset rate from the settlement date of that remarketing until their maturity in August 2007. If the remarketing were to be unsuccessful, the unit holders would be entitled to deliver the senior note or anequivalent treasury security for payment of the common stock. If the senior notes are not delivered for settlement of the purchase contracts, the senior notes will pay interest at the reset rate until their maturity in August 2007.

**11.  Derivative instruments 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 thesehedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and we record the fair value of these instruments within our consolidated balance sheets.

Gains and losses from derivative financial instruments are largely offset by gains and losses on the underlying transactions. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings.Generally, the contract terms of hedge instruments closely mirror those of the item being hedged, providing a high degree of risk reduction and correlation. At July 31, 2004, we increased the carrying amount of our long-term debt by $23 million, representing the fairvalue of debt in excess of the carrying amount on that date. Also at July 31, 2004, we recorded derivative assets of $48 million and derivative liabilities of $42 million.

We did not realize any material gains or losses related to these transactions for any of the periods presented.  Accordingly, non-cash changes in assets, liabilities and equity have been excluded from the condensed consolidated statements ofcash flows presented.

**12.  Commitments and contingencies**Our condensed consolidated balance sheets contain carrying amounts for certain assets and liabilities that are based on estimates and assumptions.  Certain of these estimates are related to loss contingencies, recoverability of assets, and to other potentialobligations for which we are contingently liable. Such estimates include reserves for self-insured risks, litigation reserves, reserves for disputed amounts with vendors, and tax reserves.  We believe that these reserves are adequate to cover all probable andestimable loss exposures at July 31, 2004.

Our corporate income tax returns are routinely examined by the Internal Revenue Service ("IRS") and other taxing authorities.  In the past year, the IRS proposed, and we agreed to, several adjustments to certaindeductions claimed in our 1997 to 1999 federal income tax returns.  Based on specific facts and circumstances, from time to time, management establishes reserves to cover certain tax related contingencies includingcontingencies resulting from questions raised by the taxing authorities during the course of an examination.  On June 29, 2004, the IRS notified us that its examination of our 1997 to 1999 U.S. federal tax returns was completed and its adjustments werefinal.  As a result, the Company reversed previously accrued income tax reserves that had been established to cover tax related contingencies in the years 1997 to 1999.  This reversal decreased income tax expense and increased net earnings for our secondquarter ended July 31, 2004 by $200 million.

We file unclaimed property returns as required by law.  In certain jurisdictions, the rules concerning proper treatment of unclaimed properties are ambiguous.  In 2003, four states commenced an audit of our unclaimed property returns usingcontingent fee, third-party auditors.  As of July 31, 2004, we believe we have adequate reserves established for potential unclaimed property liabilities.

**12**

On May 21, 2004, we, Toysrus.com, LLC, our Internet subsidiary, and two other affiliated companies, filed a lawsuit against Amazon.com, Inc. and its affiliated companies related to our strategic alliance with Amazon.com, Inc.  The lawsuit wasfiled to protect our exclusivity rights in the toy, game, and baby products categories for the online e-commerce site on the Amazon.com platform.  The complaint seeks injunctive and declaratory relief, monetary damages and contract rescission against Amazon.com,Inc.  The suit was filed in the Superior Court of New Jersey, Chancery Division, Passaic County.  On June 25, 2004, Amazon.com filed a counterclaim against us and our affiliated companies alleging breach of contract relating to inventory and selectionrequirements. 

This counterclaim seeks monetary damages and invokes contract termination rights.  At this time, we do not anticipate that this lawsuit, or the subject matter thereof, will disrupt our ability to continue to offer products and services on oure-commerce sites, affect our customers and suppliers, or have any material effect on our financial condition or results of operations.  We anticipate continuing to make payments in accordance with the agreement.

We are exposed to other claims and litigation arising out of the ordinary course of business.  We believe the currently identified claims and litigation will not have a material adverse effect on our condensed consolidated financialstatements.

**13.  Investment in Toys “R” Us – Japan**We have accounted for our 48% ownership investment in the common stock of Toys “R” Us – Japan, a licensee of ours, using the “equity method” of accounting since the initial public offering of Toys “R” Us – Japan inApril 2000.  Our policy is to account for the sale of subsidiaries’ stock by recognizing gains or losses for value received in excess of, or less than, our basis in such subsidiary.

At July 31, 2004, the quoted market value of our investment was $319 million, which exceeds our carrying value.  The valuation is derived from a mathematical calculation based on the closing quotation published by the Tokyo over-the-countermarket and is not necessarily indicative of the amount that could be realized upon sale.  We are the guarantor of 80% of a 10 billion yen ($90 million) loan to Toys “R” Us – Japan from third parties in Japan.  The loan has an annualinterest rate of 6.47% and is due in 2012.

**14.  Earnings per share**The following table sets forth the computation of basic and diluted earnings per share:

 

Quarter Ended

Six Months Ended

(In millions, except per share data)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

**July 31, 2004**

August 2, 2003 (As restated for EITF 03-10)

Numerator:

Net earnings / (loss) available to common shareholders

**$**

**61**

  

$

(11

)

  

**$**

**33**

  

$

(37

)

                                                    

Denominator for basic earnings per share – weighted average shares

**214.2**

213.3

**214.0**

213.1

                                   

Impact of dilutive securities

** 3.3 **

 - 

** 3.3 **

 - 

                                                        

Denominator for diluted earnings per share – weighted average shares

**217.5**

213.3

**217.3**

213.1

                                                        

Basic earnings / (loss) per share

**$**

**0.28**

$

(0.05

)

**$**

**0.15**

$

(0.17

)

                                                        

Diluted earnings / (loss) per share

**$**

**0.28**

$

(0.05

)

**$**

**0.15**

$

(0.17

)

 

**13**

Options to purchase approximately 21.7 million shares of common stock were outstanding during the second quarter and six-month period ended July 31, 2004.  However, these options to purchase shares of common stock were not included in thecomputation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares.

