**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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 October 30, 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)**

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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 theregistrant was required to file 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 November 25, 2004 was 215,057,434.

 

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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         |                                                                                                                                                                       | 16 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                          | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                                       |                                                                                                                                                                                      | 28 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 4.  Controls and Procedures                                                                                                                     |                                                                                                                                                                                      | 28 |
|                                     |                                                                                                                                                           |                                                                                                                                                                       |  |  |
|                      |                                                                                                                                                                |                                                                                                                                                                                      |
| **PART II – OTHER INFORMATION**    |                                                                                                                                                                |                                                                                                                                                                                      |
|                                          |                                                                                                                                                                |                                                                                                                                                                                      |  |
|                                     | Item 1.  Legal Proceedings                                                                                                                           |                                                                                                                                                                                      | 29 |
|                                          |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      |                                                                                                                                                                       | 29 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 3.  Defaults Upon Senior Securities                                                                                                                  |                                                                                                                                                                                      | 29 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 4.  Submission of Matters to a Vote of Security Holders                                                                                              |                                                                                                                                                                                      | 30 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 5.  Other Information                                                                                                                                |                                                                                                                                                                                      | 30 |
|                                     |                                                                                                                                                 |                                                                                                                                                                                      |  |
|                                     | Item 6.  Exhibits                                                                                                                                    |                                                                                                                                                                                      | 30 |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
| **SIGNATURE**                            |                                                                                                                                                 | 31                                                                                                                                                                                   |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
|                           |                                                                                                                                                                |                                                                                                                                                                                      |
|                                |                                                                                                                                                                |                                                                                                                                                                                      |
|                                |                                                                                                                                                                |                                                                                                                                                                                      |

 

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**PART I – FINANCIAL INFORMATION**

**Item 1. Financial Statements****                                                                                                                            **

Back_to_Index

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

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   | **October 30, 2004**           |                                                                                                        | November 1, 2003 (As restated for   EITF 03-10) |                                                              | January 31, 2004 (As restated for EITF 03-10)                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|--------------------------------|--------------------------------------------------------------------------------------------------------|------------------------------------------------------|--------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                    |                                |                                                      |                                                      |            |                                                                                                        |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |  |  |
| *Current Assets:*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                   |       |                   |                                                      |                                     |                   |  |       |                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Cash and cash equivalents                         |                                | **$**                                                                                                  | **748**                                              |                                                              | $                                                                                                      | 961 |  | $ | 2,003 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Restricted cash                                   |                                |                                                                                                        |  -                                         |                                                              |                                                                                                        | 49 |  |  |  -  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Accounts and other receivables                    |                                |                                                                                                        | **147**                                              |                                                              |                                                                                                        | 131 |  |  | 146 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Merchandise inventories                           |                                |                                                                                                        | **3,092**                                            |                                                              |                                                                                                        | 3,556 |  |  | 2,080 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Property assets held for sale                     |                                |                                                                                                        | **10**                                               |                                                              |                                                                                                        |  -  |  |  | 163 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Income tax benefit                                |                                | ** **                                                                                             | **133**                                              |                                                              |                                                                                                        |  -  |  |  |  -  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Prepaid expenses and other current assets         |                                | ** **                                                                                             | **97**                                               |                                                              |                                                                                                   | 111 |  |   | 249 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     Total current assets      |                           | ** **                                                                                             | **4,227**                                            |                                                         |                                                                                                   | 4,808 |   |   | 4,641 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |  |  |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                   |                                | **4,533**                                                                                              |                                                      |                                                              | 4,751                                                                                                  |  |  | 4,572 |
| Goodwill and other intangibles, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                   |                                | **387**                                                                                                |                                                      |                                                              | 348                                                                                                    |  |  | 348 |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                              | ** **                     | **571**                                                                                                |                                                 |                                                         | 744                                                                                                    |   |   | 613 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                              |                                |                                                                                                   |                                                      |                                                         |                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                           | **$**                                                                                                  | **9,718**                                            |                                                         | $                                                                                                      | 10,651 |   | $ | 10,174 |
|                                                                                                      |                                              |                                |                                                                                                   |                                                      |                                                         |                                                                                                        |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |  |  |
| *Current Liabilities:*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Short-term borrowings                             |                                | **$**                                                                                                  |  -                                         |                                                              | $                                                                                                      |  -  |  | $ |  -  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Accounts payable                                  |                                |                                                                                                        | **1,601**                                            |                                                              |                                                                                                        | 1,727 |  |  | 991 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Accrued expenses and other current liabilities    |                                |                                                                                                        | **667**                                              |                                                              |                                                                                                        | 572 |  |  | 894 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Income tax payable                                |                                |                                                                                                        |  -                                         |                                                              |                                                                                                        | 180 |  |  | 214 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Current portion of long-term debt                 |                                |                                                                                                        | **32**                                               |                                                              |                                                                                                        | 967 |  |  | 657 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     Total current liabilities |                           | ** **                                                                                             | **2,300**                                            |                                                         |                                                                                                   | 3,446 |   |   | 2,756 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |  |  |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                   |                                | **2,293**                                                                                              |                                                      |                                                              | 2,311                                                                                                  |  |  | 2,349 |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                   |                                | **538**                                                                                                |                                                      |                                                              | 564                                                                                                    |  |  | 538 |
| Other non-current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                              | ** **                     | **313**                                                                                                |                                                 |                                                         | 307                                                                                                    |   |   | 328 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |  |  |
| Minority interest in Toysrus.com                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              | ** **                     |  -                                                                                           |                                                 |                                                         | 10                                                                                                     |   |   | 9 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                   |                                |                                                                                                        |                                                      |                                                              |                                                                                                        |  |  |  |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                              | ** **                     | **4,274**                                                                                              |                                                 |                                                         | 4,013                                                                                                  |   |   | 4,194 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                              |                                |                                                                                                   |                                                      |                                                         |                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                   |                           | **$**                                                                                                  | **9,718**                                            |                                                         | $                                                                                                      | 10,651 |   | $ | 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      |                      | Nine Months Ended  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|--------------------|----------------------|--------------------|
|                                                                                                                                                                                                                                                                                                                                                        |                          |                    |                      |                    |
|                                                                                                                                                                                                                                                                                                                                                        |           |     | **October 30, 2004** |     | November 1, 2003 (As restated for   EITF 03-10) |        |      | **October 30, 2004** |     | November 1, 2003 (As restated for   EITF 03-10) |     |
|                                                                                                                                                                                                                                                                                                                                                        |                          |                    |                      |                    |  |  |  |  |  |  |  |
| Net sales                                                                                                                                                                                                                                                                                                                                              |                     |                    | **$**                | **2,214**          |  |  | $ | 2,246 |   |  |  | **$** | **6,294** |  |  | $ | 6,463 |  |  |
| Cost of sales                                                                                                                                                                                                                                                                                                                                          |                     | **  **   |                      | **1,475**          |  |    |  | 1,479 |   |  |  |  | **4,246** |  |  |  | 4,240 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                               | Gross margin             |               | ** **           |                    | **739** |  |   |  | 767 |   |  |  |  | **2,048** |  |  |  | 2,223 |  |  |
|                                                           |                          |                    |                      |                    |  |  |  |             |  |  |  |  |  |  |  |  |             |  |  |
| Selling, general and administrative expenses                                                                                                                                                                                                                                                                                                           |                     | ** **         |                      | **678**            |  |   |  | 732 |   |  |  |  | **1,981** |  |  |  | 2,025 |  |  |
| Depreciation and amortization                                                                                                                                                                                                                                                                                                                          |                     | ** **         |                      | **83**             |  |   |  | 78 |   |  |  |  | **243** |  |  |  | 239 |  |  |
| Restructuring and other (income) / charges, net                                                                                                                                                                                                                                                                                                        |                          |                    |                      | **(11**            | **)** |  |  |  -  |  |  |  |  | **42** |  |  |  |  -  |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                               | Total operating expenses |               | ** **           |                    | **750** |  |   |  | 810 |  |  |  |  | **2,266** |  |  |  | 2,264 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
| Operating loss                                                                                                                                                                                                                                                                                                                                         |                     | ** **         |                      | **(11**            | **)** |   |  | (43 | ) |  |  |  | **(218** | **)** |  |  | (41 | ) |  |
|                                                           |                          |                    |                      |                    |  |  |  |             |  |  |  |  |  |  |  |  |             |  |  |
| Interest expense, net                                                                                                                                                                                                                                                                                                                                  |                     | ** **         |                      | **(28**            | **)** |   |  | (33 | ) |  |  |  | **(84** | **)** |  |  | (94 | ) |  |
| Gain on sale of Toysrus.com - Japan                                                                                                                                                                                                                                                                                                                    |                     | ** **         |                      | ** - **  |  |  |  | 3 |  |  |  |  | ** - ** |  |  |  | 3 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
| Loss before income taxes                                                                                                                                                                                                                                                                                                                               |                          |                    |                      | **(39**            | **)** |  |  | (73 | ) |  |  |  | **(302** | **)** |  |  | (132 | ) |  |
|                                                           |                          |                    |                      |                    |  |  |  |             |  |  |  |  |  |  |  |  |             |  |  |
| Income tax benefit                                                                                                                                                                                                                                                                                                                                     |                     | ** **         |                      | **14**             |  |   |  | 27 |  |  |  |  | **310** |  |  |  | 49 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
| Net (loss) / earnings                                                                                                                                                                                                                                                                                                                                  |                     |                    | **$**                | **(25**            | **)** |  | $ | (46 | ) |  |  | **$** | **8** |  |  | $ | (83 | ) |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
| Basic (loss) / earnings per share                                                                                                                                                                                                                                                                                                                      |                     |                    | **$**                | **(0.12**          | **)** |  | $ | (0.22 | ) |  |  | **$** | **0.04** |  |  | $ | (0.39 | ) |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
| Diluted (loss) / earnings per share                                                                                                                                                                                                                                                                                                                    |                     |                    | **$**                | **(0.12**          | **)** |  | $ | (0.22 | ) |  |  | **$** | **0.04** |  |  | $ | (0.39 | ) |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
| Average basic shares outstanding                                                                                                                                                                                                                                                                                                                       |                          |                    |                      | **214.5**          |  |  |  | 213.4 |  |  |  |  | **214.2** |  |  |  | 213.2 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |
| Average diluted shares outstanding                                                                                                                                                                                                                                                                                                                     |                          |                    |                      | **214.5**          |  |  |  | 213.4 |  |  |  |  | **217.6** |  |  |  | 213.2 |  |  |
|                                                                                                                                                                                                                                                                                                                                                        |                     | **  **   |                      |               |  |  |  |  |  |  |  |

