10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 28, 2006

Commission file number 1-11609

TOYS “R” US, INC.

(Exact name of registrant as specified in its charter)

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)

Securities registered pursuant to Section 12(b) or 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨    No  x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

As of January 28, 2006 there were outstanding 1,000 shares of common stock of Toys “R” Us, Inc. (all of which are owned by our holding company and are not publicly traded).

DOCUMENTS INCORPORATED BY REFERENCE

None

Forward-Looking Statements

This Annual Report on Form 10-K contains “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe 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, among other things, our strategy, store openings and renovations, future financial or operational performance, anticipated cost savings, results of store closings and restructurings, anticipated domestic or international development, future financings, 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 spending patterns, general economic conditions in the United States and other countries in which we conduct our business, our ability to implement our strategy, our substantial level of indebtedness and related debt-service obligations, restrictions imposed by covenants in our debt agreements, availability of adequate financing, our dependence on key vendors for our merchandise, domestic and international events affecting the delivery of toys and other products to our stores, economic, political and other developments associated with our international operations, existence of adverse litigation and risks, uncertainties and factors set forth under “Item 1A. Risk Factors” and in our reports and documents filed with the Securities Exchange Commission. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible 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 as of the date they were made, and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

INDEX

		PAGE
PART I.
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	22
PART II.
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7a.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	107
Item 9A.	Controls and Procedures	107
Item 9B.	Other Information	111
PART III.
Item 10.	Directors and Executive Officers of the Registrant	112
Item 11.	Executive Compensation	115
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	123
Item 13.	Certain Relationships and Related Transactions	124
Item 14.	Principal Accounting Fees and Services	126
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	128
SIGNATURES		129
INDEX TO EXHIBITS		130

PART I

ITEM 1.    BUSINESS

Except as expressly indicated or unless the context otherwise requires, as used herein, the “Company,” “we,” “us,” or “our” means Toys “R” Us, Inc., and its subsidiaries. Based on sales, we are the largest specialty retailer of toys in the United States and Puerto Rico, and the only national specialty retailer of baby-juvenile products in the United States. As of January 28, 2006, our business consists of 671 Toys “R” Us stores in the United States, 230 Babies “R” Us specialty baby-juvenile stores in the United States and 641 international stores in 31 countries, of which 625 are Toys “R” Us stores and 16 are Babies “R” Us stores. Included in the 641 international stores are 336 licensed or franchised stores. Toysrus.com, our Internet subsidiary, sells merchandise on the Internet through www.toysrus.com, www.babiesrus.com, www.imaginarium.com, www.sportsrus.com, and www.personalizedbyrus.com in the United States and www.toysrus.ca in Canada. Toys “R” Us, Inc. is incorporated in the state of Delaware.

Our fiscal year ends on the Saturday nearest to January 31 of each calendar year. This Annual Report on Form 10-K reports on our last three fiscal years ended as follows: for the fiscal year ended January 28, 2006 (our 2005 fiscal year end), for the fiscal year ended January 29, 2005 (our 2004 fiscal year end), and for the fiscal year ended January 31, 2004 (our 2003 fiscal year end). References to 2005, 2004 and 2003 are to our fiscal years unless otherwise specified or the context otherwise requires.

Our retail business began in 1948 when founder Charles Lazarus opened a baby furniture store, Children’s Bargain Town, in Washington, D.C. The Toys “R” Us name made its debut in 1957. Since inception, Toys “R” Us has built its reputation as a leading consumer destination for toys and children’s products, including apparel. We opened our first Babies “R” Us stores in 1996, expanding our presence into the specialty baby-juvenile market. Based on sales, we are among the market share leaders in most of the largest markets in which Toys “R” Us retail stores operate, including the United States and United Kingdom. We attribute our market-leading positions in the toy and baby-juvenile markets to our broad product offerings, our highly recognized brand names, our substantial scale and geographic footprint, and our strong vendor relationships.

Merger Transaction

We were acquired on July 21, 2005 by an investment group consisting of entities advised by or affiliated with Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co., L.P. (“KKR”), and Vornado Realty Trust (collectively, the “Sponsors”), along with a fourth investor, GB Holdings I, LLC (the “Fourth Investor”), an affiliate of Gordon Brothers, a consulting firm that is independent from and unaffiliated with the Sponsors and management. The acquisition was consummated through a $6.6 billion merger of the Company into Global Toys Acquisition Merger Sub, Inc. (“Acquisition Sub”) with the Company being the surviving corporation in the merger (the “Merger”) pursuant to an Agreement and Plan of Merger, dated as of March 17, 2005 (the “Merger Agreement”), among the Company, Global Toys Acquisition, LLC (“Parent”) and Acquisition Sub. The Sponsors and the Fourth Investor are collectively referred to herein as the “Investors.”

Under the Merger Agreement, the former holders of the Company’s common stock, par value $0.10 per share, received $26.75 per share, or approximately $5.9 billion. In addition, approximately $766 million was used, among other things, to settle our equity security units, and our warrants and options to purchase common stock, restricted stock and restricted stock units, fees and expenses related to the Merger, and severance, bonuses and related payroll taxes. The merger consideration was funded through the use of the Company’s available cash, cash equity contributions from the Investors and the debt financings as described more fully below. We refer to the July 21, 2005 Merger and recapitalization as the “Merger Transaction.” Please refer to the section entitled “Merger Transaction” under Item 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and Note 2 to our Consolidated Financial Statements entitled “MERGER TRANSACTION” for further details.

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Toys “R” Us – U.S.

Through our Toys “R” Us stores, based on sales, we are the largest specialty retailer of toys in the United States and Puerto Rico. In the U.S. toys and video game products market, based on sales, we were the second-largest toy retailer in 2005. We offer the most comprehensive selection of merchandise in the retail toy industry. By focusing on toys, we are able to provide customers with a comprehensive range of merchandise and vendors with a year-round distribution outlet for the broadest assortment of their products. Our product offerings include toys, plush, games, bicycles, sporting goods, VHS and DVD movies, electronic and video games, small pools, books, educational and development products, clothing, infant and juvenile furniture, and electronics, as well as educational and entertainment computer software for children. A typical Toys “R” Us store currently has year-round between 8,000 and 10,000 items, which we believe is nearly twice the number of items offered by mass merchandisers or other specialty stores that sell toys.

We seek to differentiate ourselves from competitors in several key areas, including product selection, product presentation, service, in-store experience, and marketing. In the last several years, we have taken a number of actions in our attempt to strengthen our franchise. These actions included:

• Enhancing our product offering and adding more exclusive products to our mix;

• Renovating our toy store base in the United States to freshen our stores and enhance the shopping experience;

• Adding an Imaginarium learning and educational toy boutique to all domestic toy stores; and

• Reorganizing our store management teams into merchandise “Worlds” and improving customer service.

Operations

As of January 28, 2006, we operated 671 toy stores in the United States, including 419 combo stores, which combine our toy offering with approximately 5,500 square feet of children’s apparel. Our extensive experience in retail site selection has resulted in a portfolio of stores that include attractive locations in many of our chosen markets. Toys “R” Us stores, generally conform to standardized designs, are approximately 30,000 to 45,000 square feet and consist of freestanding units or are located within shopping centers. During the fiscal year 2005, we closed ten toy stores.

On January 5, 2006, our Board of Directors approved the closing of 87 Toys “R” Us stores in the United States. As of January 28, 2006, we closed three of these stores. All of the remaining 84 stores were closed by April 2, 2006. Twelve of these stores will be converted into Babies “R” Us stores, resulting in the permanent closure of 75 stores. For further details refer to “2005 Restructuring Initiative” in this section, Item 7 entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and Note 5 to the Consolidated Financial Statements entitled “RESTRUCTURING AND OTHER CHARGES.”

Product Selection and Merchandise

Our product offerings are primarily focused on serving the needs of parents or grandparents interested in purchasing toys for children between the ages of two and ten. We offer products according to the following merchandise “Worlds”:

• Core Toy—Our core toy products include boys and girls toys, such as dolls and doll accessories, action figures, role play toys and vehicles; pre-school merchandise, such as pre-school learning products, activities and toys; and our Imaginarium product offerings, which include educational and developmental products and accessories, games, ANIMAL ALLEY plush and puzzles;

• Seasonal—Our seasonal offerings include toys and other products geared toward the Christmas and Halloween holidays and the summer season, as well as bikes, sports merchandise, play sets and other seasonal products;

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• Juvenile or Infant Care—Our juvenile and infant care products include baby products and apparel for infants and toddlers in sizes ranging from newborn to age four;

• R ZONE—Our R ZONE world includes video game hardware and software, electronics, computer software and other related products;

• Geoffrey’s Box Office—Geoffrey’s Box Office consists of VHS and DVD movies and other content designed to appeal to parents and children; and

• Apparel—Apparel is offered in our U.S. Toys “R” Us combo stores and generally includes clothing in sizes ranging from newborn to age ten.

We offer a wide selection of popular national toy brands including many products that are unique to, or launched at, Toys “R” Us. Over the past few years, we have worked with key resources to obtain exclusive products and expand our private label brands enabling us to earn higher margins and offer products that our customers will not find elsewhere. For example, over the past several years, we have entered into exclusive branded product agreements with toy companies such as Mattel, Inc., MGA Entertainment, Inc., Lego, Fisher Price and Cranium, and have developed exclusive licensed toy lines such as Animal Planet, Viking’s Construction Sets, Magic Hair Fairytale Dora, Conga Game, and Scholastic learning products through alliances with various companies. We have also entered into joint marketing campaigns for product promotions related to, among others, Batman Begins, Star Wars, Cinderella, and Major League Baseball. We offer a broad selection of private label merchandise under names such as ANIMAL ALLEY, FAST LANE, FUN YEARS and DREAM DAZZLERS in our Toys “R” Us stores. We believe these private label brands provide a solid platform on which we can expand our product offering in the future.

Marketing

We have achieved our leading market position largely as a result of building a highly recognized, brand name and delivering superior service to our customers. We use a variety of broad-based and targeted marketing and advertising strategies to reach consumers. These methods include mass marketing programs such as catalogs and other inserts in national or local newspapers and national television and radio broadcasts. Another key part of our holiday season marketing strategy involves placing ads in newspapers on Thanksgiving Day to drive sales on the following Friday and Saturday. Our overall marketing efforts are carefully coordinated such that in-store marketing signage is consistent with the current television, radio and print advertisements.

Customer Service

Compared to mass merchandisers, we are able to provide superior service to our customers through our highly trained sales force. We train our store associates extensively to deepen their product knowledge and enhance their targeted selling skills in order to improve customer service in our stores. In addition, we are working to improve waiting times at checkout counters and the allocation of products within our stores.

Market and Competition

The U.S. retail toy and video game products market totaled approximately $32 billion in sales in 2005, with approximately two-thirds of sales driven by traditional toys and approximately one-third driven by video games. In the toys and video games products market, we compete with mass merchandisers, such as Wal-Mart, Target and Kmart; consumer electronics retailers, such as Best Buy, Circuit City and Gamestop; national and regional chains; as well as local retailers in the market areas we serve. In our apparel business, we compete with national and local department stores, specialty and discount store chains, as well as Internet and catalog businesses. In recent years, mass merchandisers, primarily Wal-Mart and Target have expanded their market share for toys and games as they have expanded their commitment to the toy and video game categories and rolled out new stores across the United States. As with other categories, their market share gains have predominantly come from department stores, secondary mass merchandisers and independent players. Mass merchandisers use aggressive

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pricing policies and enlarged toy-selling areas during the holiday season to build traffic for other store departments. In addition, competition in the video game market has increased in recent years as mass merchandisers have expanded and consumer electronics retailers, such as Best Buy, Electronics Boutique and Gamestop, have all experienced significant growth.

We believe the principal competitive factors in the toy market are product variety, quality and availability, price, advertising and promotion, convenience or store location, customer support, and service. We believe that we are able to compete with our key competitors by providing the broadest range of merchandise and high levels of customer support and service at competitive prices.

Seasonality

Our Toys “R” Us business is highly seasonal with sales and earnings highest in the fourth quarter. During the last three fiscal years, more than 40% of the sales from our U.S. toy business and a substantial portion of our operating earnings and cash flows from operations were generated in the fourth quarter. Our results of operations depend significantly upon the holiday selling season in the fourth quarter.

Geographic Distribution of Toys “R” Us Stores

The following table sets forth the location of our Toys “R” Us stores across the United States and Puerto Rico as of January 28, 2006:

Location	Number of Stores
Alabama	7
Alaska	1
Arizona	11
Arkansas	4
California	80
Colorado	8
Connecticut	10
Delaware	2
Florida	46
Georgia	20
Hawaii	1
Idaho	2
Illinois	31
Indiana	13
Iowa	8
Kansas	5
Kentucky	8
Louisiana	8
Maine	2
Maryland	18
Massachusetts	18
Michigan	24
Minnesota	9
Mississippi	5
Missouri	13
Montana	1
Nebraska	3

Location	Number of Stores
Nevada	4
New Hampshire	5
New Jersey	26
New Mexico	4
New York	45
North Carolina	15
North Dakota	1
Ohio	31
Oklahoma	5
Oregon	7
Pennsylvania	33
Rhode Island	1
South Carolina	9
South Dakota	2
Tennessee	14
Texas	49
Utah	6
Vermont	1
Virginia	21
Washington	15
West Virginia	4
Wisconsin	11
Puerto Rico	4
Total USA	671

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Toys “R” Us – International

Toys “R” Us – International (“Toys International”) operates, licenses and franchises toy stores in 31 foreign countries. These stores generally conform to traditional prototypical designs similar to those used by Toys “R” Us – U.S., typically ranging in size from 30,000 to 45,000 square feet of space. Some international stores utilize proprietary brands and shopping “Worlds” that have been successful in the United States. The “Worlds” include Imaginarium boutiques, which are known in some countries as “World of Imagination,” and Babies “R” Us boutiques. We present our customers with a “one-stop” shopping experience and provide a breadth of product assortment unrivaled by our competitors. A typical Toys International store carries a range of 7,500 to 9,500 items. Our differentiated assortment, proportionately higher private label or exclusively licensed product offerings, and quality service levels enable us to command a reputation as the shopping destination for toys, games, juvenile, and family leisure products.

We seek to differentiate ourselves from competitors in several key areas, including product selection, product presentation, service, in-store experience, and marketing. In the last several years, we have taken a number of actions in our attempt to strengthen our business. These actions included:

• Enhancing our product offering and adding more exclusive products to our mix;

• Continually reviewing our store portfolio for potential renovations to enhance the shopping experience;

• Adding Imaginarium / World of Imagination learning and educational toy boutiques to all stores; and

• Reorganizing our stores into merchandise “Worlds” and improving customer service.

Operations

As of January 28, 2006, we operated 305 international stores, 2 of which are Babies “R” Us stores, and our franchisees and licensees operated 336 franchised or licensed international stores, 14 of which are Babies “R” Us stores. During fiscal 2005, we opened 10 and closed 4 international stores, and our franchisees and licensees opened 38 and closed 4 international stores, for a total of 48 opened and 8 closed international stores, respectively. During fiscal 2006, we intend to open an estimated 19 new international stores and close 1 international store and our franchisees and licensees intend to open an estimated 38 stores and close 4 international stores, for a total of 57 proposed new and 5 proposed closing international stores, respectively. Continued store openings are a key part of our overall international growth strategy.

Our international division has wholly-owned operations in Australia, Austria, Canada, France, Germany, Portugal, Spain, Switzerland, and the United Kingdom. We intend to pursue opportunities that may arise in these and other countries. Sales in foreign countries (excluding sales by licensees and franchisees) represented approximately 25% of consolidated sales in 2005.

Product Selection and Merchandise

Our product offerings are similar to the offerings in Toys “R” Us stores in the United States. We sell toys, plush, games, bicycles, sporting goods, DVDs, electronic and video games, outdoor, educational and development products, clothing, infant and juvenile furniture, and electronics, as well as educational and entertainment computer software for children. We offer products according to the following merchandise “Worlds”:

• Core Toy—Our principal core toy products include boys and girls toys, such as dolls and doll accessories, action figures, role play toys and vehicles;

• Seasonal—Our seasonal offerings include toys and other products geared toward the Christmas and other major holidays such as Three Kings, Carnival, Easter, etc. Other seasonal products include bikes, sports merchandise, play sets and other wheeled goods;

• Juvenile or Infant Care—Our juvenile and infant care products include baby products and apparel for infants and toddlers in sizes ranging from newborn to age four;

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• Learning—Our learning products include educational electronics and developmental toys and related products; and

• R ZONE—Our R ZONE world includes video game hardware and software, electronics, computer software, DVDs, and other related products.

Marketing

Toys International marketing strategies are similar to the programs in the United States. We use press advertisements featured in national papers, catalogs/rotos distributed within newspapers, targeted door-to-door distribution, direct mailings to loyalty card members, other targeted mailings, in-store marketing and television advertising. Our focus on in-store marketing is to generate strong customer frequency and increase average sale per customer. Our United Kingdom business is especially well known for its usage of feature walls, innovative product displays and signage that direct the customer to the latest promotions and product demonstrations as well as to the products they came to buy. This promotional strategy has been replicated in our other international stores. The merchandising and marketing teams work closely to present the products in an engaging and innovative manner and one area of focus is enhancing our in-store signage. We are constantly changing our banners and in-store promotions, which are advertised throughout the year, to attract consumers to visit the stores.

Customer Service

Compared to other mass merchandisers and hypermarkets, Toys International is committed to providing different varieties of toys, games, and juvenile categories throughout the year. We have a sales driven culture and dedicated sales advisers trained in their product “Worlds” in order to help provide the right product for each customer’s needs.

Market and Competition

In the toys and video games products market, we compete with mass merchandisers, discounters, and hypermarkets such as Argos, Woolworths, Carrefore, Auchan, El Corte Ingles, Wal-Mart, and Zellers. These competitors aggressively price in the toys and games space with larger dedicated selling space during the holiday season in order to build traffic for other store departments.

The competitive factors in the toy market impacting the United States are present similarly in other countries where we operate. We believe we are able to compete through product assortment differentiation, maintaining in-stock positions, convenient locations, superior customer service, and competitive pricing.

Seasonality

Our Toys International business is highly seasonal, with sales and earnings highest in the fourth quarter. During the last three fiscal years, more than 40% of the sales from our international toy business were generated in the fourth quarter. Our results of operations depend significantly upon the holiday selling season in the fourth quarter.

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Geographic Distribution of International Stores

The following table sets forth the location of our owned, licensed and franchised International stores located in 31 countries as of January 28, 2006:

Location	Number of Stores
Australia	31
Austria	12
Bahrain	1	*
Canada	65
Denmark	12	*
Egypt	2	*
France	33
Germany	50
Hong Kong	7	*
Indonesia	3	*
Israel	23	*
Japan	163	(1)
Kuwait	1	*
Malaysia	9	*
Mauritius	1	*
Netherlands	15	*
Norway	6	*
Oman	1	*
Portugal	8
Qatar	1	*
Saudi Arabia	7	*
Singapore	6	*
South Africa	14	*
Spain	35
Sweden	11	*
Switzerland	4
Taiwan	13	*

Location	Number of Stores
Thailand	2	*
Turkey	35	*
United Arab Emirates	3	*
United Kingdom	67
Total International	641
* Franchised or licensed
(1) Licensed operation in which we hold a 47.9% equity ownership

Toys “R” Us – Japan

At January 28, 2006, Toys “R” Us – Japan, Ltd. (“Toys “R” Us – Japan”), a licensee of ours, operated 163 stores, which are included in the 336 licensed or franchised international stores. Of these 163 stores, 14 stores are Babies “R” Us stores and the remainder are toy stores. During 2006, Toys “R” Us – Japan intends to open an additional four Babies “R” Us stores as well as eight Toys “R” Us stores. We have a 47.9% ownership in the common stock of Toys “R” Us – Japan and have accounted for this investment under the equity method of accounting. For a further discussion of our investment in Toys “R” Us – Japan, refer to Note 9 to the Consolidated Financial Statements entitled “INVESTMENT IN TOYS “R” US – JAPAN.” Refer to Note 28 to the Consolidated Financial Statements entitled “SUBSEQUENT EVENTS” for details of our and/or the Sponsors’ proposed increase in the number of directors on the Board of Directors of Toys “R” Us – Japan in April 2006.

Babies “R” Us

Founded in 1996, Babies “R” Us is the largest specialty retailer of baby-juvenile products in the United States and the only specialty retailer in its category that operates on a national U.S. scale. Our focus on the baby-juvenile market allows us to offer the broadest range of baby-juvenile products and deliver a high level of customer service and product knowledge.

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Operations

In 1996, we opened our first Babies “R” Us stores. The acquisition of Baby Superstore, Inc. in 1997 added 76 locations, and our continued expansion of these stores helped Babies “R” Us become the leader in the specialty baby-juvenile market. As of January 28, 2006, we operated 230 Babies “R” Us specialty baby-juvenile retail stores in the United States. As with our Toys “R” Us – U.S. stores, our extensive experience in retail site selection has resulted in a portfolio of Babies “R” Us stores that includes attractive locations in our chosen markets. A typical Babies “R” Us store is designed for an easy shopping experience with low profile merchandise displays in the center of the store, providing a sweeping view of the entire product selection. We also utilize low fixtures and walls to maximize the presentation of merchandise and feature exclusive, new or special value products throughout the store. A typical Babies “R” Us store generally consists of an average 36,000 square feet, and most Babies “R” Us stores devote between 2,000 and 5,000 square feet to specialty name brand and private label clothing.

We opened 13 Babies “R” Us stores in 2005 and as part of our long-range growth plan, we plan to open approximately 65 new Babies “R” Us stores over the next three years, including approximately 22 stores in 2006. This growth will come from developing new stores and converting certain Toys “R” Us stores into Babies “R” Us stores. Markets for new stores are selected on the basis of proximity to other Babies “R” Us stores, demographic factors, population growth potential, competitive environment, availability of real estate and cost. Once a potential market area is identified, we select a suitable location based upon several criteria, including size of the property, access to major commercial thoroughfares, proximity of other strong anchor stores or other destination superstores, visibility and parking capacity.

Product Selection and Merchandise

Our product selection is focused to serve newborns and children up to 4 years of age. Consequently, we must market a broad array of product sizes within multiple product categories. Because first-time parents tend to make multiple product purchases during a relatively short period of time, we seek to provide the expectant parent with a one-stop shopping venue for all baby product needs, providing what we believe is the most complete selection of baby-related products in the marketplace. Our Babies “R” Us stores typically offer over 24,000 items from approximately 250 suppliers, including:

• Baby gear – Our baby gear products include car seats, strollers, high chairs, swings, travel yards and entertainers;

• Baby accessories – Our baby accessories include bath products, safety products, monitors, rattles, gates, potty seats, carriers and other products;

• Consumables – Our consumable products include diapers, wipes, formula, baby food and health and beauty aids;

• Apparel – Our apparel category includes brand name and private label layettes, sleepwear, playwear, clothing accessories and shoes ranging in sizes from “preemie” to 48 months;

• Furniture – Our baby furniture includes cribs, cases, changing tables, gliders, toy boxes, mattress tables and chair sets and some toddler beds. We feature JARDINE, our exclusive brand, the WENDY BELLISSIMO licensed brand, as well as nationally recognized brands;

• Bedding and room décor – We carry a comprehensive selection of products for nurseries. Our bedding and room décor products include bedding sets and matching accessories, blankets, rugs, wall borders and bedding necessities, such as mattress covers, changing pads and changing pad covers. We also offer a selection of bedding basics under our private label brand, KOALA BABY, the WENDY BELLISSIMO licensed brand, as well as various brand name bedding products; and

• Infant toys – We offer a broad selection of infant toys, which includes play mats, plush, books and videos, among other products.

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Our extensive merchandise mix consists of leading national brands, exclusive products and private label merchandise. We feature brand-name products from many of the leading manufacturers of newborn and infant products. We believe that our private label and exclusive brands differentiate us from our competition while providing high quality products at competitive prices, maintaining attractive margins, and driving customer visits. We also offer brand-name products that are available exclusively to us. In addition, we sell brand-name products through direct-licensing agreements with well-known designers. For example, we began offering products under the WENDY BELLISSIMO brand name in the fourth quarter of 2004. These products are offered exclusively at our stores. We believe that direct-licensing relationships with brand-name designers will further differentiate our products and allow us to enhance profitability.

Marketing

The core of our marketing strategy is to convey our one stop shopping solution to new and expectant parents as well as our mission of delivering value-added services to our customers. We use various targeted marketing and advertising techniques to reach our customer audiences and promote our brands in order to reinforce and augment our “top-of-mind” reputation among consumers and thereby drive customer traffic. These methods include direct mail, juvenile magazine advertisements, e-mail and promotional marketing efforts. Our direct mail program, which includes catalogs and postcards, advertises our products and delivers useful age and stage relevant information to both pre and postnatal parents and special deals and coupons are often included to drive traffic and sales. Our promotional marketing efforts are focused on working with key juvenile vendors in order to further our ability to effectively reach this targeted audience more often and to deliver more added value programs to our guests. We also advertise on radio to reach a broader audience for key promotions and store openings.

Each of our stores, as well as our Internet site, offers access to our comprehensive baby registry, which allows an expectant parent to list products that she or he wants and enables gift-givers to tailor purchases to the expectant parent’s specific needs and wishes. Nearly one-quarter of the approximately four million infants born in the United States in 2005 had parents registered at Babies “R” Us and/or Toys “R” Us, which we believe makes it not only the largest registry of its kind, but also a key competitive advantage. Our baby registry also facilitates our direct marketing and customer relationship management initiatives.

Customer Service

From our baby registry and highly trained staff, to our extensive product selection and exclusive products, we believe we are widely recognized as providing superior service as compared to our competitors at mass merchandisers. Each Babies “R” Us store maintains a well-trained, knowledgeable and accessible staff on the sales floor to assist customers with product inquiries and purchase decisions. Our sales associates are continuously trained on product and service skills using a combination of e-learning, role playing and coaching tools, and our service levels are tested regularly through customer satisfaction surveys and mystery shops performed by outside consultants. In addition, we provide a home delivery program in most of our stores for the added convenience of our customers. In addition to our baby registry, we offer a variety of helpful publications and innovative programs and services for the expectant parent, including frequent in-store product demonstrations and periodic educational seminars led by store associates and local experts such as grandparents’ seminars and car seat safety inspections.

Market and Competition

The retail baby-juvenile market in the United States is large and growing. Estimates of the size of the baby-juvenile product market in the United States vary due to extreme fragmentation of the supplier and retailer base as well as lack of agreement as to the definition of the relevant products and customer ages.

We compete with mass merchandisers, such as Wal-Mart, Target and K-Mart; national and regional chains; department stores, discount stores, supermarkets, warehouse clubs and drug stores; as well as local retailers in the

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market areas we serve. In our apparel business, we compete with national and local department stores, specialty and discount store chains, as well as Internet and catalog businesses. Our baby registry competes with baby registries of mass merchandisers and other special format and regional retailers. Within the past few years, the number of multiple registries and online registries has steadily increased. We believe the principal competitive factors in the baby-juvenile industry are product variety, convenience, customer support and service, and price, as well as functionality for our registry. We believe we are able to compete with our key competitors by providing the broadest range of merchandise and high levels of customer service at competitive prices.

Geographic Distribution of Babies “R” Us Stores

The following table sets forth the location of our Babies “R” Us stores across the United States as of January 28, 2006:

Location	Number of Stores	Location	Number of Stores
Alabama	3	Mississippi	1
Arizona	4	Missouri	5
California	25	Nebraska	1
Colorado	5	Nevada	3
Connecticut	5	New Hampshire	2
Delaware	1	New Jersey	13
Florida	15	New Mexico	1
Georgia	9	New York	17
Idaho	1	North Carolina	7
Illinois	11	Ohio	10
Indiana	6	Oklahoma	2
Iowa	1	Oregon	2
Kansas	1	Pennsylvania	13
Kentucky	2	Rhode Island	1
Louisiana	2	South Carolina	3
Maine	1	Tennessee	4
Maryland	4	Texas	16
Massachusetts	6	Utah	3
Michigan	11	Virginia	7
Minnesota	3	Washington	3
		Total	230

Toysrus.com

Toysrus.com sells merchandise to the public via the Internet at www.toysrus.com, www.babiesrus.com, www.imaginarium.com, www.sportsrus.com, and www.personalizedbyrus.com. We launched our e-commerce website in 1998.

In 2000, we entered into a strategic alliance agreement with Amazon.com, Inc. (“Amazon.com”) and launched a co-branded toy store. Toysrus.com operates three co-branded online stores under the strategic alliance agreement with Amazon.com. These online stores sell toys, collectible items, and video games through the Toysrus.com website; baby products through the Babiesrus.com website; and learning and information products through the Imaginarium.com website. Our online operations provide a broad range of our product offerings, including many products and brands available exclusively online. Customers can create a baby registry online that is accessible at all U.S. Babies “R” Us and Toys “R” Us locations, and they can also edit a store-created registry online. Our Internet operations have become a fast-growing distribution channel for us, with more than 120 million site visits in 2005. Amazon.com also provides certain website services for our online sports merchandise store, Sportsrus.com, that has been operating since September 2003. An unrelated third party handles order fulfillment for Sportsrus.com and a separate unrelated third party handles order fulfillment for Personalizedbyrus.com.

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On May 21, 2004, we, Toysrus.com, LLC, and two other affiliated companies, filed a lawsuit against Amazon.com and its affiliated companies seeking to terminate the strategic alliance agreement with Amazon.com and its affiliated companies due to breaches of the agreement by Amazon.com. On June 25, 2004, Amazon.com filed a counterclaim against us and our affiliated companies. On March 31, 2006 the trial court entered a final order in our favor terminating the strategic alliance agreement with Amazon.com as of that date and denying any relief to Amazon.com on its counterclaim. The court also established a wind-down period through June 30, 2006, during which time Amazon.com will continue to operate the co-branded stores. On April 3, 2006 Amazon.com filed a Notice of Appeal and filed a Motion for Stay of Judgment in the trial court. On April 20, 2006, the trial court denied Amazon.com’s request for a stay. Amazon.com filed a request in the appellate court on April 21, 2006 for emergent relief from the trial court’s denial of its request for a stay, and on that same day, the appellate court refused Amazon.com’s motion for an immediate stay and determined to consider Amazon.com’s request on the normal briefing schedule. In anticipation of these favorable rulings, we have been planning the launch of an independent website using our own domain names. For further details refer to Item 3 entitled “LEGAL PROCEEDINGS” and to Note 24 to the Consolidated Financial Statements entitled “LITIGATION AND LEGAL PROCEEDINGS.”

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 by SOFTBANK Venture Capital and affiliates (“SOFTBANK”) and other investors. Prior to this acquisition, SB Toys, Inc. owned a 20% interest, as a minority shareholder, of Toysrus.com, LLC, our Internet subsidiary. As a result we recorded a 20% minority interest in consolidation to account for the ownership stake of SB Toys, Inc. Beginning in the fourth quarter of 2004, we recognized 100% of the results of Toysrus.com, LLC in our consolidated financial statements.

Employees

As of January 28, 2006, we employed worldwide approximately 59,000 full-time and part-time individuals. Due to the seasonality of our business, we employed approximately 90,000 full-time and part-time employees during the 2005 holiday season.