**15.  Subsequent events**On August 11, 2004, we announced that our Board of Directors has decided to pursue a separation of the Toys “R” Us and Babies “R” Us businesses.

Our Board of Directors continues to evaluate the means of effecting the separation and intends to effect the separation in a manner designed to enhance shareholder value.  We are taking steps, among other actions, to explore the possible saleof the global toy business as well as to prepare for a possible spin-off of Babies “R” Us. We expect to complete the separation of the ownership of the two businesses during the first half of fiscal 2005.

On August 17, 2004 we sold our former global support center in Montvale, New Jersey.   We received net proceeds of $14.5 million, which equaled our net book value.

 

**14**

**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations**

Back to Index

***General***Toys “R” Us, Inc. and its subsidiaries generate sales, earnings, and cash flow by retailing specialty toys, baby products and children’s apparel worldwide.  We operate all of the “R” Us branded stores in the United States, as wellas approximately 50% of the “R” Us branded stores internationally, the balance of which are either licensed or franchised.  Our operating segments include: Toys “R” Us – U.S., Toys “R” Us – International, ourBabies “R” Us specialty baby-juvenile stores, Toysrus.com, our Internet subsidiary, and Kids “R” Us.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to help you better understand and evaluate our financial condition and results of operations.  Werecommend that you read this section in conjunction with our condensed consolidated financial statements in Item 1 and with our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

***Results of Operations***Consolidated net income was $61 million, or $0.28 per share, for the second quarter ended July 31, 2004 versus a consolidated net loss of $11 million, or $0.05 per share for the second quarter ended August 2, 2003.  Consolidated net income was $33 million, or$0.15 per share, for the six months ended July 31, 2004 versus a consolidated net loss of $37 million, or $0.17 per share for the six months ended August 2, 2003. Net income for the second quarter and the first six months of 2004 reflects the reversal of $200 millionof previously accrued income tax reserves that had been established to cover tax related contingencies in the years 1997 to 1999.  See Note 12 to the condensed consolidated financial statements for further details.

As discussed in Note 2 to the condensed consolidated financial statements, we applied the provisions of EITF 03-10 beginning in the first quarter of 2004.  Our 2003 condensed consolidated financial statements have been restated forcomparability purposes, as permitted by the provisions of EITF 03-10.  Also, as discussed in Note 2 to the condensed consolidated financial statements, we applied the provisions of EITF 02-16 beginning in the first quarter of 2003.  The following tablespresent our second quarter 2003 condensed consolidated and segment results, as previously reported and as restated for comparability to the 2004 presentation, as permitted by the provisions of EITF 03-10:

 

**15**

 

**QUARTER ENDED**

(In millions, except per share data)

**July 31, 2004, as reported**

August 2, 2003, as restated for  EITF 03-10 **(1)**

EITF 03-10 adjustments

August 2, 2003, as reported  in 2003 **(2)**

Net sales

 

**$**

**2,022**

**   **

 

$

2,104

   

 

$

(34

)

       

$

2,138

   

Cost of sales

**1,441**

1,368

(33

)

1,401

 

 

Gross margin

**581**

736

(1

)

737

                                                  

Selling, general and administrative    expenses

**656**

641

 - 

   

641

Depreciation and amortization

**79**

81

 - 

81

Restructuring and other charges

**38**

 - 

 - 

 - 

                                                  

 

Total operating expenses

**773**

722

 - 

722

                                                  

Operating (loss) / earnings

**(192**

**)**

14

(1

)

15

                                                  

Interest expense - net

**(27**

**)**

(32

)

 - 

(32

)

                                                  

Loss before income taxes

**(219**

**)**

(18

)

(1

)

(17

)
 
Income tax benefit

**280**

7

1

6

                                                  

Net earnings / (loss)

**$**

**61**

$

(11

)

$

 - 

$

(11

)

                                                  

Basic earnings / (loss) per share

**$**

**0.28**

$

(0.05

)

$

- 

$

(0.05

)

Diluted earnings / (loss) per share

**$**

**0.28**

$

(0.05

)

$

 - 

$

(0.05

)

                                                  

Average basic shares outstanding

**214.2**

213.3

213.3

Average diluted shares outstanding

**217.5**

213.3

213.3

                                                  
(1)The provisions of EITF 02-16 and EITF 03-10 did not permit adoption through a cumulative effect adjustment at the beginning of 2003. Our results for the second quarter of 2003, as restated, wereunfavorably impacted by $14 million ($9 million after-tax), or $0.04 per share, resulting from the non- recurring initial implementation of both EITF 02-16 and EITF 03-10.  For all periods subsequent to 2003, the recognition of credits and allowances receivedfrom vendors will be driven by changes in vendor agreements, the amount of credits and allowances received from vendors, and changes in sales and inventory levels. The adoption of EITF 02-16 and EITF 03-10 had no net impact on our cash flows. See Note 2 to thecondensed consolidated financial statements for a further discussion about the adoption of EITF 02-16 and EITF 03-10. (2) Includes the adoption of EITF 02-16.
**16**

**SIX MONTHS ENDED**

(In millions, except per share data)

**July 31, 2004, as reported**

August 2, 2003, as restated for  EITF 03-10 **(1)**

EITF 03-10 adjustments

August 2, 2003, as reported  in 2003 **(2)**

Net sales

 