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)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       | Nine Months Ended                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       | **October 30, 2004**                                                 |               | November 1, 2003 (As restated for EITF 03-10) |
|                                                                                                                |                                                                                                                                                       |                                                                      |  |  |
| **Cash Flows from Operating Activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                  | ** **                                                           | ** ** | ** ** |  |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Net earnings / (loss)                                                                                                                                 |                                                                      | **$** | **8** |  |  | $ | (83 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Adjustments to reconcile net earnings / (loss) to net cash used in operating            activities: |                                        |       |  |    |  |       |  |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |     Depreciation and amortization                |   | ** ** | **243** |  |  |  | 239 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |     Other                                        |   | ** ** | **4** |  |  |  | (6 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |     Changes in operating assets and liabilities: |   | ** ** |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |        Merchandise inventories |   | ** ** | **(1,004** | **)** |  |  | (1,334 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |        Prepaid expenses and other operating assets |  |  | **13** |  |  |  | 65 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |        Accrued expenses and other liabilities |  |  | **(236** | **)** |  |  | (270 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |        Accounts payable |  |  | **596** |  |  |  | 835 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |        Income taxes payable / receivable |  |  | **(348** | **)** |  |  | (78 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |   |       Net cash used in operating activities |   | ** ** | **(724** | **)** |  |  | (632 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
| **Cash Flows from Investing Activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                  | ** **                                                           |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Capital expenditures, net                                                                                                                             |                                                                 | ** ** | **(155** | **)** |  |  | (161 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Proceeds from sale of fixed assets                                                                                                                    |                                                                      |  | **133** |  |  |  |  -  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Purchase of SB Toys, Inc.                                                                                                                             |                                                                      |  | **(42** | **)** |  |  |  -  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Reduction in cash due to deconsolidation of Toysrus.com - Japan                                                                                       |                                                                      |  |  -  |  |  |  | (1 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |   |       Net cash used in investing activities |   | ** ** | **(64** | **)** |  |  | (162 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
| **Cash Flows from Financing Activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                  | ** **                                                           |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Long-term debt borrowings                                                                                                                             |                                                                      |  | ** - ** |  |  |  | 792 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Long-term debt repayment                                                                                                                              |                                                                 | ** ** | **(501** | **)** |  |  | (29 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Other                                                                                                                                                 |                                                                 | ** ** | **11** |  |  |  |  -  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                 |   |       Net cash (used in) / provided by financing activities |   | ** ** | **(490** | **)** |  |  | 763 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                       |                                                                      |  |  |
| Effect of exchange rate changes on cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                  | ** **                                                           | **23** |  |  |  | (31 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                       |                                                                      |  |  |
| **Cash and cash equivalents: **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Net decrease during period                                                                                                                      |                                                                 | ** ** | **(1,255** | **)** |  |  | (62 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Cash and cash equivalents at beginning of period                                                                                                |                                                                 |  | **2,003** |  |  |  | 1,023 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Cash and cash equivalents at end of period                                                                                                      |                                                                 | **$** | **748** |  |  | $ | 961 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                       |                                                                      |  |  |
| **Supplemental disclosures of cash flow information:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                       |                                                                      |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Net income taxes paid                                                                                                                           |                                                                 | **$** | **2 ** |  |  | $ | 12 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  Interest paid                                                                                                                                   |                                                                 | **$** | **138** |  |  | $ | 102 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                  |                                                                      |  |  |

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 itssubsidiaries.  We are a worldwide specialty retailer 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, allknown 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 operatingresults for the unaudited periods.  Ultimate outcomes 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.  Thefinancial statements included herein should be read in 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 havebeen reclassified to conform to the current period presentation.

**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, byResellers to Sales Incentives Offered 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 andallowances from vendors for coupons 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 allowancesreceived from vendors that do not 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 Receivedfrom a Vendor” (EITF 02-16), 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 |
|                                                                                                                                                                                      |                                |                                       |                                                  |                          |
| Third quarter ended November 1, 2003                                                                                                                                                 |                                |       $ | 17                                               |      |     |       $ | 13 |      |     |       $ | 30 |      |     |       $ | 14 |      |     |       $ | 16 |  |
|                                |                                |                                       |          |                          |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          |  |
| Nine months ended November 1, 2003                                                                                                                                                   |                                |       $ | 40                                               |      |     |       $ | 44 |      |     |       $ | 84 |      |     |       $ | 41 |      |     |       $ | 43 |      |
|                                |                                |                                       |          |                          |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          |  |
| 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 atthe beginning of 2003, the unfavorable impact on 2003 earnings / (loss) before taxes would have been reduced by $14 million for the third quarter, $41 million for the nine months of ended November 1, 2003, and $74 million for the full year.  The recognition ofcredits and allowances received from vendors 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 andinventory levels.  The adoption of EITF 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 ofoperations for the third quarter and the nine months ended November 1, 2003.

**3.  Restructuring and other charges**

Our condensed consolidated financial statements for the nine-month period ended October 30, 2004 included the following pre-tax charges related to restructuring initiatives from current and prior years, and are asfollows:

| (In millions)Restructuring        and other chargesDepreciation        and amortizationCost of SalesSG&A**Total**
2004 Initiatives$   12$   -$   -$   4**$   16**
2003 Initiatives     11     3     10**     -****     24**
2001 Initiatives     13     -**     -****     -****     13**
1998 and 1995 Initiatives           6     -**     -****     -****            6**
Total$   42$**  **3$   10$   4**$   59**
Restructuring and other (income) / charges were ($11) million and $42 million for the third quarter and nine-month period ended October 30, 2004, respectively. The third quarter income of $11 million is due to a gain of $23million related to the sale of the Kids "R" Us real estate, as part of the 2003 initiatives, partially offset by $12 million of charges primarily associated with continuing costs for the closings of the Kids “R” Us store locations.

At October 30, 2004, we have total remaining reserves of $122 million to complete all of these restructuring initiatives.  We believe that remaining reserves atOctober 30, 2004are adequate to complete these initiatives and commitments.  See below 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 had decided to pursue a separation of the Toys “R” Us and Babies “R” Us businesses.  In addition, we announced our intention torestructure the company’s corporate headquarter operations in Wayne, New Jersey.  We recorded termination costs of $14 million associated with this action in the second quarter of 2004 and additional net costs of $2 million in thethird quarter of 2004.  Of these total charges, net charges of $4 million were recorded in selling, general and administrative expenses, and were related to compensation costs for associates terminated in the second quarter.  As ofOctober 30, 2004, $12 million of reserves for termination costs remain to complete this initiative. We anticipate that additional termination costs will be incurred in subsequent quarters relating to the restructuring of the company’s corporateheadquarters.

***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 thesestores.  A majority of these facilities were closed on or before January 31, 2004, and as of October 30, 2004, one Kids “R” Us store continued to operate.  This store subsequently closed on November 13, 2004.