Vendor Service

We have approximately 1,300 to 1,500 vendor relationships through which we procure the merchandise that we offer to guests. For 2005, our top 20 vendors worldwide, based on our purchase volume in dollars, represented approximately 39% of the total products we purchased. Most of our foreign sourced merchandise comes from China, and we purchase that merchandise in U.S. dollars.

We provide a number of valuable services to our vendors. Our year-round commitment to selling toys and baby products, as well as our merchandising expertise gives vendors a meaningful opportunity to display new merchandise and reach consumers throughout the year. In addition, we are able to provide our vendors with a wide variety of data on sales trends, product testing, and marketing guidance and support, as well as early feedback on our vendors’ product development initiatives through the depth and longevity of our experienced merchandising team.

2005 Restructuring Initiative

On January 5, 2006, our Board of Directors approved the closing of 87 Toys “R” Us stores in the United States. As of January 28, 2006, we closed three of these stores. All of the remaining 84 stores were closed by April 2, 2006. Twelve of these stores will be converted into Babies “R” Us stores, resulting in the permanent closure of 75 stores. The decision to take this action resulted from a comprehensive review and evaluation of our U.S. stores over the past several months. We retained Gordon Brothers Retail Partners, LLC to assist us in connection with the orderly sale of the inventory in these stores.

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In connection with the closing and conversion of these stores, we recorded $94 million of costs and charges during 2005. We estimate an additional $55 million of charges will be recorded in the first quarter of 2006. The $94 million of costs and charges include $41 million of inventory markdowns and liquidator fees that were recorded in cost of sales and $22 million of depreciation that was accelerated through the closing periods of the stores. The remaining $31 million of costs and charges are included in restructuring and other charges in the Consolidated Statement of Operations, and consist of $22 million relating to asset impairments, $1 million relating to lease commitments, and $8 million relating to severance costs. As a result of the store closings, approximately 3,000 employee positions have been eliminated.

Details of restructuring and other charges, as well as other strategic initiatives, are described in Item 7. entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and within Note 5 to the Consolidated Financial Statements entitled “RESTRUCTURING AND OTHER CHARGES.”

Closing of Kids “R” Us and Imaginarium Freestanding Stores

On November 17, 2003, we announced our decision to close all 146 of the remaining freestanding Kids “R” Us stores and all 36 of the freestanding Imaginarium stores, as well as three distribution centers that support these stores due to accelerated deterioration in their financial performance. On March 2, 2004, we entered into an agreement with Office Depot, Inc. (“Office Depot”) under which Office Depot agreed to acquire 124 of the former Kids “R” Us stores for $197 million in cash, before commissions and fees, plus the assumption of lease payments and other obligations. Twenty-four properties were excluded from the agreement with Office Depot and these properties are being marketed for disposition or have been disposed of to date. As of January 28, 2006, all of the freestanding Kids “R” Us and Imaginarium stores have been closed.

Financial Information About Industry Segments

Information about industry segments is set forth within Note 23 to the Consolidated Financial Statements entitled “SEGMENTS.”

Distribution Centers

In the United States, we operate 12 distribution centers, which support our U.S. toys and baby stores. We also operate eight distribution centers outside of the United States that support our International toy stores.

These distribution centers employ warehouse management systems and material handling equipment that help to minimize overall inventory levels and distribution costs. We believe the flexibility afforded by our warehouse/distribution system and by operating the fleet of trucks used to distribute merchandise, provide us with operating efficiencies and the ability to maintain a superior in-stock inventory position at our stores. We are currently implementing initiatives to improve our supply chain management and to optimize our inventory assortment. We are also expanding our automated replenishment system to improve inventory turnover.

Trademarks

“TOYS “R” US”^®, “BABIES “R” US” ^®, “IMAGINARIUM” ^®, “GEOFFREY” ^®, “TOYSRUS.COM”^® as well as variations of our family of “R” Us marks, either have been registered, or have trademark applications pending, with the United States Patent and Trademark Office and with the trademark registries of many foreign countries. We believe that our rights to these properties are adequately protected.

Available Information

Our investor relations website is www.toysrusinc.com. On this website under “COMPANY NEWS, SEC Filings,” we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,

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and Current Reports on Form 8-K, as well as amendments to those reports as soon as reasonably practicable after we electronically file with or furnish such material to the Securities Exchange Commission.

Our website contains the Toys “R” Us, Inc. Chief Executive Officer and Senior Financial Officers Code of Ethics (“CEO and Senior Financial Officers Code”), which is our code of ethics for our Chief Executive Officer and our senior financial officers. Any waivers from the CEO and Senior Financial Officers Code that apply to our Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, or persons performing similar functions will be promptly disclosed on the Company’s website. These materials are also available in print, free of charge, to any investor who requests them by writing to: Toys “R” Us, Inc., One Geoffrey Way, Wayne, New Jersey 07470, Attention: Investor Relations.

We are not incorporating by reference in this Annual Report on Form 10-K any material from our websites.

ITEM 1A.    RISK FACTORS

Risks Associated with Our Business

Investors should carefully consider the risks described below and all other information in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or that it currently deems immaterial may also impair the Company’s business and operations. If any of the following risks actually occur, the Company’s business, financial condition, cash flows, or results of operations could be materially adversely affected.

Our Toys “R” Us business is highly seasonal, and our financial performance depends on the results of the fourth quarter of each year

Our Toys “R” Us business is highly seasonal with sales and earnings highest in the fourth quarter. During the last three fiscal years, more than 40% of the sales from our worldwide toy business and a substantial portion of our operating earnings and cash flows from operations were generated in the fourth quarter. Our results of operations depend significantly upon the holiday selling season in the fourth quarter. If we achieve less than satisfactory sales, operating earnings or cash flows from operating activities during the key fourth quarter, we may not be able to compensate sufficiently for the lower sales, operating earnings, or cash flows from operating activities during the first three quarters of the fiscal year. In addition, our results may be affected by dates on which important holidays fall and the shopping patterns relating to those holidays. Our Babies “R” Us business is not significantly impacted by seasonality, with sales generally spread evenly across all the four quarters of the fiscal year.

Our industry is highly competitive and competitive conditions may adversely affect our revenues and overall profitability

The retailing industry is highly and increasingly competitive and our results of operations are sensitive to, and may be adversely affected by, competitive pricing, promotional pressures, additional competitor store openings, and other factors. We compete with discount and mass merchandisers such as Wal-Mart, Target, and Kmart; electronic retailers, such as Best Buy and Circuit City; national and regional chains; as well as local retailers in the market areas we serve. We also compete with discount stores, supermarkets and warehouse clubs. In addition, competition in the retail apparel business consists of national and local department stores, specialty and discount store chains, as well as Internet and catalog businesses. Competition is principally based on product variety, quality and availability, price, convenience or store location, advertising and promotion, customer support and service. Some of our competitors may have greater financial resources, lower merchandise acquisition costs, and lower operating expenses than our Company.

Most of the merchandise we sell is also available from various retailers at competitive prices. Discount and mass merchandisers use aggressive pricing policies and enlarged toy-selling areas during the holiday season to

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build traffic for other store departments. Our apparel business is vulnerable to demand and pricing shifts and to less than optimal selection as a result of these factors. Competition in the video game market has increased in recent years as mass merchandisers have expanded and consumer electronics retailers, such as Best Buy, Circuit City and Gamestop, have all experienced significant growth.

In addition, the baby registry market is highly competitive, with competition based on convenience, quality and selection of merchandise offerings and functionality. Our baby registry primarily competes with the baby registries of mass merchandisers, such as Wal-Mart and Target, and other specialty format and regional retailers. Some of our competitors have been aggressively advertising and marketing their baby registries through national and television and magazine campaigns. Within the past few years, the number of multiple registries and online registries has steadily increased. These trends present consumers with more choices for their baby registry needs, and, as a result, increase competition for our baby registry.

If we fail to compete successfully, we could face lower sales and may decide or be compelled to offer greater discounts to our customers, which could result in decreased profitability.

Our operations have significant liquidity and capital requirements and depend on the availability of adequate financing

We have significant liquidity and capital requirements. Among other things, the seasonality of our Toys “R” Us business requires us to purchase merchandise well in advance of the holiday selling season. We depend on our ability to generate cash flow from operating activities, as well as on borrowings under $2 billion five-year secured revolving credit facility to finance the carrying costs of this inventory, to pay for capital expenditures and to maintain operations. Standard & Poor’s and Moody’s rate our unsecured debt as non-investment grade. Our credit ratings could (1) negatively impact our ability to finance our operations on satisfactory terms, and (2) have the effect of increasing our financing costs. While we currently have adequate sources of funds to provide for our ongoing operations and capital requirements, any inability to have future access to financing, when needed, would have a negative effect on our company.

We may not retain or attract customers if we fail to implement successfully our strategy

We continue to implement a series of customer-oriented strategic programs designed to differentiate and strengthen our core merchandise content and service levels and expand and enhance our merchandise offering in our Babies “R” Us stores. We are also broadening the scope of our marketing and advertising programs for our Toys “R” Us and Babies “R” Us stores. The success of these and other initiatives will depend on various factors, including the appeal of our store formats, our ability to offer new products to customers, our financial condition, our ability to respond to changing consumer preferences and competitive and economic conditions. We are also continuing with plans to reduce and optimize our operating expense structure. If we are unsuccessful at implementing some or all of our strategic initiatives, we may be unable to retain or attract customers, which could result in lower sales and a failure to realize the benefit of the expenditures incurred for these initiatives.

Our sales may be adversely affected if we fail to respond to changes in consumer preferences in a timely manner

Our financial performance depends on our ability to identify, originate and define product trends, as well as to anticipate, gauge and react to changing consumer demands in a timely manner. Our toy and baby-juvenile products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. The retail apparel business fluctuates according to changes in consumer preferences dictated in part by fashion, perceived value and season. These fluctuations affect the merchandise in stock since purchase orders are made well in advance of the season and, at times, before fashion trends and high-demand brands are evidenced by consumer purchases.

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We cannot assure you that we will be able to continue to meet changing consumer demands in the future. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and missed opportunities for other products. In addition, because we place orders for products well in advance of purchases by customers, we could experience excess inventory if our customers purchase fewer products than anticipated.

Our sales may be adversely affected by changes in consumer spending patterns

Sales of toys and baby-juvenile products may depend upon discretionary consumer spending, which may be affected by general economic conditions, consumer confidence, and other factors beyond our control. A decline in consumer spending could, among other things, negatively affect our sales and could also result in excess inventories, which could in turn lead to increased inventory financing expenses. As a result, changes in consumer spending patterns could adversely affect our profitability.

Toy sales may be negatively impacted by the trend toward age compression

Toy sales may be negatively impacted by “age compression,” which is the acceleration of children leaving traditional play categories at increasingly younger ages for more sophisticated products such as cell phones, DVD players, CD players, MP3 devices, and other electronic products. The age compression pattern tends to decrease consumer demand for traditional toys. To the extent that we are unable to offer consumers more sophisticated products or that these more sophisticated items are also available at a wider range of retailers than our traditional competitors, our sales and profitability could be detrimentally affected and we could experience excess inventories.

Sales of video games tend to be cyclical and may result in fluctuations in our results of operations

Sales of video games, which have tended to account for 10% to 20% of our domestic toy store sales, have been cyclical in nature in response to the introduction and maturation of new technology. Following the introduction of new video game platforms, sales of these platforms and related software and accessories generally increase due to initial demand, while sales of older platforms and related products generally decrease as customers migrate toward the new platforms. New video game platforms have historically been introduced approximately every five years. If video game platform manufacturers fail to develop new hardware platforms, our sales of video game products could decline.

We depend on key vendors to supply the merchandise that we sell to our customers

Our performance depends, in part, on our ability to purchase our merchandise in sufficient quantities at competitive prices. We purchase our merchandise from numerous foreign and domestic manufacturers and importers. We have no contractual assurances of continued supply, pricing or access to new products, and any vendor could change the terms upon which they sell to us or discontinue selling to us at any time. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Better than expected sales demand may also lead to customer backorders and lower in-stock positions of our merchandise.

We have approximately 1,300 to 1,500 vendor relationships through which we procure the merchandise that we offer to guests. For 2005, our top 20 vendors worldwide, based on our purchase volume in dollars, represented approximately 39% of the total products we purchased. Our inability to acquire suitable merchandise on acceptable terms or the loss of one or more key vendors could have a negative effect on our business and operating results because we would be missing products that we felt were important to our assortment, unless and until alternative supply arrangements are secured. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality and/or more expensive than those we currently purchase.

In addition, our vendors are subject to certain risks, including labor disputes, union organizing activities, vendor financial liquidity, inclement weather, natural disasters, and general economic and political conditions,

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that could limit our vendors’ ability to provide us with quality merchandise on a timely basis and at a price that is commercially acceptable. For these or other reasons, one or more of our vendors might not adhere to our quality control standards, and we might not identify the deficiency before merchandise ships to our stores or customers. In addition, our vendors may have difficulty adjusting to our changing demands and growing business. Our vendors’ failure to manufacture or import quality merchandise in a timely and effective manner could damage our reputation and brands, and could lead to an increase in customer litigation against us and an attendant increase in our routine litigation costs. Further, any merchandise that does not meet our quality standards could become subject to a recall, which would damage our reputation and brands, and harm our business.

Our inability to obtain commercial insurance at acceptable prices or our failure to adequately reserve for self-insured exposures might have a negative impact on our business.

Insurance costs continue to be volatile, affected by natural catastrophes, fear of terrorism and financial irregularities and other fraud at publicly traded companies. We believe that commercial insurance coverage is prudent for risk management, and insurance costs may increase substantially in the future. In addition, for certain types or levels of risk, such as risks associated with earthquakes, hurricanes or terrorist attacks, we may determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we may choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. We insure a substantial portion of our general liability and workers’ compensation risks through a wholly-owned insurance subsidiary, in addition to third party insurance coverage. Provisions for losses related to self-insured risks are based upon independent actuarially determined estimates. We maintain stop-loss coverage to limit the exposure related to certain risks. The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could have a material impact on our consolidated financial statements.

International events could delay or prevent the delivery of products to our stores

A significant portion of the toys and other products sold by us are manufactured outside of the United States, primarily in Asia. As a result, any event causing a disruption of imports, including the imposition of import restrictions or trade restrictions in the form of tariffs, “antidumping” duties, acts of war, terrorism or diseases such as the bird flu, could increase the cost and reduce the supply of products available to us, which could, in turn, negatively affect our sales and profitability. In addition, over the past few years, port-labor issues, rail congestion, and trucking shortages have had an impact on all direct importers. Although we attempt to anticipate and manage such situations, both our sales and profitability could be adversely impacted by such developments in the future.

International factors could negatively affect our business

We are subject to the risks inherent in conducting our business across national boundaries, many of which are outside of our control. These risks include the following:

• Economic downturns;

• Currency exchange rate and interest rate fluctuations;

• Changes in governmental policy, including, among others, those relating to taxation;

• International military, political, diplomatic and terrorist incidents;

• Government instability;

• Nationalization of foreign assets; and

• Tariffs and governmental trade policies.

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We cannot ensure that one or more of these factors will not negatively affect International and, as a result, our business and financial performance.

The success of our Internet operations depends on our ability to provide quality service to our Internet customers

The success of our online business depends on our ability to provide quality service to our Internet customers. Our internet segment Toysrus.com operates online stores pursuant to a strategic alliance agreement with Amazon.com.

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 requesting termination of our strategic alliance agreement with Amazon.com. On June 25, 2004, Amazon.com filed a counterclaim against us and our affiliated companies.

On March 31, 2006 the trial court entered a final order in our favor terminating the strategic alliance agreement with Amazon.com as of that date and denying Amazon.com’s counterclaim. The court also established a wind-down period through June 30, 2006, during which time Amazon.com will continue to operate the co-branded stores. On April 3, 2006 Amazon filed a Notice of Appeal and filed a Motion for Stay of Judgment in the trial court. On April 20, 2006, the trial court denied Amazon.com’s request for a stay. Amazon.com filed a request in the appellate court on April 21, 2006 for emergent relief from the trial court’s denial of its request for a stay, and on that same day, the appellate court refused Amazon.com’s motion for an immediate stay and determined to consider Amazon.com’s request on the normal briefing schedule. For further details refer to Item 3 entitled “LEGAL PROCEEDINGS” and Note 24 to the Consolidated Financial Statements entitled “LITIGATION AND LEGAL PROCEEDINGS”.

In anticipation of these favorable rulings, we have been planning for the launch of an independent website at our domain names, however, we may not be able to provide the same level of website and fulfillment services ourselves or through other third parties, which could have a negative effect on the sales and profitability of our online business.

Our Internet operations are also subject to a number of risks and uncertainties, which are beyond our control, including the following:

• changes in consumer willingness to purchase goods via the Internet;

• increases in software filters that may inhibit our ability to market our products through e-mail messages to our customers and increases in consumer privacy concerns relating to the Internet;

• changes in applicable federal and state regulation, such as the Federal Trade Commission Act, the Children’s Online Privacy Act, the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act;

• breaches of Internet security; and

• failures in our Internet infrastructure or the failure of systems or third parties, such as telephone or electric power service, resulting in website downtime or other problems.

Our business exposes us to personal injury and product liability claims which could result in adverse publicity and harm to our brand and our results of operations

We are from time to time subject to claims due to the injury of an individual in our stores or on our property. In addition, we have in the past been subject to product liability claims for the products that we sell. While our purchase orders generally require the manufacturer to indemnify us against any product liability claims, there is a risk that if the manufacturer becomes insolvent we would not be indemnified. Any personal

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injury claim made against us or, in the event the manufacturer was insolvent, any product liability claim made against us, whether or not it has merit, could be time consuming, result in costly litigation expenses and damages, result in adverse publicity or damage to our brand and have an adverse effect on our results of operations.

Our business operations could be disrupted if our information technology systems fail to perform adequately

We depend upon our information technology systems in the conduct of our operations. If our major information systems fail to perform as anticipated, we could experience difficulties in replenishing inventories or in delivering toys and other products to store locations in response to consumer demands. Any of these or other systems related problems could, in turn, adversely affect our sales and profitability.

Our results of operations could suffer if we lose key management or are unable to attract and retain the talent required for our business

Our future success depends to a significant degree on the skills, experience and efforts of our senior management team. The loss of services of any of these individuals, or the inability by us and our parent company to attract and retain qualified individuals for key management positions, could harm our business and financial performance.

We reported a material weakness in our internal control over financial reporting and if we are unable to improve our internal controls, our financial results may not be accurately reported

Management’s assessment of the effectiveness of our internal control over financial reporting as of January 28, 2006 identified a material weakness in our internal controls in our financial reporting process due mainly to our lack of the appropriate complement of personnel, including technically qualified personnel, and the inability of our information technology systems to consistently perform necessary functions. As a result of this material weakness, management determined that our disclosure controls and procedures were not effective as of January 28, 2006. The material weakness and our plan to remediate that material weakness are described in Item 9A. entitled “CONTROLS AND PROCEDURES” of this Annual Report on Form 10-K.

The initiatives we have taken to improve the reliability of our internal controls and to remediate the material weakness are ongoing. However, we might be unable to hire sufficient qualified personnel and or obtain the necessary technological upgrades needed to remediate the material weakness. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial reporting processes and that we will remediate the material weakness described in this Annual Report on Form 10-K. Any failure to implement required new or improved controls or to remediate the material weakness, or difficulties encountered in their implementation could prevent us from accurately reporting our financial results, result in material misstatements in our financial statements or cause us to fail to meet our reporting obligations. In addition, we cannot assure you that we will not in the future identify further material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact the reliability of our financial reporting and financial statements. Insufficient internal controls could also cause investors to lose confidence in our reported financial information.

Changes to accounting rules or regulations may adversely affect our results of operations

Changes to existing accounting rules or regulations may impact our future results of operations. For example, on December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123R, “Share Based Payment,” which requires us, starting in the first quarter of fiscal 2006, to measure compensation costs for all stock-based compensation at fair value and record compensation expense equal to that value over the requisite service period. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective. Other new accounting rules or regulations and varying

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interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations or the questioning of current accounting practices, may adversely affect our results of operations.

Changes to estimates related to our property and equipment, or operating results that are lower than our current estimates at certain store locations, may cause us to incur impairment charges

We make certain estimates and projections in connection with impairment analyses for certain of our store locations in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” We review for impairment all stores for which current cash flows from operations are negative or the construction costs are significantly in excess of the amount originally expected. An impairment charge is required when the carrying value of the asset exceeds the undiscounted future cash flows over the life of the lease. These calculations require us to make a number of estimates and projections of future results, often up to 20 years into the future. If these estimates or projections change or prove incorrect, we may be, and have been, required to record impairment charges on certain of these store locations. If these impairment charges are significant, our results of operations would be adversely affected.

The Sponsors control us and may have conflicts of interest with us in the future

Investment funds or group advised by or affiliated with the Sponsors currently indirectly control us through their ownership of 98.7% of the voting stock of our parent holding company. As a result, the Sponsors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of the Sponsors as equity holders may conflict with our interests. In addition, the Sponsors may have an interest in pursuing dispositions, acquisitions, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to us as a company. For example, the Sponsors could cause us to make acquisitions that increase the amount of indebtedness that is secured or sell assets, which may impair our ability to make payments under the debt instruments.

The Sponsors may direct us to make significant changes to our business operations and strategy, including with respect to, among other things, store openings and closings, new product and service offerings, sales of real estate and other assets, employee headcount levels and initiatives to reduce cost and expenses. We cannot assure you that the future business operations of our company will remain broadly in line with our existing operations or that significant real estate and other assets will not be sold.

The Sponsors also are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by the Sponsors continue to indirectly own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions.

Risks Related to Our Substantial Indebtedness

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the various debt instruments

We are highly leveraged. As of January 28, 2006, our total indebtedness was $5,947 million, including $12 million of payment obligations relating to capital lease obligations.

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Our substantial indebtedness could have important consequences, including:

• making it more difficult for us to make payments on the debt, as our business may not be able to generate sufficient cash flows from operating activities to meet our debt service obligations;

• increasing our vulnerability to general economic and industry conditions;

• requiring a substantial portion of cash flow from operating activities to be dedicated to the payment of principal and interest on our indebtedness, and as a result reducing our ability to use our cash flow to fund our operations and capital expenditures, capitalize on future business opportunities and expand our business and execute our strategy;

• exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;

• causing us to make non-strategic divestitures;

• limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements and general corporate or other purposes; and

• limiting our ability to adjust to changing market conditions and to react to competitive pressure and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

Our subsidiaries and we may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our debt instruments. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify. In addition, we could be unable to refinance or obtain additional financing because of market conditions, our high levels of debt and the debt restrictions included in our debt instruments. Additionally, our costs of new indebtedness could be substantially higher.

For the fiscal year 2005, our interest expense was $394 million compared to $130 million for the fiscal year 2004. Based on our overall interest rate exposure related to floating rate debt outstanding at January 28, 2006, a 1% increase in interest rates would have had an unfavorable annualized impact on pre-tax earnings of $31 million in 2005.

Our debt agreements contain covenants that limit our flexibility in operating our business

The agreements governing our indebtedness contain various covenants that limit our ability to engage in specified types of transactions, and which may adversely affect our ability to operate our business. Among other things, these covenants limit our and our subsidiaries’ ability to:

• incur additional indebtedness;

• pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

• issue stock of subsidiaries;

• make certain investments, loans or advances;

• transfer and sell certain assets;

• create or permit liens on assets;

• consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

• enter into certain transactions with our affiliates; and

• amend certain material documents.

A breach of any of these covenants could result in default under our debt agreements, which could prompt the lenders to declare all amounts outstanding under the debt agreements to be immediately due and payable and

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terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. If the lenders under the debt agreements accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets and funds to repay the borrowings under our debt agreements.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

The following summarizes our worldwide operating store and distribution center facilities as of January 28, 2006 (excluding International licensed and franchised stores):

	Owned	Ground Leased (a)	Leased	Total
Stores:
Toys “R” Us	313	152	206	671
International	81	23	201	305
Babies “R” Us	31	85	114	230
	425	260	521	1,206
Distribution Centers:
United States	9	—	3	12
International	5	—	3	8
	14	—	6	20
Total Operating Stores and Distribution Centers	439	260	527	1,226

^(a) Owned buildings on leased land.

Our Global Store Support Center facility in Wayne, New Jersey was originally financed under a lease arrangement commonly referred to as a “synthetic lease.” Under this lease, unrelated third parties arranged by Wachovia Development Corporation, a multi-purpose real estate investment company, funded the acquisition and construction of the facility. On June 1, 2005, we purchased our Global Store Support Center facility for a purchase price of $128.8 million pursuant to the purchase election option under the lease arrangement.

Refer to Note 11 to the Consolidated Financial Statements entitled, “SEASONAL FINANCING AND LONG-TERM DEBT” for a description of real estate-related financings.

We have former stores and distribution centers that are no longer part of our operations. Approximately half of these locations are owned and the remaining locations are leased. We have tenants in more than half of these locations, and for those without tenants, we continue to market the facilities for disposition. The net costs associated with these locations are reflected in our consolidated financial statements, but the number of surplus locations is not listed above.

ITEM 3.    LEGAL PROCEEDINGS

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. 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 sought temporary and permanent injunctive and declaratory relief to protect our rights during the litigation and to end the agreement, monetary damages and

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contract rescission against Amazon.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 and selection requirements. This counterclaim sought monetary damages and invoked contract termination rights. On March 1, 2006, the trial court issued its opinion granting our request for termination of the agreement and denying Amazon.com’s request for relief on its counterclaim. On March 31, 2006, the trial court entered a final order in our favor terminating the strategic alliance agreement with Amazon.com as of that date and establishing a wind-down period through June 30, 2006, during which time Amazon.com will continue to operate the co-branded stores. The court also denied Amazon.com any relief on its counterclaim. On April 3, 2006, the trial court entered an amended final order, which clarified several minor issues in the final order. In anticipation of these favorable rulings, we have been planning for the launch of an independent website at our own domain names. On April 3, 2006, Amazon filed a Notice of Appeal and also filed a Motion for Stay of Judgment in the trial court. On April 20, 2006, the trial court denied Amazon.com’s request for a stay. Amazon.com filed a request in the appellate court on April 21, 2006 for emergent relief from the trial court’s denial of its request for a stay, and on that same day, the appellate court refused Amazon.com’s motion for an immediate stay and determined to consider Amazon.com’s request on the normal briefing schedule. We believe Amazon.com’s pending motion for stay of the order terminating the strategic alliance agreement, as well as its pending appeal of the order, is without merit and will be denied.

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 these proceedings will have a material adverse effect on our financial condition, results of operations, or cash flows.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED

STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

In connection with the closing of the Merger, the Company’s common stock, par value $0.10 (the “Company Common Stock”), was converted into the right to receive $26.75 per share, and we requested that the New York Stock Exchange file with the Securities and Exchange Commission an application on Form 25 to strike the Company Common Stock from listing and registration thereon. On July 26, 2005, the New York Stock Exchange confirmed that such filing has been made.

As a result of the Merger, our common stock is privately held, and there is no established trading market for our stock. As of the date of this filing, there was one holder of record of our common stock.

ITEM 6.    SELECTED FINANCIAL DATA

	Fiscal Year Ended
(In millions, except earnings per share data and number of stores)	Jan 28, 2006			Jan 29, 2005		Jan 31, 2004 (1)		Feb 01, 2003 (1)		Feb 02, 2002 (1)
Operations (2)
Net Sales	$	11,275		$	11,100	$	11,320	$	11,305	$	11,019
Net (Loss) Earnings		(384	)		252		63		213		68
Basic Earnings Per Share		n/a			1.17		0.30		1.03		0.34
Diluted Earnings Per Share		n/a			1.16		0.29		1.02		0.33
Financial Position at Year End
Working Capital	$	348		$	1,806	$	1,865	$	1,185	$	618
Real Estate—Net		2,386			2,400		2,328		2,263		2,202
Total Assets		8,366			9,768		10,265		9,451		8,138
Long-Term Debt (3)		5,540			1,860		2,349		2,139		1,816
Stockholders’ (Deficit) Equity		(724	)		4,325		3,974		3,815		3,207
Common Shares Outstanding		n/a			215.9		213.6		212.5		196.7
Number of Stores at Year End
Toys “R” Us—U.S.		671			681		685		685		701
Toys “R” Us—International (4)		641			601		574		544		507
Babies “R” Us—U.S.		230			217		198		183		165
Kids “R” Us—U.S.		—			—		44		146		184
Imaginarium—U.S.		—			—		—		37		42
Total Stores		1,542			1,499		1,501		1,595		1,599

⁽¹⁾ Restated to reflect a correction in our accounting practices for leases and leasehold improvements. Refer to Note 3 to the Consolidated Financial Statements entitled “RESTATEMENT OF FINANCIAL STATEMENTS FOR ACCOUNTING FOR LEASES AND LEASEHOLD IMPROVEMENTS” for details.

⁽²⁾ Certain fiscal years include the impact of restructuring and other charges. In addition, the fiscal year ended January 31, 2004 was impacted by the adoption of an accounting change. For further details, see Note 4 to the Consolidated Financial Statements entitled “CHANGES IN ACCOUNTING.”

⁽³⁾ Excludes current portion.

⁽⁴⁾ Includes licensed and franchised stores.

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ITEM 7. MA NAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the readers of our financial statements with a narrative discussion about our businesses. The MD&A should be read in conjunction with our consolidated financial statements and the related notes, and contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” and Item 1A. entitled “RISK FACTORS.”

OVERVIEW

Restatement

As disclosed in Note 3 to the Consolidated Financial Statements entitled “RESTATEMENT OF FINANCIAL STATEMENTS FOR ACCOUNTING FOR LEASES AND LEASEHOLD IMPROVEMENTS” we restated our previously issued financial statements for the fiscal year ended January 31, 2004, to reflect corrections in our accounting practices for leases and leasehold improvements. Consequently, our results as of January 31, 2004, as presented in our consolidated financial statements and the MD&A, reflect the balances and amounts on a restated basis.

Our Business

The company generates sales, earnings, and cash flows by retailing toys, baby-juvenile products and children’s apparel worldwide. We operate all of the “R” Us branded retail stores in the United States and Puerto Rico, as well as approximately 50% of the “R” Us branded retail stores internationally. Our reportable segments are Toys “R” Us – U.S., which operates toy stores in 49 states and Puerto Rico; Toys “R” Us – International, which operates, licenses or franchises stores in 31 foreign countries; Babies “R” Us, which operates specialty baby-juvenile stores in 40 states; Toysrus.com, our internet subsidiary; and Kids “R” Us, which had limited activity during the first half of 2004 and had no activity during 2005. As of January 28, 2006, there were 1,542 “R” Us branded retail stores operating in the following formats:

• 671 Toys “R” Us toy stores throughout the United States and Puerto Rico which offer toy, baby-juvenile, and children’s clothing products;

• 641 international stores, of which 625 are Toys “R” Us stores and 16 are Babies “R” Us stores. Included in the 641 stores are 336 licensed or franchised stores; and

• 230 Babies “R” Us specialty baby-juvenile stores in the United States.

In addition, we sell merchandise through our Internet sites at www.toysrus.com, www.babiesrus.com, www.imaginarium.com, www.sportsrus.com, www.toysrus.ca, and www.personalizedbyrus.com.