**$**

**4,080**

**   **

 

$

4,217

   

  

$

(91

)

 

$

4,308

   

Cost of sales
     
**2,771**
     
2,761
     
(60

)
    
2,821

 

 

Gross margin

**1,309**

1,456

(31

)

1,487

                                                  

Selling, general and administrative    expenses

**1,303**

1,293

 - 

   

1,293

Depreciation and amortization

**160**

161

 - 

161

Restructuring and other charges

**53**

 - 

 - 

 - 

                                                  

 

Total operating expenses

**1,516**

1,454

 - 

1,454

                                                  

Operating (loss) / earnings

**(207**

**)**

2

(31

)

33

                                                  

Interest expense - net

**(56**

**)**

(61

)

 - 

(61

)

                                                  

Loss before income taxes

**(263**

**)**

(59

)

(31

)

(28

)
 
Income tax benefit

**296**

22

12

10

                                                  

Net earnings / (loss)

**$**

**33**

$

(37

)

$

(19

)

$

(18

)

                                                  

Basic earnings / (loss) per share

**$**

**0.15**

$

(0.17

)

$

(0.09

)

$

(0.08

)

Diluted earnings / (loss) per share

**$**

**0.15**

$

(0.17

)

$

(0.09

)

$

(0.08

)

                                                  

Average basic shares outstanding

**214.0**

213.1

213.1

Average diluted shares outstanding

**217.3**

213.1

213.1

                                                  

(1)The provisions of EITF 02-16 and EITF 03-10 did not permit adoption through a cumulative effect adjustment at the beginning of 2003. Our results for the first six months of 2003, as restated, were unfavorablyimpacted by $27 million ($17 million after-tax), or $0.08 per share, resulting from the non-recurring initial implementation of both EITF 02-16 and EITF 03-10.  For all periods subsequent to 2003, the recognition of credits and allowances received from vendorswill be driven by changes in vendor agreements, the amount of credits and allowances received from vendors, and changes in sales and inventory levels. The adoption of EITF 02-16 and EITF 03-10 had no net impact on our cash flows. See Note 2 to the condensedconsolidated financial statements for a further discussion about the adoption of EITF 02-16 and EITF 03-10.(2)Includes the adoption of EITF 02-16.

**17**

**QUARTER ENDED**

(In millions)

**July 31, 2004, as reported**

August 2, 2003, as restated for EITF 03-10

EITF 03-10 adjustments

August 2, 2003, as reported in 2003

Net sales

  

     

  

     

  

     

  

     

Toys “R” Us – U.S.

**$**

**1,044**

$

1,123

$

(18

)

$

1,141

  

Toys “R” Us – International

**472**

432

(9

)

441

Babies “R” Us

**454**

429

(6

)

435

  

Toysrus.com

**51**

51

 - 

51

 

Kids “R” Us (1)

**1**

69

(1

)

70

          

          

Total

**$**

**2,022**

$

2,104

$

(34

)

$

2,138

**   **

**     **

**   **

   

     

   

   

     

   

   

     

   

Operating (loss) / earnings (2)

  

Toys “R” Us – U.S.

**$**

**(138**

**)**

$

9

$

(1

)

$

10

Toys “R” Us – International

**6**

4

 - 

4

Babies “R” Us

**54**

46

 - 

46

  

Toysrus.com, net of minority interest

**(5**

**)**

(9

)

 - 

(9

)

 

Kids “R” Us

**(8**

**)**

(15

)

 - 

(15

)

Other   (3)

**(63**

**)**

(21

)

 - 

(21

)

  

Restructuring and other charges

**(38**

**)**

 - 

 - 

 - 

          

          

Operating (loss) / earnings

**(192**

**)**

14

(1

)

15

          

**   **

**     **

**   **

   

     

   

   

     

   

   

     

   

Interest expense – net

**(27**

**)**

(32

)

 - 

(32

)

          

          

Loss before income taxes

**$**

**(219**

**)**

$

(18

)

$

(1

)

$

(17

)

          

          

(1) We expect the remaining free-standing stores will close later this year.  See Note 3 to the condensed consolidated financial statements for a further discussion.

(2) Consolidated operating loss for the quarter ended July 31, 2004 included pre-tax charges of  $190 million.   Of these charges, we recorded inventory markdownsrelated the Toys “R” Us - U.S., Toys “R” Us – International, and Kids “R” Us divisions of  $132 million, $15 million, and $7 million, respectively.  Included in “other” are charges related to reservesestablished for termination benefits and unclaimed property. 

(3) Includes corporate expenses, the operating results of Toy Box, and the equity earnings of Toys “R” Us – Japan, a licensee of ours.

 

**18**

**SIX MONTHS ENDED**

(In millions)

**July 31, 2004, as reported**

August 2, 2003, as restated for EITF 03-10

EITF 03-10 adjustments

August 2, 2003, as reported in 2003

Net sales

  

     

  

     

  

     

  

     

Toys “R” Us – U.S.

**$**

**2,115**

$

2,256

$

(55

)

$

2,311

  

Toys “R” Us – International

**888**

808

(17

)

825

Babies “R” Us

**945**

877

(14

)

891

  

Toysrus.com

**104**

108

(2

)

110

 

Kids “R” Us (1)

**28**

168

(3

)

171

          

          

Total

**$**

**4,080**

$

4,217

$

(91

)

$

4,308

**   **

**     **

**   **

   

     

   

   

     

   

   

     

   

Operating (loss) / earnings   (2)

  

Toys “R” Us – U.S.