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 oflease payments and other obligations.  Twenty-four properties have subsequently been excluded from the agreement with Office Depot, Inc., and are being separately marketed for disposition, or are being converted to Babies “R” Us stores.  All buteight of the real estate closings were completed by October 30, 2004 and net cash proceeds of approximately $130 million were received.  A $23 million gain associated with this transaction was recorded during the thirdquarter.

**6**

We expect to collect approximately $17 million on the remaining eight stores. We anticipate that the remaining closings will be completed in phases and any resulting gain will be recorded over the next several months as thetransaction is concluded.

We recorded charges of $147 million in the fourth quarter of 2003 related to the closing of these Kids “R” Us facilities.  These charges included $49 million of inventory markdowns recorded in cost of salesand $24 million of depreciation that was accelerated 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 net charges of $24 million during the nine months endedOctober 30, 2004, for the closing of the free-standing Kids “R”Us stores.  Included in the $24 million of charges are inventory markdowns related to this initiative of $10 million for the nine months endedOctober 30, 2004, which were recorded in cost of sales, and charges of $34 millionfor asset impairment, lease obligations, and vacancy-related costs for the closed facilities recorded as restructuring and other charges.  Offsetting the $34 million in charges is the $23 million gain on sale of Kids “R” Us real estate. In addition,we recorded $3 million of accelerated depreciation recorded in the nine month period endedOctober 30, 2004. We expect to record additional charges during the fourth quarter of 2004 for the remaining stores that will close, as wellas for vacancy-related costs for closed facilities until their disposition.

Details on the activity of charges and reserves for the nine-month period ended October 30, 2004 are as follows:

(In millions)

Balance atJanuary 31, 2004

   

Adjustments

   

Utilized

**Balance at October 30, 2004**

Inventory markdowns

**           **$

21

      $

10

      $

(31

)

**           $**

** - **

Asset impairment

 - 

10

(10

)

** - **

Real estate and lease commitments

   

13

          

24

       

(22

)

      

**15**

**          **

Sale of Kids “R” Us real estate

 - 

(23

)

23

** - **

Termination costs

11

 - 

(8

)

      

**3**

Accelerated depreciation

 - 

      

3

(3

)

      

** - **

Total remaining restructuring reserves

   

**           **$

45

          

      $

24

      $

(51

)

      

**           $**

**18**

**          **

***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, NewJersey.  These actions resulted in total pre-tax charges of $237 million, which were partially offset by the reversal of $24 million of previously accrued charges ($11 million from the 1998 restructuring charges and $13 million from the 1995 restructuringcharges) that we determined to be no longer needed.  Therefore, we recorded net charges of $213 million in the fourth quarter of 2001, of which $27 million of charges were recorded in cost of sales.  During the nine months endedOctober 30, 2004, we recorded additional net charges of $13 million primarily related to lease commitments on idle facilities.

**7**

Details on the activity of charges and reserves for the nine-month period ended October 30, 2004 are as follows:

(In millions)

Balance atJanuary 31, 2004

   

Adjustments

   

 

Utilized

**Balance at October 30, 2004**

Real estate and lease commitments

**           **

      

     

     

     

     

Store closings

   

$

25

          

$

(3

)

$

(7

)

      

**           $**

**15**

Store support center consolidation

44

14

(8

)

      

**50**

**          **

Asset write-down

 - 

2

(2

)

 - 

Total remaining restructuring reserves

   

**           **$

69

          

      $

13

      $

(17

)

      

**           $**

**65**

**          **

***Other Prior Year Initiatives***

We had $27 million of reserves remaining at October 30, 2004 from restructuring charges previously recorded in 1998 and 1995, primarily for long-term lease commitments, that will be utilized in 2004 and thereafter. During the nine months ended October 30, 2004, we recorded additional net charges of $6 million, which included a $1 million reversal in the third quarter of 2004, related to properties included in these restructuringinitiatives.

***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 atOctober30, 2004 include the remaining former Kids “R” Us real estate assets. On August 17, 2004 we sold one of our former store support center locations in Montvale, New Jersey.  We received net proceeds of $14.5 million, which equaled our net bookvalue.

**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-onlyprovisions of SFAS No. 123, “Accounting for Stock Based Compensation” (SFAS No. 123).

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 torecognize compensation expense 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

Nine Months Ended

(In millions, except per share data)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

Net (loss) / earnings – as reported

**$**

**(25**

**)**

$

(46

)

**$**

**8**

$

(83

)

Net loss– pro forma

**$**

**(28**

**)**

$

(54

)

**$**

**(4**

**)**

$

(111

)

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

   

**$**

**(0.12**

**)**

   

$

(0.22

)

   

**$**

**0.04**

   

$

(0.39

)

Basic and diluted loss per share – pro forma

**$**

**(0.13**

**)**

$

(0.25

)

**$**

**(0.02**

**)**

$

(0.52

)

The weighted-average fair value at the date of grant for options granted in the third quarter of 2004 and 2003 was $5.71 and $4.40 per option, respectively. The weighted-average fair value at the date of grant for optionsgranted in the nine months ended October 30, 2004 and November 1, 2003 was $4.96 per option and $2.84 per option, respectively.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

**8**

As there were a number of options granted during the nine months periods ended October 30, 2004 and November 1, 2003, a range of assumptions is provided below:

Quarter Ended

Nine Months Ended

**October 30, 2004**

November 1, 2003

**October 30, 2004**

November 1, 2003

Expected stock price volatility

**0.397**

  

0.493 – 0.528

  

**0.397 – 0.458**

  

0.481 – 0.548

Risk-free interest rate

**3.7%**

2.8% - 3.4%

**2.7% - 3.9%**

2.3% - 3.4%

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.

**5. Goodwill and other intangible assets**

In 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), which we adopted at the beginning of 2002. SFAS No. 142 changed the accounting for goodwill from an amortization methodto impairment only approach and accordingly, we ceased amortization of all goodwill in 2002.

The carrying amount of goodwill and other intangible assets at October 30, 2004 was $387 million and was comprised of the following:
-  Goodwill and other intangible assets of $39 million, subject to finalization of purchase-price accounting, relating to the acquisition of all the issued and outstanding shares of the capital stock of SB Toys, Inc. on October 26, 2004 for $42million. See Note 8 for further details;Goodwill of $319 million related to the acquisition of Baby Super Stores, Inc. in 1997; andGoodwill of $29 million relating to the acquisition of Imaginarium Toy Centers, Inc. in 1999.

**6.  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-relatedpurchases, are recognized in cost of sales and 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 (seeNote 2 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 EITF02-16.

**9**

**7.  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.

**8.  Toysrus.com**

Toysrus.com operates three co-branded on-line stores under a strategic alliance with Amazon.com, Inc. (“Amazon.com”).  These on-line stores sell toys, collectible items and video games through the Toysrus.comwebsite; baby products through the Babiesrus.com website; and learning and information products through the Imaginarium.com website.  Under this alliance, which expires in 2010, Toysrus.com and Amazon.com are responsible for specific aspects of the on-linestores.

Toysrus.com is responsible for:

Amazon.com is responsible for:

 ● 

Merchandising

    

 ● 

Website development

 ● 

Marketing

   

 ● 

Order fulfillment

 ● 

Content for the co-branded stores

   

 ● 

Customer service

 ● 

Identifying, buying, owning, and managing the inventory

   

 ● 

Storage of Toysrus.com inventory in Amazon.com’s U.S. distribution centers.

Amazon.com also provides certain website services for our on-line sports merchandise store (Sportsrus.com) that has been operating since September 2003. An unrelated third party handles order fulfillment for Sportsrus.com and aseparate unrelated third party handles order fulfillment forPersonalizedbyrus.com.

We recognize revenue for Toysrus.com at the point in time when merchandise is shipped to guests, in accordance with the shipping terms (FOB shipping point) that exist under the agreement with Amazon.com.

See Note 14 for information concerning a lawsuit between us and Amazon.com which relates to our on-line operations.

On October 26, 2004, Toys “R” Us, Inc., acquired all of the issued and outstanding shares of capital stock of SB Toys, Inc., for $42 million in cash.  SB Toys Inc. was previously owned bySOFTBANK Venture Capital and affiliates (“SOFTBANK”).  Prior to this acquisition, SB Toys, Inc. owned a 20% interest, as a minority shareholder, of Toysrus.com, LLC.  As a result we recorded a 20% minority interest in consolidation toaccount for the ownership stake of SB Toys, Inc.  Beginning in the fourth quarter of 2004, Toys “R” Us Inc. will recognize 100% of the results of Toysrus.com, LLC.