On July 21, 2005, we were acquired by an investment group consisting of entities advised by or affiliated with Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co. and Vornado Realty Trust (collectively, the “Sponsors”) along with a fourth investor, GB Holdings I, LLC (the “Fourth Investor”), an affiliate of Gordon Brothers, a consulting firm that is independent from and unaffiliated with the Sponsors and management. As a result of the merger, we are a wholly-owned subsidiary of Toys “R” Us Holdings, Inc. Refer to the section entitled “The Merger Transaction” below for further details.

The following is a description of our segments:

• Toys “R” Us – U.S. We sell toys, plush, games, sporting goods, movies, electronic and video games, small pools, books, educational products, clothing, infant and juvenile furniture, and electronics. Our toy stores offer approximately 8,000 to 10,000 items year-round, through our Toys “R” Us stores, based upon net sales; we are the largest specialty retailer of toys in the United States. In the U.S. toys and

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games market (including video game products), based upon net sales we are the second-largest toy retailer. We offer the most comprehensive selection of merchandise in the retail toy industry. By focusing on toys, we are able to provide customers with a comprehensive range of merchandise, and we are able to provide vendors with a year-round distribution outlet for the broadest assortment of their products.

• Toys “R” Us – International. Our International division operates, licenses and franchises toy stores in 31 foreign countries. These stores generally conform to traditional prototypical designs similar to those used by Toys “R” Us – U.S., typically ranging in size from 30,000 to 45,000 square feet of space. Our International division has wholly-owned operations in Australia, Austria, Canada, France, Germany, Portugal, Spain, Switzerland, and the United Kingdom. We believe that growth opportunities exist outside of the United States for the Toys “R” Us store and Babies “R” Us store formats. We also plan to open smaller format toy stores in Europe and expand the Babies “R” Us presence through standalone stores and increased space allocation within existing Toys “R” Us stores. We intend to continue the growth of our private label and exclusive brands to increase our margins and offer unique products to our customers.

• Babies “R” Us. Babies “R” Us stores target the pre-natal to infant market by offering room settings of juvenile furniture, such as cribs, dressers, changing tables, bedding, and accessories. In addition, we provide baby gear, such as play yards, booster seats, high chairs, strollers, car seats, toddler and infant plush toys, and gifts. We also offer a computerized baby registry service, and we believe that Babies “R” Us registers more expectant parents than any other retailer in the domestic market. Our focus on the baby-juvenile market allows us to offer the broadest range of baby-juvenile products and deliver a high level of customer service and product knowledge, which we believe is important to parents who are expecting or have newborn children, and helps to differentiate us from competitors. We opened 13 Babies “R” Us stores since January 29, 2005. As part of our long-range growth plan, we plan to open approximately 65 new Babies “R” Us stores over the next three years, including approximately 22 stores in 2006.

• Toysrus.com. Toysrus.com sells merchandise to the public via the Internet at Toysrus.com, Babiesrus.com, Imaginarium.com, Sportsrus.com, Personalizedbyrus.com, and the recently added Toysrus.ca (which operates in Canada). We launched our e-commerce website in 1998. In 2000, we entered into a strategic alliance with Amazon.com, Inc. (“Amazon.com”) and launched a co-branded toy store. Under the strategic alliance, this co-branded store offers toys and video games (Toysrus.com), baby products (Babiesrus.com), and learning and educational products (Imaginarium.com). As a result of the litigation with Amazon.com, on March 31, 2006, the trial court entered a final order in our favor terminating the strategic alliance agreement with Amazon.com as of that date and establishing a wind-down period through June 30, 2006, during which time Amazon.com will continue to operate the co-branded store. In anticipation of this favorable ruling, we have been planning for the launch of an independent website at our domain names. Refer to Note 28 to the Consolidated Financial Statements, entitled “SUBSEQUENT EVENTS” for details on the favorable outcome of Toysrus.com’s and the Company’s lawsuit against Amazon.com and its affiliated Companies.

We believe the following are our principal challenges and risks, predominantly for the Toys “R” Us – U.S. division:

• Increased competition – Our businesses operate in a highly and increasingly competitive retail market. We face strong competition from discount and mass merchandisers, national and regional chains and department stores, local retailers in the market areas we serve, and Internet and catalog businesses. We compete on the basis of product variety, quality and availability, price, advertising and promotion, convenience or store location, customer support, and service. Price competition in the United States toy retailing business continued to be intense during the 2005 holiday season. We believe that success in this competitive environment can be achieved through enhancing the shopping experience for our guests, superior inventory management, strengthening brand loyalty, and competitive pricing. We also continue to focus on strengthening our relationships with our vendors.

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• Spending patterns and age compression – In recent years, toy sales have been negatively impacted by “age compression,” which is the acceleration of children leaving traditional play categories at increasingly younger ages for more sophisticated products such as cell phones, DVD players, CD players, MP3 devices, and other electronic products. The age compression pattern tends to decrease consumer demand for traditional toys. To the extent that we are unable to offer consumers more sophisticated products or that these more sophisticated items are also available at a wider range of retailers than our traditional competitors, our net sales and profitability could be detrimentally affected and we could experience excess inventories.

• Video game business – The video game category is a significant merchandising category in the worldwide toy store business. Over the course of a video cycle, from release of a video platform until the release of the next generation of video platforms, video games have tended to account for 10-20% of our domestic toy store net sales. We have seen significant declines in sales in this category during the last several years, primarily as a result of intense competition, as well as the maturation of this category. Competition in the video game market has increased as the leading discounters, such as Wal-Mart and Target have expanded, and specialty players, such as Best Buy, Electronics Boutique, and Gamestop, have all experienced significant growth. Net sales of video merchandise for the fifty-two weeks ended January 28, 2006, represented 12.9% of domestic toy sales versus 13.6% for the same period last year.

• Seasonality – Our worldwide toy store business is highly seasonal with sales and earnings highest in the fourth quarter. During the last three fiscal years, more than 40% of the sales from our worldwide toy store business and a substantial portion of the operating earnings and cash flows from operations were generated in the fourth quarter. Our results of operations depend significantly upon the holiday selling season in the fourth quarter. If less than satisfactory sales, operating earnings or cash flows from operations are achieved during the key fourth quarter, we may not be able to compensate sufficiently for the lower sales, operating earnings, or cash flows from operations during the first three quarters of the fiscal year. Our Babies “R” Us business is not significantly impacted by seasonality.

The Merger Transaction

On March 17, 2005, we entered into an Agreement and Plan of Merger, dated as of March 17, 2005 (the “Merger Agreement”), with Global Toys Acquisition, LLC (“Parent”) and Global Toys Acquisition Merger Sub, Inc. (“Acquisition Sub”) to sell our entire company to entities directly and indirectly owned by an investment group consisting of entities advised by or affiliated with Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co., L.P. (“KKR”) and Vornado Realty Trust (collectively, the “Sponsors”).

On July 21, 2005, the transaction was consummated by the Sponsors, along with a fourth investor, GB Holdings I, LLC (the “Fourth Investor”), an affiliate of Gordon Brothers, a consulting firm that is independent from and unaffiliated with the Sponsors and management, through a $6.6 billion merger of Acquisition Sub with and into the Company, with the Company being the surviving corporation in the merger (the “Merger”). The Sponsors and the Fourth Investor are collectively referred to herein as the “Investors.” Under the Merger Agreement, the former holders of the Company’s common stock, par value $0.10 per share, received $26.75 per share, or approximately $5.9 billion. In addition, approximately $766 million was used, among other things, to settle our equity security units and our warrants and options to purchase common stock, restricted stock and restricted stock units, fees and expenses related to the Merger, and severance, bonuses and related payroll taxes. The Merger consideration was funded through the use of the Company’s available cash, cash equity contributions from the Investors and the debt financings as described more fully below. We refer to the July 21, 2005 Merger and recapitalization as the “Merger Transaction.”

The Merger Transaction has been accounted for as a recapitalization and accordingly, there was no change in the basis of the assets and liabilities of Toys “R” Us, Inc. Therefore, all operations of Toys “R” Us, Inc. prior to the Merger Transaction are reflected herein at their historical amounts. Immediately following the consummation of the Merger Transaction, we implemented an inversion transaction whereby one of our dormant subsidiaries, became the new parent of Toys “R” Us, Inc. and is now known as Toys “R” Us Holdings, Inc.

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For the fifty-two weeks ended January 28, 2006, the fees and expenses related to the Merger Transaction and the related financing transactions principally consisted of advisory fees and expenses of $78 million, financing fees of $135 million, sponsor fees of $81 million, and other fees and expenses of $74 million. Of the $368 million of costs, approximately $243 million were expensed, $148 million as transaction related costs and $95 million as amortization of debt issuance cost, interest expense, and real estate taxes. The remaining amount of $125 million was capitalized as debt issuance costs.

In connection with the Merger Transaction we entered into other definitive agreements as further described in Note 2 to the Consolidated Financial Statements entitled “MERGER TRANSACTION.”

RESULTS OF OPERATIONS

We have provided below a discussion of our results of operations, which are presented on the basis required by accounting principles generally accepted in the United States (“GAAP”). In addition, we have provided certain information on an adjusted basis to reflect accounting changes and unusual items (non-GAAP measures). Management uses these non-GAAP measures to evaluate operating performance. We have incorporated this information into the discussion below because we believe it is a meaningful measure of our normalized operating performance and will assist you in understanding our results of operations on a comparative basis and in recognizing underlying trends. This adjusted information supplements, and is not intended to represent a measure of performance in accordance with, disclosures required by GAAP.

Comparable Store Sales

We include, in computing comparable store net sales, stores that have been open for 56 weeks (1 year and 4 weeks) from their “soft” opening date. Soft opening is typically two weeks prior to the grand opening. By measuring the year-over-year sales of merchandise in the stores that have a history of being open for a full comparable 56 weeks or more, we can better gauge how the core store base is performing since it excludes store openings and closings. Percentages represent changes in comparable store sales versus the same period in the prior year.

Various factors affect comparable store sales, including the number of stores we open or close, the general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition, current local and global economic conditions, the timing of our releases of new merchandise and promotional events, the success of marketing programs, and the cannibalization of existing store sales by new stores. Among other things, weather conditions can affect comparable store sales because inclement weather can require us to close certain stores temporarily and thus reduce store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors have caused our comparable store sales to fluctuate significantly in the past on an annual, quarterly and monthly basis and, as a result, we expect that comparable store sales will continue to fluctuate in the future.

	Comparable Store Net Sales Performance
(In local currencies)	2005		2004		2003
Toys “R” Us –  U.S.	(1.4	)%	(3.7	)%	(3.6	)%
Toys “R” Us –  International (1)	3.1	%	0.6	%	2.1	%
Babies “R” Us	5.7	%	2.2	%	2.8	%

⁽¹⁾ Includes wholly-owned operations only.

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	Divisional Store Count
		Increase /			Increase /
	2005	(Decrease)		2004	(Decrease)		2003
Toys “R” Us – U.S.	671	(10	)	681	(4	)	685
Toys “R” Us – International (1)	641	40		601	27		574
Babies “R” Us	230	13		217	19		198
Kids “R” Us	—	—		—	(44	)	44
Total	1,542	43		1,499	(2	)	1,501

⁽¹⁾ Includes 305 wholly-owned and 336 licensed and franchised stores as of January 28, 2006; 299 wholly-owned and 302 licensed and franchised stores as of January 29, 2005; and 293 wholly-owned and 281 licensed and franchised stores as of January 31, 2004.

Net (Loss) Earnings

	Consolidated Net (Loss) Earnings
				Increase /					Increase /
(In millions)	2005			(Decrease)			2004		(Decrease)		2003
Net (loss) earnings	$	(384	)	$	(636	)	$	252	$	189	$	63

2005 compared to 2004

We generated a net loss of $384 million in 2005 compared to net earnings of $252 million in 2004, primarily due to charges of $410 million related to the Merger Transaction in 2005 and higher interest expenses of $264 million as a result of increased borrowings related to the Merger Transaction in 2005, as well as contract settlement fees and other expenses of $22 million. In addition, we incurred $22 million of accelerated depreciation related to our announced Toys “R” Us – U.S. store closings and $34 million of restructuring and other charges for 2005. Refer to Notes 2 and 5 to the Consolidated Financial Statements entitled “MERGER TRANSACTION” and “RESTRUCTURING AND OTHER CHARGES,” respectively, for further details on these charges. The change in net (loss) earnings in 2005 was partially offset by the net tax benefit of $62 million and the net earnings generated by the additional net sales of $175 million in 2005 compared to 2004.

2004 compared to 2003

Consolidated net earnings increased by $189 million to $252 million in 2004 compared to $63 million in 2003, primarily due to a reduction of $94 million in our 2004 selling, general and administrative expenses compared to 2003 as well as a net tax benefit of $89 million in 2004 compared to 2003 as a result of the reversal of previously accrued income taxes. Additionally, reduced restructuring and other charges of $59 million in 2004 compared to 2003 contributed to higher net earnings for 2004. These amounts were partially offset by the reduced net earnings from the decrease of $220 million in net sales in 2004 compared to 2003. Our 2004 consolidated financial statements were impacted by the adoption of the provisions of Emerging Issues Task Force (“EITF”) Issue No. 03-10, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, by Resellers to Sales 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 and allowances from vendors for coupons related to events that meet the direct offset requirements of EITF 03-10, we recognize the related reimbursement as a reduction of cost of sales, during the period of redemption. Our 2003 consolidated financial statements have been restated as permitted by the provisions of EITF 03-10.

We receive credits and allowances that are related to formal agreements negotiated with our vendors. These credits and allowances are predominantly for cooperative advertising, promotions, and volume related purchases.

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Credits and allowances received from vendors that do not meet the direct offset requirements of EITF 03-10 have been recorded as a reduction of product costs in accordance with EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”). Our 2004 and 2003 consolidated financial statements were impacted by the implementation of EITF 02-16. We adopted the provisions of EITF 02-16 at the beginning of 2003. Under this guidance, amounts received from vendors are considered a reduction of product cost, unless certain restrictive provisions are met. EITF 02-16 was effective for all new arrangements, and modifications to existing arrangements, entered into after December 31, 2002. Beginning in 2003, we began to treat cooperative advertising arrangements as a reduction of product cost. For further details on the impact of adoption of EITF 02-16 and EITF 03-10 refer to Note 4 to the Consolidated Financial Statements entitled “CHANGES IN ACCOUNTING.” The adoption of EITF 02-16 and EITF 03-10 had no impact on our consolidated statements of cash flows.

Our consolidated financial statements for 2004 and 2003 also include restructuring and other charges, some of which are recorded in cost of sales. In addition, our consolidated financial statements for 2003 include depreciation that was accelerated during the closing periods of the Kids “R” Us stores. Refer to Note 5 to the Consolidated Financial Statements entitled “RESTRUCTURING AND OTHER CHARGES” for further details.

Consolidated Net Sales

2005 compared to 2004

	Net Sales
(In millions)	2005		% of net sales		2004		% of net sales		Percentage Growth/(Decline)
Toys “R” Us – U.S.	$	5,975	53.0	%	$	6,104	55.0	%	(2.1	)%
Toys “R” Us – International		2,793	24.8	%		2,739	24.7	%	2.0	%
Babies “R” Us		2,078	18.4	%		1,863	16.8	%	11.5	%
Toysrus.com		429	3.8	%		366	3.3	%	17.2	%
Kids “R” Us (1)		—	—			28	0.2	%	(100.0	)%
Total net sales	$	11,275	100.0	%	$	11,100	100.0	%	1.6	%

⁽¹⁾ Reflects the effect of our decision to close all of our freestanding Kids “R” Us stores, as previously announced on November 17, 2003.

Consolidated net sales increased by 1.6% to $11.3 billion in 2005 from $11.1 billion in 2004. Excluding the impact of foreign currency translation that decreased net sales for 2005 by $61 million, and a $28 million decline in net sales associated with the previously announced Kids “R” Us store closings, total net sales increased by $264 million, or 2.4%, compared to 2004.

The increase in net sales for 2005 was primarily the result of net sales increases in our Babies “R” Us division of 11.5% to $2.1 billion, and net sales increases in our International division of 4.2% to $2.9 billion (excluding the effect of currency translation). These increases in net sales in our Babies “R” Us and International division were primarily due to the addition of 13 Babies “R” Us stores in the United States and the opening of ten wholly-owned international stores in 2005, slightly offset by the closures of four wholly-owned international stores in 2005. In addition, comparable store net sales at our Babies “R” Us and International divisions showed favorable increases, as shown in the table above under “Comparable Store Net Sales Performance.” These increases were partially offset by net sales decreases in our Toys “R” Us – U.S. division primarily due to comparable store net sales declines of 1.4% in 2005.

Toys “R” Us – U.S.

Net sales for the Toys “R” Us – U.S. division decreased by $129 million, or 2.1%, to $5.98 billion compared to $6.10 billion in 2004. Net sales declines were primarily the result of a dramatic increase in the price of fuel

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and a soft video cycle anticipated before the release of new platforms. In addition, comparable store net sales at our Toys “R” Us – U.S. division declined 1.4% in 2005 compared to 2004. Video net sales declined approximately 7% compared to 2004. The closing of 10 U.S. toy stores during 2005 also negatively affected net sales in our Toys “R” Us – U.S. division by contributing approximately $34 million to the net sales declines. In addition, three hurricanes that impacted store performance in the Southeast, accounted for approximately $14 million of the net sales declines.

Toys “R” Us – International

Net sales for the International division increased by $54 million, or 2.0%, for 2005, compared to 2004. Excluding the adverse effects of $61 million of foreign currency translation, net sales for the International division increased by $115 million, or 4.2%, for 2005 versus 2004. The increase in net sales was driven by increases in comparable store net sales of 3.1% due to strong net sales in our core toy, learning, and juvenile products categories, partially offset by a decrease in net sales in our video games and consumer electronics categories. The opening of ten wholly-owned international stores, slightly offset by the closure of four wholly-owned international stores, also contributed to our sales growth in 2005.

Babies “R” Us

Net sales for the Babies “R” Us division increased by $215 million, or 11.5%, for 2005 compared to 2004, primarily as a result of a 5.7% increase in comparable store net sales as well as the contribution of approximately $31.7 million in net sales from the additional 13 new stores opened in 2005. Our diaper/formula, gifts, bedding, health and beauty aids, infant care, and wood furniture categories all had double-digit net sales increases. The net sales increase was also driven by the impact of enhanced advertising events.

Toysrus.com

Net sales at Toysrus.com increased by $63 million, or 17.2%, for 2005 compared to 2004. The net sales increase was driven by approximately 13% growth in total orders and a 5% increase in average order dollar value, which contributed to a 27% growth in baby product sales, and 17% growth in toy sales, partially offset by a 5% decline in video game sales.

2004 compared to 2003

	Net Sales
(In millions)	2004		% of net sales		2003		% of net sales		Percentage Growth/(Decline)
Toys “R” Us – U.S.	$	6,104	55.0	%	$	6,326	55.9	%	(3.5	)%
Toys “R” Us – International		2,739	24.7	%		2,470	21.8	%	10.9	%
Babies “R” Us		1,863	16.8	%		1,738	15.3	%	7.2	%
Toysrus.com		366	3.3	%		371	3.3	%	(1.3	)%
Kids “R” Us (1)		28	0.2	%		415	3.7	%	(93.3	)%
Total net sales	$	11,100	100.0	%	$	11,320	100.0	%	(1.9	)%

⁽¹⁾ Reflects the effect of our decision to close all of our freestanding Kids “R” Us stores, as previously announced on November 17, 2003.

Consolidated net sales decreased by 1.9% to $11.1 billion in 2004 from $11.3 billion in 2003. Excluding the impact of foreign currency translation that increased net sales for 2004 by $227 million, and a $387 million decline in net sales associated with the previously announced Kids “R” Us store closings, total net sales decreased by $60 million, or 0.6%, compared to 2003.

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The decrease in net sales for 2004 was primarily the result of declines in comparable store net sales at the Toys “R” Us – U.S. division, which posted comparable store sales declines of 3.7% for 2004. These decreases in net sales were partially offset by net sales increases in our Babies “R” Us division of 7.2% to $1.9 billion in 2004, and net sales increases in our International division of 1.7% (excluding the effect of currency translation) to $2.5 billion in 2004. These increases in net sales in our Babies “R” Us and International divisions were primarily due to the addition of 19 Babies “R” Us stores in the United States and seven wholly-owned international stores in 2004. In addition, comparable store net sales at our Babies “R” Us and International divisions showed favorable increases, as shown in the table above under “Comparable Store Net Sales Performance.”

Overall net sales decreases in 2004 were primarily attributable to soft sales in the Toys “R” Us – U.S. division, resulting from decreases in net sales of video game products of 8.9% in 2004. These declines reflected price deflation of video game products associated with increased competition and the continued maturation of this category.

Toys “R” Us – U.S.

Net sales for the Toys “R” Us – U.S. division decreased by $222 million, or 3.5%, to $6.1 billion in 2004 compared to 2003. Comparable store net sales at our Toys “R” Us – U.S. division declined 3.7% in 2004. Net sales were impacted by a 9% decline in video hardware and games due to maturing platforms. An overall decline in most juvenile categories, most significantly baby gear, also contributed to the net sales decline. In addition, we experienced sales declines in our action figures, Barbie and Barbie accessories, and games and collectible cards categories.

Toys “R” Us – International

Net sales for the International division increased by $269 million, or 10.9%, for 2004 compared to 2003. Excluding the effects of $227 million of foreign currency translation, net sales for the International division increased $42 million, or 1.7%, for 2004 versus 2003. The increase in net sales was driven by increases in comparable store net sales of 0.6%, as well as from strong net sales in learning and juvenile products. In addition, the opening of seven new wholly-owned international stores, slightly offset by the closure of five wholly-owned international stores, contributed to our sales growth.

Babies “R” Us

Net sales for the Babies “R” Us division increased by $125 million, or 7.2%, for 2004 compared to 2003, driven by a 2.2% increase in comparable store net sales as well as the contribution of approximately $32.9 million in net sales from the addition of 19 new stores in 2004. The increase in net sales was also driven by strong net sales in diaper/formula, juvenile accessories, baby gear, and apparel categories.

Toysrus.com

Net sales at Toysrus.com decreased by $5 million, or 1.3%, for 2004 compared to 2003. The net sales decrease was the result of the November 1, 2003 sale of Toysrus.com’s entire 55% investment in the common stock of Toysrus.com – Japan to Toys “R” Us – Japan, subsequent to which the financial statements of Toysrus.com – Japan were consolidated into the results of Toys “R” Us – Japan and no longer in our results. Excluding the sales of Toysrus.com – Japan, net sales increased by 3.4% compared to 2003.

Cost of Sales and Gross Margin

We record the costs associated with operating our distribution network as a part of consolidated selling, general, and administrative expenses (“SG&A”), including those costs that primarily relate to transporting

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merchandise from distribution centers to stores. Therefore, our consolidated gross margin may not be comparable to the gross margin of other retailers that include similar costs in their cost of sales. Credits and allowances received from vendors are recognized in consolidated cost of sales and also have a positive impact on our consolidated gross margin.

The following costs are included in “Cost of Sales:”

• The cost of acquired merchandise from vendors;

• Freight in;

• Markdowns;

• Provision for inventory shortages; and

• Credits and allowances from our merchandise vendors.

Consolidated Gross Margin

2005 compared to 2004

	Gross Margin
(In millions)	2005		% of net sales		2004		% of net sales
Toys “R” Us – U.S.	$	1,678	28.1	%	$	1,771	29.0	%
Toys “R” Us – International		1,026	36.7	%		1,006	36.7	%
Babies “R” Us		791	38.1	%		706	37.9	%
Toysrus.com		128	29.8	%		108	29.5	%
Kids “R” Us (1)		—	—			3	10.7	%
Total gross margin	$	3,623	32.1	%	$	3,594	32.4	%

⁽¹⁾ Reflects the effect of our decision to close all of our freestanding Kids “R” Us stores, as previously announced on November 17, 2003.

Consolidated gross margin, as a percentage of net sales, in 2005 decreased by 0.3 percentage points, but increased in absolute dollars by $29 million, compared to 2004. Gross margin for 2004 included $157 million in inventory markdowns which negatively impacted gross margin as a percentage of net sales by 1.4 percentage points in 2004. These markdowns affected our Toys “R” Us, International and Kids “R” Us divisions by $132 million, $15 million, and $10 million, respectively. Excluding the impact of the markdowns, gross margin as a percentage of net sales decreased 1.7 percentage points, or $128 million, in 2005 compared to 2004. The decrease in gross margin was attributable to increased price competitiveness and increased promotions and markdowns to maintain inventory quality.

Toys “R” Us – U.S.

Gross margin as a percentage of net sales for Toys “R” Us – U.S. decreased by 0.9 percentage points, or $93 million, compared to 2004. Gross margin for 2004, included a special $132 million charge related to an initiative to liquidate selected older store inventory which negatively impacted gross margin as a percentage of net sales by 2.2 percentage points in 2004.

Excluding the impact of the 2004 inventory initiative, gross margin as a percentage of net sales for 2005 decreased 3.1 percentage points, or $225 million, compared to 2004.

The decrease in gross margin as a percentage of net sales was mainly due to promotional efforts built around stringent inventory management efforts to minimize slow-moving, low-return inventory. Promotional

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markdowns were approximately $102 million higher than 2004 which helped drive inventory levels for the Toys “R” Us – U.S. down by approximately $360 million year over year. This was in part due to increased response rates to direct mail offerings and gift card promotions. The increase in promotional markdowns reduced gross margin as a percentage of net sales by 1.7 percentage points. In addition, we recorded $41 million in inventory markdowns and liquidator fees related to our announced Toys “R” Us – U.S. store closings as detailed further in Note 5 to the Consolidated Financial Statements entitled, “RESTRUCTURING AND OTHER CHARGES.” This reduced gross margin as a percentage of net sales by 0.7 percentage points in 2005. The decrease in gross margin dollars was also attributable to the overall net sales decline of $129 million in 2005, which reduced gross margin dollars by approximately $43 million. Also, lower inventory purchases reduced the amount of volume rebates, which reduced gross margin dollars by approximately $38 million in 2005. This reduced gross margin as a percentage of net sales by 0.6 percentage points.

Toys “R” Us – International

Gross margin as a percentage of net sales for Toys “R” Us – International in 2005 remained flat compared to 2004, but increased in absolute dollars by $20 million. Gross margin for 2004 included special inventory markdowns of $15 million related to an initiative to liquidate selected older store inventory. The inventory markdowns negatively impacted gross margin as a percentage of net sales by 0.6 percentage points for 2004. Excluding the effect of inventory markdowns in 2004, gross margin as a percentage of net sales for the International division decreased 0.6 percentage points, but increased in absolute dollar value by $5 million, for 2005 compared to 2004.

The decrease in 2005 gross margin compared to 2004 as a percentage of net sales (excluding the impact of the special $15 million inventory markdown taken in 2004), was primarily due to a 0.4 percentage point decline in our initial markup, due to product mix and currency impact, coupled with a 0.4 percentage point increase in regular markdowns, partially offset by a 0.2 percentage point improvement in inventory shortage.

Babies “R” Us

Gross margin as a percentage of net sales for Babies “R” Us in 2005 increased by 0.2 percentage points, or $85 million, compared to 2004. The increase in gross margin as a percentage of net sales was the result of improved overall initial markup of 0.4 percentage points driven by the diaper/formula and infant care categories offset by product mix and lower margin on imports of 0.5 percentage points. An increase of 0.2 percentage points in supplier promotional support and purchase allowances also contributed to the improvement. The increase in gross margin as percentage of sales was also attributable to the overall net sales increase of $215 million in 2005 compared to 2004, which increased gross margin dollars by approximately $80 million.

Toysrus.com

Gross margin as a percentage of net sales for Toysrus.com in 2005 increased by 0.3 percentage points, or $20 million, compared to 2004. The increase in gross margin as a percentage of net sales was primarily due to a continued shift of business toward higher margin baby products, such as infant bedding, wooden furniture, infant care, and baby accessories, all posting double-digit sales increases compared to 2004.

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2004 compared to 2003

	Gross Margin
(In millions)	2004		% of net sales		2003		% of net sales
Toys “R” Us – U.S.	$	1,771	29.0	%	$	1,918	30.3	%
Toys “R” Us – International		1,006	36.7	%		869	35.2	%
Babies “R” Us		706	37.9	%		654	37.6	%
Toysrus.com		108	29.5	%		102	27.5	%
Kids “R” Us (1)		3	10.7	%		131	31.6	%
Total gross margin	$	3,594	32.4	%	$	3,674	32.5	%

⁽¹⁾ Reflects the effect of our decision to close all of our freestanding Kids “R” Us stores, as previously announced on November 17, 2003.

Consolidated gross margin, as a percentage of net sales, decreased by 0.1 percentage points to 32.4% during 2004, and included the unfavorable impact of $157 million in inventory markdowns recorded in 2004 primarily to liquidate selected older toy store inventory and therefore enhance store productivity and supply chain efficiency. The markdowns were also intended to accelerate inventory turnover and generate additional cash flow. These markdowns affected our Toys “R” Us – U.S., International and Kids “R” Us divisions. Excluding the unfavorable impact of these inventory markdowns, consolidated gross margin was 33.8% for 2004.

Consolidated gross margin for 2003 included the unfavorable impact of the initial implementation of the provisions of EITF 03-10 and EITF 02-16 of $74 million. In addition, consolidated gross margin for 2003 included store closing inventory markdowns of $49 million related to the closing of the Kids “R” Us and Imaginarium freestanding stores.

Excluding the impact of inventory markdowns in 2004 and 2003, 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, increased by 0.3 percentage points to 33.8% for 2004. The increases in gross margin of 0.3 percentage points in 2004 reflected the impact of a favorable shift in the sales mix, driven in part by sales increases in higher margin exclusive and licensed product lines.

Toys “R” Us – U.S.

Gross margin as a percentage of net sales for the Toys “R” Us – U.S. division was 29.0% for 2004 compared to 30.3% for 2003. Gross margin for 2004 included a special $132 million unfavorable charge related to a 2004 initiative to liquidate selected older store inventory. The decline in gross margin for 2004 was attributable to the impact of this initiative. This initial change represented an unfavorable impact of 2.2 percentage points for 2004. Excluding the unfavorable impact of this initiative, gross margin increased from 30.3% in 2003 to 31.2% in 2004.

The 2003 gross margin of 30.3% for the Toys “R” Us – U.S. division included an unfavorable impact of $53 million due to the initial implementation of the provisions of EITF 03-10 and EITF 02-16. The implementation of these provisions adversely affected gross margin for 2003 by 0.9 percentage points. 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 for 2004 remained in line with 2003 at 31.2%.

Toys “R” Us – International

The International division reported an increase in gross margin of 1.5 percentage points to 36.7% for 2004 up from 35.2% for 2003. Gross margin for 2004 included inventory markdowns of $15 million, which adversely affected gross margin by 0.6 percentage points. Excluding the effect of inventory markdowns, gross margin was 37.3% for 2004.

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Gross margin for 2003 for the International division included the implementation effects of EITF 03-10 and EITF 02-16. Implementation of these provisions adversely affected gross margin for 2003 by 0.6 percentage points. 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 1.5 percentage points in 2004. These increases reflected the effects of favorable shifts in sales mix offset by a highly promotional and competitive environment in most of our foreign markets.

Babies “R” Us

Babies “R” Us reported a 0.3 percentage point increase in gross margin to 37.9% of net sales for 2004. Gross margin for 2003 for the Babies “R” Us division included the unfavorable impact of the initial implementation of the provisions of EITF 03-10 and EITF 02-16 of $6 million. The implementation of these provisions adversely affected gross margin for 2003 by 0.4 percentage points.