**$**

**(152**

**)**

$

(2

)

$

(27

)

$

25

Toys “R” Us – International

**(8**

**)**

(8

)

(1

)

(7

)

Babies “R” Us

**117**

100

(3

)

103

  

Toysrus.com, net of minority interest

**(9**

**)**

(17

)

 - 

(17

)

 

Kids “R” Us

**(8**

**)**

(23

)

 - 

(23

)

Other   (3)

**(94**

**)**

(48

)

 - 

(48

)

  

Restructuring and other charges

**(53**

**)**

 - 

 - 

 - 

          

          

Operating (loss) / earnings

**(207**

**)**

2

(31

)

33

          

**   **

**     **

**   **

   

     

   

   

     

   

   

     

   

Interest expense – net

**(56**

**)**

(61

)

 - 

(61

)

          

          

Loss before income taxes

**$**

**(263**

**)**

$

(59

)

$

(31

)

$

(28

)

          

(1) We expect the remaining free-standing stores will close later this year.  See Note 3 to the condensed consolidated financial statements for a further discussion.

(2) Consolidated operating loss for the six months ended July 31, 2004 included pre-tax charges of  $193 million.  Of these charges, we recorded inventory markdowns relatedthe Toys “R” Us - U.S., Toys “R” Us – International, and Kids “R” Us divisions of  $132 million, $15 million, and $10 million, respectively.  Included in “other” are charges related to reservesestablished for termination benefits and unclaimed property. 

 (3) Includes corporate expenses, the operating results of Toy Box, and the equity earnings of Toys “R” Us – Japan, a licensee of ours.

                                                          

***Second quarter and six months selected operating highlights:***

Percentage of Sales

Quarter Ended

Six Months Ended

**July 31, 2004, as reported**

August 2, 2003, as restated for EITF 03-10

**July 31, 2004**,**as reported**

August 2, 2003, as restated for EITF 03-10

Cost of sales a

   

**71.3**

**  %**

   

65.0

  %

   

**67.9**

**  %**

   

65.5

  %

Gross margin

**28.7**

**  %**

   

35.0

  %

**32.1**

**  %**

34.5

  %

Selling, general and administrative expenses b

**32.4**

**  %**

   

30.5

  %

**31.9**

**  %**

30.7

  %

Operating (loss) / earnings

**(9.5**

**) %**

   

0.7

  %

**(5.1**

**) %**

 - 

 

Net earnings / (loss) c

**3.0**

**  %**

   

(0.5

) %

**0.8**

**  %**

(0.9

) %

a  2004 results include $154 million and $157 million in inventory markdowns for the second quarter and year to date period, respectively.  Excluding the impact of markdowns, cost of sales were $1,287 million, or 63.6% of total sales for the secondquarter and $2,614 million, or 64.1% of total sales for the six-month period ended July 31, 2004.

b  Includes reserves established for termination benefits and unclaimed property recorded in the second quarter.

c  Includes the reversal of $200 million of income tax reserves recorded in the second quarter.

**19**

***Sales***Consolidated net sales for the second quarter of 2004 were $2.0 billion and $2.1 billion for the second quarter of 2003, representing a decrease of $82 million, or 3.9%, from the second quarter of 2003.  For the six months ended July 31, 2004, consolidated netsales were $4.1 billion, down 3.2% from last year’s $4.2 billion.  Excluding the impact of currency translation that increased sales for the second quarter of 2004 by $30 million, and a $68 million decline in sales associated with thepreviously announced Kids “R” Us (KRU) store closings, total sales decreased by $44 million, or 2.2% for the second quarter.  For the first six months ended July 31, 2004, currency translation had an $81 million favorable impact, while the KRUclosings resulted in a $140 million decline.  Excluding these amounts, sales for the first six months of 2004 were down $78 million, or 1.9% compared with the same period in 2003. These decreases are primarily the result of continued declines incomparable store sales at the Toys “R” Us – U.S. division, which posted comparable store sales declines of 7.7% for the second quarter of 2004 and 6.6% for the six months ended July 31, 2004, partially offset by the  Babies “R” Uscomparable store sales increase of 1.8% for the second quarter of 2004 and a 3.2% for the first half of 2004. 

Overall sales shortfalls were primarily attributable to continued softness in sales of the Toys “R” Us – U.S. division, resulting from a 20% decrease in net sales of video game products in the second quarter of 2004 and 24% for theyear to date period as compared to 2003. The decline in our video game business in the United States is the result of the continued maturation from the last significant video game platform releases in 2001, increased competition, and price deflation of video gameproducts.  We do not expect that any significant video game platforms will be released in 2004. 

***Cost of Sales and Gross Margin***Consolidated gross margin, as a percentage of sales, decreased by 6.3 percentage points to 28.7% during the second quarter of 2004 and 2.4 percentage points to 32.1% for the six months ended July 31, 2004.  Consolidated gross margin for the second quarter of2004 and the six-month period ended July 31, 2004 includes the unfavorable impact of $154 million and $157 million, respectively, in inventory markdowns primarily to liquidate selected older toy store inventory and therefore enhance store productivity and supplychain efficiency. This is also intended to accelerate inventory turnover and generate additional cash flow.  Excluding the unfavorable impact of these inventory markdowns, consolidated gross margin was 36.4 % for the second quarter and 35.9% for the six monthsended July 31, 2004.  Consolidated gross margin for the second quarter and the six months ended August 2, 2003 includes the unfavorable non-recurring impact of the initial implementation of the provisions of EITF 03-10 and EITF 02-16 of $14 million for thesecond quarter and of $27 million for the year to date period.