On November 1, 2003, Toysrus.com sold its entire 55% investment in the common stock of Toysrus.com – Japan to Toys – Japan for $3 million and the assumption of net liabilities of $10 million. In conjunction withthis transaction, we recognized a non-operating gain, after minority interest allocations, of $3 million ($2 million, net of tax) in the third quarter of 2003.  Prior to this transaction, the financial statements of Toysrus.com – Japan were consolidatedwith the financial statements of Toysrus.com. As a result of this transaction, Toys – Japan owns 100% of the outstanding shares of Toysrus.com – Japan, and, accordingly, Toys - Japan consolidated the financial statements of Toysrus.com – Japan sinceNovember 2003.  This transaction had no impact on our agreement with Amazon.com.

**10**

**9.  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, foreigncurrency translation adjustments, and unrealized gains / (losses) on hedged transactions, 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. The components of comprehensive income / (loss) are as follows:

Quarter Ended

Nine Months Ended

(In millions, net of tax)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

Net (loss) / earnings

**$**

**(25**

**)**

  

$

(46

)

  

**$**

**8**

  

$

(83

)

Foreign currency translation adjustments

**41**

28

**31**

39

Unrealized loss on hedged transactions

**(4**

**)**

(3

)

**(1**

**)**

(2

)

Comprehensive income / (loss)

**$**

**12**

$

(21

)

**$**

**38**

$

(46

)

**11**

**10.  Segments**

A summary of operations by reportable segment is as follows:

Quarter Ended

Nine Months Ended

(In millions)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

Net sales

    

  

            

  

     

  

           

  

      

**  **

             

     

            

  

   

Toys “R” Us – U.S.

**$**

**1,149**

$

1,157

**$**

**3,264**

$

3,413

   

Toys “R” Us – International

**525**

458

**1,413**

1,266

   

Babies “R” Us

**473**

448

**1,418**

1,325

   

Toysrus.com

**67**

66

**171**

174

   

Kids “R” Us (1)

 

** - **

117

**28**

285

Total net sales

 

**$**

**2,214**

$

2,246

**$**

**6,294**

$

6,463

Operating (loss) / earnings

  

  

            

  

   

  

           

  

   

**  **

             

   

            

  

   

Toys “R” Us – U.S.

**$**

**(77**

**)**

$

(79

)

**$**

**(229**

**)**

$

(81

)

   

Toys “R” Us – International

**15**

9

**7**

1

   

Babies “R” Us

**57**

50

**174**

150

   

Toysrus.com, net of minority interest

**(6**

**)**

(6

)

**(15**

**)**

(23

)

   

Kids “R” Us

 

**(2**

**)**

7

**(10**

**)**

(16

)

   

Other (2), (5)

**(9**

**)**

(24

)

**(103**

**)**

(72

)

Restructuring and other income / (charges), net (3)

**11**

 - 

**(42**

**)**

 - 

 

 

Operating loss (4)

**(11**

**)**

(43

)

**(218**

**)**

(41

)

                                                                 

     

     

Interest expense, net

 

**(28**

**)**

(33

)

**(84**

**)**

(94

)

  

Gain from sale of Toysrus.com – Japan

 

** - **

3

 - 

3

Loss before income taxes

 

**$**

**(39**

**)**

$

(73

)

**$**

**(302**

**)**

$

(132

)

(1)  Reflects the effect of our decision to close all of our free-standing Kids “R” Us stores, aspreviously announced on November 17, 2003.

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

(3) Includes a gain of $23 million related to the sale of the Kids "R" Us real estate recorded in the third quarter of 2004.

(4) Consolidated operating loss of $218 million for the nine months ended October 30, 2004 reflects $157 million in inventory markdowns recorded during the second quarter of 2004 relatedto the Toys “R” Us – U.S., Toys “R” Us – International, and Kids “R” Us divisions of $132 million, $15 million, and $10 million, respectively. 

(5) Included in “other” for the third quarter of 2004 is a $13 million reversal of previously recorded unclaimed property reserves as a result of settlement with third parties.  For the nine months ended October30, 2004, “other” included net charges related to reserves established for termination costs and unclaimed property of $23 million.

**12**

**11.  Merchandise inventories**

Merchandise inventories 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 ormarket, inventories would show no change at October 30, 2004, November 1, 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 componentsof our consolidated merchandise inventories are as follows:

(In millions)

**October 30, 2004**

November 1, 2003(As restated for EITF 03-10)

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

Toys “R” Us – U.S.

**$**

**1,948**

$

2,333

$

1,314

Toys “R” Us – International

**724**

  ** **

721

  ** **

392

  ** **

Babies “R” Us

      ** **

**306**

      ** **

293

      ** **

328

Toysrus.com

**114**

120

42

Kids “R” Us

** - **

89

4

** $**

**3,092**

 $

3,556

 $

2,080

**12.  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, thisobligation was swapped into a $466 million fixed-rate obligation with an effective interest rate of 7.43% per annum, interest payments paid annually, and principal paid 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 notes bearing 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 $390million.  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 onOctober 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” registrationstatement.  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 swapagreements.  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 thatmatured in 2004 and 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 inthe fair value of the interest rate swap offset changes in the fair value of the fixed rate debt due to changes in market interest rates.

In May 2002, we completed a public offering 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 andreceived 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.

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. Thesenior notes are initially pledged to secure the holder’s obligation to purchase our common stock under the related purchase contract. When the purchase contracts are settled in August 2005, we will issue common stock. We will issue a minimum of approximately18.7 million shares and up to a maximum of 22.8 million shares on the settlement date, depending on our average stock price.

**13**

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 thesenior notes are successfully 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 seniornote or an equivalent 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.

**13.  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 importmerchandise purchases. We account for these hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and we record the fair value of these instruments within our consolidated balance 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 recognizedin 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 October 30, 2004, we increased the carrying amount of our long-term debt by $58 million,representing the fair value of debt in excess of the carrying amount on that date. Also at October 30, 2004, we recorded derivative assets of $50 million and derivative liabilities of $17 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 condensedconsolidated statements of cash flows presented.

**14.  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 potential obligations 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 thesereserves are adequate to cover all probable and estimable loss exposures at October 30, 2004.

Based on specific facts and circumstances, management establishes reserves to cover certain tax related contingencies.  On June 29, 2004, the IRS notified us that its examination of our 1997 to1999 U.S. federal tax returns was completed and its adjustments were final.  As a result, in the second quarter of 2004, we reversed previously accrued income tax reserves that had been established to cover tax related contingencies in the years 1997 to1999.  This reversal decreased income tax expense and increased net earnings for our nine months ended October 30, 2004 by $200 million.

Based on specific facts and circumstances, management establishes reserves to cover certain unclaimed property contingencies. During the second quarter of 2004, we increased our unclaimed property reserves by $31.5 million tocover certain amounts for unclaimed property contingencies for the years 1981 to 1999. On October 8, 2004, the State of Delaware notified us that its examination of our 1981 to 1999 years was completed and its adjustments were final. As a result, in the third quarterof 2004, we remitted $17.1 million of unclaimed property and interest to the State of Delaware and reversed a portion of our previously accrued unclaimed property reserves.  This reversal decreased selling, general, and administrative expenses and increasedearnings for the third quarter ended October 30, 2004 by $13 million.

On May 21, 2004, we, Toysrus.com, LLC, our Internet subsidiary, and two other affiliated companies, filed a lawsuit against Amazon.com and its affiliated companies related to our strategic alliance with Amazon.com.  Thelawsuit 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 seeks injunctive and declaratory relief, monetary damages and contract rescission againstAmazon.com.  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 andselection requirements. 

**14**

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 offerproducts 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.

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

**15.  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 in April 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 October 30, 2004, the quoted market value of our investment was $280 million, which exceeds our carrying value.  The valuation is derived from a mathematical calculation based on the closing quotation published by theTokyo over-the-counter market 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 ($95 million) loan to Toys “R” Us – Japan from third parties in Japan.  Theloan has an annual interest rate of 6.47% and is due in 2012.

**16.  Earnings per share **

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

Quarter Ended

Nine Months Ended

(In millions, except per share data)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

**October 30, 2004**

November 1, 2003 (As restated for EITF 03-10)

Numerator:

Net (loss) / earnings available to common shareholders

**$**

**(25)**

  

$

(46

)

  

**$**

**8**

  

$

(83

)

                                                    

Denominator for basic (loss) / earnings per share –  weighted average shares

**214.5**

213.4

**214.2**

213.2

                                   

Impact of dilutive securities

** - **

 - 

**3.4**

 - 

                                                        

Denominator for diluted earnings per share – weighted average shares

**214.5**

213.4

**217.6**

213.2

                                                        

Basic (loss) / earnings per share

**$**

**(0.12**

**)**

$

(0.22

)

**$**

**0.04**

$

(0.39

)

                                                        

Diluted (loss) / earnings per share

**$**

**(0.12**

**)**

$

(0.22

)

**$**

**0.04**

$

(0.39

)

Options to purchase approximately 21.6 million shares of common stock were outstanding during the nine-month period ended October 30, 2004.  However, these options to purchase shares of common stock were not included inthe computation of diluted earnings per share because to do so would have been anti-dilutive.