Toysrus.com

Toysrus.com reported an increase of 2.0 percentage points in gross margin as a percentage of net sales to 29.5% compared to 2003. The inventory 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 in 2004 reflected a favorable shift of business from lower margin video game products to higher margin baby and toy products, as well as lower markdowns due to improved inventory management.

Selling, General and Administrative Expenses

The following are the types of costs included in SG&A expenses:

• Store payroll and related payroll benefits;

• Rent and other store operating expenses;

• Advertising expenses;

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

• Other corporate-related expenses.

2005 compared to 2004

	Selling, General and Administrative Expenses
(In millions)	2005		% of net sales		2004		% of net sales
Toys “R” Us Consolidated	$	2,899	25.7	%	$	2,932	26.4	%

Consolidated SG&A expenses, as a percentage of net sales, decreased by 0.7 percentage points, or $33 million, for 2005 compared to 2004. The decrease in SG&A expenses, as a percentage of net sales compared to 2004, was partially due to the decrease in the Toys “R” Us – U.S. division’s SG&A expenses, including savings in advertising, payroll expenses and overhead charges. Payroll savings were primarily driven by lower hourly payroll and related payroll taxes as a result of lower sales, lower medical costs and a lower bonus payout. These savings were partially offset by increases in, higher facility maintenance costs, higher utility costs and higher property taxes as well as the Babies “R” Us division’s higher distribution center and store support center costs primarily due to new store growth and to support higher store for store sales. Fixed expenses were leveraged by large sales increases in the Toysrus.com division, which resulted in a decrease in SG&A as a percentage of sales.

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2004 compared to 2003

	Selling, General and Administrative Expenses
(In millions)	2004		% of net sales		2003		% of net sales
Toys “R” Us Consolidated	$	2,932	26.4	%	$	3,026	26.7	%

Consolidated SG&A expense as a percentage of net sales for 2004 decreased by 0.3 percentage points compared to 2003. The decrease for 2004 reflected a $68 million reduction in payroll and related benefits as a result of our decision to close the Kids “R” Us division. In addition, the decrease reflected net proceeds from a settlement with MasterCard and Visa of $20 million in 2004. In addition, we recorded a $14 million gain for the sale of real estate of our former toy store in Santa Monica, California in 2004. These savings were offset by additional expenditures that we incurred during 2004 related to our strategic review initiative and Sarbanes-Oxley compliance totaling $29 million. Consolidated SG&A for 2004 included adjustments related to straight-line rent expense of $2 million.

Transaction and related costs

We recorded expenses of $410 million in 2005 which reflected $148 million of expenses to execute the Merger Transaction, $222 million of stock compensation costs associated with the Merger Transaction related to stock options and restricted stock as well as $40 million of severance, bonuses and related payroll taxes.

Contract settlement fees and other

Contract settlement fees and other was $22 million for the fifty-two weeks ended January 28, 2006. This amount resulted from the loss on early extinguishment of debt of $7 million related to the purchase of the notes associated with our equity security units and a contract settlement fee of $15 million related to the early termination of our synthetic lease of our Global Store Support Center in Wayne, New Jersey.

Depreciation and Amortization

2005 compared to 2004

	Depreciation and Amortization
(In millions)	2005		% of net sales		2004		% of net sales
Toys “R” Us Consolidated	$	400	3.5	%	$	354	3.2	%

Depreciation and amortization was $400 million in 2005 versus $354 million in 2004. Depreciation for 2005 included $22 million in accelerated depreciation related to our announced Toys “R” Us – U.S. store closings as detailed in Note 5 to the Consolidated Financial Statements, entitled “RESTRUCTURING AND OTHER CHARGES.” The increase in depreciation and amortization is also attributed to an increase of $16 million in capital expenditures from $269 million in 2004 to $285 million in 2005.

2004 compared to 2003

	Depreciation and Amortization
(In millions)	2004		% of net sales		2003		% of net sales
Toys “R” Us Consolidated	$	354	3.2	%	$	368	3.3	%

Depreciation and amortization was $354 million in 2004 versus $368 million in 2003. Depreciation for both 2004 and 2003 included the effect of shorter depreciation or amortization periods for leasehold improvements, which increased expenses by $21 million and $20 million, respectively. Depreciation for 2004 also included the effect of the sale of the Kids “R” Us real estate during 2004 which decreased depreciation by approximately $15

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million. Depreciation and amortization for 2003 also included $24 million of depreciation recorded during the fourth quarter of 2003 that was accelerated through the closing periods for the freestanding Kids “R” Us and Imaginarium stores.

Interest Expense

2005 compared to 2004

	Interest Expense
(In millions)	2005		% of net sales		2004		% of net sales
Toys “R” Us Consolidated	$	394	3.5	%	$	130	1.2	%

Interest expense, as a percentage of net sales, increased by 2.3 percentage points, or $264 million, for 2005 compared to 2004. This increase was primarily due to the substantial increased borrowings as a result of the Merger Transaction as well as increased short-term interest rates on our floating rate debt. In addition, interest expense for 2005 included $90 million of deferred financing cost amortization incurred in connection with borrowings related to the Merger Transaction. As a result of the substantial borrowings we entered into as a part of the Merger Transaction, we anticipate that interest expense will remain high in the foreseeable future.

2004 compared to 2003

	Interest Expense
(In millions)	2004		% of net sales		2003		% of net sales
Toys “R” Us Consolidated	$	130	1.2	%	$	142	1.3	%

Interest expense, as a percentage of net sales, decreased by 0.1 percentage points, or $12 million, for 2004 compared to 2003. The $12 million decrease in 2004 was comprised of a $42 million reduction in interest expense as a result of long-term debt principal repayments offset by an $18 million increase in interest expense related to the annualizing of long-term debt issued during 2003, and a $12 million increase due to rising short-term interest rates.

Interest Income

2005 compared to 2004

	Interest Income
(In millions)	2005		% of net sales		2004		% of net sales
Toys “R” Us Consolidated	$	31	0.3	%	$	19	0.2	%

Interest income, as a percentage of net sales, increased by 0.1 percentage points, or $12 million for 2005 compared to 2004. This increase was a result of higher interest rates on our investments partially offset by decreased average cash balances.

2004 compared to 2003

	Interest Income
(In millions)	2004		% of net sales		2003		% of net sales
Toys “R” Us Consolidated	$	19	0.2	%	$	18	0.2	%

Interest income, as a percentage of net sales remained flat for 2004 compared to 2003. While we experienced a decrease in our average cash balances, it was offset by higher interest rates on our investments.

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Income Taxes

2005 compared to 2004

During 2005 and 2004, the effective tax rates were (24.0)% and (30.4)%, respectively. The primary reason for the change in the 2005 effective tax rate was due to the reversal of $200 million of tax reserves in 2004, as further described in Note 20 to the Consolidated Financial Statements entitled, “INCOME TAXES.”

2004 compared to 2003

During 2004 and 2003, the effective tax rates were (30.4)% and 32.0%, respectively. Our effective tax rate in 2004 reflects the tax benefit of a reversal of previously accrued income taxes of $200 million based on the settlement of an IRS audit, and a $54 million tax charge on the repatriation of previously indefinitely reinvested foreign earnings.

Foreign Currency Translation

Foreign currency translation had an unfavorable impact on our consolidated and international operating earnings for 2005 of $16 million, and a favorable impact on our consolidated and International operating earnings for 2004 and 2003 of $17 million and $20 million, respectively. The 2005 impact resulted in a decrease in operating earnings for the International division of 7%. Conversely, for 2004 and 2003, operating earnings of the international division benefited, by 10% and 13% respectively. The unfavorable impact on consolidated net earnings for 2005 was 5%. For 2004 and 2003, the favorable impact on consolidated net earnings was 8% and 5%, respectively.

Other

Inflation did not have a significant impact on our consolidated net earnings in 2005, 2004 or 2003.

RESTRUCTURING AND OTHER CHARGES

On January 5, 2006, our Board of Directors approved the closing of 87 Toys “R” Us stores in the United States. As of January 28, 2006, we closed three of these stores. All of the remaining 84 stores were closed by April 2, 2006. Twelve of these stores will be converted into Babies “R” Us stores, resulting in the permanent closure of 75 stores. The decision to take this action resulted from a comprehensive review and evaluation of our U.S. stores over the last several months of 2005. We retained Gordon Brothers Retail Partners, LLC to assist us in connection with the orderly sale of the inventory in these stores.

In connection with the closing and conversion of these stores, we recorded $94 million of costs and charges during 2005. We estimate an additional $55 million of charges will be recorded in the first quarter of 2006. The $94 million of costs and charges include $41 million of inventory markdowns and liquidator fees that were recorded in cost of sales and $22 million of depreciation that was accelerated through the closing periods of the stores. The remaining $31 million of costs and charges are included in restructuring and other charges in the Consolidated Statement of Operations, and consist of $22 million relating to asset impairments, $1 million relating to lease commitments, and $8 million relating to severance costs. As a result of the store closings, approximately 3,000 employee positions have been eliminated.

On August 11, 2004, we announced our intention to restructure our Global Store Support Center operations in Wayne, New Jersey. As a result, we recorded termination costs of $14 million associated with this action in the second quarter of 2004 and additional net costs of $7 million in the second half of 2004. Of these total charges, $13 million were recorded in restructuring and other charges related to severance and lease commitments, and charges of $8 million were recorded in selling, general and administrative expenses, comprised of $2 million for payroll-related costs and $6 million for stock option compensation charges resulting

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from modifications to stock option agreements for the severed executives. As of January 28, 2006, $1 million of reserves for termination costs remain to complete this initiative.

On November 17, 2003, we announced our decision to close all 146 of the remaining freestanding Kids “R” Us stores and all 36 of the freestanding Imaginarium stores, as well as three distribution centers that support these stores due to deterioration in their financial performance. On March 2, 2004, we entered into an agreement with Office Depot, Inc. (“Office Depot”) under which Office Depot agreed to acquire 124 of the former Kids “R” Us stores for $197 million in cash, before commissions and fees, plus the assumption of lease payments and other obligations. Twenty-four properties were subsequently excluded from the agreement with Office Depot and these properties are being marketed for disposition or have been disposed of to date. As of January 28, 2006, all of the free standing Kids “R” Us and Imaginarium stores were closed. During 2005, we recorded a loss of $1 million on the sale of property and $2 million of vacancy-related costs. We expect to record additional charges for the accretion of interest related to vacancy costs for closed facilities until their disposition. Charges in connection with these initiatives may be subject to revision for changes in estimates.

In 2001, we recorded net charges of $184 million 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. During 2005, we incurred additional charges of $1 million related to store closings and utilized $13 million of reserves. This reduced our remaining reserves from $63 million at January 29, 2005 to $51 million at January 28, 2006.

We had $22 million of reserves remaining at January 28, 2006, from restructuring charges previously recorded in 1998 and 1995, primarily for long-term lease commitments, that will be utilized in 2006 and thereafter. During 2005, we recorded a net reversal of $1 million resulting from adjustments to lease shortfall reserves.

Refer to Note 5 to the Consolidated Financial Statements entitled “RESTRUCTURING AND OTHER CHARGES” for further details.

LIQUIDITY AND CAPITAL RESOURCES

We fund inventory expenditures during normal and peak periods through cash flows from operating activities, available cash, and our revolving credit facilities. Our working capital needs follow a seasonal pattern, peaking in the third quarter of the year when inventory is received for the holiday selling season. Our largest source of operating cash flows is cash collections from our customers. In general, our primary uses of cash are financing construction of new stores, remodeling existing stores, debt servicing, completing restructuring initiatives and providing for working capital, which principally represents the purchase of inventory.

We have been able to meet our cash needs principally by using cash on hand, cash flows from operations, our variable rate revolving credit facilities and the multicurrency revolving facilities.

Additionally, we have lines of credit with various banks to meet certain of the short-term financing needs of our foreign subsidiaries. At January 28, 2006, we had an unused amount of $2 billion under our secured revolving credit facility and a total of $343 million of unused amounts under our multi-currency revolving credit facilities (95 million British Pounds and 145 million Euro). As a result of our new borrowing arrangements following the Merger Transaction, effective July 21, 2005, we cancelled our previous unsecured $685 million credit facility.

We believe that cash generated from operations, along with our existing cash and revolving credit facilities, will be sufficient to fund our expected cash flow requirements, and planned capital expenditures for at least the next 12 months. In addition, we will consider additional sources of financing to fund our long-term growth.

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(In millions)	2005			2004			2003
Toys “R” Us Consolidated
Net cash provided by operating activities	$	671		$	748		$	797
Net cash provided by (used in) investing activities		573			(477	)		(774	)
Net cash (used in) provided by financing activities		(1,488	)		(476	)		422
Effect of exchange rate fluctuations on cash		(7	)		25			(40	)
Net (decrease) increase in cash and equivalents	$	(251	)	$	(180	)	$	405
Net cash provided by operating activities	$	671		$	748		$	797
Less: Capital expenditures		(285	)		(269	)		(262	)
Free cash flow	$	386		$	479		$	535

Free cash flow is a non-GAAP measure. We believe free cash flow is an important metric, as it represents a measure of how profitable a company is on a cash basis after the deduction of capital expenses, as most retail companies require regular capital expenditures to build and maintain stores and purchase new equipment to keep the business growing. We use this metric internally as we believe our sustained ability to increase free cash flow is an important driver of value creation.

Cash flows from operating activities

(In millions)	2005			2004			2003
Net (loss) earnings	$	(384	)	$	252		$	63
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization		400			354			368
Other non-cash reconciling adjustments		332			(33	)		83
Decrease in merchandise inventories		387			221			133
Other changes in operating assets and liabilities		(64	)		(46	)		150
Net cash provided by operating activities	$	671		$	748		$	797

Net cash provided by operating activities for 2005 was $671 million, a decrease of $77 million compared to 2004, due primarily to the increased net loss as a result of transaction costs related to the Merger, increased interest payments on new borrowings we incurred in connection with the Merger, decline in the income tax benefit, and losses on early extinguishment of debt and contract settlement fees.

Net cash provided by operating activities for 2004 was $748 million and included the favorable impact of an increase in year on year earnings, reduced inventory levels resulting from continued inventory management improvement, and the reduction in cash invested in prepaid and other operating assets driven primarily by a reduction in the over-funding of the Company’s supplemental executive retirement program assets of $35 million. These benefits were offset by non-cash income related to the reversal of approximately $200 million in income tax reserves related to settlement of certain IRS audits.

Net cash provided by operating activities for 2003 reflected an increase of $222 million resulting from favorable variances for inventory, accounts receivable and accounts payable brought about by improved inventory and cash flow management and the effect of inventory liquidation at our Kids “R” Us stores. Inventories at Kids “R” Us decreased by $83 million to $4 million during 2003, and were liquidated as the remaining freestanding stores closed during the first half of 2004. In addition, cash flow from operating activities for 2003 reflected the effect of the non-cash portion of restructuring and other charges of $63 million for the year.

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Cash flows from investing activities

(In millions)	2005			2004			2003
Capital expenditures	$	(285	)	$	(269	)	$	(262	)
Sale (purchase) of short-term investments and other		953			(382	)		(572	)
Purchase of SB Toys, Inc.		—			(42	)		—
(Increase) decrease in restricted cash		(107	)		—			60
Proceeds from sale of fixed assets		12			216			—
Net cash provided by (used in) investing activities	$	573		$	(477	)	$	(774	)

Net cash provided by investing activities was $573 million for 2005. The increase was primarily due to proceeds from the sale of $953 million of our short-term investments. This increase was partially offset by the $16 million increase in capital expenditures in 2005, as well as an increase of $107 million in restricted cash which serves as collateral for certain property financings we entered into during 2005. Capital expenditures in 2005 included the cost related to the opening of 13 new Babies “R” Us stores in the United States, 10 new wholly-owned International toy stores, as well as a $112 million payment to purchase the Wayne Global Store Support Center, which was previously leased.

Cash flows used in investing activities for 2004 decreased by $297 million. The decrease was driven by the receipt of net proceeds from the sale of Kids “R” Us assets of $157 million, the net proceeds from the sale of our store in Santa Monica, California of $24 million, $15 million related to the sale of one of our former Store Support Center locations and an additional $20 million related to the sale of other fixed assets. In addition, our investment in short term and other securities decreased by $190 million versus 2003. These decreases were partially offset by $42 million related to the acquisition of SB Toys, Inc., previously a minority shareholder in Toysrus.com. Capital expenditures of $269 million for the opening of 19 new Babies “R” Us stores and one new toy store in the United States, seven new wholly-owned international toy stores, as well as on-going maintenance and improvement capital expenditures, were in line with 2003.

Cash flows used in investing activities for 2003 increased by $379 million. This increase was due to higher investments in short term and other securities of $572 million. Capital expenditures of $262 million for the opening of 16 new Babies “R” Us stores, six new wholly-owned international toy stores, information technology projects, and on-going maintenance and improvement capital expenditures were $133 million lower as compared to 2002. This decrease was due to the completion of the Mission Possible formatting during 2002.

In addition, our capital expenditures in each of the preceding three years included costs to improve and enhance our information technology systems.

During 2006, we plan to continue to expand our Babies “R” Us store base in the United States and our Toys “R” Us store base abroad. However, we can provide no assurance that this expansion will occur.

Cash flows from financing activities

(In millions)	2005			2004			2003
Short-term and long-term borrowings	$	7,329		$	—		$	792
Short-term and long-term repayments		(3,700	)		(503	)		(370	)
Repurchase of common stock		(5,891	)		—			—
Repurchase of stock options and restricted stock		(227	)		—			—
Capital contributed by affiliate		1,279			—			—
Other financing activities, net		(278	)		27			—
Net cash (used in) provided by financing activities	$	(1,488	)	$	(476	)	$	422

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Net cash used in financing activities was $1,488 million for 2005 reflecting the proceeds from our long-term debt borrowings of $7,004 million, our short-term debt borrowings of $325 million, capital contributions by our affiliates of $1,279 million, total proceeds of $107 million related to the issuance of common stock and the exercise of stock options. These cash inflows were offset by the repurchase of common stock under the Merger Transaction of $5,891 million, debt repayments of $3,700 million, repurchase of options and restricted stock of $227 million, repurchase of equity security units and warrants of $130 million, and capitalized debt issuance costs of $255 million.

Net cash flow used in financing activities in 2004 included the payment of $466 million to retire our 500 million Euro-denominated bonds.

Net cash flow from financing activities in 2003 included the net proceeds of $792 million from notes issued under a “shelf” registration statement filed with the Securities and Exchange Commission. Long-term debt repayments in 2003 included $342 million to retire our 475 million Swiss Franc note that matured on January 28, 2004.

As part of the Merger Transaction, during 2005, we made the following significant changes to our debt structure:

• $1.0 Billion European Facilities Agreement and £95 Million and €145 Million Multi-Currency Revolving Credit Facilities. On July 21, 2005, Toys “R” Us (UK) Limited, our indirect wholly-owned subsidiary, entered into a senior facilities agreement with a syndicate of financial institutions. Under the agreement, a $1.0 billion bridge facility and multi-currency revolving credit facilities in an amount of up to £95 million and €145 million, respectively, were made available to Toys “R” Us (UK) Limited and other European affiliates of Toys “R” Us (UK) Limited. The facilities are, to the extent legally possible, guaranteed by Toys “R” Us (UK) Limited’s immediate holding company, Toys “R” Us Europe, LLC, and their respective material subsidiaries, and secured by a lien over assets of the borrowers and guarantors under the facilities. The $1.0 billion bridge facility had a scheduled maturity of July 21, 2006. The revolving credit facilities have a scheduled maturity of July 21, 2010. If the borrowings outstanding under the bridge facility were to exceed $857 million at the maturity date, $282 million could have been converted into a 5 ¹/2 year senior facility, and $575 million could have been converted into a six-year senior facility. Any remaining borrowings in excess of $857 million would have been due upon maturity. The bridge facility has an annual interest rate of LIBOR plus 1.50% and/or EURIBOR plus 1.50%. As of January 28, 2006, we had borrowed the full amount of $1.0 billion on the bridge facility. Following the end of fiscal 2005, on February 9, 2006, we repaid all of the outstanding borrowings under the bridge facility using property financing as well as available funds. We classified $122 million of the bridge facility as current portion of long-term debt, as this amount was paid by using the available funds, and classified $886 million as long-term debt, as this amount was paid from the funds received from our property financing. Refer to Note 28 to the Consolidated Financial Statements, entitled “SUBSEQUENT EVENTS” for details on our new long-term financing arrangements. During 2005, we entered into various swap agreements to hedge our exposure related to these facilities. Refer to Note 13 to the Consolidated Financial Statements, entitled “DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.” The multi-currency revolving credit facilities carry an annual interest rate of LIBOR plus 1.50% and/or EURIBOR plus 1.50%. We had no borrowings under the revolving credit facilities as of January 28, 2006.

The bridge facility and multi-currency revolving credit facilities agreement contains covenants, including, among other things, covenants that restrict the ability of Toys “R” Us (UK) Limited, Toys “R” Us Europe, LLC, and their respective subsidiaries to incur certain additional indebtedness, create or permit liens on assets, or engage in mergers or consolidations. In addition, for so long as the $1.0 billion bridge facility remained outstanding, Toys “R” Us Europe, LLC was required to comply with certain financial covenants, including requirements to maintain a ratio of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to net interest payable of not less than 2.0:1.0 and a

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ratio of consolidated total net debt to consolidated EBITDA of no greater than 6.5:1.0. Following repayment of the bridge facility, the minimum ratio of consolidated EBITDA to net interest payable required under the facility will increase to 4.0:1.0 and the maximum ratio of consolidated total net debt to consolidated EBITDA required under the facility will decrease to 4.0:1.0 for the third accounting quarter in each fiscal year and 2.75:1.0 for the first, second and fourth accounting quarters. At January 28, 2006, prior to the repayment of the bridge facility, Toys “R” Us Europe, LLC’s ratio of consolidated EBITDA to net interest payable was 6.4:1.0 and Toys “R” Us Europe, LLC’s ratio of consolidated total net debt to consolidated EBITDA was 4.6:1.0.

• $800 Million Secured Real Estate Loans. On July 21, 2005, certain indirect wholly owned subsidiaries entered into mortgage loan agreements totaling $800 million, carrying annual weighted average interest rates of LIBOR plus 1.30%. Each of these loan agreements has a two-year term and provides for three one-year extensions at the election of the borrower. Direct and indirect interests in certain real property located in the United States secured the loans. As of January 28, 2006, we had $800 million outstanding under these loan agreements.

The loan agreements contain covenants, including, among other things, covenants that restrict the ability of the borrowers to incur additional indebtedness, create or permit liens on assets or engage in mergers or consolidations, commingle assets with affiliates, amend organizational documents, and initiate zoning reclassification of any portion of the secured property. In addition, these covenants restrict certain transfers of, and the creation of liens on, direct or indirect interests in the borrowers except in specified circumstances. The debt is subject to mandatory prepayment as specified in the loan agreements.

• $1.3 Billion New Holdco Credit Agreement. On December 9, 2005, TRU 2005 RE Holding Co. I, LLC, our indirect wholly-owned subsidiary, entered into a credit agreement with a syndicate of financial institutions, pursuant to which we borrowed $1.3 billion. We used a portion of the proceeds to repay approximately $927 million of existing indebtedness under the bridge loan agreement, dated as of July 21, 2005, described above. The remainder of the proceeds from the transaction, after establishing a restricted cash account of $107 million as collateral, was used to pay expenses in connection with the transaction and to reduce existing indebtedness under a revolving credit facility. The loan has an interest rate of either 3.00% plus LIBOR or 2.00% plus the higher of (i) 0.50% in excess of the overnight Federal funds rate and (ii) the prime lending rate. Concurrently with the making of the loan, we entered into an interest rate cap agreement to effectively cap the interest rate on LIBOR at 7.50% for the initial term of the loan. The loan is secured in part by certain cash accounts and contract rights. The initial maturity date is December 9, 2008. The credit agreement provides for two maturity date extension options to December 8, 2009 and December 7, 2010, respectively. The credit agreement contains covenants, including, among other things, covenants that restrict the ability of the borrower or the guarantors, which are our indirect wholly-owned subsidiaries Wayne Real Estate Company, LLC, MAP Real Estate, LLC, TRU 2005 RE I, LLC, and TRU 2005 RE II Trust, to create or permit liens on assets, incur additional indebtedness, modify or terminate the master lease that these companies have with Toys “R” Us – Delaware, Inc. (“Toys-Delaware”) or engage in mergers or consolidations. In addition, these covenants restrict certain transfers of, and the creation of liens on, direct or indirect interests in the borrower and the guarantors. The credit agreement has a three-year term and provides for two one-year extensions at the election of the borrower. This credit agreement contains certain borrowing base conditions related to the real property assets owned by the guarantors, which, if the assets cease to comply with such conditions, could result in a required repayment of all or a portion of the loan.

• $2 Billion Secured Revolving Credit Facility. On July 21, 2005, we, including Toys-Delaware, our direct wholly-owned subsidiary, Toys “R” Us (Canada) Ltd / Toys “R” Us (Canada) Ltee, our indirect wholly-owned subsidiary, and certain other domestic subsidiaries entered into a $2.0 billion five-year secured revolving credit facility, carrying an annual interest rate of LIBOR plus 1.75%-3.75%, with a syndicate of financial institutions. The credit facility is available for general corporate purposes and the issuance of letters of credit. Borrowings under this credit facility are secured by tangible and intangible

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assets, subject to specific exclusions stated in the credit agreement. The credit agreement contains covenants, including, among other things, covenants that restrict the ability of Toys-Delaware and certain of its subsidiaries to incur certain additional indebtedness, create or permit liens on assets, engage in mergers or consolidations, pay dividends or repurchase capital stock or make other restricted payments, make loans or advances, engage in transactions with affiliates, or amend material documents. The revolving credit facility also requires that Toys-Delaware maintain a minimum excess availability of $125 million, meaning that the borrowing base (generally consisting of specified percentages of eligible inventory, credit card receivables and certain real estate less any applicable availability reserves) must exceed the amount of borrowings under the credit facility by a minimum of $125 million. Pricing for the facility is tiered based on levels of excess availability.

As of January 28, 2006, we had no borrowings under this facility and had $165 million of letters of credit outstanding. On July 21, 2005, we cancelled our previous unsecured credit facility of $685 million, which had no outstanding balances.

Borrowings under this secured revolving credit facility are made and/or guaranteed by Toys-Delaware and certain of its subsidiaries and are secured by the tangible and intangible assets (with specified exceptions) of the borrowers, Babiesrus.com, LLC, Toysrus.com, Inc. and certain subsidiaries of Toys-Delaware. The debt is subject to mandatory prepayment provisions as specified in the credit agreement.

• $1.9 Billion Unsecured Bridge Facility. On July 21, 2005, we entered into a bridge loan agreement with a syndicate of financial institutions. Upon consummation of the Merger Transaction, Toys-Delaware became the borrower under this agreement. The bridge loan agreement originally provided for a one-year term unsecured credit facility of $1.9 billion, carrying an annual interest rate of LIBOR plus 5.25%. Any outstanding bridge loans on July 21, 2006 (the “Conversion Date”) will be automatically converted into term loans with a six-year term (“Term Loans”). On and after the first anniversary of the Conversion Date, lenders collectively holding at least 51% of the Term Loans may elect to exchange their Term Loans for exchange notes, which will mature on July 21, 2012. On December 9, 2005, we repaid $927 million of the outstanding bridge loan balance in conjunction with the execution of the $1.3 Billion New Holdco Credit Agreement, details of which appear above. As of January 28, 2006, we had $973 million outstanding under our bridge loan agreement. The borrowings under the bridge loan agreement are guaranteed by Toys “R” Us, Inc. (until the bridge loans are converted to term loans on July 21, 2006), certain subsidiaries of Toys-Delaware, and certain other entities. In connection with the principal repayment, a pro-rata portion of previously capitalized transaction costs in the amount of approximately $32 million was expensed in 2005.

The bridge loan agreement contains covenants, including, among other things, covenants that restrict the ability of Toys-Delaware and certain of its subsidiaries to incur certain additional indebtedness, create or permit liens on assets, or engage in mergers or consolidations.

We entered into the following additional borrowings subsequent to our year ended January 28, 2006:

• On January 23, 2006, Toys “R” Us Iberia Real Estate, S.L., our indirect wholly-owned subsidiary, entered into a secured loan agreement with a syndicate of financial institutions. The loan is secured by, among other things, selected Spanish real estate, which has been or will be acquired by the borrower. On February 1, 2006, the loan agreement was drawn down, and pursuant to which we borrowed €135.1 million. The maturity date for the loan is February 1, 2013. The loan has an interest rate of 1.50% plus mandatory costs plus EURIBOR. We have entered into hedging arrangements whereby we have fixed the interest under the loan at 4.505% plus mandatory costs per annum. The loan agreement contains covenants, including, among other things, covenants that restrict the ability of the borrower to engage in mergers or consolidations, incur additional indebtedness, or create or permit liens on assets. The loan also requires the company to maintain an interest coverage ratio of 110%. On January 23, 2006, Toys “R” Us France Real Estate SAS, our indirect wholly-owned subsidiary, entered into a secured loan agreement with a syndicate of financial institutions. The loan is secured by, among other things, selected

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French real estate, which has been or will be acquired by the borrower. On February 1, 2006, the loan agreement was drawn down, and pursuant to which we borrowed €65.2 million. The maturity date for the loan is February 1, 2013. The loan has an interest rate of 1.50% plus mandatory costs plus EURIBOR. We have entered into hedging arrangements whereby we have effectively fixed the interest under the loan at 4.505% plus mandatory costs per annum. The loan agreement contains covenants, including, among other things, covenants that restrict the ability of the borrower to engage in mergers or consolidations, incur additional indebtedness, or create or permit liens on assets. The loan also requires the company to maintain an interest coverage ratio of 110%.

• On February 8, 2006, Toys “R” Us Properties (UK) Limited (“Toys Properties”), our indirect wholly-owned subsidiary, entered into a credit agreement with Vanwall Finance PLC as the Issuer and as Senior Lender and The Royal Bank of Scotland PLC as Junior Lender, which included a series of Secured Senior Loans comprising an initial principal amount of approximately £347.0 million and a Junior Loan comprising an initial principal amount of up to £62.4 million. The Senior Lender and Junior Lender have also agreed to provide an aggregate of approximately £10.8 million in additional loans under specified conditions. The loans are secured by, among other things, selected UK real estate, which has been or will be acquired by the borrower. The credit agreement contains customary covenants, including, among other things, covenants that restrict the ability of Toys Properties to incur certain additional indebtedness, create or permit liens on assets, dispose of or acquire further property, vary or terminate the lease agreements, conclude further leases or engage in mergers or consolidations. The credit agreement has a seven-year term and Toys Properties is required to repay the loans in part in quarterly installments from the first anniversary date. The final maturity date is April 7, 2013. The credit agreement also contains various and customary events of default with respect to the loans, including, without limitation, the failure to pay interest or principal when the same is due under the credit agreement, cross default provisions, the failure of representations and warranties contained in the Credit Agreement to be true and certain insolvency events with respect to Toys Properties. The Senior Loan bears interest at an annual rate of mandatory costs plus 4.5575% plus a margin ranging from 0.28% to 1.50% and the Junior Loan bears interest at an annual rate of mandatory costs plus LIBOR plus a margin of 2.25%. Toys Properties has entered into hedging arrangements in relation to its floating rate exposure under the credit agreement, whereby Toys Properties effectively fixed the interest under the Junior Loan at 6.8075% plus mandatory costs per annum. The proceeds from the above-described U.K. transaction, together with other available funds, were used to repay all of the outstanding indebtedness under the bridge facility component of the Senior Facilities Agreement entered into by Toys “R” Us (UK) Limited on July 21, 2005 and to pay part of the transaction costs. In connection with the financing transaction, we revised our estimated amortization period of the $1.0 billion European bridge facility deferred transaction costs and, as a result, recorded an additional $27 million in amortization expense in the thirteen-week period ended January 28, 2006.