After excluding the impact of inventory markdowns in 2004, as well as the initial implementation impact of EITF 03-10 and EITF 02-16 in 2003, consolidated gross margin, as a percentage of sales, increased by 0.8 percentage points for the secondquarter of 2004 and 0.7 percentage points for the six months ended July 31, 2004 versus the prior year comparable periods. These increases were primarily due to a more favorable sales mix.  The impact of the above charges primarily affected the Toys“R” Us – U.S. and the International divisions.  The following table illustrates the effects of these charges on our consolidated gross margin:

 

Gross Margin Rate Variance(Over Prior Periods)

Quarter Ended July 31, 2004

Six Months Ended July 31, 2004

**Gross margin rate variance as reported**

**   **

**(6.3**

**) %**

**   **

**(2.4**

**) %**

Impact of inventory markdowns (includes KRU)

7.7

  %

   

3.8

  %

Impact of initial implementation of    EITF 03-10 and EITF 02-16 on 2003 results

(0.6

) %

   

(0.7

) %

Net margin

0.8

  %

   

0.7

  %

 

**20**

Gross margin as a percentage of sales for the Toys “R” Us – U.S. division was 22.1% for the second quarter of 2004 versus 34.2% for the second quarter of 2003.  For the six months ended July 31, 2004, the Toys “R”Us – U.S. division reported gross margin as a percentage of sales of 27.8% versus 33.2% for the prior year comparable period.  Gross margin for the second quarter of 2004 and the six-month period ended July 31, 2004 includes a $132 million unfavorableimpact related to inventory markdowns.  This represents an unfavorable impact of 12.7 percentage points and 6.2 percentage points for the second quarter and the first half of 2004, respectively.  Excluding the unfavorable impact of inventory markdowns in2004, gross margin was 34.8% for the second quarter and 34.0% for the six months ended July 31, 2004.

Gross margin for the second quarter and the six months ended August 2, 2003 for the Toys “R” Us- U.S. division includes the unfavorable non-recurring impact of the initial implementation of the provisions of EITF 03-10 and EITF 02-16 of$9 million for the second quarter and of $19 million for the year to date period.  The implementation effects represented unfavorable variances in gross margin of 0.8 percentage points and of 0.9 percentage points for the second quarter and the six months endedAugust 2, 2003, respectively.  Excluding the effect of inventory markdowns in 2004 and the effect of the implementation of EITF 03-10 and EITF 02-16 in 2003, gross margin for the Toys “R” Us division decreased by 0.2 percentage points for the secondquarter and by 0.1 percentage points for the six months ended July 31, 2004.

Babies “R” Us reported a 1.3 percentage point increase in gross margin to 37.7% of net sales for the second quarter of 2004, up from 36.4% in 2003.  Of this increase, 0.4 percentage points are due to the implementation effects ofEITF 03-10 and EITF 02-16 on 2003 results.  For the six months ended July 31, 2004, Babies “R” Us reported gross margin as a percentage of sales of 37.9 %, an increase of 1.4 percentage points over the comparable period last year.  Of thisincrease, 0.3 percentage points are due to the implementation effects of EITF 03-10 and EITF 02-16. The remaining increases in gross margin for the Babies “R” Us division for the second quarter of 2004 and the six months ended July 31, 2004 were primarilydue to a more favorable sales mix.

The International division reported a decrease in gross margin of 0.8 percentage points to 36.0% for the second quarter of 2004 from 36.8% for the second quarter of 2003.  Gross margin for 2004 includes inventory markdowns of $15 millionrecorded during the second quarter.  Excluding the effect of inventory markdowns, gross margin was 39.2% for the second quarter of 2004.  For the six months ended July 31, 2004, gross margin was 36.8% versus 36.6% for the prior year comparable period. Excluding the effect of the inventory markdowns, gross margin was 38.5% for the first half of 2004. 

Gross margin for the second quarter and the six months period ended August 2, 2003 for the International division includes the implementation effects of EITF 03-10 and EITF 02-16.  This represented unfavorable gross margin variances of 0.7percentage points for both the second quarter and the six months ended August 2, 2003.   Excluding the effect of inventory markdowns in 2004 and the effect of implementation of EITF 03-10 and EITF 02-16 in 2003, gross margin for the International divisionincreased by 1.7 percentage points for the second quarter of 2004 and by 1.2 percentage points for the six months ended July 31, 2004. This net increase in margin at the International division is predominantly related to a favorable sales mix of higher Baby, Learningand owned brands, and lower sales of video product.

Toysrus.com reported an increase of 3.9 percentage points in gross margin to 29.4% for the second quarter of 2004 and an increase of 4.8 percentage points to 29.8% for the six months ended July 31, 2004.  The inventory markdowns and theimplementation of EITF 03-10 and EITF 02-16 did not affect the gross margin at Toysrus.com. The increase in gross margin for Toysrus.com reflects a favorable shift of business from lower margin video game products to higher margin Baby and Toy products, as well aslower markdowns due to improved inventory management.   

***Selling, General and Administrative Expenses***Consolidated SG&A expenses, as a percentage of sales, for the second quarter of 2004 increased by 1.9 percentage points to 32.4% and by 1.2 percentage points to 31.9% for the six months period ended July 31, 2004.  These increases were primarily attributableto charges related to the establishment of reserves for termination benefits and unclaimed property.  These charges represented 1.7 percentage points of the increase for the second quarter of 2004 and 0.8 percentage points of the increase for the six monthsended July 31, 2004.  The remaining increases for the second quarter and the six months ended July 31, 2004 were the result of the net sales decreases discussed above, partially offset by overall cost containment measures.