**15**

**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'sapparel worldwide.  We operate all of the "R" Us branded stores in theUnited States, as well as approximately 50% of the "R" Us branded storesinternationally, the balance of which are either licensed or franchised. Our operating segments include: Toys "R" Us - U.S., Toys "R" Us - International, our Babies "R" Us specialty baby-juvenile stores,Toysrus.com, our Internet subsidiary, and Kids "R" Us.

This Management's Discussion and Analysis of FinancialCondition and Results of Operations (MD&A) is intended to provideinformation to help you better understand and evaluate our financial conditionand results of operations.  We recommend that you read this section inconjunction with our condensed consolidated financial statements in Item 1 andwith our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

***Results of Operations***

Consolidated net loss was $25 million, or $0.12 per share, forthe third quarter ended October 30, 2004 versus a consolidated net loss of $46million, or $0.22 per share, for the third quarter ended November 1, 2003. Consolidated net income was $8 million, or $0.04 per share, for the nine monthsended October 30, 2004 versus a consolidated net loss of $83 million, or $0.39per share, for the nine months ended November 1, 2003. Net earnings for thenine-month period ended October 30, 2004 reflect the reversal of $200 million ofpreviously accrued income tax reserves that had been established to cover taxrelated contingencies for the years 1997 to 1999.  See Note 14 to thecondensed consolidated financial statements for further details.

As discussed in Note 2 to the condensed consolidated financialstatements, we applied the provisions of EITF 03-10 beginning in the firstquarter of 2004.  Our 2003 condensed consolidated financial statements havebeen restated for comparability purposes, as permitted by the provisions of EITF03-10.  Also, as discussed in Note 2 to the condensed consolidatedfinancial statements; we applied the provisions of EITF 02-16 beginning in thefirst quarter of 2003.  The following tables present our third quarter 2003condensed consolidated and segment results, as previously reported and asrestated for comparability to the 2004 presentation, as permitted by theprovisions of EITF 03-10:

**16**

**QUARTER ENDED**

(In millions, except per share data)

**October 30, 2004, as reported**

November 1, 2003, as restated for  EITF 03-10 (1)

EITF 03-10 adjustments

November 1, 2003, as reportedin 2003 (2)

Net sales

 

**$**

**2,214**

**   **

 

$

2,246

   

 

$

(75

)

 

$

2,321

   

Cost of sales

**1,475**

1,479

(62

)

1,541

 

 

Gross margin

**739**

767

(13

)

780

                                                  

Selling, general and administrative expenses

**678**

732

 - 

   

732

Depreciation and amortization

**83**

78

 - 

78

Restructuring and other income, net (3)

**(11**

**)**

 - 

 - 

 - 

                                                  

 

Total operating expenses

**750**

810

 - 

810

                                                  

Operating loss (4)

**(11**

**)**

(43

)

(13

)

(30

)

                                                  

Interest expense, net

**(28**

**)**

(33

)

 - 

(33

)

Gain from sale of Toysrus.com - Japan

** - **

3

 - 

3

                                                  

Loss before income taxes

**(39**

**)**

(73

)

(13

)

(60

)

Income tax benefit

**14**

27

5

22

                                                  

Net loss

**$**

**(25**

**)**

$

(46

)

$

 (8

)

$

(38

)

                                                  

Basic and diluted loss per share

**$**

**(0.12**

**)**

$

(0.22

)

$

(0.04

)

$

(0.18

)

Average basic and diluted shares     outstanding

**214.5**

213.4

213.4

(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 third quarter of 2003, as restated, were unfavorably 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 subsequentto 2003, the recognition of credits and allowances received from 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 03-10had no net impact on our cash flows. See Note 2 to the condensed 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.

(3)Includes a gain of $23 million related to the sale of the Kids “R” Us real estate recorded in the third quarter of 2004.See Note 3 tothe condensed consolidated financial statements for further details.

(4) Consolidated operating loss of $11 million for the third quarter of 2004 includes a $13 million reversal of previously recorded unclaimed propertyreserves as a result of settlement with third parties.  See Note 14 to the condensed consolidated financial statements for further details.

**17**

**NINE MONTHS ENDED**

(In millions, except per share data)

**October 30, 2004, as reported**

November 1, 2003, as restated forEITF 03-10 (1)

EITF 03-10 adjustments

November 1, 2003, as reportedin 2003 (2)

Net sales

 

**$**

**6,294**

**   **

 

$

6,463

   

  

$

(166

)

 

$

6,629

   

Cost of sales

**4,246**

4,240

(122

)

4,362

 

 

Gross margin

**2,048**

2,223

(44

)

2,267

                                                  

Selling, general and administrative expenses

**1,981**

2,025

 - 

   

2,025

Depreciation and amortization

**243**

239

 - 

239

Restructuring and other charges, net(3)

**42**

 - 

 - 

 - 

                                                  

 

Total operating expenses

**2,266**

2,264

 - 

2,264

                                                  

Operating (loss) / earnings (4)

**(218**

**)**

(41

)

(44

)

3

                                                  

Interest expense, net

**(84**

**)**

(94

)

 - 

(94

)

Gain from sale of Toysrus.com - Japan

** - **

3

 - 

3

                                                  

Loss before income taxes

**(302**

**)**

(132

)

(44

)

(88

)

Income tax benefit (5)

**310**

49

17

32

                                                  

Net earnings / (loss)

**$**

**8**

$

(83

)

$

(27

)

$

(56

)

                                                  

Basic earnings / (loss) per share

**$**

**0.04**

$

(0.39

)

$

(0.13

)

$

(0.26

)

Diluted earnings / (loss) per share

**$**

**0.04**

$

(0.39

)

$

(0.13

)

$

(0.26

)

                                                  

Average basic shares outstanding

**214.2**

213.2

213.2

Average diluted shares outstanding

**217.6**

213.2

213.2

                                                  

(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 resultsfor the nine months ended November 1, 2003, as restated, were unfavorably impacted by $41 million ($26 million after-tax), or $0.12 per share, resulting from the non-recurring initial implementation of both EITF 02-16 and EITF 03-10.  For all periods subsequentto 2003, the recognition of credits and allowances received from 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 03-10had no net impact on our cash flows. See Note 2 to the condensed 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.

(3)Includes a gain of $23 million related to the sale of the Kids “R” Us real estate recorded in the third quarter of 2004.See Note 3 tothe condensed consolidated financial statements for further details.

(4) Consolidated operating loss of $218 million for the nine months ended October 30, 2004 reflects $157 million in inventory markdowns recorded during the second quarter of 2004 relatedto the Toys “R” Us – U.S., Toys “R” Us – International, and Kids “R” Us divisions of $132 million, $15 million, and $10 million, respectively.  For the nine months ended October 30, 2004 includes charges related toreserves established for termination costs and unclaimed property of $23 million, net of $13 million reversal.  

(5)Includes the reversal of $200 million of income tax reserves recorded in the second quarter of 2004.See Note 14 to the condensedconsolidated financial statements for further details.

**18**

**QUARTER ENDED**

(In millions)

**October 30, 2004, as reported**

November 1, 2003, as restated for EITF 03-10

EITF 03-10 adjustments

November 1, 2003, as reported in 2003

Net sales

  

     

  

     

  

     

  

     

Toys “R” Us – U.S.

**$**

**1,149**

$

1,157

$

(48

)

$

1,205

  

Toys “R” Us – International

**525**

458

(11

)

469

Babies “R” Us

**473**

448

(9

)

457

  

Toysrus.com

**67**

66

(2

)

68

 

Kids “R” Us(1)

** - **

117

(5

)

122

          

          

Total

**$**

**2,214**

$

2,246

$

(75

)

$

2,321

**   **

**     **

**   **

   

     

   

   

     

   

   

     

   

Operating (loss) / earnings

  

Toys “R” Us – U.S.

**$**

**(77**

**)**

$

(79

)

$

(9

)

$

(70

)

Toys “R” Us – International

**15**

9

(1

)

10

Babies “R” Us

**57**

50

(3

)

53

  

Toysrus.com, net of minority interest

**(6**

**)**

(6

)

 - 

(6

)

 

Kids “R” Us

**(2**

**)**

7

 - 

7

Other(2)

**(9**

**)**

(24

)

 - 

(24

)

Restructuring and other income, net(3)

**11**

 - 

 - 

 - 

          

          

Operating loss(4)

**(11**

**)**

(43

)

(13

)

(30

)

Interest expense, net

**(28**

**)**

(33

)

 - 

(33

)

Gain from sale of Toysrus.com - Japan

** - **

3

 - 

3

          

          

Loss before income taxes

**$**

**(39**

**)**

$

(73

)

$

(13

)

$

(60

)

          

          

(1) Reflects the effect of our decision to close all  of our free-standing Kids “R” Us stores, as previously announced on November17, 2003. See Note 3 to the condensed consolidated financial statements for further details.