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Contractual Obligations and Commitments

Our contractual obligations consist mainly of operating leases related to real estate used in the operation of our business, and long-term debt. Below are the operating leases and principal amounts due under long-term debt issuances, as well as other obligations:

Contractual Obligations at January 28, 2006

	Payments Due By Period
(In millions)	2006		2007-2008		2009-2010		2011 and thereafter		Total
Operating leases	$	328	$	606	$	536	$	1,256	$	2,726
Less: sub-leases to third parties		25		41		25		63		154
Net operating lease obligations		303		565		511		1,193		2,572
Capital lease obligations		4		6		1		1		12
Interest payments (a)		392		630		425		644		2,091
Long-term debt		403		2,150		—		3,359		5,912
Purchase obligations (b)		1,051		—		—		—		1,051
Guarantees (c)		6		12		12		14		44
Other (d)		130		139		113		8		390
Total contractual obligations	$	2,289	$	3,502	$	1,062	$	5,219	$	12,072

(a) $1.8 billion of debt was subject to fixed interest rates and $4.1 billion of debt was subject to variable interest rates. The interest payments in the table for the $4.1 billion of variable rate debt were based on the indexed interest rates in effect at January 28, 2006.

(b) Purchase obligations consist primarily of open purchase orders for merchandise that are not included in our consolidated balance sheet as of January 28, 2006. Certain of these open purchase orders allow us to cancel the order without recourse.

(c) We are the guarantor of various loans to Toys “R” Us – Japan from third parties in Japan. For further details see Note 9 to the Consolidated Financial Statements entitled “INVESTMENT IN TOYS “R” US – JAPAN.”

(d) Includes minimum royalty obligations, pension obligations, risk management liabilities, and other general obligations.

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

We currently have a $2 billion secured credit facility from a syndicate of financial institutions. The credit facility is available for general corporate purposes and the issuance of letters of credit. Borrowings under this credit facility are secured by tangible and intangible assets, subject to specific exclusions. Additionally, we have multi-currency revolving credit facilities in an amount of up to £95 million and €145 million, which are secured by a lien over certain assets. We had a $685 million unsecured committed revolving credit facility from a syndicate of financial institutions on January 29, 2005, which we terminated on July 21, 2005. There were no outstanding loan balances under these credit facilities at the end of 2005, 2004 or 2003. Additionally, we have lines of credit with various banks to meet certain of the short-term financing needs of our foreign subsidiaries.

Credit Ratings

On October 21, 2005, Standard & Poor’s revised our corporate credit rating to B-, a two-level downgrade from our previous rating of B+. On October 17, 2005, Moody’s revised our corporate credit rating to B2, a

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one-level downgrade from our previous rating of B1. These current ratings are considered non-investment grade. Our current ratings are as follows:

	Moody’s	Standard and Poor’s
Long-term debt	B2	B-
Outlook	Negative	Stable

Other credit ratings for our debt are available; however, we have disclosed only the ratings of the two largest nationally recognized statistical rating organizations.

Our current credit ratings, as well as future rating agency actions, could (1) negatively impact our ability to finance our operations on satisfactory terms, and (2) have the effect of increasing our financing costs. Our debt instruments do not contain provisions requiring acceleration of payment upon a debt rating downgrade.

In connection with the financing transactions undertaken or planned as a result of the Merger Transaction, it is possible that the rating agencies will further revise the ratings in respect of our outstanding debt securities. At this time, we are unable to predict the ratings to be so assigned to our outstanding debt by the rating agencies.

OFF-BALANCE SHEET ARRANGEMENTS

Our Global Store Support Center facility in Wayne, New Jersey was originally financed under a lease arrangement commonly referred to as a “synthetic lease.” Under this lease, unrelated third parties arranged by Wachovia Development Corporation, a multi-purpose real estate investment company, funded the acquisition and construction of the facility. On June 1, 2005, we purchased our Global Store Support Center facility for a purchase price of $128.8 million pursuant to the purchase election option under the lease arrangement.

We guarantee 80% of Toys “R” Us – Japan’s three installment loans from a third party in Japan, totaling 6.5 billion yen ($56 million). See Note 9 to the Consolidated Financial Statements entitled “INVESTMENT IN TOYS “R” US – JAPAN” for a further discussion on these guarantees.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities as of the date of the financial statements and during the applicable periods. We base these estimates on historical 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 on our consolidated financial statements.

We believe the following are our most critical accounting policies that include significant judgments and estimates used in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time they were made, and if changes in these estimates could have a material impact on our consolidated financial condition or results of operations:

Merchandise Inventories:

Merchandise inventories for the Toys “R” Us – U.S. division, other than apparel, are stated at the lower of LIFO (last-in, first-out) cost or market value, as determined by the retail inventory method and represent approximately 52% of total merchandise inventories. All other merchandise inventories are stated at the lower of FIFO (first-in, first-out) cost or market value as determined by the retail inventory method.

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We receive various types of merchandise and other types of allowances from our vendors based on negotiated terms. We use estimates at interim periods to record our provisions for inventory shortage, to adjust certain inventories to a LIFO basis, and to record merchandise allowances from our vendors. These estimates are based on the development of the cost-to-retail ratios (estimated average markup percentages for product categories), consumer price index data, estimated inventory turnover, and the accounting for retail price adjustments. These estimates are based on available data and are adjusted to actual amounts at the completion of our physical inventories, finalization of all vendor allowance agreements, and the closing of our books at the end of our fiscal year. In addition, we perform an inventory-aging analysis for determining obsolete inventory. Our policy to write down inventory to its net realizable value is based on various management’s assumptions. Among them is the establishment of criteria to identify and write down obsolete inventory based on the type and the inventory’s receipt date. Inventory is reviewed on an interim basis and adjusted as appropriate to reflect write-downs determined to be necessary.

Factors such as slower inventory turnover due to changes in competitors’ tactics, consumer preferences, consumer spending and unseasonable weather patterns, among other factors, could cause excess inventory requiring greater than estimated markdowns to entice consumer purchases, resulting in an unfavorable impact on our consolidated financial statements. Sales shortfalls due to the above factors could cause reduced purchases from vendors and associated vendor allowances that would also result in an unfavorable impact on our consolidated financial statements.

Excess Facilities and Long-lived Assets Impairment:

Based on an overall analysis of store performance and expected trends, management periodically evaluates the need to close underperforming stores. Reserves are established at the point of closure for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Two key assumptions in calculating the reserve include the timeframe expected to terminate lease agreements and estimation of other related exit costs. If actual timing and potential termination costs differ from our estimates, the resulting reserves could vary from recorded amounts. Reserves are reviewed periodically and adjusted, when necessary.

We review the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review for impairment all stores for which undiscounted current cash flows from operations are negative, or the construction costs are significantly in excess of the amount originally expected. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows over the life of the lease. Our estimate of undiscounted future cash flows over the lease term is based upon our experience, historical operations of the stores and estimates of future store profitability and economic conditions. The future estimates of store profitability and economic conditions require estimating such factors as sales growth, employment rates, lease escalations, inflation on operating expenses and the overall economics of the retail industry for up to 20 years in the future, and are therefore subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The fair value is estimated based upon future cash flows (discounted at a rate that approximates our weighted average cost of capital) or other reasonable estimates of fair market value.

Goodwill is evaluated for impairment annually under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires us to estimate future cash flows to measure the recoverability of goodwill. Future indicators of impairment for long-lived assets, other than goodwill, could result in asset impairment charges. In addition, while we have concluded that our goodwill of $359 million as of January 28, 2006 will be fully recoverable in future periods, changes in estimated future cash flows could require us to record impairment charges on goodwill.

48

Self-Insured Liabilities:

We insure a substantial portion of our workers’ compensation, general liability, auto liability and property insurance risks through a wholly-owned insurance subsidiary, in addition to third party insurance coverage. Provisions for losses related to self-insured risks are based upon independent actuarially determined estimates. We maintain stop-loss coverage to limit the exposure related to certain risks. The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can impact ultimate costs.

Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could have a material impact on our consolidated financial statements.

Derivatives and Hedging Activities:

We enter into derivative financial arrangements to hedge a variety of risk exposures, including interest rate and currency risks associated with our long-term debt, as well as foreign currency risk relating to import merchandise purchases. We account for these hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and we record the fair value of these instruments within our consolidated balance sheet.

Gains and losses from derivative financial instruments are largely offset by gains and losses on the underlying transactions. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings. Generally, the contract terms of hedge instruments closely mirror those of the item being hedged, providing a high degree of risk reduction and correlation. At January 28, 2006, we recorded derivative assets of $9 million and derivative liabilities of $2 million.

We intend to continue to meet the conditions for hedge accounting. However, if hedges were not to be highly effective in offsetting cash flows attributable to the hedged risk, the changes in the fair value of the derivatives used as hedges could have an impact on our consolidated financial statements. Assuming that all derivatives at January 28, 2006 were deemed ineffective, our consolidated pre-tax earnings would be favorably impacted by $7 million.

Revenue Recognition:

Revenue is recognized for retail sales at the point of sale in the store and for purchases from our website, when the merchandise is shipped and risk of ownership transfers. Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated product returns in each reporting period based on historical return experience and changes in customer demand.

Income Taxes:

The Company’s provision for income taxes is based on a number of factors, including our income, permanent differences, temporary differences, statutory tax rates and credits, tax reserves, and valuation allowances, by legal entity and jurisdiction. A schedule of the current and deferred provision for income taxes is included in Note 20 to the Consolidated Financial Statements entitled “INCOME TAXES.”

The Company’s effective tax rate is determined by dividing the provision for income taxes by our (loss) earnings before income taxes. Our effective tax rate is based on our income, statutory tax rates, valuation allowances, permanent items, and various tax planning opportunities available to us, by jurisdiction. Significant

49

judgment is required in determining our effective tax rate and in evaluating our tax positions. A reconciliation of the effective tax rate to the statutory 35% U.S. federal income tax rate is included in Note 20 to the Consolidated Financial Statements entitled “INCOME TAXES.”

The Company establishes tax reserves when, despite the belief that our tax return positions are fully supportable, it is probable we may not succeed in defending our positions. We adjust these reserves, as well as the related interest, based on the latest facts and circumstances, including progress made during the course of a tax audit. U.S. federal, foreign, and state tax authorities regularly examine the Company’s tax returns. While it is often difficult to predict the final outcome of, the timing of, or the tax treatment of, any particular tax position or deduction, we believe that our reserves reflect the probable outcome of known tax contingencies. The Company maintains its tax reserves in the Income taxes payable account.

Tax law and accounting rules often differ as to the timing and treatment of certain items of income and expense. As a result, the tax rate reflected in our tax return (our current or cash tax rate) is different than the tax rate reflected in our consolidated financial statements. Some of the differences are permanent, while other differences are temporary as they reverse over time. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in a future tax return for which we have already recorded a tax benefit in our current financial statements. An example would be a loss carry forward for federal, foreign or state tax purposes. We establish valuation allowances for our deferred tax assets when we believe it is more likely than not that the expected future taxable income or tax thereon will not support the use of a deduction or credit. An example would be a valuation allowance for the tax benefit associated with a loss carryover in a tax jurisdiction that the Company does not expect to generate sufficient taxable income to utilize the loss carryover. Deferred tax liabilities generally represent items that can be deducted currently on the tax return and will be expensed in our consolidated financial statements in a future year. An example would be accelerated depreciation on fixed assets where the Company has deducted more depreciation in the tax return that was expensed in the consolidated financial statements. The Company maintains the current and non-current portion of its deferred tax assets in the Prepaid expenses, derivatives and other current assets, and the Other assets accounts, respectively, and maintains the current and non-current portion of its deferred tax liabilities in the Accrued expenses and other current liabilities, and Deferred income tax accounts, respectively. Schedules showing the major temporary differences that give rise to the deferred tax assets and deferred tax liabilities are included in Note 20 to the Consolidated Financial Statements entitled “INCOME TAXES.”

During 2005, management determined that the Company would no longer permanently reinvest any of its foreign earnings outside the United States. As such, we have established deferred U.S. income tax on the current and cumulative earnings of our foreign subsidiaries.

Stock-Based Compensation

We account for stock options using the intrinsic method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Options Issued to Employees” (“APB 25”) and its related interpretations. We typically issue options with exercise prices equal to the market price of the stock at the date of grant and therefore do not recognize stock compensation expense for these grants. However, certain post-merger grants whose defined vesting schedules were considered to be not substantive or which were considered as replacement awards for cancelled grants have been accounted for as variable awards. In addition, for awards where a contingent event giving rise to a put right on options is within the control of the employee, the related options are accounted for as a variable liability award. Compensation costs on awards requiring variable plan accounting are estimated and recorded each period until the measurement date. We recognized stock-based compensation expense of $222 million in connection with the Merger and recapitalization. Refer to Note 12 to the Consolidated Financial Statements entitled “STOCK-BASED COMPENSATION” for further details.

50

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-based Compensation – Transition and Disclosure an Amendment of FASB Statement No. 123” requires the disclosure of pro forma net income determined as if we had adopted the fair value method. Under SFAS 123, the estimated fair value of stock options is calculated through the use of option pricing models and is amortized to expense over the options’ vesting period. These models require subjective assumptions, including expected life, which affect the calculated values.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 27 to the Consolidated Financial Statements entitled “RECENT ACCOUNTING PRONOUNCEMENTS” for a discussion of recent accounting pronouncements and their impact on our consolidated financial statements.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Our foreign currency exposure is primarily concentrated in the United Kingdom and Continental Europe, Canada, Australia and Japan. We face currency exposures that arise from translating the results of our worldwide operations into U.S. dollars from exchange rates that have fluctuated from the beginning of the period. We also face transactional currency exposures relating to merchandise that we purchase in foreign currencies. We enter into forward exchange contracts to minimize and manage the currency risks associated with these transactions. The counter-parties to these contracts are highly rated financial institutions and we do not have significant exposure to any single counter-party. Gains or losses on these derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. For foreign currency derivative instruments, market risk is determined by calculating the impact on fair value of an assumed one-time change in foreign exchange rates relative to the U.S. dollar. Fair values were estimated based on market prices, where available, or dealer quotes. With respect to derivative instruments outstanding at January 28, 2006, a 10% appreciation of the U.S. dollar would have no impact on pre-tax earnings in 2005 and would increase comprehensive income in 2005 by $15 million, while a 10% depreciation of the U.S. dollar would have no impact on pre-tax earnings in 2005 and would decrease comprehensive income in 2005 by $13 million. Comparatively, considering our derivative instruments outstanding at January 29, 2005, a 10% appreciation of the U.S. dollar would have increased pre-tax earnings in 2004 by $1 million and increased comprehensive income in 2004 by $19 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings in 2004 by $1 million and decreased comprehensive income in 2004 by $21 million. Considering our derivative instruments outstanding at January 31, 2004, a 10% appreciation of the U.S. dollar would have increased comprehensive income in 2003 by $19 million, while a 10% depreciation of the U.S. dollar would have decreased comprehensive income in 2003 by $19 million.

We are faced with interest rate risks resulting from interest rate fluctuations. We have a variety of fixed and variable rate debt instruments. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and variable rate debt and have entered into interest rate swaps to maintain that balance. For interest rate derivative instruments, market risk is determined by calculating the impact to fair value of an assumed one-time change in interest rates across all maturities. Fair values were estimated based on market prices where available or dealer quotes. A change in interest rates on variable rate debt impacts earnings, cash

51

flow and the fair value of debt. A change in interest rates on fixed rate debt does not impact the fair value of debt, earnings or cash flow. Based on our overall interest rate exposure related to floating rate debt outstanding at January 28, 2006, January 29, 2005, and January 31, 2004, a 1% increase in interest rates would have had an unfavorable annualized impact on pre-tax earnings of $31 million in 2005, $20 million in 2004, and $20 million in 2003. A 1% decrease in interest rates would have had a favorable annualized impact on pre-tax earnings of $31 million in 2005, $20 million in 2004, and $20 million in 2003. A 1% increase in interest rates would not impact the carrying value of our long-term debt at January 28, 2006. At January 29, 2005, a 1% increase in interest rates would decrease the fair value of our long-term debt by approximately $98 million, respectively. A 1% decrease in interest rates would not impact the carrying value of our long-term debt at January 28, 2006. At January 29, 2005, a 1% decrease in interest rates would increase the fair value of our long-term debt by approximately $107 million, respectively.

52

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	PAGE
Report of Independent Registered Public Accounting Firm	54
Consolidated Statements of Operations	56
Consolidated Balance Sheets	57
Consolidated Statements of Cash Flows	58
Consolidated Statements of Stockholders’ Equity	59
Notes to Consolidated Financial Statements	60
Quarterly Results of Operations (Unaudited)	106

53

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Toys “R” Us, Inc.:

We have audited the accompanying consolidated balance sheet of Toys “R” Us, Inc. and subsidiaries (the “Company”) as of January 28, 2006, and the related consolidated statements of operations, stockholder’s (deficit) equity, and cash flows for the fifty-two week period ended January 28, 2006. Our audit also included the financial statement schedule listed in the Index at Item 15 (a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 28, 2006, and the results of its operation and its cash flows for the fifty-two week period ended January 28, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements as a whole, presents fairly, in all material respects, the financial information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 28, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.

/s/    Deloitte & Touche LLP

New York, New York

April 28, 2006

54

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Toys “R” Us, Inc.

We have audited the accompanying consolidated balance sheets of Toys “R” Us, Inc. and subsidiaries as of January 29, 2005, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the years ended January 29, 2005 and January 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Toys “R” Us, Inc. and subsidiaries at January 29, 2005, and the consolidated results of their operations and their cash flows for the years ended January 29, 2005 and January 31, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, the Company has restated its financial statements for the years ended January 29, 2005 and January 31, 2004 to correct its accounting for leases and leasehold improvements.

As discussed in Note 4 to the consolidated financial statements, in the year ended January 29, 2005, the Company adopted EITF 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers,” retroactive to February 2, 2003. In the year ended January 31, 2004, the Company adopted the provisions of EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” effective February 2, 2003.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Toys “R” Us, Inc.’s internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 28, 2005 expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

/s/ Ernst & Young LLP

New York, New York

April 28, 2005

55

Toys “R” Us, Inc. and Subsidiaries

Consolidated Statements of Operations

	52 Weeks Ended
(In millions)	January 28, 2006			January 29, 2005			January 31, 2004
							(As restated)
Net sales	$	11,275		$	11,100		$	11,320
Cost of sales		7,652			7,506			7,646
Gross margin		3,623			3,594			3,674
Selling, general and administrative expenses		2,899			2,932			3,026
Transaction and related costs		410			—			—
Depreciation and amortization		400			354			368
Restructuring and other charges		34			4			63
Contract settlement fees and other		22			—			—
Total operating expenses		3,765			3,290			3,457
Operating (loss) earnings		(142	)		304			217
Other (expense) income:
Interest expense		(394	)		(130	)		(142	)
Interest income		31			19			18
(Loss) earnings before income taxes		(505	)		193			93
Income tax (benefit) expense		(121	)		(59	)		30
Net (loss) earnings	$	(384	)	$	252		$	63

See Notes to Consolidated Financial Statements.

56

Toys “R” Us, Inc. and Subsidiaries

Consolidated Balance Sheets

(In millions)	January 28, 2006			January 29, 2005
ASSETS
Current Assets:
Cash and cash equivalents	$	981		$	1,232
Short-term investments		—			953
Accounts and other receivables		218			171
Merchandise inventories		1,488			1,884
Net property assets held for sale		—			7
Prepaid expenses, derivative assets and other current assets		216			160
Total current assets		2,903			4,407
Property and equipment:
Real estate, net		2,386			2,393
Other, net		1,789			1,946
Total property and equipment		4,175			4,339
Goodwill		359			353
Deferred tax assets		457			426
Restricted cash		107			—
Other assets		365			243
	$	8,366		$	9,768
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current Liabilities:
Accounts payable	$	1,118		$	1,023
Accrued expenses and other current liabilities		900			881
Income taxes payable		130			245
Current portion of long-term debt		407			452
Total current liabilities		2,555			2,601
Long-term debt		5,540			1,860
Deferred tax liabilities		531			485
Deferred rent liabilities		260			269
Other non-current liabilities		204			228
Stockholders’ (Deficit) Equity
Common Stock		—			30
Additional paid-in-capital		—			405
(Deficit) retained earnings		(669	)		5,560
Accumulated other comprehensive loss		(55	)		(7	)
Unearned compensation		—			(5	)
Treasury shares, at cost		—			(1,658	)
Total stockholders’ (deficit) equity		(724	)		4,325
	$	8,366		$	9,768

See Notes to Consolidated Financial Statements.

57

Toys “R” Us, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	52 Weeks Ended
(In millions)	January 28, 2006			January 29, 2005			January 31, 2004 (As restated)
Cash Flows from Operating Activities:
Net (loss) earnings	$	(384	)	$	252		$	63
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		400			354			368
Amortization of restricted stock		16			7			10
Amortization of debt issuance costs		90			—			—
Stock compensation expenses arising from cash settlement		195			—			—
Deferred income taxes		(80	)		(40	)		27
Stock option compensation expense		17			6			—
Minority interest in Toysrus.com		—			(6	)		(8	)
Proceeds received from settlement of derivatives		34			—			—
Non-cash portion of restructuring and other charges		34			4			63
Equity in loss of Toys “R” Us – Japan, net of dividend		10			(11	)		(16	)
Other		16			7			7
Changes in operating assets and liabilities:
Accounts and other receivables		(51	)		(3	)		58
Merchandise inventories		387			221			133
Prepaid expenses and other operating assets		(13	)		76			28
Accounts payable, accrued expenses and other liabilities		112			(45	)		117
Income taxes payable		(112	)		(74	)		(53	)
Net cash provided by operating activities		671			748			797
Cash Flows from Investing Activities:
Capital expenditures		(285	)		(269	)		(262	)
Proceeds from sale (purchase) of short-term investments		953			(382	)		(572	)
Purchase of SB Toys, Inc.		—			(42	)		—
(Increase) decrease in restricted cash		(107	)		—			60
Proceeds from sale of fixed assets		12			216			—
Net cash provided by (used in) investing activities		573			(477	)		(774	)
Cash Flows from Financing Activities:
Long-term debt borrowings		7,004			—			792
Short-term debt borrowings		325			—			—
Long-term debt repayment		(3,526	)		(503	)		(370	)
Short-term debt repayment		(174	)		—			—
Repurchase of common stock		(5,891	)		—			—
Repurchase of stock options and restricted stock		(227	)		—			—
Capital contributed by affiliate		1,279			—			—
Repurchase of equity security units and warrants		(130	)		—			—
Proceeds received from exercise of stock options		87			27			—
Proceeds received from issuance of common stock		20			—			—
Capitalized debt issuance costs		(255	)		—			—
Net cash (used in) provided by financing activities		(1,488	)		(476	)		422
Effect of exchange rate changes on cash and cash equivalents		(7	)		25			(40	)
Cash and Cash Equivalents:
(Decrease) increase during period		(251	)		(180	)		405
Beginning of period		1,232			1,412			1,007
End of period	$	981		$	1,232		$	1,412
Supplemental Disclosures of Cash Flow Information:
Income taxes paid, net of refunds	$	70		$	27		$	33
Interest paid	$	272		$	143		$	117

See Notes to Consolidated Financial Statements.

58

Toys “R” Us, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ (Deficit) Equity

	Common Stock										Additional paid-in-capital			Unamortized value of restricted stock			Accumulated other comprehensive loss			Retained earnings (deficit)			Total stockholders’ equity (deficit)
	Issued					In Treasury
(In millions)	Shares		Amount			Shares		Amount
Balance, February 1, 2003 (as restated)	300.4		$	30		(87.9	)	$	(1,722	)	$	414		$	—		$	(152	)	$	5,245		$	3,815
Net earnings for the period	—			—		—			—			—			—			—			63			63
Foreign currency translation adjustments	—			—		—			—			—			—			105			—			105
Unrealized loss on hedged transactions, net of tax	—			—		—			—			—			—			(5	)		—			(5	)
Minimum pension liability adjustment, net of tax	—			—		—			—			—			—			(12	)		—			(12	)
Total comprehensive income																								151
Issuance of restricted stock, net and other	—			—		1.1			15			(7	)		—			—			—			8
Balance, January 31, 2004 (as restated)	300.4		$	30		(86.8	)	$	(1,707	)	$	407		$	—		$	(64	)	$	5,308		$	3,974
Net earnings for the period	—			—		—			—			—			—			—			252			252
Foreign currency translation adjustments	—			—		—			—			—			—			58			—			58
Unrealized loss on hedged transactions, net of tax	—			—		—			—			—			—			(3	)		—			(3	)
Minimum pension liability adjustment, net of tax	—			—		—			—			—			—			2			—			2
Total comprehensive income																								309
Exercise of stock options, net	—			—		1.9			37			(6	)		—			—			—			31
Stock compensation expense	—			—		—			—			6			—			—			—			6
Issuance of restricted stock, net and other	—			—		0.4			12			(2	)		(12	)		—			—			(2	)
Amortization of restricted stock	—			—		—			—			—			7			—			—			7
Balance, January 29, 2005	300.4		$	30		(84.5	)	$	(1,658	)	$	405		$	(5	)	$	(7	)	$	5,560		$	4,325
Net loss for the period	—			—		—			—			—			—			—			(384	)		(384	)
Foreign currency translation adjustments	—			—		—			—			—			—			(63	)		—			(63	)
Unrealized gain on hedged transactions, net of tax	—			—		—			—			—			—			18			—			18
Minimum pension liability adjustment, net of tax	—			—		—			—			—			—			(3	)		—			(3	)
Total comprehensive loss																								(432	)
Exercise of stock options, net	—			—		4.8			96			(9	)		—			—			—			87
Tax benefit related to stock plan activities	—			—		—			—			16			—			—			—			16
Issuance of restricted stock, net and other	—			—		0.3			5			5			(11	)		—			—			(1	)
Amortization of restricted stock	—			—		—			—			—			16			—			—			16
Exercise of equity security units (“ESUs”)	—			—		0.9			19			1			—			—			—			20
Treasury stock repurchase	—			—		(221.0	)		(5,891	)		—			—			—			—			(5,891	)
Contribution of capital by affiliate	—			—		—			—			1,279			—			—			—			1,279
Repurchase of options and awards, net of related compensation costs	—			—		—			(28	)		15			—			—			—			(13	)
Obligations for net cash settlement of awards and ESUs	—			—		—			—			(109	)		—			—			—			(109	)
Repurchase of ESUs and warrants	—			—		(0.9	)		(21	)		—			—			—			—			(21	)
Cancellation of treasury stock	(300.4	)		(30	)	300.4			7,478			(1,603	)		—			—			(5,845	)		—
Balance, January 28, 2006 (1)	—			—		—			—			—			—			(55	)		(669	)		(724	)

⁽¹⁾ 1,000 shares of common stock, par value $.01 per share, outstanding.

See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Except as expressly indicated or unless the context otherwise requires, as used herein, the “Company,” “we,” “us,” or “our” means Toys “R” Us, Inc., and its subsidiaries. We are the largest specialty retailer of toys in North America and the only national specialty retailer of baby-juvenile products in the United States. As of January 28, 2006, our business consists of 671 Toys “R” Us stores in the United States, 230 Babies “R” Us specialty baby-juvenile stores in the United States, 641 international stores in 31 countries, of which 625 are Toys “R” Us toy stores and 16 are Babies “R” Us stores. Included in the 641 stores are 336 licensed or franchised stores. Toysrus.com, our internet subsidiary, sells merchandise on the Internet through www.toysrus.com, www.babiesrus.com, www.imaginarium.com, www.sportsrus.com, and www.personalizedbyrus.com in the United States and www.toysrus.ca in Canada. Toys “R” Us, Inc. is incorporated in the state of Delaware.

Effective July 21, 2005, the Company became a wholly-owned subsidiary of Toys “R” Us Holdings, Inc. (“Holdings”).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. We eliminated all material inter-company balances and transactions. We translated all assets and liabilities of foreign operations at current rates of exchange at the balance sheet date and translated the results of foreign operations at average rates in effect for the period. We show any unrealized translation gains or losses as a component of the line item accumulated other comprehensive (loss) income within the consolidated statements of stockholders’ (deficit) equity.

Fiscal Year

Our fiscal year ends on the Saturday nearest to January 31. Unless otherwise stated, references to years in this report relate to the 52-week fiscal years below:

Fiscal Year	Number of Weeks	Ended
2005	52	January 28, 2006
2004	52	January 29, 2005
2003	52	January 31, 2004

Use of Estimates

The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities as of the date of the financial statements and during the applicable periods. We base these estimates on historical 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 on our consolidated financial statements.

Reclassifications

We have made certain reclassifications to prior period information to conform to current presentations. In 2004, we reclassified our auction rate securities and variable rate demand notes from cash and cash equivalents to

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Notes to Consolidated Financial Statements—(Continued)

short-term investments for the current and prior years. We have also made corresponding adjustments to our consolidated statements of cash flows to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. As of January 28, 2006, we no longer own auction rate securities or variable rate demand notes. The fair value of these investments at January 29, 2005 was $953 million.

We reclassified certain 2004 balances from cash and cash equivalents related to credit card receivables into accounts receivable. Accordingly, our cash and cash equivalents were reduced by $18 million as of January 29, 2005.

In the consolidated statements of cash flows for 2003, we reclassified $60 million in decreases to restricted cash from cash flows from financing activities to cash flows from investing activities.

Cash and Cash Equivalents

We consider our highly liquid investments with original maturities of less than three months to be cash equivalents. Book cash overdrafts issued but not yet presented to the bank for payment are reclassified to accounts payable.

Restricted Cash

Restricted cash primarily represents cash that serves as collateral and other cash that is restricted from withdrawal. As of January 28, 2006, restricted cash represents the restriction of $107 million, all of which serves as collateral for certain property financings we entered into during 2005. As of January 29, 2005, we had no restricted cash.

Merchandise Inventories

Merchandise inventories for the Toys “R” Us – U.S. division, other than apparel, are stated at the lower of LIFO (last-in, first-out) cost or market value, as determined by the retail inventory method and represent approximately 52% of total merchandise inventories. All other merchandise inventories are stated at the lower of FIFO (first-in, first-out) cost or market value as determined by the retail inventory method.

Property and Equipment

We record property and equipment at cost. Leasehold improvements represent capital improvements made to our leased properties. We record depreciation and amortization using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the respective leases, if applicable. We utilize accelerated depreciation methods for income tax reporting purposes with recognition of deferred income taxes for the resulting temporary differences.