**21**

***Foreign Currency Exchange***Operating loss for the second quarter of 2004 was $192 million versus operating earnings of $14 million for the second quarter of 2003.  Operating loss for the second quarter of 2004 included a favorable foreign exchange impact of $2 million.  Excluding theimpact of foreign currency translation, operating loss for the second quarter of 2004 was $194 million.  Operating loss for the six months ended July 31, 2004 was $207 million versus operating earnings of $2 million for the six months ended August 2, 2003. Current year to date operating loss included a $1 million unfavorable foreign exchange impact. 

Operating earnings for the Toys “R” Us – International division were $6 million for the second quarter of 2004 versus $4 million for the second quarter of 2003.  Operating earnings for 2004 included an unfavorable impact of$15 million of the previously mentioned inventory markdowns.  Excluding the impact of foreign currency translation and the impact of inventory markdowns, operating earnings for the Toys “R” Us – International division were $19 million for thesecond quarter of 2004 versus operating earnings of $4 million for the second quarter of 2003. Operating loss for the Toys “R” Us – International division was $8 million for the first six months of 2004 in line with the operating loss for2003.  Excluding the impact of foreign currency translation and the effect of the inventory markdowns, operating earnings for the Toys “R” Us – International division were $8 million for the first six months of 2004 versus an operating loss of$8 million for the first six months of 2003.

***Restructuring and Other Charges***On August 11, 2004, we announced that our Board of Directors has decided to pursue a separation of the Toys “R” Us and Babies “R” Us businesses.  In addition, we announced our intention to restructure thecompany’s corporate headquarter operations in Wayne, New Jersey.  We recorded termination benefits and other related charges of $14 million associated with this action in the second quarter of 2004. Of these charges, $3 million were recorded inselling, general and administrative expenses and related to compensation benefits for associates terminated in the second quarter.  As of July 31, 2004, the entire $14 million of reserves for termination benefits remain for this initiative. We anticipate thatadditional termination benefits will be incurred in subsequent quarters relating to the restructuring of the company’s corporate headquarters**.**

On November 17, 2003, we announced our decision to close all 146 of our free-standing Kids “R” Us stores and all 36 of our free-standing Imaginarium stores, as well as three distribution centers that support these stores.  On March2, 2004, we entered into an agreement under which Office Depot, Inc. agreed to acquire 124 of the former Kids “R” Us stores.  Certain properties have subsequently been excluded from the agreement with Office Depot, Inc. and these properties are beingmarketed for disposition.  We currently expect to receive approximately $180 million in cash, before commissions and fees, from Office Depot, Inc. (or its designee) plus the assumption of lease payments and other obligations.  We recorded charges of $20million and $35 million during the second quarter and the first six months of 2004, respectively, for the closing of the free-standing Kids “R” Us stores.  Included in the $20 million and $35 million of charges, are inventory markdowns related tothis initiative of $7 million, for the second quarter of 2004, and $10 million for the six month ended July 31, 2004, that were recorded in cost of sales. Also included in these charges are $13 million, for the second quarter of 2004, and $22 million, for the firstsix months of 2004, of asset impairment,  lease obligations, and vacancy-related costs for the closed facilities recorded as restructuring and other charges. In addition, these charges include $3 million of accelerated depreciation recorded in the first sixmonths of 2004. We expect to record additional charges for the remaining stores that will close later this year, as well as for vacancy related costs for closed facilities until their disposition.  Those stores that will not be acquired by Office Depot, Inc. (orits designee) either had leases that ended, will be converted to Babies “R” Us stores, or are being marketed for disposition. More than half of the closings were completed at July 31, 2004 and cash proceeds of more than $100 million have beenreceived.  We anticipate that the remaining closings will be completed in phases and the resulting gain recorded, over the next several months as the transaction is concluded.

In 2001, we recorded charges to close a number of stores, to eliminate a number of staff positions, and to consolidate five store support center facilities into our Global Store Support Center facility in Wayne, New Jersey. In connection with thisinitiative, we recorded an additional $13 million of charges, of which $12 million were recorded in the second quarter of 2004, related to lease commitments on idle facilities.

**22**

In 1998 and 1995, we announced strategic initiatives to reposition our worldwide business. These included charges primarily for long-term lease commitments that will be utilized in 2004 and thereafter. We have recorded additional charges of $7million during the first six months of 2004 related to properties included in these restructuring initiatives, of which $2 million were recorded in the second quarter of 2004.  See Note 3 to the condensed consolidated financial statements for a furtherdiscussion about restructuring and other charges.

***Liquidity and Capital Resources***Our primary sources of liquidity are cash flow provided from operations, our existing cash balances, and our $685 million unsecured revolving credit facility that expires in September 2006.  Our $200 million unsecured revolving credit facility, which we chosenot to renew, expired on May 20, 2004.

The seasonal nature of our business typically causes cash balances to decline from the beginning of the fiscal year through October as inventory levels increase for the holiday selling season and funds are used for construction of new stores,remodeling existing stores, and other initiatives that normally occur in this period.  Our unsecured revolving credit facility is available for seasonal borrowing and other general corporate purposes.  We had no outstanding balances under this creditfacility at the end of the second quarter. 

We believe that cash flow from our operations in 2004, along with our existing cash and our unsecured revolving credit facility, will be adequate to meet our expected cash flow requirements, and to fund our planned capital expenditures for at leastthe next 12 months.  In addition, our next significant debt maturity will occur in 2006 and we believe that we will be able to either repay or refinance this maturing debt.

Net cash used in operating activities for the first six months of 2004 was $478 million compared to $386 million for the first six months of 2003.  The increase in net cash used in operating activities is due to a decrease in accounts payableand a decrease in income tax payable, partially offset by a smaller increase in inventory levels.  The decrease in the accounts payable balance was the result of a change in the timing of certain vendor payments. The decrease in income tax payable was primarilythe result of the reversal of income tax reserves of $200 million. The smaller increase in inventory levels was the result of the $157 million of markdowns primarily to liquidate selected older toy store inventory as well as better inventory management.