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

(3) Includes a gain of $23 million related to the sale of the Kids “R” Us real estate recorded in the third quarter of2004. See Note 3 to the condensed consolidated financial statements for further details.

(4) Included in “other” for the third quarter of 2004 is a $13 million reversal of previously recorded unclaimed property reserves as a resultof settlement with third parties.  See Note 14 to the condensed consolidated financial statements for further details.

**19**

**NINE MONTHS ENDED**

(In millions)

**October 30, 2004, as reported**

November 1, 2003, as restated for EITF 03-10

EITF 03-10 adjustments

November 1, 2003, as reported in 2003

Net sales

  

     

  

     

  

     

  

     

Toys “R” Us – U.S.

**$**

**3,264**

$

3,413

$

(103

)

$

3,516

  

Toys “R” Us – International

**1,413**

1,266

(28

)

1,294

Babies “R” Us

**1,418**

1,325

(23

)

1,348

  

Toysrus.com

**171**

174

(4

)

178

 

Kids “R” Us(1)

**28**

285

(8

)

293

          

          

Total

**$**

**6,294**

$

6,463

$

(166

)

$

6,629

**   **

**     **

**   **

   

     

   

   

     

   

   

     

   

Operating (loss) / earnings 

  

Toys “R” Us – U.S.

**$**

**(229**

**)**

$

(81

)

$

(36

)

$

(45

)

Toys “R” Us – International

**7**

1

(2

)

3

Babies “R” Us

**174**

150

(6

)

156

  

Toysrus.com, net of minority interest

**(15**

**)**

(23

)

 - 

(23

)

 

Kids “R” Us

**(10**

**)**

(16

)

 - 

(16

)

Other(2)

**(103**

**)**

(72

)

 - 

(72

)

Restructuring and other charges, net(3)

**(42**

**)**

 - 

 - 

 - 

          

          

Operating (loss) / earnings(4)

**(218**

**)**

(41

)

(44

)

3

Interest expense, net

**(84**

**)**

(94

)

 - 

(94

)

Gain from sale of Toysrus.com - Japan

** - **

3

 - 

3

          

          

Loss before income taxes

**$**

**(302**

**)**

$

(132

)

$

(44

)

$

(88

)

          

(1) Reflects the effect of our decision to close all  of our free-standing Kids “R” Us stores, as previously announced on November 17,2003. See Note 3 to the condensed consolidated financial statements for further details.

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

(3) Includes a gain of $23 million related to the sale of the Kids “R” Us real estate recorded in the third quarter of2004. See Note 3 to the condensed consolidated financial statements for further details.

(4)Consolidated operating loss of $218 million for the nine months ended October 30, 2004 reflects $157 million in inventory markdowns recorded during the second quarter of 2004 related to theToys “R” Us – U.S., Toys “R” Us – International, and Kids “R” Us divisions of $132 million, $15 million, and $10 million, respectively.  For the nine months ended October 30, 2004 “other” includedcharges related to reserves established for termination costs and unclaimed property of $23 million, net of $13 million reversal.  

**20**

***Third quarter and nine months selected operating highlights:***

Percentage of Sales

Quarter Ended

Nine Months Ended

**October 30, 2004, as reported**

November 1, 2003, as restated for EITF 03-10

**October 30, 2004**,**as reported**

November 1, 2003, as restated for EITF 03-10

Cost of sales

   

**66.6**

**  %**

   

65.9

  %

   

**67.5**

**  % (1)**

   

65.6

  %

Gross margin

**33.4**

**  %**

   

34.1

  %

**32.5**

**  %**

34.4

  %

Selling, general and administrative    expenses (2)

**30.6**

**  %**

   

32.6

  %

**31.5**

**  %**

31.3

  %

Operating loss

**(0.5**

**)%**

   

(1.9

) %

**(3.5**

**)%**

(0.6

)%

Net loss 

**(1.1**

**)%**

   

(2.0

)%

**0.1**

**  % (3)**

(1.3

)%

(1)2004 results include $157 million in inventory markdowns for the year-to-date period.  Excluding the impact of markdowns, cost of sales were $4,089 million, or 65.0% of total sales forthe nine-month period ended October 30, 2004.

(2)Includes reserves established for termination costs and unclaimed property recorded in the second quarter of 2004 and the reversal of $13 million of reserves during the third quarterresulting from settlement of claims with third parties.

(3)Includes the reversal of $200 million of income tax reserves recorded in the second quarter of 2004.

***Sales***

Consolidated net sales for the third quarter of 2004 were $2.21 billion compared to $2.25 billion for the third quarter of 2003, representing a decrease of $32 million, or 1.4%.  For the nine months ended October 30,2004, consolidated net sales were $6.29 billion, a decrease of 2.6% compared to $6.46 billion for the prior year period.  Excluding the impact of currency translation that increased net sales for the third quarter of 2004 by $42 million, anda $117 million decline in net sales associated with the previously announced Kids “R” Us store closings, total net sales increased by $43 million, or 2.0%, for the third quarter.  For the nine-month period ended October 30, 2004, currency translation had a $123 million favorable impact, while the Kids “R” Us closings resulted in a $257 million decline in net sales.  Excluding these amounts, net sales for the nine months ended October 30,2004 decreased by $35 million, or 0.6% compared with the same period in 2003. These decreases were primarily the result of declines in comparable store sales at the Toys “R” Us – U.S. division, which posted comparable store salesdeclines of 1.7% for the third quarter of 2004 and 5.0% for the nine months ended October 30, 2004.  These decreases were partially offset by Babies “R” Us comparable store sales increases of 0.5% for the third quarter of 2004 and 2.3% for the ninemonths ended October 30, 2004, and International division comparable store sales increases in local currencies of 4.3% and 1.1% for the quarter and the nine months ended October 30, 2004, respectively.

Overall net sales decreases were primarily attributable to soft sales in the Toys “R” Us – U.S. division, resulting from a 16.1% decrease in net sales of video game products for the nine months ended October30, 2004 compared to the prior year period.  However, for the third quarter of 2004, video game sales increased by 2.4% over the prior year period, primarily due to the contribution of new software releases. The year-to-date decline in our video game business inthe United States reflected the continued maturation from the last significant video game platform releases in 2001, increased competition, and price deflation of video game products.  We do not expect that any significant new video game platforms will bereleased in 2004. 

***Cost of Sales and Gross Margin***

Consolidated gross margin, as a percentage of net sales, decreased by 0.7 percentage points to 33.4% during the third quarter of 2004 and 1.9 percentage points to 32.5% for the nine months ended October 30, 2004. Consolidated gross margin for the nine-month period ended October 30, 2004 included the unfavorable impact of $157 million in inventory markdowns primarily to liquidate selected older toy store inventory and therefore enhance store productivity and supply chainefficiency.  The markdowns were also intended to accelerate inventory turnover and generate additional cash flow.  Excluding the unfavorable impact of these inventory markdowns, consolidated gross margin was 35.0% for the nine months ended October 30,2004. 

**21**

Consolidated gross margin for the third quarter and the nine months ended November 1, 2003 included the unfavorable non-recurring impact of the initial implementation of the provisions of EITF 03-10 and EITF 02-16 of $14million and $41 million, respectively.

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 net sales, decreased by 1.4 percentagepoints for the third quarter of 2004 and was flat at 35% for the nine months ended October 30, 2004 compared to the corresponding prior year periods. The decrease for the third quarter of 2004 reflects a lower margin at the Toys “R” Us – U.S.division primarily due to an increased mix of lower margin video game merchandise coupled with the impact of selling through lower margin clearance merchandise.  The lower margin at our Toys “R” Us – U.S. division was offset by increases ingross margin at the Babies “R” Us and International divisions resulting from a more favorable sales mix at these divisions.