For any store closures where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the date the store is closed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

We review the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review for impairment all stores for which current cash flows from operations are negative, or the construction costs are significantly in

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Notes to Consolidated Financial Statements—(Continued)

excess of the amount originally expected. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows over the life of the lease. Our estimate of undiscounted future cash flows over the lease term is based upon our experience, historical operations of the stores and estimates of future store profitability and economic conditions. The future estimates of store profitability and economic conditions require estimating such factors as sales growth, employment rates, lease escalations, inflation on operating expenses and the overall economics of the retail industry for up to 20 years in the future, and are therefore subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The fair value is estimated based upon future cash flows (discounted at a rate that approximates our weighted average cost of capital) or other reasonable estimates of fair market value.

Insurance Risks

We insure a substantial portion of our workers’ compensation, general liability, auto liability and property insurance risks through a wholly owned insurance subsidiary, in addition to third party insurance coverage. Provisions for losses related to self-insured risks are based upon independent actuarially determined estimates. We maintain stop-loss coverage to limit the exposure related to certain risks. The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can impact ultimate costs. As of January 28, 2006, we discounted a portion of our reserves for self-insurance risk related to our workers’ compensation insurance.

Commitments and Contingencies

We are subject to various claims and contingencies related to lawsuits and taxes, as well as commitments under contractual and other commercial obligations. We recognize liabilities for contingencies and commitments when a loss is probable and estimable. For additional information on our commitments, refer to Note 25 entitled “COMMITMENTS AND CONTINGENCIES.”

Deferred Rent

The Company recognizes fixed minimum rent expense on non-cancelable leases on a straight-line basis over the term of each individual lease including the build-out period. The difference between recognized rental expense and amounts payable under the lease is recorded as a deferred lease liability.

Financial Instruments

We enter into forward foreign exchange contracts to minimize the risk associated with currency movement relating to our foreign subsidiaries. We recognize the gains and losses, which offset the movement in the underlying transactions, as part of such transactions. We recognize changes in fair value currently in earnings unless specific hedge accounting criteria are met. Pre-tax gross deferred unrealized losses on the forward contracts were $2 million and $2 million at January 28, 2006 and January 29, 2005, respectively. We include the related receivable, payable and deferred gain or loss in “other assets” and “other non-current liabilities” on the consolidated balance sheets.

At January 28, 2006, we had $294 million notional amount of short-term outstanding forward contracts maturing in 2006. At January 29, 2005, we had $335 million notional amount of short-term outstanding forward contracts that matured in fiscal 2005. We entered into these contracts with counter-parties that have high credit ratings and with which we have the contractual right to net forward currency settlements.

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Notes to Consolidated Financial Statements—(Continued)

We also enter into derivative financial arrangements to hedge interest rate risk associated with our long-term debt. We enter into interest rate swaps and/or caps to manage this interest rate risk. At January 28, 2006, we had interest rate caps on $2.1 billion of debt; these derivatives had a market value of less than $1 million. Additionally, we had interest rate swaps with a total notional value of $989 million; these swaps had a total market value of $8 million.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is as follows:

• Australian Dollar for our subsidiary in Australia;

• British Pound for our subsidiary in the United Kingdom;

• Canadian dollar for our subsidiary in Canada;

• Euro for subsidiaries in Austria, France, Germany, Spain, and Portugal; and

• Swiss Franc for our subsidiary in Switzerland.

Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as other comprehensive income within shareholders’ equity. Gains and losses resulting from foreign currency transactions have not been significant and are included in selling, general and administrative expenses.

Consolidation of Variable Interest Entities

In December 2003, the FASB issued Interpretation No. 46 (revised December 2003) (“FIN 46(R)”), “Consolidation of Variable Interest Entities.” Implementation of the provisions of FIN 46(R) was effective for the first reporting period after March 15, 2004. FIN 46(R) requires the consolidation of entities that are controlled by a company through interests other than voting interests. Under the requirements of this interpretation, an entity that maintains a majority of the risks or rewards associated with VIEs, also known as Special Purpose Entities, is viewed to be effectively in the same position as the parent in a parent-subsidiary relationship.

We have determined that we have not created or entered into any VIEs during the fiscal year that would require consolidation by us.

Revenue Recognition

We recognize sales at the time the guest takes possession of merchandise, either at the point of sale in our stores or at the time of shipment for products purchased from our websites. We recognize the sale from layaway transactions when our guests satisfy all payment obligations and take possession of the merchandise. We recognize the sale from gift cards and the issuance of store credits as they are redeemed.

Reserve for Sales Returns

We reserve amounts for sales returns for estimated product returns by our guests based on that subsidiaries’ historical return experience, changes in customer demand, known returns we have not received, and other assumptions. The balance of our reserve for sales returns was $9 million for both 2005 and 2004.

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Notes to Consolidated Financial Statements—(Continued)

Cost of Sales and Selling, General, and Administrative Expenses

The following table illustrates costs associated with each expense category:

“Cost of sales”	“SG&A”
•   The cost of acquired merchandise from vendors; •   Freight in; •   Markdowns; •   Provision for inventory shortages; and •   Credits and allowances from our merchandise vendors.	•   Store payroll and related payroll benefits; •   Rent and other store operating expenses; •   Advertising expenses; •   Costs associated with operating our distribution network that primarily relate to moving merchandise from distribution centers to stores; and •   Other corporate related expenses.

Credits and Allowances Received from Vendors

We receive credits and allowances that are related to formal agreements negotiated with our vendors. These credits and allowances are predominantly for cooperative advertising, promotions, and volume related purchases. We treat credits and allowances, including cooperative advertising allowances, as a reduction of product cost in accordance with the provisions of Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”).

We have also applied the provision of EITF Issue 03-10, “Application of EITF Issue No. 02-16, ‘Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,’ by Resellers to Sales Incentives Offered to Consumers by Manufacturers” (“EITF 03-10”). EITF 03-10 applies to coupon arrangements entered into or modified after November 25, 2003. We adopted the provisions of EITF 03-10 beginning in 2004. Our 2005 and 2004 sales are recorded net of in store coupons that we redeemed. The transition provisions for EITF 03-10 provided for restatement of our comparable fiscal 2003 consolidated financial statements. Refer to Note 3 entitled “RESTATEMENT OF FINANCIAL STATEMENTS FOR ACCOUNTING FOR LEASES AND LEASEHOLD IMPROVEMENTS” and to Note 4 entitled “CHANGES IN ACCOUNTING” for further details on the impact on our results due to the adoption of EITF 03-10.

Advertising Costs

Gross advertising costs are recognized in selling, general and administrative expenses (“SG&A”) at the point of first broadcast or distribution and were $307 million in fiscal 2005, $336 million in fiscal 2004, and $364 million in fiscal 2003.

Costs of Computer Software

We capitalize certain costs associated with computer software developed or obtained for internal use in accordance with the provisions of Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”), issued by the American Institute of Certified Public Accountants (“AICPA”). We capitalize those costs from the acquisition of external materials and services associated with developing or obtaining internal use computer software. We capitalize certain payroll costs for employees that are directly associated with internal use computer software projects once specific criteria of SOP 98-1 are met. We expense those costs that are associated with preliminary stage activities, training, maintenance,

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Notes to Consolidated Financial Statements—(Continued)

and all other post-implementation stage activities as they are incurred. We amortize all costs capitalized in connection with internal use computer software projects on a straight-line basis over a useful life of five years, beginning when the software is ready for its intended use.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings.

Stock-Based compensation

We account for stock options using the intrinsic method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Options Issued to Employees” (“APB 25”) and its related interpretations. We typically issue options with exercise prices equal to the market price of the stock at the date of grant and therefore do not recognize stock compensation expense for these grants. However, certain post-merger grants whose defined vesting schedules were considered to be not substantive or which were considered as replacement awards for cancelled grants have been accounted for as variable awards. In addition, for awards where a contingent event giving rise to a put right on options is within the control of the employee, the related options are accounted for as a variable award. Compensation costs on awards requiring variable plan accounting are estimated and recorded each period until the measurement date. We recognized stock-based compensation expense of $222 million in connection with the Merger and recapitalization. Refer to Note 12 entitled “STOCK-BASED COMPENSATION” for further details.

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-based Compensation – Transition and Disclosure an Amendment of FASB Statement No. 123” requires the disclosure of pro forma net income determined as if we had adopted the fair value method. Under SFAS 123, the estimated fair value of stock options is calculated through the use of option pricing models and is amortized to expense over the options’ vesting period. These models require subjective assumptions, including expected life, which affect the calculated values.

The following table illustrates the effect on net (loss) earnings had we applied the fair value recognition provision of SFAS 123:

(In millions)	2005			2004			2003 (as restated)
Net (loss) earnings – as reported	$	(384	)	$	252		$	63
Add: Total employee-related stock-based compensation expense, included in reported net earnings (loss), net of related taxes		143			8			6
Less: Total employee-related stock-based compensation expense determined under fair value based method for all awards, net of related taxes		(22	)		(19	)		(40	)
Net (loss) earnings – pro forma	$	(263	)	$	241		$	29

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Notes to Consolidated Financial Statements—(Continued)

The weighted-average fair value at the date of grant for stock options granted during fiscal 2005, 2004 and 2003 were $5.76 per option, $4.96 per option and $2.86 per option, respectively. The Black-Scholes option-pricing model was used to estimate the fair value of each option on the date of grant except with respect to options granted after July 21, 2005 for which the minimum value method was used.

As there were a number of options granted during the years 2003 through 2005, a range of assumptions is provided below:

	2005	2004	2003
Expected stock price volatility (1)	0.000 – 0.237	0.302 – 0.458	0.473 – 0.548
Risk-free interest rate	3.8% – 4.5%	2.7% – 3.9%	2.3% – 3.4%
Weighted average expected life of options	6 years	5 years	5 years

⁽¹⁾ Fair value is calculated using the minimum value method for the options granted after July 21, 2005.

The effects of applying SFAS 123 and the results obtained through the use of the Black-Scholes option-pricing model may be different than the results obtained by using other subjective assumptions.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004), “Share-based Payment” (“SFAS 123(R)”), which replaces SFAS 123 and amends APB 25 and SFAS No. 95, “Statement of Cash Flows” (“SFAS 95”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on fair value. SFAS 123(R) also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as currently required.

For private companies, SFAS 123(R) is effective for the first annual reporting period beginning after December 15, 2005. The Company adopted SFAS 123(R) as of the beginning of its fiscal year 2006 using the “prospective transition” method allowed for private companies. As described above, the Company will measure compensation costs related to its share-based awards under APB 25, as allowed by SFAS 123, and provides pro forma disclosure in the notes to the financial statements of the effects of accounting for share-based payments under SFAS 123, as required by that standard. As the intrinsic value method of APB 25 has rarely resulted in the recognition of expense in the Company’s financial statements related to the options granted prior to January 28, 2006, the Company expects the adoption of SFAS 123(R) to have an impact on its results of operations for options granted after adoption. The impact of the adoption of SFAS 123(R) cannot be predicted at this time because it will depend on the level of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net (loss) earnings.

NOTE 2 – MERGER TRANSACTION

On March 17, 2005, we entered into an Agreement and Plan of Merger, dated as of March 17, 2005 (the “Merger Agreement”), with Global Toys Acquisition, LLC (“Parent”) and Global Toys Acquisition Merger Sub, Inc. (“Acquisition Sub”) to sell our entire company to Parent and Acquisition Sub, which were entities directly and indirectly owned by an investment group consisting of entities advised by or affiliated with Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co., L.P., and Vornado Realty Trust (collectively, the “Sponsors”).

On July 21, 2005, the transaction was consummated by the Sponsors, along with a fourth investor, GB Holdings I, LLC (the “Fourth Investor”), an affiliate of Gordon Brothers, a consulting firm that is independent from and unaffiliated with the Sponsors and management, through a $6.6 billion merger of Acquisition Sub with

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Notes to Consolidated Financial Statements—(Continued)

and into the Company, with the Company being the surviving corporation in the merger (the “Merger”). The Sponsors and the Fourth Investor are collectively referred to herein as the “Investors.” Under the Merger Agreement, the former holders of the Company’s common stock, par value $.10 per share, received $26.75 per share, or approximately $5.9 billion. In addition, approximately $766 million was used, among other things, to settle our equity security units, and our warrants and options to purchase common stock, restricted stock and restricted stock units, fees and expenses related to the merger, and severance, bonuses and related payroll taxes.

The Merger consideration was funded through the use of the Company’s available cash, cash equity contributions from the Investors and the debt financings as described more fully below. We refer to the July 21, 2005 Merger and recapitalization as the “Merger Transaction.”

The Merger Transaction has been accounted for as a recapitalization and accordingly, there was no change in the basis of the assets and liabilities of Toys “R” Us, Inc. Therefore, all operations of Toys “R” Us, Inc. prior to the Merger Transaction are reflected herein at their historical amounts.

The following principal equity capitalization and financing transactions occurred in connection with the Merger Transaction:

• Aggregate cash equity contributions of $1.3 billion were made by the Investors; and

• We, directly or through our subsidiaries, entered into: (1) a new $2.0 billion secured revolving credit facility, of which $700 million was drawn at closing, (2) a new $1.9 billion unsecured bridge loan agreement, all of which was drawn at closing, (3) a new secured $1.0 billion European bridge loan facility and multi-currency revolving credit facilities in an amount of up to £95 million and €145 million, of which $1.0 billion was drawn at closing, and (4) $800 million of new mortgage loan agreements, all of which was drawn at closing. Refer to Notes 11, 13, 14 and 18 for further details on seasonal financing and long-term debt, derivative instruments and hedging activities, equity security units, and stock purchase warrants.

The proceeds from the equity capitalization and financing transactions, together with $1.2 billion of our available cash, were used to fund the:

• Purchase of common stock outstanding of approximately $5.9 billion;

• Purchase of all stock options, restricted stock, and restricted stock units of the Company under the terms of the Merger Agreement of approximately $227 million;

• Settlement of our equity security units of approximately $114 million;

• Purchase of all stock warrants of approximately $17 million;

• Fees and expenses related to the Merger Transaction and the related financing transactions of approximately $368 million; and

• Severance, bonuses and related payroll taxes of approximately $40 million.

For fiscal 2005, the fees and expenses related to the Merger Transaction and the related financing transactions principally consisted of advisory fees and expenses of $78 million, financing fees of $135 million, sponsor fees of $81 million, and other fees and expenses of $74 million. Of the $368 million of costs, approximately $243 million were expensed, $148 million as transaction related costs and $95 million as amortization of debt issuance cost, interest expense, and real estate taxes. The remaining amount of $125 million is capitalized debt issuance costs.

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Notes to Consolidated Financial Statements—(Continued)

Transaction and related costs

We recorded expenses of $410 million for fiscal 2005. These costs reflect $148 million of expenses related to the Merger transaction, compensation expenses associated with the Merger Transaction related to stock options and restricted stock of $222 million, as well as severance, bonuses and related payroll taxes of $40 million.

For fiscal 2005, we capitalized $42 million in fees and expenses related to the Domestic New Holdco and European financing transactions. Refer to Notes 11 and 28 entitled, “SEASONAL FINANCING AND LONG TERM DEBT” and “SUBSEQUENT EVENTS,” respectively, for further details. As a result of the new financing transactions, we recognized approximately $59 million in accelerated amortization expense during fiscal 2005.

In connection with the closing of the Merger, the Company notified the New York Stock Exchange that all of the Company’s common stock, par value $0.10 (the “Company Common Stock”), was converted into the right to receive $26.75 per share, and requested that the New York Stock Exchange file with the Securities and Exchange Commission an application on Form 25 to strike the Company Common Stock from listing and registration thereon. On July 26, 2005, the New York Stock Exchange confirmed that such filing has been made.

Immediately following the consummation of the Merger Transaction, we implemented an inversion transaction (the “Inversion”) whereby one of our dormant subsidiaries became the new parent of Toys “R” Us, Inc. and is now known as Toys “R” Us Holdings, Inc. (“Holdings”), as follows:

• Holdings’ shares of common stock held by Toys “R” Us, Inc. were cancelled. The Certificate of Incorporation of Holdings was amended to authorize two classes of common stock, Class L Common and Class A Common (collectively, the “Common Stock”); and

• The Investors’ shares of Toys “R” Us, Inc. common stock (including the shares held by management) were automatically converted into shares of Holdings. All of the shares of Common Stock were issued in “strips” of stock, which consisted of one share of Class L common stock and nine shares of Class A common stock so that each Investor owns the same proportionate interest in Class L and Class A common stock. Subsequent to the conversion, the Investors and management have the same ownership interests in Holdings as they previously did in Toys “R” Us, Inc.

Immediately following the consummation of the Merger Transaction and the Inversion, the Company was indirectly owned 32.9% by each of the Sponsors, 1.1% by the Fourth Investor and 0.2% by management.

In connection with the Merger and the Inversion, effective as of July 21, 2005, the Company’s Certificate of Incorporation was amended to change the Company’s authorized common stock from 650,000,000 shares of common stock, par value $.10 per share, to 3,000 authorized shares of common stock, par value $.01 per share. As of January 28, 2006, there were 1,000 shares of common stock held by Holdings.

Executive Severance Obligations

In connection with the Merger Transaction, for fiscal 2005, we recorded $28.6 million of payments to senior executives whose employment with the Company ceased. Based upon current compensation levels at January 28, 2006, if all of the remaining senior executives who have retention agreements with the Company were separated and received the severance benefits specified under their respective agreements, our additional costs would be in the range of $28 million to $33 million.

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Notes to Consolidated Financial Statements—(Continued)

NOTE 3 – RESTATEMENT OF FINANCIAL STATEMENTS FOR ACCOUNTING FOR LEASES AND LEASEHOLD IMPROVEMENTS

During fiscal 2005, we re-evaluated our lease accounting practices and corrected our accounting for leases, specifically the accounting for operating leases with scheduled rent increases and leasehold improvements. Under the requirements of Financial Standards Accounting Board (FASB) Technical Bulletin 85-3, “Accounting for Leases with Scheduled Rent Increases,” rent expense should be amortized on a straight-line basis over the term of the lease.

We have restated our previously issued financial statements for the fiscal years ended January 31, 2004 and February 1, 2003, the respective quarterly financial information, as well as the first three quarters of the fiscal year ended January 29, 2005, to reflect the above corrections in our accounting practices for leases and leasehold improvements.

We adjusted the initial lease terms to include rent holiday periods and option renewals that are reasonably assured of being exercised and included the straight-line effect over the lengthened term to include option periods with escalating rents, which had the effect of increasing previously reported rent expense. We also reviewed our leasehold improvements to ensure amortization over the shorter of their economic lives or adjusted term and in certain instances shortened the depreciation or amortization periods for leasehold improvements, which had the effect of increasing previously reported annual depreciation and amortization expense.

Following is a summary of the cumulative effects of these changes on our consolidated statements of operations for fiscal year 2003. In addition, our consolidated statement of operations for the 2003 fiscal year also reflects the restatement adjustment for the implementation of EITF 03-10. Refer to Note 4 entitled “CHANGES IN ACCOUNTING” for further details.

	Consolidated Statement of Earnings
Year ended January 31, 2004 (In millions)	As restated			Lease adjustments			EITF 03-10 adjustments			As previously reported
Net sales	$	11,320		$	—		$	(246	)	$	11,566
Cost of sales		7,646			—			(203	)		7,849
Gross margin		3,674			—			(43	)		3,717
Selling, general and administrative expenses		3,026			4			—			3,022
Depreciation and amortization		368			20			—			348
Restructuring and other charges		63			(22	)		—			85
Total operating expenses		3,457			2			—			3,455
Operating earnings (loss)		217			(2	)		(43	)		262
Other (expense) income:
Interest expense		(142	)		—			—			(142	)
Interest and other income		18			—			—			18
Earnings (loss) before income taxes		93			(2	)		(43	)		138
Income tax (benefit) expense		30			(4	)(a)		(16	)		50
Net earnings (loss)	$	63		$	2		$	(27	)	$	88

^(a) Includes the benefit associated with the cumulative impact of the lease accounting restatement on the effective tax rate.

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NOTE 4 – CHANGES IN ACCOUNTING

In the first quarter of 2004, we applied the provisions of Emerging Issues Task Force (EITF) Issue No. 03-10, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, by Resellers to Sales 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 and allowances from vendors for coupons related to events that meet the direct offset requirements of EITF 03-10, we will recognize as a reduction of cost of sales the related reimbursement during the period of redemption. Credits and allowances received 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 Received from a Vendor”, which we applied at the beginning of 2003. Our 2003 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 before income taxes:

	EITF						Source of change
(In millions)	02-16 Adoption		03-10 Restatement		Total		Implementation		Current Period		Total
Year ended January 31, 2004	$	50	$	43	$	93	$	74	$	19	$	93

The provisions of EITF 02-16 and EITF 03-10 did not permit adoption through a cumulative effect adjustment at the beginning of 2003. As noted above, if we had been permitted to record a cumulative effect adjustment at the beginning of 2003, the unfavorable impact on 2003 earnings before income taxes would have been reduced by $74 million for the year ended January 31, 2004. The recognition of credits 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 and inventory levels. The adoption of EITF 02-16 and EITF 03-10 had no net impact on our consolidated statements of cash flows.

NOTE 5 – RESTRUCTURING AND OTHER CHARGES

Our consolidated financial statements for fiscal 2005 included the following pre-tax charges related to restructuring initiatives from current and prior years, and are as follows:

(In millions)	Restructuring and other charges			Depreciation and amortization		Cost of Sales		SG&A		Total
2005 Initiatives	$	31		$	22	$	41	$	—	$	94
2004 Initiatives		0			—		—		5		5
2003 Initiatives		3			—		—		—		3
2001 Initiatives		1			—		—		—		1
1995 and 1998 Initiatives		(1	)		—		—		—		(1	)
Total	$	34		$	22	$	41	$	5	$	102

At January 28, 2006, we had total remaining reserves of $125 million to complete all of these restructuring initiatives. We believe that remaining reserves at January 28, 2006 are adequate to complete these initiatives and commitments. See below for a further discussion of individual restructuring initiatives and related charges and reserves.

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Notes to Consolidated Financial Statements—(Continued)

2005 Initiatives

On January 5, 2006, our Board of Directors approved the closing of 87 Toys “R” Us stores in the United States. As of January 28, 2006, we closed three of these stores. All of the remaining 84 stores were closed by April 2, 2006. Twelve of these stores will be converted into Babies “R” Us stores, resulting in the permanent closure of 75 stores. The decision to take this action resulted from a comprehensive review and evaluation of our U.S. stores during the second half of 2005. We retained Gordon Brothers Retail Partners, LLC to assist us in connection with the orderly sale of the inventory in these stores.

In connection with the closing and conversion of these stores, we recorded $94 million of costs and charges during 2005. We estimate an additional $55 million of charges will be recorded in the first quarter of 2006. The $94 million of costs and charges include $41 million of inventory markdowns and liquidator fees that were recorded in cost of sales and $22 million of depreciation that was accelerated through the closing periods of the stores. The remaining $31 million of costs and charges are included in restructuring and other charges in the Consolidated Statement of Operations, and consisted of $22 million relating to asset impairments, $1 million relating to lease commitments and $8 million relating to severance costs. As a result of the store closings, approximately 3,000 employee positions have been eliminated.

Details on the activity of charges and reserves for the fiscal year ended January 28, 2006 are as follows:

(In millions)	Initial Charge		Utilized			Balance at January 28, 2006
Lease commitments	$	1	$	—		$	1
Asset impairment		22		(22	)		—
Accelerated depreciation		22		(22	)		—
Inventory markdowns and liquidator fees		41		(7	)		34
Severance		8		—			8
Total remaining restructuring reserves	$	94	$	(51	)	$	43

2004 Initiatives

On August 11, 2004, we announced our intention to restructure our Global Store Support Center operations in Wayne, New Jersey. As a result, we recorded termination costs of $21 million associated with this action during 2004. Of these total charges, $13 million were recorded in restructuring and other charges related to severance and lease commitments, and charges of $8 million were recorded in selling, general and administrative expenses, comprised of $2 million for payroll-related costs and $6 million for stock option compensation charges resulting from modifications to stock option agreements for severed executives.

For fiscal 2005, we recorded $5 million of net charges related to our 2004 initiatives for stock option compensation charges, recorded in selling, general and administrative expenses. While the stock option compensation charges are part of the 2004 restructuring initiative, they are not part of the restructuring reserve account but rather included as a component of stockholders’ (deficit) equity. As of January 28, 2006, $1 million of reserves for termination costs remained to complete this initiative.

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Notes to Consolidated Financial Statements—(Continued)

Details on the activity of charges and reserves for the fiscal year ended January 28, 2006 are as follows:

(In millions)	Balance at January 29, 2005		Adjustments		Utilized			Balance at January 28, 2006
Severance	$	8	$	—	$	(8	)	$	—
Other compensation		2		—		(1	)		1
Total remaining restructuring reserves	$	10	$	—	$	(9	)	$	1

2003 Initiatives

On November 17, 2003, we announced our decision to close all 146 of the remaining freestanding Kids “R” Us stores and all 36 of the freestanding Imaginarium stores, as well as three distribution centers that support these stores due to deterioration in their financial performance. As of January 28, 2006, all of the freestanding Kids “R” Us and Imaginarium stores were closed.

On March 2, 2004, we entered into an agreement under which Office Depot, Inc. agreed to acquire 124 of the former Kids “R” Us stores for $197 million in cash, before commissions and fees, plus the assumption of lease payments and other obligations. Twenty-four properties were excluded from the agreement with Office Depot, Inc., and are being separately marketed for disposition or have been disposed of to date. All closings were completed by January 29, 2005 and net cash proceeds of approximately $150 million were received. A $53 million gain associated with this transaction was recorded during fiscal 2004. An additional $2 million gain for the disposition of other Kids “R” Us properties was also recorded during fiscal 2004.

As outlined in the summary table below, we recorded charges of $3 million during fiscal 2005, for the disposition of the other Kids “R” Us stores. Charges for fiscal 2005 included a loss of $1 million on the sale of property and $2 million of vacancy-related costs. We expect to record additional charges for the accretion of interest related to vacancy costs for closed facilities until their disposition. Charges in connection with these initiatives may be subject to revision for changes in estimates. At January 28, 2006, we had $8 million of reserves remaining for these initiatives.

Details on the activity of charges and reserves for the fiscal year ended January 28, 2006 are as follows:

(In millions)	Balance at January 29, 2005		Adjustments		Utilized			Balance at January 28, 2006
Lease commitments	$	13	$	—	$	(5	)	$	8
Sale of Kids “R” Us real estate		—		1		(1	)		—
Vacancy costs and other		—		2		(2	)		—
Total remaining restructuring reserves	$	13	$	3	$	(8	)	$	8

2001 Initiatives

In 2001, we recorded net charges of $184 million 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. During fiscal 2005, we incurred additional charges of $1 million related to store closings and utilized $13 million of reserves. This reduced our remaining reserves from $63 million at January 29, 2005 to $51 million at January 28, 2006.

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Notes to Consolidated Financial Statements—(Continued)

Other Prior Year Initiatives

We had $22 million of reserves remaining at January 28, 2006 from restructuring charges previously recorded in 1998 and 1995, primarily for long-term lease commitments, that will be utilized in 2006 and through 2016. During fiscal 2005, we recorded a net reversal of $1 million resulting from adjustments to lease shortfall reserves.

NOTE 6 – MERCHANDISE INVENTORIES

Merchandise inventories for the Toys “R” Us – U.S. division, other than apparel, are stated at the lower of LIFO (last-in, first-out) cost or market value, as determined by the retail inventory method and represent approximately 52% of total merchandise inventories as of January 28, 2006. All other merchandise inventories are stated at the lower of FIFO (first-in, first-out) cost or market value as determined by the retail inventory method. If all inventories had been valued at the lower of FIFO, cost or market, inventories would be unchanged at January 28, 2006, and January 29, 2005. Details on the components of our consolidated merchandise inventories are as follows:

Details on the components of our consolidated merchandise inventories are as follows:

(In millions)	2005		2004
Toys “R” Us – U.S.	$	721	$	1,085
Toys “R” Us – International		402		402
Babies “R” Us		323		349
Toysrus.com		42		48
Total	$	1,488	$	1,884

NOTE 7 – GOODWILL

Details on goodwill by division are as follows:

(In millions)	2005		2004
Toys “R” Us – U.S.	$	29	$	29
Babies “R” Us		319		319
Toysrus.com		11		5
Total	$	359	$	353

On January 17, 2006, Toys “R” Us – Delaware, Inc. (“Toys-Delaware”), a subsidiary of the Company, acquired all of the outstanding stock options and shares of Toysrus.com, Inc., including the minority interest not owned by the Company. Each holder of shares in Toysrus.com received $1.13 per share less applicable withholding taxes. Each option holder received an amount in cash, less applicable withholding taxes, equal to the value of the option calculated using an option-pricing model based on the $1.13 per share. As a result of this transaction, the company recognized a total of $6 million of additional goodwill.

The $319 million of Babies “R” Us goodwill relates to the 1997 acquisition of Baby Super Stores, Inc., which is now part of the Babies “R” Us reporting unit. The $29 million of goodwill relates to the 1999 acquisition of Imaginarium Toy Centers, which is now part of the Toys “R” Us – U.S. reporting unit. The $5 million of Toysrus.com goodwill relates to the 2004 acquisition of SB Toys, Inc., which is now part of Toysrus.com.

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Notes to Consolidated Financial Statements—(Continued)

We estimated fair value of these reporting units on the first day of the fourth quarter of each year which for fiscal 2005 was October 30, 2005, using a discounted cash flow analysis approach and/or a market multiples approach. These approaches require us to make certain assumptions and estimates regarding industry economic factors and future profitability of acquired businesses. It is our policy to conduct impairment testing based on our most current business plans, which reflect changes we anticipate in the economy and the industry. Based on our estimates of our reporting unit fair values compared to their carrying values, we determined that none of the goodwill associated with these reporting units was impaired.

NOTE 8 – PROPERTY AND EQUIPMENT

(In millions)	Useful life	2005		2004
	(in years)
Land		$	838	$	829
Buildings	45-50		2,117		2,055
Furniture and equipment	5-20		1,637		1,664
Leasehold improvements	12 1/2-35		1,708		1,702
Costs of computer software	5		300		284
Construction in progress			12		14
Leased property and equipment under capital lease	3-8		34		43
			6,646		6,591
Less accumulated depreciation and amortization			2,471		2,245
			4,175		4,346
Less net property assets held for sale			—		7
Total		$	4,175	$	4,339

NOTE 9 – INVESTMENT IN TOYS “R” US – JAPAN

We have accounted for our 47.9% 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 equity in the (loss) earnings of Toys “R” Us – Japan is included in consolidated SG&A on our Consolidated Statements of Operations. The loss for fiscal 2005 was $3 million and the earnings were $23 million and $32 million for fiscal 2004 and fiscal 2003, respectively. The carrying value of the investment is reflected on our consolidated balance sheets as part of the line item other assets and was $147 million in 2005 and $157 million in 2004. At January 28, 2006, the quoted market value of our investment was $227 million, which exceeds our carrying value. The valuation is derived from a mathematical calculation based on the closing quotation on January 28, 2006 published by the Tokyo over-the-counter market and is not necessarily indicative of the amount that could be realized upon sale. We had been the guarantor of 80% of a 10 billion yen loan to Toys “R” Us – Japan from a third party in Japan. On January 16, 2006, Toys “R” Us – Japan repaid and refinanced this loan. We did not provide guarantees under the new loan. We currently guarantee 80% of Toys “R” Us – Japan’s three installment loans from a third party in Japan, totaling 6.5 billion yen ($56 million). These loans have annual interest rates of 2.6% – 2.8%. Refer to Note 28 entitled “SUBSEQUENT EVENTS” for details of our and/or the Sponsor’s proposed increase in the number of directors on the Board of Directors of Toys “R” Us – Japan in April 2006.