Net cash used in financing activities was $486 million for the first six months of 2004 compared to net cash provided by financing activities in the first six months of 2003 of $376 million.  Financing activities for the first six months of2004 reflect the payment of our 500 million euro-denominated bond bearing an original interest rate of 6.375% per annum.  In 2001, this obligation was swapped into a $466 million fixed rate obligation with an effective interest rate of 7.43% per annum, interestpayments due annually, and principal due on February 13, 2004.  Financing activities in the first six months of 2003 reflect the receipt of the net proceeds of $390 million from the issuance and sale of $400 million aggregate principal notes bearing interest ata coupon rate of 7.875% issued on April 15, 2003 and due April 15, 2013.  The notes were sold at a price of 98.3% of the principal amount, resulting in an effective yield of 8.125% per annum.  Simultaneously with the sale of the notes, we entered intointerest rate swap agreements.  As a result of these swap agreements, interest accrues at the rate of LIBOR plus 3.6% per annum.

***Uses of Capital***Net capital expenditures increased by $11 million during the first half of 2004 versus the comparable period in 2003.  This increase is the result of increased investment in new and renovated Babies “R” Us stores.   For 2004, we plan toinvest approximately $340 million in capital expenditures.  This includes plans to open approximately 20 new Babies “R” Us stores in 2004, several of which will be conversions of former Kids “R” Us stores, and approximately 20 existingstores will be renovated to our newest prototype.  We also plan to open approximately nine new wholly-owned international Toys “R” Us stores and to convert approximately 35 Toys “R” Us stores in the United States into combo stores, whichcombine our toy offering with children’s apparel.  In addition, we plan to improve and enhance our information technology systems.

**23**

***Credit Ratings***On March 10, 2004, Standard & Poor’s revised our long-term debt credit rating to BB, a one level downgrade from BB+.  On March 24, 2004, Moody’s revised our long-term debt credit rating to Ba2, a two level downgrade from Baa3.  These currentcredit ratings are considered non-investment grade and are as follows:

 

**Moody’s**

**Standard and Poor’s**

Long-term debt

          

Ba2

          

BB

Commercial paper

NP

NR

Outlook

Negative

Negative

 

Other credit ratings for our debt are available; however, we have disclosed only the ratings of the two largest nationally recognized statistical rating organizations because we believe these are the most relevant to our business.

Our current credit ratings, as well as future rating agency actions, could (1) negatively impact our ability to finance our operations on satisfactory terms; (2) have the effect of increasing our future financing costs; and (3) have the effect ofslightly increasing our insurance premiums and collateral requirements necessary for our self-insured programs.  Our debt instruments do not contain provisions requiring acceleration of payment upon a debt rating downgrade.

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

A summary of significant accounting policies and a description of accounting policies that we believe critical may be found in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004, in the Critical Accounting Policies section ofthe Management’s Discussion and Analysis of Financial Condition and Results of Operations.***Forward-Looking Statements***This Form 10-Q contains “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors createdthereby.  All statements herein that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements.  We generally identify these statements by words or phrases, such as “anticipate,”“estimate,” “plan,” “expect,” “believe,” “intend,” “foresee,” “will,” “may,” and similar words or phrases.  These statements discuss, among other things,implementation of the results of our strategic review, restructurings, our strategy, store openings and renovations, future financial or operational performance, anticipated cost savings, store closings, anticipated domestic or international development, and othergoals and targets.  These statements are subject to risks, uncertainties, and other factors, including, among others, competition in the retail industry, seasonality of our business, changes in consumer preferences and consumer spending patterns, generaleconomic conditions in the United States and other countries in which we conduct our business, our ability to implement our strategy, availability of adequate financing, our dependence on key vendors for our merchandise, international events affecting the delivery oftoys and other products to our stores, economic, political and other developments associated with our international operations, and risks, uncertainties and factors set forth in our reports and documents filed with the United States Securities and Exchange Commission(which reports and documents should be read in conjunction with this Quarterly Report on Form 10-Q).  We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actualresults or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements.  Forward-looking statements speak only as of the date they were made,and we undertake no obligation to update these statements in light of subsequent events or developments.  Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

**24**

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**Item 3.  Quantitative and Qualitative Disclosures About Market Risk**We are exposed to market risk from potential changes in interest rates and foreign exchange rates.  Our market risks at July 31, 2004 are similar to those disclosed in Item 7a of our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.  Wecontinue to regularly evaluate these risks and continue to take measures to mitigate these risks, including, among other measures, entering into derivative financial instruments to hedge a variety of risk exposures including interest rate and currency risks. There has been no material change to our market risk since January 31, 2004.

**Item 4.  Controls and Procedures**(a) Disclosure Controls and Procedures.  As of July 31, 2004, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to Rules 13a- 15 (e) and 15d -15 (e) under the Securities Exchange Act of 1934.  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controlsand procedures are effective in timely alerting them to material information required to be included in our SEC periodic reports.