The following table illustrates the effects of the inventory markdowns in 2004 and the initial implementation impact of EITF 03-10 and EITF 02-16 in 2003 on our consolidated gross margin:

Gross Margin Rate Variance (Over Prior Periods)

Quarter Ended October 30, 2004

Nine Months Ended October 30, 2004

**Gross margin rate variance as reported**

**   **

**(0.7**

**) %**

**   **

**(1.9**

**) %**

Impact of inventory markdowns (includes KRU)

-

  %

   

2.5

  %

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

(0.7

) %

   

(0.6

) %

Net margin

(1.4

)  %

   

-

  %

Gross margin as a percentage of net sales for the Toys “R” Us – U.S. division was 29.9% for the third quarter of 2004 compared to 31.5% for the third quarter of 2003.  For the nine months endedOctober 30, 2004, the Toys “R” Us – U.S. division reported gross margin as a percentage of sales of 28.6% compared to 32.6% for the prior year comparable period.  Gross margin for nine months ended October 30, 2004 included a $132 millionunfavorable impact related to inventory markdowns.  This represents an unfavorable impact of 4.0 percentage points for the year-to-date period.  Excluding the unfavorable impact of inventory markdowns in 2004, gross margin was 32.6% for nine months endedOctober 30, 2004.

Gross margin for the third quarter and the nine months ended November 1, 2003 for the Toys “R” Us – U.S. division included the unfavorable non-recurring impact of the initial implementation of the provisionsof EITF 03-10 and EITF 02-16 of $10 million and $29 million, respectively.  The implementation of these provisions adversely affected gross margin for the third quarter and nine months ended October 30, 2003 by 0.8 percentage points and of 0.9 percentage points,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 2.4 percentage points for the third quarter and by0.9 percentage points for the nine months ended October 30, 2004. These decreases were primarily due to an increased mix of video game product, the impact of selling through lower margin clearance product and a reduction in base allowances as a result of lowerreceipts.

Babies “R” Us reported a 0.8 percentage point increase in gross margin to 38.1% of net sales for the third quarter of 2004, up from 37.3% in 2003.  For the nine months ended October 30, 2004, Babies“R” Us reported gross margin as a percentage of sales of 37.9 %, an increase of 1.1 percentage points over the comparable prior year period. 

**22**

Gross margin for the third quarter and the nine months ended November 1, 2003 for the Babies “R” Us division included the unfavorable non-recurring impact of the initial implementation of the provisions of EITF03-10 and EITF 02-16 of $1million and $4 million, respectively.  The implementation of these provisions adversely affected gross margin for the third quarter and nine months ended October 30, 2003 by 0.2 percentage points and of 0.3 percentage points,respectively.  The remaining increases in gross margin for the Babies “R” Us division for the third quarter of 2004 and the nine months ended October 30, 2004 of 0.6 and 0.8 percentage points, respectively were primarily due to a morefavorable sales mix.

The International division reported an increase in gross margin of 1.0 percentage points to 37.7% for the third quarter of 2004 up from 36.7% for the third quarter of 2003.  Gross margin for the nine-month period endedOctober 30, 2004 was 37.2% compared to 36.7% for the nine months ended November 1, 2003.   Gross margin for the nine-month period ended October 30, 2004 included inventory markdowns of $15 million recorded during the second quarter of 2004.  Excluding the effect of inventory markdowns, gross margin was 38.2% for the nine months ended October 30, 2004.

Gross margin for the third quarter and the nine-month period ended November 1, 2003 for the International division included the implementation effects of EITF 03-10 and EITF 02-16.  Implementation of these provisionsadversely affected gross margin by 0.6 percentage points for both, the third quarter and the nine months ended November 1, 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 division increased by 0.4 percentage points for the third quarter of 2004 and by 0.9 percentage points for the nine months ended October 30, 2004. The net increases in margin at the International division for the thirdquarter and the nine months ended October 30, 2004 were predominantly related to a favorable sales mix of higher margin Baby, Learning and owned brands, and lower sales of video product.

Toysrus.com reported an increase of 2.6 percentage points in gross margin to 28.4% for the third quarter of 2004 and an increase of 3.9 percentage points to 29.2% for the nine months ended October 30, 2004.  Theinventory markdowns and the implementation of EITF 03-10 and EITF 02-16 did not affect gross margin at Toysrus.com. The increase in gross margin for Toysrus.com reflected a favorable shift of business from lower margin video game products to higher margin baby andtoy products, as well as lower markdowns due to improved inventory management.

***Selling, General and Administrative Expenses***

Consolidated SG&A expenses, as a percentage of net sales, for the third quarter of 2004 decreased by 2.0 percentage points to 30.6% and increased by 0.2 percentage points to 31.5% for the nine months period ended October30, 2004.  The decrease during the quarter was partially the due to the reversal of previously recorded unclaimed property reserves as a result of settlement with third parties. See Note 14 to the consolidated financial statements for furtherdetails.  This accounted for an improvement of 0.6 percentage points with the remaining difference due to lower payroll expenses primarily at our Toys “R” Us – U.S. division.  For the year-to-date period, the increase in SG&A as apercentage of net sales was primarily attributable to charges related to the establishment of reserves for termination costs and unclaimed property,partially offset by $12 million of charges primarily associated with continuing costs forthe closings of the Kids “R” Us store locations.  These charges increased SG&A as a percentage of net sales for the nine months ended October 30, 2004 by 0.4 percentage points.  Excluding these charges, SG&A as a percentage of netsales for the year-to-date period would have decreased by 0.2 percentage points.

***Operating Loss / Earnings***

Operating loss for the third quarter of 2004 was $11 million compared to an operating loss of $43 million for the third quarter of 2003.  Foreign exchange for the third quarter of 2004 did not have a material impact onthe operating loss.  Operating loss for the nine months ended October 30, 2004 was $218 million versus an operating loss of $41 million for the nine months ended November 1, 2003.  Operating loss for the year-to-date period of 2004 included a $1 millionunfavorable foreign exchange impact. 

Operating earnings for the Toys “R” Us – International division were $15 million for the third quarter of 2004 compared to $9 million for the third quarter of 2003.  Operating earnings for the Toys“R” Us – International division were $7 million for the nine months ended October 30, 2004 versus $1 million for the comparable period in 2003.  Operating earnings for the third quarter and nine months ended October 30, 2004 included a gainof  $2 million related to a sale of property in the United Kingdom. 

**23**

Excluding the impact of foreign currency translation, the effect of the inventory markdowns and the gain on the sale of property, operating earnings for the Toys “R” Us – International division were $21million for the year-to-date period of 2004 versus operating earnings of $1 million for the year-to-date period of 2003.

***Restructuring and Other Charges***

On August 11, 2004, we announced that our Board of Directors had decided to pursue a separation of the Toys “R” Us and Babies “R” Us businesses.  In addition, we announced our intention torestructure the company’s corporate headquarter operations in Wayne, New Jersey.  We recorded termination costs of $14 million associated with this action in the second quarter of 2004 and additional net costs of $2 million in thethird quarter of 2004.  Of these total charges, net charges of $4 million were recorded in selling, general and administrative expenses, and were related to compensation costs for associates terminated in the second quarter.  As ofOctober 30, 2004, $12 million of reserves for termination costs remain to complete this initiative. We anticipate that additional termination costs will be incurred in subsequent quarters relating to the restructuring of the company’s corporateheadquarters.

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 thesestores.  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. 

Twenty-four properties have subsequently been excluded from the agreement with Office Depot, Inc. and these properties are being marketed for disposition or converted to Babies “R” Us stores.  We recorded netcharges of $24 million during the nine-month period ended October 30, 2004 for the closing of the free-standing Kids “R” Us stores.  Included in the $24 million of charges, are inventory markdowns related to this initiative of $10 million for thenine month ended October 30, 2004, which were recorded in cost of sales, and charges of $34 million for asset impairment, lease obligations, and vacancy-related costs for the closed facilities recorded as restructuring and other charges.  Offsetting the chargesof $34 million is the $23 million gain on sale of Kids “R” Us real estate, recorded in the third quarter of 2004.  In addition, charges of $3 million for accelerated depreciation were recorded year-to-date. We expect to record additional chargesduring the fourth quarter of 2004 for the eight remaining stores that will close later this year, as well as for vacancy related costs for closed facilities until their disposition. 

A majority of these facilities were closed on or before January 31, 2004, and as of October 30, 2004 one Kids “R” Us store remained in operation.  This store subsequently closed on November 13, 2004.  Asof October 30, 2004 we received net cash proceeds of more than $130 million and recorded a $23 million gain related to the sale of the Kids "R" Us real estate.  We anticipate that the eight remaining closings will be completed in phases and any resulting gainwill be 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. Inconnection with this initiative, we recorded additional net charges of $13 million during the nine-month period ended October 30, 2004, primarily related to lease commitments on idle facilities.

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. During the nine-monthperiod ended October 30, 2004, we recorded additional net charges of $6 million, which included a $1 million reversal in the third quarter of 2004, related to properties included in these restructuring initiatives.

See Note 3 to the condensed consolidated financial statements for a further discussion about restructuring and other charges.

***Liquidity and Capital Resources ***

Our primary sources of liquidity are cash flows provided from operations, our existing cash balances, and our $685 million unsecured revolving credit facility that expires in September 2006.  Our $200 million unsecuredrevolving credit facility, which we chose not to renew, expired on May 20, 2004.