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Notes to Consolidated Financial Statements—(Continued)

NOTE 10 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

A summary of the Company’s accrued expenses and other current liabilities as of January 28, 2006 and January 29, 2005, is outlined in the table below:

(In millions)	2005		2004
Gift card / gift certificate liability	$	195	$	172
Accrued bonus		49		74
Accrued interest		80		59
Sales and use tax / VAT payable		92		84
Current deferred tax liabilities		66		76
Other (1)		418		416
Total	$	900	$	881

⁽¹⁾ Other includes, among other items, accrued payroll and other benefits, profit sharing and other operating accruals.

NOTE 11 – SEASONAL FINANCING AND LONG-TERM DEBT

A summary of the Company’s long-term debt and seasonal financing as of January 28, 2006 and January 29, 2005, is outlined in the table below:

(In millions)	2005		2004
6.875% notes, due fiscal 2006	$	250	$	253
LIBOR plus 1.50% senior facility, due fiscal 2006-2011		1,008		—
LIBOR plus 1.30% mortgage loan, due fiscal 2007		800		—
Equity security units (including, as a part thereof, 6.25% notes due fiscal 2007) (a)		—		403
Note at an effective cost of 2.23% due in semi-annual installments through fiscal 2008 (b)		81		109
LIBOR plus 3.0% credit facility, due fiscal 2008		1,300		—
7.625% notes, due fiscal 2011		527		531
LIBOR plus 5.25% bridge loan, due fiscal 2012		973		—
7.875% notes, due fiscal 2013		389		389
7.375% notes, due fiscal 2018		408		403
8.750% debentures, due fiscal 2021		199		199
Other		12		25
		5,947		2,312
Less current portion		407		452
Total	$	5,540	$	1,860

^(a) Refer to Note 14 entitled “ISSUANCE OF COMMON STOCK AND EQUITY SECURITY UNITS” for details on the settlement of the debt component of our Equity security units.

^(b) Amortizing note secured by the expected future yen cash flows from license fees due from Toys “R” Us – Japan.

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Notes to Consolidated Financial Statements—(Continued)

All of the borrowings under our $1.0 billion bridge facility as well as our £95 million and €145 million multi-currency revolving credit facilities, our $800 million mortgage loans, our new $1.3 billion credit facility, our $2 billion credit facility, our $1.9 billion bridge loan, as well as $2 million of the debt included in “Other” were incurred by our subsidiaries. In addition, our 8.75% debentures due fiscal 2021 are obligations of Toys “R” Us, Inc. and our subsidiary Toys-Delaware. All of the other obligations described in the table above are obligations of Toys “R” Us, Inc.

As of January 28, 2006, we were in compliance with our financial covenants related to our outstanding debt.

$1.0 Billion European Facilities Agreement and £95 Million and €145 Million Multi-Currency Revolving Credit Facilities

On July 21, 2005, Toys “R” Us (UK) Limited, our indirect wholly-owned subsidiary, entered into a senior facilities agreement with a syndicate of financial institutions. Under the agreement, a $1.0 billion bridge facility and multi-currency revolving credit facilities in an amount of up to £95 million and €145 million, respectively, were made available to Toys “R” Us (UK) Limited and other European affiliates of Toys “R” Us (UK) Limited. The facilities are, to the extent legally possible, guaranteed by Toys “R” Us (UK) Limited’s immediate holding company, Toys “R” Us Europe, LLC, and their respective material subsidiaries, and secured by a lien over assets of the borrowers and guarantors under the facilities. The $1.0 billion bridge facility had a scheduled maturity of July 21, 2006. The revolving credit facilities have a scheduled maturity of July 21, 2010. If the borrowings outstanding under the bridge facility were to exceed $857 million at the maturity date, $282 million could have been converted into a 5 ¹/2 year senior facility, and $575 million could have been converted into a six-year senior facility. Any remaining borrowings in excess of $857 million would have been due upon maturity. The bridge facility has an annual interest rate of LIBOR plus 1.50% and/or EURIBOR plus 1.50%. As of January 28, 2006, we had borrowed the full amount of $1.0 billion on the bridge facility. Following the end of fiscal 2005, on February 9, 2006, we repaid all of the outstanding borrowings under the bridge facility using property financing as well as available funds. We classified $122 million of the bridge facility as current portion of long-term debt, as this amount was paid by using the available funds, and classified $886 million as long-term debt, as this amount was paid from the funds received from our property financing. Refer to Note 28 to the Consolidated Financial Statements, entitled “SUBSEQUENT EVENTS” for details on our new long-term financing arrangements. During 2005, we entered into various swap agreements to hedge our exposure related to these facilities. Refer to Note 13 to the Consolidated Financial Statements, entitled “DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.” The multi-currency revolving credit facilities carry an annual interest rate of LIBOR plus 1.50% and/or EURIBOR plus 1.50%. We had no borrowings under the revolving credit facilities as of January 28, 2006.

The bridge facility and multi-currency revolving credit facilities agreement contains covenants, including, among other things, covenants that restrict the ability of Toys “R” Us (UK) Limited, Toys “R” Us Europe, LLC, and their respective subsidiaries to incur certain additional indebtedness, create or permit liens on assets, or engage in mergers or consolidations. In addition, for so long as the $1.0 billion bridge facility remained outstanding, Toys “R” Us Europe, LLC was required to comply with certain financial covenants, including requirements to maintain a ratio of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to net interest payable of not less than 2.0:1.0 and a ratio of consolidated total net debt to consolidated EBITDA of no greater than 6.5:1.0. Following repayment of the bridge facility, the minimum ratio of consolidated EBITDA to net interest payable required under the facility will increase to 4.0:1.0 and the maximum ratio of consolidated total net debt to consolidated EBITDA required under the facility will decrease to 4.0:1.0 for the third accounting quarter in each fiscal year and 2.75:1.0 for the first, second and fourth accounting quarters. At January 28, 2006, prior to the repayment of the bridge facility, Toys “R” Us Europe, LLC’s ratio of consolidated EBITDA to net interest payable was 6.4:1.0 and Toys “R” Us Europe, LLC’s ratio of consolidated total net debt to consolidated EBITDA was 4.6:1.0.

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Notes to Consolidated Financial Statements—(Continued)

$800 Million Secured Real Estate Loans

On July 21, 2005, certain indirect wholly owned subsidiaries entered into mortgage loan agreements totaling $800 million, carrying annual weighted average interest rates of LIBOR plus 1.30%. Each of these loan agreements has a two-year term and provides for three one-year extensions at the election of the borrower. Direct and indirect interests in certain real property located in the United States secured the loans. As of January 28, 2006, we had $800 million outstanding under these loan agreements.

The loan agreements contain covenants, including, among other things, covenants that restrict the ability of the borrowers to incur additional indebtedness, create or permit liens on assets or engage in mergers or consolidations, commingle assets with affiliates, amend organizational documents, and initiate zoning reclassification of any portion of the secured property. In addition, these covenants restrict certain transfers of, and the creation of liens on, direct or indirect interests in the borrowers except in specified circumstances. The debt is subject to mandatory prepayment as specified in the agreement.

$1.3 Billion New Holdco Credit Agreement

On December 9, 2005, TRU 2005 RE Holding Co. I, LLC, our indirect wholly-owned subsidiary, entered into a credit agreement with a syndicate of financial institutions, pursuant to which we borrowed $1.3 billion. We used a portion of the proceeds to repay approximately $927 million of existing indebtedness under the bridge loan agreement, dated as of July 21, 2005, described above. The remainder of the proceeds from the transaction, after establishing a restricted cash account of $107 million as collateral, was used to pay expenses in connection with the transaction and to reduce existing indebtedness under a revolving credit facility. The loan has an interest rate of either 3.00% plus LIBOR or 2.00% plus the higher of (i) 0.50% in excess of the overnight Federal funds rate and (ii) the prime lending rate. Concurrently with the making of the loan, we entered into an interest rate cap agreement to effectively cap the interest rate on LIBOR at 7.50% for the initial term of the loan. The loan is secured in part by certain cash accounts and contract rights. The initial maturity date is December 9, 2008. The credit agreement provides for two maturity date extension options to December 8, 2009 and December 7, 2010, respectively. The credit agreement contains covenants, including, among other things, covenants that restrict the ability of the borrower or the guarantors, which are our indirect wholly-owned subsidiaries Wayne Real Estate Company, LLC, MAP Real Estate, LLC, TRU 2005 RE I, LLC, and TRU 2005 RE II Trust, to create or permit liens on assets, incur additional indebtedness, modify or terminate the master lease that these companies have with Toys-Delaware or engage in mergers or consolidations. In addition, these covenants restrict certain transfers of, and the creation of liens on, direct or indirect interests in the borrower and the guarantors. The credit agreement has a three-year term and provides for two one-year extensions at the election of the borrower. This credit agreement contains certain borrowing base conditions related to the real property assets owned by the guarantors, which, if the assets cease to comply with such conditions, could result in a required repayment of all or a portion of the loan.

$2 Billion Secured Revolving Credit Facility

On July 21, 2005, we, including Toys-Delaware, our direct wholly-owned subsidiary, Toys “R” Us (Canada) Ltd / Toys “R” Us (Canada) Ltee, our indirect wholly-owned subsidiary, and certain other domestic subsidiaries entered into a $2.0 billion five-year secured revolving credit facility, carrying an annual interest rate of LIBOR plus 1.75%-3.75%, with a syndicate of financial institutions. The credit facility is available for general corporate purposes and the issuance of letters of credit. Borrowings under this credit facility are secured by tangible and intangible assets, subject to specific exclusions stated in the credit agreement. The credit agreement contains covenants, including, among other things, covenants that restrict the ability of Toys-Delaware and certain of its subsidiaries to incur certain additional indebtedness, create or permit liens on assets, engage in

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Notes to Consolidated Financial Statements—(Continued)

mergers or consolidations, pay dividends or repurchase capital stock or make other restricted payments, make loans or advances, engage in transactions with affiliates, or amend material documents. The revolving credit facility also requires that Toys-Delaware maintain a minimum excess availability of $125 million, meaning that the borrowing base (generally consisting of specified percentages of eligible inventory, credit card receivables and certain real estate less any applicable availability reserves) must exceed the amount of borrowings under the credit facility by a minimum of $125 million. Pricing for the facility is tiered based on levels of excess availability.

As of January 28, 2006, we had no borrowings under this facility and had $165 million of letters of credit outstanding. On July 21, 2005, we cancelled our previous unsecured credit facility of $685 million, which had no outstanding balances.

Borrowings under this secured revolving credit facility are made and/or guaranteed by Toys-Delaware and certain of its subsidiaries and are secured by the tangible and intangible assets (with specified exceptions) of the borrowers, Babiesrus.com, LLC, Toysrus.com, Inc. and certain subsidiaries of Toys-Delaware. The debt is subject to mandatory prepayment provisions as specified in the credit agreement.

$1.9 Billion Unsecured Bridge Facility

On July 21, 2005, we entered into a bridge loan agreement with a syndicate of financial institutions. Upon consummation of the Merger Transaction, Toys-Delaware became the borrower under this agreement. The bridge loan agreement originally provided for a one-year term unsecured credit facility of $1.9 billion, carrying an annual interest rate of LIBOR plus 5.25%. Any outstanding bridge loans on July 21, 2006 (the “Conversion Date”) will be automatically converted into term loans with a six-year term (“Term Loans”). On and after the first anniversary of the Conversion Date, lenders collectively holding at least 51% of the Term Loans may elect to exchange their Term Loans for exchange notes, which will mature on July 21, 2012. On December 9, 2005, we repaid $927 million of the outstanding bridge loan balance in conjunction with the execution of the $1.3 Billion New Holdco Credit Agreement, details of which appear above. As of January 28, 2006, we had $973 million outstanding under our bridge loan agreement. The borrowings under the bridge loan agreement are guaranteed by Toys “R” Us, Inc. (until the bridge loans are converted to term loans on July 21, 2006), certain subsidiaries of Toys-Delaware, and certain other entities. In connection with the principal repayment, a pro-rata portion of previously capitalized transaction costs in the amount of approximately $32 million was expensed in 2005.

The bridge loan agreement contains covenants, including, among other things, covenants that restrict the ability of Toys-Delaware and certain of its subsidiaries to incur certain additional indebtedness, create or permit liens on assets, or engage in mergers or consolidations.

Other Debt

In March 2003, we filed a “shelf” registration statement with the Securities and Exchange Commission. This registration statement gave us the capability to sell up to $800 million of debt securities that would be used to repay outstanding debt and for general corporate purposes. In April 2003, we sold and issued $400 million in notes bearing interest at a coupon rate of 7.875% 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. We received net proceeds of $390 million. In September 2003, we sold an additional $400 million in notes bearing interest at a coupon rate of 7.375% per annum, maturing on October 15, 2018, which fully utilized our capacity to issue debt under the “shelf” registration statement filed in March 2003. The notes were sold at a price of 99.6% of the principal amount, resulting in an effective yield of 7.424% per annum. We received net proceeds of $395 million.

In 2001, we issued and sold $750 million of notes comprised of $500 million of notes bearing interest at 7.625% per annum, maturing in August 2011, and $250 million of notes bearing interest at 6.875% per annum, maturing in August 2006.

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Notes to Consolidated Financial Statements—(Continued)

The annual maturities of long-term debt at January 28, 2006 are as follows:

(In millions)	Annual maturities (a)
2006	$	407
2007		835
2008		1,321
2009		1
2010		—
2011 and subsequent		3,383
Total	$	5,947

^(a) We had no interest rate and currency swaps that have been designated as fair value hedges as of January 28, 2006.

NOTE 12 – STOCK BASED COMPENSATION

Pre-merger Equity Plans

Prior to the Merger, our stock-based compensation plans (the “Plans”) covered our employees, consultants and directors and provided for the issuance of non-qualified options, incentive stock options, performance share options, performance units, stock appreciation rights, restricted shares, restricted units and unrestricted shares. Approximately, 44.0 million shares of authorized common stock were reserved for the Plans as of January 29, 2005.

The Plans’ stock options had a variety of vesting dates with the majority of the options vesting approximately three years from the date of grant; 50% over the first two years, and the remaining 50% over three years. Options granted to directors were exercisable by one-third, commencing on the third, fourth, and fifth anniversaries from the date of the grant. The exercise price per share of all options granted under the Plans was based on the average of the high and low market price of our common stock on the date of grant. Generally, these options expired ten years from the date of grant.

In connection with the Merger, the Company’s outstanding stock options as well as restricted stock and stock units were settled, cancelled, or, in limited circumstances, exchanged for new interest in Holdings. Each option holder received an amount in cash, less applicable withholding taxes, equal to $26.75 less the exercise price of each option. Each restricted stock unit holder received $26.75 less applicable withholding taxes. Certain stock options held by management of the Company were exchanged for options to purchase common strips, consisting of nine shares of Class A common stock and one share of Class L common stock of Holdings (the “Rollover Options”). Each rollover option retained its original exercise price and expiration date and was fully vested as of July 21, 2005. As the result of the above stock plan activities, $222 million of compensation expense, including $12 million related to Rollover Options, relating to the Merger, was recognized by the Company in fiscal 2005. This cost is reflected in “Transaction and related costs” expense for the fiscal year ended January 28, 2006.

2005 Management Equity Plan

On July 21, 2005, Holdings’ Board of Directors adopted the 2005 Management Equity Plan (“2005 Plan”). The 2005 Plan provides for the granting of service-based and performance-based stock options, Rollover Options, as discussed above, and restricted stocks to executive officers and other key employees of Holdings and

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Notes to Consolidated Financial Statements—(Continued)

its subsidiaries. All awards are in the form of one or more common strips. Each common strip consists of nine shares of Class A common stock and one share of Class L common stock of Holdings.

The service-based awards generally cliff vest 40% on the second anniversary of the award with the remaining ratably over the subsequent three years. The performance-based awards vest over a service period, the same period as service-based awards and the achievement of certain performance conditions by the Company. In addition, to the extent that the performance condition of an award is not satisfied prior thereto, the performance-based awards vest on the eighth anniversary of the date of the grant as long as the executive is still employed by the Company. All options expire ten years from the date of the grant. As of January 28, 2006, Holdings granted 813,864 service-based and 1,545,822 performance-based options to purchase common strips.

The 2005 Plan also permits the sale of non-transferable, restricted stock to certain employees at a purchase price equal to fair market value of the common strips. As of January 28, 2006, 62,805 common strips of restricted stock were purchased by executives of the Company at $26.75 per common strip, the fair value as of that date.

Put Obligations

Concurrent with the Merger, certain officers of the Company were given options to sell their shares of stock in the Company acquired on the exercise of Rollover Options back to the Company upon their resignation. In addition, certain other executives of the Company whose Rollover Options provide put rights upon retirement are eligible to retire during the term of the options. As the put rights are within the control of the employee, APB 25 requires the related options to be accounted for as variable in nature. The $2 million intrinsic value related to these Rollover Options has been classified as other non-current liabilities in the financial statements.

At January 28, 2006, an aggregate of 1.5 million strips were reserved for future option grants under the 2005 plan. All outstanding options expire at dates ranging from September 8, 2008 to October 25, 2015. Per the 2005 Plan, the Board of Directors has discretion over the amount of shares available for future issuances of restricted stock and Rollover Options.

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Notes to Consolidated Financial Statements—(Continued)

Stock option transactions are summarized as follows:

	Shares(1) (in millions)		Exercise price per share	Weighted average exercise price
Outstanding at February 1, 2003	32.6		$  9.83 - $40.94	$	20.43
Granted	5.7		8.25 -   14.54		8.35
Exercised	(0.5	)	8.25 -   11.97		8.35
Canceled	(4.2	)	8.25 -   40.94		19.86
Outstanding at January 31, 2004	33.6		$  8.25 - $38.56	$	18.61
Granted	1.6		14.37 -   19.69		16.79
Exercised	(2.0	)	8.25 -   20.41		15.13
Canceled	(4.2	)	8.25 -   38.56		18.73
Outstanding at January 29, 2005	29.0		$8.25 - $38.36	$	18.74
Granted prior to recapitalization	0.0		—		—
Exercised prior to recapitalization	(4.8	)	8.25 -   26.02		18.24
Cancelled prior to recapitalization	(0.7	)	8.25 -   34.72		20.62
Exercised and settled in connection with recapitalization	(21.5	)	8.25 -   26.25		18.30
Cancelled in connection with recapitalization	(1.3	)	26.99 -   51.39		31.19
Granted subsequent to recapitalization	2.4		26.75		26.75
Outstanding at January 28, 2006	3.1		$  8.25 - $26.75	$	22.92

⁽¹⁾ Post merger options are for common strips of Holdings. Pre-Merger options are for shares of common stock of the Company.

The following table summarizes information about stock options for common strips of Holdings outstanding at January 28, 2006:

	Outstanding				Exercisable (Vested)
Range of exercise prices	Number of options (in millions)	Weighted average remaining years of contractual life	Weighted average exercise price		Number of options (in millions)	Weighted average exercise price
$  8.25 – $10.25	0.5	7.2	$	8.25	0.5	$	8.25
$12.00 – $19.72	0.2	6.1		15.68	0.2		15.68
$26.75	2.4	9.5		26.75	—		—
Outstanding at January 28, 2006	3.1	8.9	$	22.92	0.7	$	10.15

In addition, options exercisable and the weighted-average exercise prices were 21.2 million and $20.35 at January 29, 2005, and 28.3 million and $19.37 at January 31, 2004.

Acquisition of Minority Interest in Toysrus.com

Toysrus.com, Inc. had approximately 4.9 million stock options outstanding to both employees and non-employees of the Company at January 29, 2005 representing approximately 2.4% of the authorized common stock of Toysrus.com. In addition, as a result of option holders having exercised their options, Toysrus.com had approximately 5.0 million shares of common stock outstanding to both officers and non-employees of the Company at January 29, 2005.

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Notes to Consolidated Financial Statements—(Continued)

On January 17, 2006, Toys-Delaware a subsidiary of the Company, acquired all of the outstanding stock options and shares of Toysrus.com. Each holder of shares in Toysrus.com received $1.13 per share less applicable withholding taxes. Each option holder received an amount in cash, less applicable withholding taxes, equal to the fair value of the option calculated using an option-pricing model based on the $1.13 per share. As a result of the above, the Company recognized $3 million of compensation expense and $6 million of additional goodwill.

NOTE 13 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recording of all derivatives as either assets or liabilities on the balance sheet measured at estimated fair value and the recognition of the unrealized gains and losses. We record the fair market value of our derivatives based on information provided by reliable third parties to other assets and other liabilities within our consolidated balance sheets. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The accounting for derivatives depends on the intended use of the derivatives and the resulting designation.

We designate certain derivative instruments as cash flow hedges and formally document the hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction, at the time the derivative contract is executed. We assess the effectiveness of the hedge both at inception and on an on-going basis and determine whether the hedge is highly effective in offsetting changes in cash flows of the linked hedge item. We record the effective portion of changes in the estimated fair value in accumulated other comprehensive earnings (loss) and subsequently reclassify the related amount of accumulated other comprehensive earnings (loss) to earnings when the hedged items enter into the determination of earnings. We record any ineffectiveness related to these derivatives to earnings within our consolidated statement of operations. If it is determined that a derivative has ceased to be a highly effective hedge, we will discontinue hedge accounting for such transaction.

We enter into derivative financial arrangements to hedge a variety of risk exposures, including interest rate risk associated with our long-term debt and foreign currency risk relating to import merchandise purchases. We enter into interest rate swaps and/or caps to manage interest rate risk. We enter into foreign exchange forward contracts to minimize and manage the currency risks associated with the settlement of payables related to our merchandise import program.

Hedges related to the import program are designated as cash flow hedges at inception. Effectiveness is measured on a quarterly basis; any ineffectiveness is immediately recorded to earnings in the consolidated income statement. In cases where no ineffectiveness exists, the changes in fair value of the derivatives are recorded to other comprehensive income. As inventory is sold, amounts in other comprehensive income are reclassified to cost of sales. It is expected that $2 million of losses that are currently in other comprehensive income will be reclassified to the statement of operations within the next twelve months.

In December 2005, we entered into interest rate caps on our $1.3 billion unsecured real estate loan, which carries a rate of LIBOR plus 3.00%. We purchased these interest rate caps to hedge the adverse impact on future interest payments that would arise if short-term interest rates were to increase significantly. The interest rate caps are considered hedges of the variable cash flows associated with changes in one month LIBOR above 7.50%. The instruments are designated as cash flow hedges under the long-haul method, whereby the company evaluates the effectiveness of the hedging relationships on an ongoing basis and recalculates changes in fair value of the derivatives and related hedged items independently. At January 28, 2006, the change in fair value of the caps was immaterial and there was no material ineffectiveness.

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Notes to Consolidated Financial Statements—(Continued)

In October 2005, we entered into three forward-starting interest rate swaps to hedge an anticipated exposure related to the refinancing of the European Bridge Facility with European Property Financing. These swaps hedge the variable LIBOR and EURIBOR rates for notional amounts that include £402 million and €230 million for fixed rates of interest at 4.56% for the British pound denominated swaps and 3.01% for the euro denominated swaps. These interest rate swaps are designated as cash flow hedges of the variable cash flows associated with changes in three-month LIBOR and EURIBOR. In these hedging relationships, we are hedging the LIBOR/EURIBOR component, which is generally 3-month LIBOR/EURIBOR. Payments to be received (or paid) under the swap contract will offset the fluctuations in debt interest expense caused by changes in the relevant LIBOR/ EURIBOR index. As such, these instruments hedge fluctuations in the debt’s interest expense caused by changes in the relevant LIBOR/EURIBOR index. The instruments are designated as cash flow hedges under the long-haul method, whereby the company evaluates the effectiveness of the hedging relationships on an ongoing basis and recalculates changes in fair value of the derivatives and related hedged items independently. The interest rate swaps were highly effective in offsetting the changes in cash flows attributable to the risk being hedged. Ineffectiveness in the hedging relationship was primarily caused by differences in reset rates and timing of payments when compared to the forecasted debt issuance. At January 28, 2006, the fair value of the swaps was $8 million recorded as a long-term derivative asset. We also recognized an unrealized gain of $4 million (net of tax of $1 million) recorded as accumulated other comprehensive income on the Consolidated Balance Sheets, and less than $1 million of ineffectiveness recorded to interest expense. In relation to these hedging relationships, we also determined that certain cash flows were probable of not occurring. We recorded $2 million of the changes in fair values of the interest rate swaps to interest expense in the current quarter because it was probable that those forecasted transactions would not occur.

In July 2005, we entered into interest rate caps on our $800 million secured real estate loans, which carry annual weighted average interest rates of LIBOR plus 1.30%. We purchased these interest rate caps to hedge the adverse impact on future interest payments that would arise if short-term interest rates were to increase significantly. The interest rate caps are considered hedges of the variable cash flows associated with changes in one month LIBOR above 7.00%. The instruments are designated as cash flow hedges and, because critical terms match, are considered perfectly effective hedges. At January 28, 2006, the change in fair value of the caps was immaterial. We conduct a quarterly assessment of effectiveness and found that, at January 28, 2006, there was no ineffectiveness.

On May 27, 2005 and June 9, 2005, we terminated interest rate swap agreements that were previously classified as fair value hedges with a total notional value of $1.55 billion. As a result of these actions, we received a net payment of $38 million, the majority of which has been recorded in long-term debt as a deferred credit and will be amortized over the remaining term of the related notes. Additionally, interest will now accrue at the respective coupon rates for the $1.55 billion of debt with respect to those interest rate swaps that were terminated. Specifically, the following interest rate swaps were terminated:

• $250 million of notional amount of swaps on 6.875% notes, due fiscal 2006;

• $500 million of notional amount of swaps on 7.625% notes, due fiscal 2011;

• $400 million of notional amount of swaps on 7.875% notes, due fiscal 2013; and

• $400 million of notional amount of swaps on 7.375% notes, due fiscal 2018.

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Notes to Consolidated Financial Statements—(Continued)

NOTE 14 – ISSUANCE OF COMMON STOCK AND EQUITY SECURITY UNITS

In May 2002, 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 consisted of a contract to purchase, for $50, a specified number of shares of common stock in August 2005, and a 6.25% note due fiscal 2007 with a principal amount of $50. The 6.25% notes due fiscal 2007 were initially pledged to secure the holder’s obligation to purchase our common stock under the related purchase contract.

On April 6, 2005, we commenced a cash tender offer to purchase up to $402.5 million principal amount of our outstanding 6.25% notes due 2007 originally issued as part of our equity security units. In the tender offer, $380.7 million aggregate principal amount of notes were validly tendered and accepted for payment, and United States treasury securities were substituted as collateral to secure the holder’s obligations to purchase our common stock under the related purchase contract. The tendered notes were retired on May 6, 2005.

On May 6, 2005, we purchased and retired the remaining $21.8 million aggregate principal amount of 6.25% notes due fiscal 2007 in the remarketing that occurred on May 11, 2005. The purchase contracts were not affected by the tender offer or the purchase of the remaining notes.

On July 13, 2005, July 21, 2005, and August 8, 2005, $3 million, $17 million, and $351 million, respectively of our equity security units were settled. The settlement rate in effect at the time of the settlement, including the merger early settlement on August 8, 2005 was 2.3202 shares of the Company’s common stock under the purchase contract formula. As a result of the Merger, holders that settled on August 8, 2005 were entitled to receive $26.75 per share in lieu of each share of common stock that otherwise would have been issuable under the purchase contract upon settlement, or $62.06535 per unit. The $50 purchase price payable by the holders was offset against the $62.06535, resulting in payment by the Company of $12.06535 per equity security unit. Settling holders also received Treasury securities with a face amount of $50 per each equity security unit that were pledged as collateral by the equity security unit holders for their obligations under the purchase contracts.

The remaining $31 million of equity security units were settled in accordance with their terms on the final settlement date of August 16, 2005, and the holders received $62.06535 per unit, or $26.75 per share in lieu of the 2.3202 shares of common stock that otherwise would have been issuable under the purchase contract upon settlement. The proceeds of maturing Treasury securities pledged as collateral by the equity security holders for their obligations under the purchase contracts were used to pay the $50 purchase price per unit to the Company. As of August 16, 2005, all of our obligations under the equity security units have been fully satisfied and we have no further obligations remaining with respect to the equity security units.

NOTE 15 – DEFINED BENEFIT PENSION PLANS

We sponsor defined benefit pension plans covering certain international employees, in the United Kingdom (“The Toys “R” Us Limited Staff Pension and Life Assurance Scheme”) and Germany (“The Toys “R” Us Germany Pension Plan”), respectively with such benefits accounted for on an accrual basis using actuarial assumptions. We account for these defined benefit pension plans in accordance with SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS 132(R)”). SFAS 132(R) requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans. We use January 28, 2006 as a measurement date that matches the end of our fiscal years for our pension plans.

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Notes to Consolidated Financial Statements—(Continued)

Information regarding our pension plans at January 28, 2006, and January 29, 2005, is as follows:

Obligation and funded status at end of fiscal year (in millions):

Change in benefit obligation:

	2005			2004
Benefit obligation at beginning of year	$	50		$	40
Service cost		3			3
Interest cost		2			2
Employee contributions		1			1
Benefits, expenses paid		(1	)		(1	)
Actuarial loss		12			2
Foreign currency impact		(4	)		3
Benefit obligation at end of year	$	63		$	50

Change in plan assets:

	2005			2004
Fair value of plan assets at beginning of year	$	25		$	19
Actual return on plan assets		5			2
Employer contributions		3			3
Employee contributions		1			1
Benefits, expenses paid		(1	)		(1	)
Foreign currency – Impact		(2	)		1
Fair value of plan assets at end of year		31			25
Funded status		(32	)		(25	)
Unrecognized actuarial loss		23			16
Related tax benefit		(1	)		(2	)
Net amount recognized at year-end	$	(10	)	$	(11	)

Amounts recognized in the statement of financial position consist of:

	2005			2004
Accrued benefit liability	$	(30	)	$	(24	)
Prepaid pension cost		3			3
Accumulated other comprehensive loss		13			10
Net amount recognized	$	(14	)	$	(11	)

The accumulated benefit obligation for our defined benefit pension plans was $57 million and $47 million at January 28, 2006 and January 29, 2005, respectively. The additional minimum pension liability, classified in accumulated other comprehensive loss, increased by $3 million during fiscal 2005 and decreased by $2 million during fiscal 2004.

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Notes to Consolidated Financial Statements—(Continued)

Information for pension plans with an accumulated benefit obligations in excess of plan assets:

	2005		2004
Projected benefit obligation	$	63	$	50
Accumulated benefit obligation, net		25		22
Fair value of plan assets		31		25

Components of net periodic benefit cost during each fiscal year:

	2005			2004			2003
Service cost	$	3		$	3		$	2
Interest cost		2			2			2
Expected return on plan assets		(1	)		(1	)		(1	)
Recognized actuarial loss		1			1			1
Net periodic benefit cost	$	5		$	5		$	4

We expect to contribute $3 million to our pension plans in 2006. Pension benefit payments, which reflect future service, as appropriate, are expected to be less than $1 million for each of the years 2006 to 2010, and $1 million thereafter.