(b) Internal Controls Over Financial Reporting.  There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarterto which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

**25**
**PART II - OTHER INFORMATION**
Back to Index
**Item 1.  Legal Proceedings**
On May 21, 2004, we, Toysrus.com, LLC, our Internet subsidiary, and two other affiliated companies, filed a lawsuit against Amazon.com, Inc. and its affiliated companies related to our strategic alliance with Amazon.com, Inc.  The lawsuit was filed to protect our exclusivity rights in the toy, game, and baby products categories for the online e-commerce site on the Amazon.com platform.  The complaint seeksinjunctive and declaratory relief, monetary damages and contract rescission against Amazon.com, Inc.  The suit was filed in the Superior Court of New Jersey, Chancery Division, Passaic County.  On June 25, 2004, Amazon.com filed a counterclaim against us and our affiliated companies alleging breach of contract relating to inventory and selection requirements. This counterclaim seeks monetary damages and invokes contract terminationrights.  At this time, we do not anticipate that this lawsuit, or the subject matter thereof, will disrupt our ability to continue to offer products and services on our e-commerce sites, affect our customers and suppliers,or have any material effect on our financial condition or results of operations.  We anticipate continuing to make payments in accordance with the agreement. 
From time to time, in the ordinary course of business, we are involved in various legalproceedings, including commercial disputes, personal injury claims and employment issues.  We do not believe that any of these proceedings will have a material adverse effect on our financial condition, results ofoperations, or cash flows.
         

         

         
**Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**
         

The following table presents information with respect to repurchases of common stock made by us during the three months ended July 31, 2004.  These shares were either delivered to us by employees as payment for the exercise price of stockoptions or purchased by us and held in trust pursuant to our Non-Employee Directors’ Deferred Compensation Plan to mirror deferred restricted stock units that were granted by us to our non-employee directors during this period.

 

Period

          

Total Number of  Shares Purchased

      

Average Price Paid per Share

Total Number of Shares  Purchased as Part of  Publicly Announced  Plans or Programs   

Approximate Dollar Value  of Shares That May Yet  Be Purchased Under  the Plans or Programs

                              

    

        

    

    

        

    

05/02/2004 – 05/29/2004

(1)

    

7,981

    

    $

15.69

    
-
$

-

(2)

    

6,564

    

15.32

    

05/30/2004 – 06/26/2004

    

-

    

    $

-

    
-
$

-

06/27/2004 – 07/31/2004

    

-

    

    $

-

    
-
$

-

                              

**Total**

**    **

**14,545**

**    **

    **$**

**15.52**

    
-
$

-

                              

(1) Represents shares of common stock purchased and held in a rabbi trust established under our Non-Employee Directors’ Deferred Compensation Plan to mirror deferred restricted stock units that were grantedduring this period pursuant to our Non-Employee Directors’ Stock Unit Plan.

(2) Represents shares of common stock delivered to us as payment of taxes on the vesting of restricted units under our Amended and Restated 1994 Stock Option and Performance Incentive Plan.

 
**Item 3.  Defaults Upon Senior Securities**
         

         

None.

         

                                                                                                                                                                             

**26**

 

**Item 4.  Submission of Matters to a Vote of Security Holders**

(a)

The company’s annual meeting of stockholders was held on June 2, 2004.

         

         

(b)

At the meeting, the stockholders elected for one-year terms all persons nominated for directors as set forth in the company’s Proxy Statement, dated April 14, 2004.  The names of all directors are set forth below. 

         

         

(c)

A brief description of each matter voted on and the approximate number of votes cast are as follows:

         

         

(1)

The following table sets forth the vote of the stockholders with respect to the election of directors:

 

**Votes For**

**Votes Withheld**

         

RoAnn Costin

187,750,601

4,107,720

         

John H. Eyler, Jr.

188,181,896

3,676,425

         

Roger N. Farah

189,817,881

2,040,440

         

Peter A. Georgescu

187,805,333

4,052,988

Cinda A. Hallman

189,817,404

2,040,917

         

Calvin Hill

175,031,756

16,826,565

         

Nancy Karch

187,805,349

4,052,972

         

Norman S. Matthews

173,581,847

18,276,474

Arthur B. Newman

171,658,143

20,200,178

Frank R. Noonan

189,817,589

2,040,732

         

         

         

         

(2)

The following table sets forth the vote of the stockholders regarding the stockholder proposal to amend our governance documents to provide that nominees standing for election to the board of directors must receive the vote of a majority of sharesentitled to vote and present in person or by proxy at an annual meeting of the stockholders:

         

         

         

**For**

**Against**

**Abstaining**

19,324,390

142,207,069

1,079,706

 
**Item 5.  Other Information**
         

  None

         

         

                                                                                                                                                                                  

**27**

 
**Item 6.  Exhibits**
         

Exhibit No.

Description

         

3.1

         

Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Form 8-B, filed on January 3, 1996 and incorporated herein by reference).

3.2

         

Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Form 10-Q, filed on May 3, 2003 and incorporated herein by reference).

10.1

Retention agreement between Toys “R” Us, Inc. and Deborah Derby, dated as of May 3, 2004.

         

31.1

         

Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

         

31.2

         

Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

         

32.1

         

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

       

32.2

         

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

**28**
**SIGNATURE**
Back to Index

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

         

 

         

         

**TOYS “R” US, INC.**

         

(Registrant)

    

         

     

Date:  September 9, 2004

         

**/s/ Raymond L. Arthur**

Raymond L. Arthur

         

Executive Vice President – Chief Financial Officer

         

 

**29**
**INDEX TO EXHIBITS**
 

The following is a list of all exhibits filed or furnished as part of this report:

Exhibit No.

Description

       

3.1

              

Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Form 8-B, filed on January 3, 1996 and incorporated herein by reference).

       

3.2

              

Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Form 10-Q, filed on May 3, 2003 and incorporated herein by reference).

10.1

Retention agreement between Toys “R” Us, Inc. and Deborah Derby, dated as of May 3, 2004.

       

31.1

              

Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

              

Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

       

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

       

32.2

              

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

**30** |
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