**24**

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 forconstruction 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.  This facility does not havea material adverse change clause related to future events that could prevent us from making draw-downs under this facility, although there are customary conditions precedent to each draw-down.  We had no outstanding balances under this credit facility at the endof the third quarter.  In addition, we did not draw down on this facility during the nine-months ended October 30, 2004.

We believe that cash flows 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 capitalexpenditures for at least the next 12 months.  In addition, our next significant debt maturity of $685 million 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 nine months ended October 30, 2004 was $724 million compared to $632 million for the nine months ended November 1, 2003.  The increase in net cash used in operating activitieswas primarily due to the reduction in income taxes payable, which was the result of the reversal of income tax reserves of $200 million, along with the effect of increased operating losses year-over-year. The benefit of lower growth in inventory levels, net ofmarkdowns, was offset by lower growth in accounts payable balance.

Net cash used in investing activities was $64 million for the nine months ended October 30, 2004 compared to $162 million for the comparable period in 2003.  The decrease in net cash used in investing activities was theresult of our continued focus on the reduction of capital spending, the receipt of proceeds from the sale of the Kids “R” Us real estate during 2004 offset by the acquisition of SB Toys, Inc. during the third quarter of 2004.

Net cash used in financing activities was $490 million for the nine months ended October 30, 2004 compared to net cash provided by financing activities in the nine months ended November 1, 2003 of $763 million.  Financingactivities for the nine-month period ended October 30, 2004 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 withan effective interest rate of 7.43% per annum, interest payments paid annually, and principal paid on February 13, 2004.  Financing activities in the nine-month period ended November 1, 2003 reflect the receipt of the net proceeds of $390 million from theissuance and sale in April 2003 of $400 million aggregate principal notes which bear interest at a coupon rate of 7.875% per annum and mature on April 15, 2013.  The notes were sold at a price of 98.3% of the principal amount, resulting in an effective yield of8.125% per annum.  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. Financing activities in the nine-month periodended November 1, 2003 also reflect the receipt of the net proceeds of $395 million from the issuance and sale of an additional $400 million in notes bearing interest at a coupon rate of 7.375% per annum issued in September, 2003, maturing on October 15, 2018. The notes were sold at a price of  99.6% of the principal amount, resulting in an effective yield of 7.424% per annum.  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.

***Uses of Capital***

Net capital expenditures decreased by $6 million during the year-to-date period of 2004 versus the comparable period in 2003.  This decrease was the result of our continued focus on cost containment measures.  For 2004, we expect that our net capital expenditures will be significantly below anticipated annual depreciation and amortization of approximately $300 million.  This amount includes plans to open approximately 10 new Babies “R” Us stores inaddition to the 10 stores that have already been opened as of the end of the third quarter of 2004. Several of the additions of the Babies “R” Us stores are conversions of former Kids “R” Us stores. Furthermore, approximately 20 existingBabies “R” Us stores will be renovated. 

**25**

We have opened 6 new wholly-owned international Toys “R” Us stores and plan to open one additional store by the end of the year. We also converted approximately 35 Toys “R” Us stores in the UnitedStates into combo stores, which combine our toy offering with children’s apparel.  Part of capital expenditures will also be directed at improving and enhancing our information technology systems.

***Credit Ratings***

On March 10, 2004, Standard & Poor’s lowered our long-term debt credit rating to BB, a one level downgrade from BB+.  On March 24, 2004, Moody’s lowered our long-term debt credit rating to Ba2, a two-leveldowngrade from Baa3.  These current credit 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 ourbusiness.

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 of slightly 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 makecertain estimates and assumptions that affect the 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.  Webase these estimates on historical experience and 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 onour 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 CriticalAccounting Policies section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

***Recent Developments***

As we previously announced on August 11, 2004, 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 themeans of effecting the separation and intends to effect the separation in a manner designed to enhance shareholder value.  We continue to believe the separation will occur during the first half of 2005.

**26**

***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 thesafe harbors created thereby.  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, amongother 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 internationaldevelopment, and other goals 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 spendingpatterns, general economic 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 eventsaffecting the delivery of toys 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 StatesSecurities 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 isimpossible to predict actual results 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 asof 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.

**27**

Back_to_Index

**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 October 30, 2004 are similar to those disclosed in Item 7a of our Annual Report on Form 10-K for thefiscal year ended January 31, 2004.  We continue 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 exposuresincluding interest rate and currency risks.  There has been no material change to our market risk since January 31, 2004.

Back_to_Index

**Item 4****.  Controls and Procedures**

(a) Disclosure Controls and Procedures.  As of October 30, 2004, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of our 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 principalfinancial officer concluded that our disclosure controls and 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. 

As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules issued hereunder, we will be required to include in our Annual Report on Form 10-K for the year ending January 29, 2005 a report on management’sassessment of the effectiveness of our internal controls over financial reporting. Our independent registered public accounting firm, Ernst & Young, LLP (“E&Y”), will also be required to attest to and report on management’s assessment. Toprepare for compliance with Section 404 we have been in the process of evaluating and testing, and as necessary, taking remedial action on any issues relating to our internal controls over financial reporting. Our Section 404 assessment is in process. Our findings todate have identified certain items, which require remediation. Our procedures are ongoing, and we continue to address any items that require remediation as they are identified. Management has discussed these matters with E&Y and our Audit Committee, and we aretaking appropriate steps to remediate these items and otherwise to enhance the reliability of our internal controls over financial reporting. The timely outcome of all remediation efforts will be considered by management when assessing the effectiveness of ourinternal controls over financial reporting at the end of fiscal 2004.  Although we believe that our efforts will enable us to provide the required report and our independent auditors to provide the required attestation as of fiscal year end 2004, we can give noassurance that these efforts will be completed in a timely manner or on a successful basis.

Other than as discussed above, during our third quarter of 2004, 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 ExchangeAct) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

**28**

**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 seeks injunctive and declaratory relief, monetary damages and contractrescission 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, Inc. filed a counterclaim against us and our affiliated companies alleging breach of contractrelating to inventory and selection requirements. 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 tooffer 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 legal proceedings, including commercial disputes, personal injury claims and employment issues.  We do not believe that any of theseproceedings will have a material adverse effect on our financial condition, results of operations, 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 October 30, 2004.  These shares were either delivered to us by employees as payment forthe exercise price of stock options 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 ofShares Purchased

      

Average Price Paidper Share

      

Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs

      

Approximate Dollar Valueof Shares That May YetBe Purchased Underthe Plans or Programs

                              

    

        

    

    

        

    

    

        

    

    

        

    

08/01/2004 – 08/28/2004

(1)

    

10,458

 

    $

16.52

    

    

    -    

    

    $

    -    

    

(2)

16,868

    $

15.57

    -    

    

    $

    -    

    

08/29/2004 – 09/25/2004

    

    -    

    

    $

    -    

    

    

    -    

    

    $

    -    

    

09/26/2004 – 10/30/2004

    

    -    

    

    $

    -    

    

    

    -    

    

    $

    -    

    

                              

**Total**

**    **

**27,326**

**    **

    **$**

**15.93**

    

    

    -    

    

    **$**

    -    

    

                              

                              

    

        

    

        

    

    

        

    

        

    

 (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 granted during 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.

**29**

         

                                                                                                                                                                             

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

Stockholder Proposal.  Pursuant to Sec. 2.1(b) of the company’s Amended and Restated By-Laws, notice is hereby given that the company’s 2005 Annual Meeting of Stockholders is expected to be held on June 2,2005.  Pursuant to Sec. 2.1 (b) of the By-Laws, stockholder nominations of persons for election to the Board of Directors must be received by the company at its principal executive office, One Geoffrey Way, Wayne, New Jersey 07470, Attention: CorporateSecretary, between February 3, 2005 and March 4, 2005 in order to be considered timely. 

**Item 5.  Other Information**

         
None.
  

         

         

                                                                                                                                                                                  

**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 Raymond L. Arthur, dated as of November 1, 2004.

10.2

Retention agreement between Toys “R” Us, Inc. and John Barbour, dated as of November 1, 2004.

10.3

Amended and restated retention agreement between Toys “R” Us, Inc. and Deborah M. Derby, dated as of November 1, 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**

**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:  December 8, 2004

         

**/s/ Raymond L. Arthur**

         

           

Raymond L. Arthur

         

Executive Vice President – Chief Financial Officer

         

**31**

**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 Raymond L. Arthur, dated as of November 1, 2004.

10.2

Retention agreement between Toys “R” Us, Inc. and John Barbour, dated as of November 1, 2004.

10.3

Amended and restated retention agreement between Toys “R” Us, Inc. and Deborah M. Derby, dated as of November 1, 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.

**32** |
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