Weighted-average assumptions used to determine benefit obligations at fiscal year end:

	2005		2004(1)		2003(2)
Discount rate	4.6	%	5.3	%	5.6	%
Rate of compensation increase	3.1	%	3.4	%	3.9	%

Weighted-average assumptions used to determine net periodic benefit costs as of fiscal year end:

	2005(1)		2004(2)		2003
Discount rate	5.2	%	5.5	%	5.3	%
Long-term rate of return on plan assets	5.8	%	6.6	%	6.2	%
Rate of compensation increase	3.1	%	3.4	%	3.9	%

^(1),(2) Based on weighted average of U.K. and Germany plans

The expected return on assets is the rate of return expected to be achieved on pension fund assets in the long term, net of Plan expenses. The expected return on assets assumption for 2006 has been determined by considering the actual asset classes held by the Plan at January 28, 2006, and our expectations of future rates of return on each asset class.

For equities, we have assumed that the long-term rate of return will exceed that of United Kingdom government bonds by a margin known as the “equity risk premium”. Based on historic data and current expectations, we have adopted a risk premium of 2.5% above the 20-year United Kingdom government bond yield. For bonds, we have assumed that the long-term rate of return will exceed the current return on 20-year United Kingdom government bonds by 0.5%.

At January 28, 2006, the 20-year United Kingdom government bond yield was slightly more than 4.0%. Therefore, we have assumed an equity return of 6.5% and a bond return of 4.5%. Based on the current asset allocation in the United Kingdom Plan, the overall expected return on plan assets is 6.0% for 2006.

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Notes to Consolidated Financial Statements—(Continued)

Under the terms of the German Plan, all proceeds are invested in long-term insurance contracts, which provide guaranteed returns sufficient to meet plan objectives. At January 28, 2006, 100.0% of the Plan assets were invested in Victoria Insurance’s general investment strategy. Based on the current asset allocation of this strategy, the overall return on plan assets is expected at 4.0% for 2006.

Weighted-average asset allocation at fiscal year end by asset category:

	2005		2004
Securities	68.2	%	63.8	%
Debt securities	22.0	%	23.3	%
Insurance contracts	9.0	%	10.0	%
Cash	0.8	%	2.9	%
Total	100.0	%	100	%

Our overall investment policy falls into two parts. The strategic management of the assets is the responsibility of the Trustees (acting based on advice as they deem appropriate) and is driven by investment objectives as set out below. The remaining elements of our investment policy are part of the day-to-day management of the assets, which is delegated to a professional investment manager. The trustees of our defined benefit pension plans are guided by an overall objective of achieving, over the long-term, a return on the investments, which is consistent with the long-term assumptions made by the Actuary in determining the funding of the Plan. The long-term strategic asset allocation for the plans’ assets is currently 70.0% equities and 30.0% bonds for the United Kingdom Plan and 100.0% in insurance for the German Plan.

The investment returns that the Trustees expect to achieve are those that are broadly in line with or above the returns of the respective market indices and performance targets against which the investment manager is benchmarked. Over the longer term, the Trustees expect to achieve an investment return in excess of Retail Price Inflation. The Trustees meet with the investment manager regularly to review the manager’s actions together with the reasons for, and the background to, investment performance. We have retained investment consultants to assist the Trustees in fulfilling their responsibility for monitoring the investment manager and they provide investment reports to the Trustees as and when the Trustees so request.

NOTE 16 – COMPREHENSIVE LOSS

Comprehensive loss includes net (loss) earnings as currently reported under generally accepted accounting principles, and other comprehensive loss. Other comprehensive loss considers the effect of additional economic events that are not required to be recorded in determining net (loss) earnings but rather are reported as a separate component of stockholders’ (deficit) equity. Other comprehensive (loss) earnings include foreign currency translation adjustments, fluctuations in the fair market value of certain derivative financial instruments and minimum pension liability adjustments.

Comprehensive loss, net of taxes, is comprised of:

(In millions)	2005			2004			2003
							(As restated)
Foreign currency translation adjustments	$	(42	)	$	21		$	(37	)
Unrealized (loss) gain on hedged transactions, net of tax		—			(18	)		(15	)
Minimum pension liability adjustment, net of tax		(13	)		(10	)		(12	)
	$	(55	)	$	(7	)	$	(64	)

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Notes to Consolidated Financial Statements—(Continued)

NOTE 17 – STOCKHOLDERS’ EQUITY

Immediately prior to the Merger, the Company had authorized 650,000,000 shares of common stock, par value $.10 per share, of which 221,015,171 shares were outstanding. A portion of the proceeds of the Merger was used to pay the holders of the common stock for their stock and to settle outstanding options, restricted stock and restricted units under the Company’s stock-based compensation plans. Following the Merger Transaction and Inversion, the Company’s previously authorized common stock was cancelled and the Company amended its charter to authorize 3,000 shares of common stock, par value $.01 per share, 1,000 shares of which are outstanding and all of which are owned by Holdings. For further details refer to Note 12 entitled “STOCK BASED COMPENSATION.”

NOTE 18 – STOCK PURCHASE WARRANTS

In 2000 we issued 1.2 million stock purchase warrants for $8.33 per warrant. Each warrant gave the holder thereof the right to purchase one share of Toys “R” Us common stock at an exercise price of $13 per share, until their expiration in 2010. On August 8 and August 13, 2005, all warrants were settled for a net amount of $16.5 million. Accordingly, all of our obligations under our stock purchase warrant agreements have been fully satisfied and we have no further obligations remaining with respect to the warrant agreements.

In addition, we granted a warrant in 2000 entitling Amazon.com, Inc. (“Amazon.com”) to acquire up to 5% (subject to dilution under certain circumstances) of the capital of Toysrus.com, LLC at the then market value. The warrant expired on December 31, 2004.

NOTE 19 – LEASES

We lease a portion of the real estate used in our operations. Most leases require us to pay real estate taxes and other expenses and some leases require additional payments based on percentages of sales.

Minimum rental commitments under non-cancelable operating leases having a term of more than one year as of January 28, 2006 are as follows:

(In millions)	Gross minimum rentals		Sublease income		Net minimum rentals
2006	$	328	$	25	$	303
2007		313		23		290
2008		293		18		275
2009		277		14		263
2010		259		11		248
2011 and subsequent		1,256		63		1,193
Total	$	2,726	$	154	$	2,572

Total rent expense, net of sublease income, was $299 million, $300 million, and $307 million in 2005, 2004 and 2003, respectively. We remain directly and primarily liable for lease payments to third party landlords related to locations where we have subleased all or a portion of the locations to third parties. Rental payments received from our sub-lessees offset the lease payments made to third party landlords. To the extent that sub-lessees fail to make sublease rental payments, our total net rent expense to the third party landlords would increase by the amount of the deficiency of the sub-lessees’ payments.

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Notes to Consolidated Financial Statements—(Continued)

For leases that contain predetermined fixed escalations of the minimum rentals, we recognize the related rental expense on a straight-line basis and record the difference between the recognized rental expense and amounts payable under the leases as deferred rent liability. Deferred rent liabilities are shown as separate line items on our consolidated balance sheets and were $260 million at January 28, 2006, and $269 million at January 29, 2005. Virtually all of our leases include options that allow us to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and conditions might include rental rates agreed upon at the inception of the lease that could represent below or above market rental rates later in the life of the lease, depending upon market conditions at the time of such renewal or extension. In addition, many leases may include early termination options, which can be exercised under specified conditions, for example, upon damage, destruction or condemnation of a specified percentage of the value or land area of the property.

Lease payments that depend on factors that are not measurable at the inception of the lease, such as future sales volume, are contingent rentals and are excluded from minimum lease payments and included in the determination of total rental expense when it is probable that the expense has been incurred and the amount is reasonably estimable. Future payments for maintenance, insurance and taxes to which we are obligated are excluded from minimum lease payments. Tenant allowances received upon entering into certain store leases are recognized on a straight-line basis as a reduction to rent expense over the lease term.

NOTE 20 – INCOME TAXES

(Loss) earnings before income taxes is as follows:

(In millions)	2005			2004			2003
							(as restated)
U.S.	$	(591	)	$	(10	)	$	(64	)
Foreign		86			203			157
(Loss) earnings before income taxes	$	(505	)	$	193		$	93

The provision for income taxes is as follows:

(In millions)	2005			2004			2003
							(as restated)
Current:
U.S. Federal	$	(103	)	$	(109	)	$	(16	)
Foreign		42			52			47
State		20			36			(28	)
Total provision (benefit) for current taxes		(41	)		(21	)		3
Deferred:
U.S. Federal		(56	)		(46	)		8
Foreign		(14	)		6			7
State		(10	)		2			12
Total provision (benefit) for deferred taxes		(80	)		(38	)		27
Total provision (benefit) for income taxes	$	(121	)	$	(59	)	$	30

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Notes to Consolidated Financial Statements—(Continued)

The tax rate reconciliation is as follows:

	2005		2004		2003 (as restated)
U.S. federal statutory tax rate	(35.0	)%	35.0	%	35.0	%
State taxes, net of valuation allowances	0.8		19.2		(10.0	)
Foreign taxes, net of valuation allowances	(4.9	)	(2.3	)	(3.6	)
Distributed earnings of foreign subsidiaries	7.1		—		—
Undistributed earnings of foreign subsidiaries	9.0		—		—
Foreign tax credits	(4.7	)	—		—
Reversal of Japanese foreign tax credits	8.6		—		—
Non-deductible compensation	1.9		—		—
Extraordinary dividend	(7.1	)	27.9		—
Non-deductible fees and expenses	3.5		—		—
Adjustment of federal reserves	(4.1	)	(104.7	)	18.7
Adjustment of deferred tax accounts	(0.2	)	(4.8	)	(5.2	)
Other	1.1		(0.7	)	(2.9	)
Effective tax rate	(24.0	)%	(30.4	)%	32.0	%

The tax effects of temporary differences are included in deferred tax accounts as follows:

(In millions)	2005			2004
Deferred tax assets:
Federal tax loss carry-forwards	$	181		$	63
Federal tax credit and other carry-forwards		107			96
Foreign tax loss carry-forwards		290			332
State tax loss carry-forwards		101			123
Straight line rent		95			122
Inventory		36			—
Restructuring charges		44			48
Other		103			154
Gross deferred tax assets before valuation allowances		957			938
Valuation allowances related to:
Foreign tax loss carry-forwards		(290	)		(331	)
State tax loss carry-forwards		(86	)		(92	)
Total deferred tax assets	$	581		$	515
Deferred tax liabilities:
Fixed assets	$	(327	)	$	(423	)
Inventory		(26	)		(39	)
Un-repatriated foreign earnings		(98	)		—
Unearned revenue from gift cards		(19	)		—
Earnings of unconsolidated Japanese subsidiary		(51	)		(51	)
Other		(49	)		(46	)
Total deferred tax liabilities	$	(570	)	$	(559	)

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Notes to Consolidated Financial Statements—(Continued)

Carryforwards

At year-end the Company had recorded deferred tax benefits of $679 million for federal, foreign and state loss, credit and other carry-forwards. Management believes that all of the foreign tax loss carry-forwards and some of the state tax loss carry-forwards will not be used, and has established $376 million of valuation allowances to offset the tax benefit of these carry-forwards. During the year certain foreign and state tax loss carry-forwards were utilized to offset income or expired unused. The corresponding valuation allowances related to these carry-forwards decreased accordingly.

As previously described, the Company underwent an ownership change. Federal, certain state and certain foreign taxing jurisdictions impose limitations on the amount of tax loss, credit and other carry-forwards that can be used to offset current income and tax within any given year when there has been an ownership change. Section 382 of the Internal Revenue Code imposes a limitation on the amount of tax loss, credit and other carry-forwards that can be used to offset current income and tax within any given year when there has been an ownership change, as defined. The Company’s U.S. federal tax loss and credit carry-forward limitation is an amount equal to the value of the Company multiplied by the long-term tax exempt rate, as defined. As of January 28, 2006, the Company had a U.S. federal tax loss carry-forward of $518 million, of which $57 million a year can be used to offset federal taxable income before considering certain Section 382 planning opportunities. In addition, the company has state tax loss carry-forwards of $1.3 billion and foreign tax loss carry-forwards of $813 million which may also be subject to similar limitations.

The Company’s $518 million of federal tax loss carry-forwards and $107 million of federal tax credit carry-forwards will expire during the next 6 to 20 years. Of the Company’s $1.3 billion of state tax loss carry-forwards, $256 million will expire during the next 5 years and $1.1 billion during the next 6 to 20 years. Of the Company’s $813 million of foreign tax loss carry-forwards, $4 million will expire during the next 5 years, $1 million during the next 6 to 20 years, and $809 million may be carried forward indefinitely.

Reserves

Various U.S. federal, state and foreign taxing authorities routinely audit the company’s income tax returns. In June 2004, the Internal Revenue Service (“IRS”) completed its examination of the Company’s U.S. federal income tax returns for years 1997 to 1999. Based on the outcome of this audit, we reversed $200 million of tax reserves and interest thereon that had been established in prior periods to cover tax contingencies in the years that were addressed by this audit. Our U.S. federal income tax returns for the years 2000 to 2002 are currently under examination by the IRS. Our state income tax returns for years 1994 to 2004 in 12 states are currently under examination by various taxing authorities, and our foreign income tax returns for years 1996 to 2003 in several foreign countries are currently under examination by various foreign taxing authorities.

While it is often difficult to predict whether we will prevail, we believe that our tax reserves reflect the probable outcome of known tax contingencies.

Foreign Earnings

The Company has elected to treat four of its foreign subsidiaries as branches or disregarded entities for U.S. federal income tax purposes. By doing so, the earnings and losses of these foreign subsidiaries are included in the calculation of our income subject to current U.S. federal income tax.

During the fiscal year ending January 29, 2005 the Company took advantage of a temporary U.S. federal income tax incentive, repatriated $607 million of foreign earnings, and recorded a federal income tax expense of

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Notes to Consolidated Financial Statements—(Continued)

$54 million on these dividends based on then current law. During the fiscal year ending January 28, 2006 the IRS clarified how the tax on these repatriated foreign earnings should be calculated. Based on these clarified rules, we applied for and received a tax refund of $36 million, and we recorded a corresponding federal income tax benefit.

In the year ending January 28, 2006, management determined that the Company would no longer permanently reinvest any of the earnings of its foreign subsidiaries outside the United States. As such, we have recorded a net U.S. federal income tax expense of $44 million on the $281 million current and cumulative earnings of our foreign subsidiaries.

NOTE 21 – PROFIT SHARING PLAN

We have a profit sharing plan with a 401(k) salary deferral feature for eligible domestic employees. The terms of the plan call for annual contributions by the company as determined by the Board of Directors, subject to certain limitations. The profit sharing plan may be terminated at our discretion. Provisions of $27 million, $25 million, and $27 million, have been charged to earnings in 2005, 2004 and 2003, respectively.

NOTE 22 – TOYSRUS.COM

Toysrus.com operates three co-branded on-line stores under a strategic alliance agreement with Amazon.com. These on-line stores sell toys, collectible items, and video games through the Toysrus.com website; baby products through the Babiesrus.com website; and learning and information products through the Imaginarium.com website. On March 31, 2006, the trial court in the lawsuit we filed against Amazon.com described below entered a final order in our favor terminating the agreement with Amazon.com as of that date and establishing a wind-down period through June 30, 2006, during which time Amazon.com will continue to operate the co-branded stores. In anticipation of this favorable ruling, we have been planning for the launch of an independent website at our domain names.

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 a separate unrelated third party handles order fulfillment for Personalizedbyrus.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.

On January 17, 2006, Toys-Delaware a subsidiary of the Company, acquired all of the outstanding stock options and shares of Toysrus.com, Inc. Each holder of shares in Toysrus.com received $1.13 per share less applicable withholding taxes. Each option holder received an amount in cash, less applicable withholding taxes, equal to the value of the option calculated using an option–pricing model based on the $1.13 per share. As a result of the above, the Company recognized $3 million of compensation expense and $6 million of goodwill.

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 by SOFTBANK Venture Capital and affiliates (“SOFTBANK”) and other investors. 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 to account for the ownership stake of SB Toys, Inc. Beginning in the fourth quarter of 2004, Toys “R” Us Inc. has recognized 100% of the results of Toysrus.com, LLC.

On May 21, 2004, we filed a lawsuit against Amazon.com and its affiliated companies to terminate our strategic alliance agreement with Amazon.com. The lawsuit sought temporary and permanent injunctive and declaratory relief to protect our rights during the litigation and to end the agreement, monetary damages and

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Notes to Consolidated Financial Statements—(Continued)

contract rescission against Amazon.com. On June 25, 2004, Amazon.com filed a counterclaim against us and our affiliated companies alleging breach of contract relating to inventory and selection requirements. On March 31, 2006, the trial court entered its order granting our request for termination of the agreement and denying Amazon.com’s request for relief on its counterclaim. For further details refer to Note 24 entitled “LITIGATION AND LEGAL PROCEEDINGS.”

On November 1, 2003, Toysrus.com sold its entire 55% investment in the common stock of Toysrus.com – Japan to Toys “R” Us – Japan for $3 million and the assumption of net liabilities of $10 million. In conjunction with this transaction, we recognized a non-operating gain, after minority interest, 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 consolidated with the financial statements of Toysrus.com. As a result of this transaction, Toys “R” Us – Japan owns 100% of the outstanding shares of Toysrus.com – Japan, and accordingly, Toys “R” Us – Japan now consolidates the financial statements of Toysrus.com – Japan. This transaction had no impact on our agreement with Amazon.com.

NOTE 23 – SEGMENTS

We have four reportable segments: Toys “R” Us – U.S., Toys “R” Us – International, Babies “R” Us, and Toysrus.com. Historically, Kids “R” Us was a reportable segment, however, in 2003 we closed all of our Kids “R” Us locations and ceased treating it as a reportable segment. See Note 5 entitled “RESTRUCTURING AND OTHER CHARGES” for further discussion on the closing of the Kids “R” Us division.

Toys “R” Us – U.S. operates toy stores in 49 states and Puerto Rico and sells toys, bicycles, sporting goods, VHS and DVD movies, electronic and video games, books, educational and development products, clothing, infant and juvenile furniture, electronics, as well as educational and entertainment computer software for children; Toys “R” Us – International, operates, licenses or franchises toy stores in 31 foreign countries with wholly-owned operations in Australia, Austria, Canada, France, Germany, Portugal, Spain, Switzerland, and the United Kingdom and sells similar products as described for Toys “R” Us – U.S.; Babies “R” Us, operates stores in 40 states and sells baby-juvenile products in the United States, such as baby gear, baby accessories, consumables, apparel, furniture, bedding and room décor, and infant toys; Toysrus.com, our Internet subsidiary sells both toys and babies merchandise to the public via the Internet at www.toysrus.com, www.babiesrus.com, www.imaginarium.com, www.sportsrus.com, and www.personalizedbyrus.com.

Management evaluates segment performance primarily based on income from operations. All intercompany transactions between the segments have been eliminated. Income tax information by segment has not been included as taxes are calculated at a company-wide level and are not allocated to each segment.

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Notes to Consolidated Financial Statements—(Continued)

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

	52 Weeks Ended
(In millions)	January 28, 2006			January 29, 2005			January 31, 2004
Net sales
Toys “R” Us – U.S.	$	5,975		$	6,104		$	6,326
Toys “R” Us – International		2,793			2,739			2,470
Babies “R” Us		2,078			1,863			1,738
Toysrus.com		429			366			371
Kids “R” Us (1)		—			28			415
Total net sales	$	11,275		$	11,100		$	11,320
Operating (loss) earnings (2)
Toys “R” Us – U.S.	$	(20	)	$	4		$	70
Toys “R” Us – International		196			220			166
Babies “R” Us		226			224			192
Toysrus.com (3)		14			1			(18	)
Kids “R” Us (1)		1			(25	)		(67	)
Other (4), (5)		(503	)		(116	)		(63	)
Restructuring and other charges		(34	)		(4	)		(63	)
Contract settlement fees and other		(22	)		—			—
Operating (loss) earnings		(142	)		304			217
Interest expense		(394	)		(130	)		(142	)
Interest income		31			19			18
(Loss) earnings before income taxes	$	(505	)	$	193		$	93
Identifiable assets
Toys “R” Us – U.S.	$	4,153		$	5,678		$	4,959
Toys “R” Us – International		1,648			1,474			1,558
Babies “R” Us		1,208			1,194			1,127
Toysrus.com		78			61			55
Kids “R” Us		50			58			204
Other (6)		1,229			1,303			2,362
Total identifiable assets	$	8,366		$	9,768		$	10,265
Depreciation and amortization
Toys “R” Us – U.S.	$	218		$	200		$	194
Toys “R” Us – International		97			75			61
Babies “R” Us		42			38			31
Toysrus.com		1			—			2
Kids “R” Us		4			5			40
Other		38			36			40
Total depreciation and amortization	$	400		$	354		$	368

⁽¹⁾ Reflects the effect of our decision to close all of our freestanding Kids “R” Us stores, as previously announced on November 17, 2003.

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Notes to Consolidated Financial Statements—(Continued)

⁽²⁾ Consolidated operating earnings for fiscal 2004 reflects $157 million in inventory markdowns recorded during the second quarter of 2004 related to the Toys “R” Us – U.S., Toys “R” Us – International, and Kids “R” Us divisions of $132 million, $15 million, and $10 million, respectively.

⁽³⁾ Results for fiscal 2003 and fiscal 2004 reflect a 20% minority interest. Beginning in the fourth quarter of 2004, Toys “R” Us, Inc. recognized 100% of the results of Toysrus.com.

⁽⁴⁾ Includes corporate expenses and the equity (loss) earnings of Toys “R” Us – Japan.

⁽⁵⁾ The increase in operating loss of $387 million in “other” for fiscal 2005 compared to fiscal 2004 reflected increased corporate expenses as well as increased bonus and stock compensation expenses primarily related to the Merger Transaction.

⁽⁶⁾ Includes cash and cash equivalents, and other corporate assets.

NOTE 24 – LITIGATION AND LEGAL PROCEEDINGS

We are involved in lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, resulting in costly litigation, require significant amounts of management time and result in diversion of significant resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole.

On May 21, 2004, we filed a lawsuit against Amazon.com and its affiliated companies to terminate our strategic alliance with Amazon.com. 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 sought temporary and permanent injunctive and declaratory relief to protect our rights during the litigation and to end the agreement, monetary damages and contract rescission against Amazon.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 and selection requirements. On March 31, 2006 the trial court entered a final order in our favor terminating the strategic alliance agreement with Amazon.com as of that date and establishing a wind-down period through June 30, 2006, during which time Amazon.com will continue to operate the co-branded stores. On April 3, 2006 Amazon.com filed a Notice of Appeal and also filed a Motion for Stay of Judgment in the trial court. On April 20, 2006, the trial court denied Amazon.com’s request for a stay. Amazon.com filed a request in the appellate court on April 21, 2006 for emergent relief from the trial court’s denial of its request for a stay. On that same day, the appellate court refused Amazon.com’s motion for an immediate stay and determined to consider Amazon.com’s request for a stay of the trial court’s order on the normal briefing schedule. We believe Amazon.com’s pending motion for a stay of the trial court’s order terminating the strategic alliance agreement, as well as its pending appeal of the order, is without merit and will be denied.

NOTE 25 – COMMITMENTS AND CONTINGENCIES

We are subject to various claims and contingencies related to lawsuits and taxes, as well as commitments under contractual and other commercial obligations. We recognize liabilities for contingencies and commitments when a loss is probable and estimable. Refer to Note 19 entitled “LEASES” for minimum rental commitments under non-cancelable operating leases having a term of more than one year as of January 28, 2006. As of January 28, 2006, and January 29, 2005, we had $84 million and $82 million of reserves for self-insurance risk and $125 million and $115 million of reserves for restructuring, respectively.

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Notes to Consolidated Financial Statements—(Continued)

NOTE 26 – RELATED PARTY TRANSACTIONS

Transactions with the Sponsors – The Sponsors provide management and advisory services to us pursuant to an advisory agreement executed at the closing of the Merger Transaction. Under the terms of the advisory agreement and effective as of July 21, 2005, we paid the Sponsors an aggregate advisory fee of $3.75 million for the thirteen weeks ended October 29, 2005, and a fee for the portion of the quarter from the Merger Transaction date to the thirteen weeks ended July 30, 2005, of $0.4 million. There was no advisory fee for the thirteen weeks ended January 28, 2006. The quarterly fee for the first fiscal quarter of 2006 will be $7.5 million, and the quarterly fees for the second, third, and fourth quarters of 2006 will be $3.94 million per quarter. Thereafter, the annual fee will be $15 million, increasing five percent per year during the ten-year term of the agreement. In addition, upon consummation of the Merger Transaction, we paid the Sponsors a fee in the aggregate amount of $81 million for services rendered and out-of-pocket expenses in connection with the debt financing transactions described in Note 11 entitled “SEASONAL FINANCING AND LONG-TERM DEBT.”

On August 29, 2005, an affiliate of Vornado Realty Trust acquired by assignment an aggregate of $150 million of the lenders’ rights and obligations under the $1.9 Billion Bridge Loan Agreement. As of the date of this Annual Report on Form 10-K, $77 million of this amount remains outstanding.

NOTE 27 – RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board issued SFAS 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material and requires that these items be recognized as current period charges. SFAS 151 applies only to inventory costs incurred during periods beginning after the effective date and also requires that the allocation of fixed production overhead to conversion costs be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal 2006. We do not believe the adoption of SFAS 151 will have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2004, the FASB released Financial Staff Position 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2). The American Jobs Creation Act (the Act) provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated in either an enterprise’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. FSP 109-2 allows for time for enterprises beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. In January of 2005 we adopted a domestic reinvestment plan, and two of our foreign subsidiaries remitted cash dividends of $607 million to the United States. In conjunction with the repatriation we recorded a tax expense of $54 million based on current law. During the fiscal year 2005, in conformity with the Internal Revenue Service tax code as related to the one-time deduction, we recorded and received a benefit of $39 million representing a refund on taxes on the repatriation.

In December 2004, the FASB issued Statement No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123, which supersedes APB 25 and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123(R) is effective for the first annual reporting period beginning after December 15, 2005. We are evaluating the transition applications and the impact the adoption of SFAS No. 123(R) will have on our consolidated financial position, results of operations or cash flows.

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Notes to Consolidated Financial Statements—(Continued)

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) 107, “Share-Based Payment.” SAB 107 provides guidance regarding the interaction between SFAS 123(R) and certain SEC rules and regulations, including guidance related to valuation methods, the classification of compensation expense, non-GAAP financial measures, the accounting for income tax effects of share-based payment arrangements, disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123(R), and modifications of options prior to the adoption of SFAS 123(R). We are currently assessing the guidance in SAB 107 as part of our evaluation of the adoption of SFAS 123(R).

In March 2005, the FASB issued FASB Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” This Interpretation clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN 47 did not have a material effect on our consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, voluntary changes in accounting principles were generally required to be recognized by way of a cumulative effect adjustment within net earnings during the period of the change. SFAS 154 requires retrospective application to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the statement does not change the transition provisions of any existing accounting pronouncements. We do not believe the adoption of SFAS 154 will have a material effect on our consolidated financial position, results of operations or cash flows.

In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-06, “Determining the Amortization Period for Leasehold Improvements.” EITF 05-06 provides guidance for determining the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease, collectively referred to as subsequently acquired leasehold improvements. EITF 05-06 provides that the amortization period used for the subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements’ useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the purchase. EITF 05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the date of the FASB’s ratification, which was on June 29, 2005. The adoption of EITF 05-06 did not have a material effect on our consolidated financial position, results of operations or cash flows.

In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” to clarify the proper accounting for rental costs incurred on building or ground operating leases during a construction period. The FSP requires that rental costs incurred during a construction period be expensed, not capitalized. The statement is effective for the first reporting period beginning after December 15, 2005. We do not believe adoption of FSP 13-1 will have a material effect on our consolidated financial position, results of operations or cash flows.

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Notes to Consolidated Financial Statements—(Continued)

NOTE 28 – SUBSEQUENT EVENTS

On January 23, 2006, Toys “R” Us Iberia Real Estate, S.L., our indirect wholly-owned subsidiary, entered into a secured loan agreement with a syndicate of financial institutions. The loan is secured by, among other things, selected Spanish real estate, which has been or will be acquired by the borrower. On February 1, 2006, the loan agreement was drawn down, and pursuant to which we borrowed €135.1 million. The maturity date for the loan is February 1, 2013. The loan has an interest rate of 1.50% plus mandatory costs plus EURIBOR. We have entered into hedging arrangements whereby we have fixed the interest under the loan at 4.505% plus mandatory costs per annum. The loan agreement contains covenants, including, among other things, covenants that restrict the ability of the borrower to engage in mergers or consolidations, incur additional indebtedness, or create or permit liens on assets. The loan also requires the company to maintain an interest coverage ratio of 110%. On January 23, 2006, Toys “R” Us France Real Estate SAS, our indirect wholly-owned subsidiary, entered into a secured loan agreement with a syndicate of financial institutions. The loan is secured by, among other things, selected French real estate, which has been or will be acquired by the borrower. On February 1, 2006, the loan agreement was drawn down, and pursuant to which we borrowed €65.2 million. The maturity date for the loan is February 1, 2013. The loan has an interest rate of 1.50% plus mandatory costs plus EURIBOR. We have entered into hedging arrangements whereby we have effectively fixed the interest under the loan at 4.505% plus mandatory costs per annum. The loan agreement contains covenants, including, among other things, covenants that restrict the ability of the borrower to engage in mergers or consolidations, incur additional indebtedness, or create or permit liens on assets. The loan also requires the company to maintain an interest coverage ratio of 110%.

On February 8, 2006, Toys “R” Us Properties (UK) Limited (“Toys Properties”), our indirect wholly-owned subsidiary, entered into a credit agreement with Vanwall Finance PLC as the Issuer and as Senior Lender and The Royal Bank of Scotland PLC as Junior Lender, which included a series of Secured Senior Loans comprising an initial principal amount of approximately £347.0 million and a Junior Loan comprising an initial principal amount of up to £62.4 million. The Senior Lender and Junior Lender have also agreed to provide an aggregate of approximately £10.8 million in additional loans under specified conditions. The loans are secured by, among other things, selected UK real estate, which has been or will be acquired by the borrower. The credit agreement contains customary covenants, including, among other things, covenants that restrict the ability of Toys Properties to incur certain additional indebtedness, create or permit liens on assets, dispose of or acquire further property, vary or terminate the lease agreements, conclude further leases or engage in mergers or consolidations. The credit agreement has a seven-year term and Toys Properties is required to repay the loans in part in quarterly installments from the first anniversary date. The final maturity date is April 7, 2013. The credit agreement also contains various and customary events of default with respect to the loans, including, without limitation, the failure to pay interest or principal when the same is due under the credit agreement, cross default provisions, the failure of representations and warranties contained in the Credit Agreement to be true and certain insolvency events with respect to Toys Properties. The Senior Loan bears interest at an annual rate of mandatory costs plus 4.5575% plus a margin ranging from 0.28% to 1.50% and the Junior Loan bears interest at an annual rate of mandatory costs plus LIBOR plus a margin of 2.25%. Toys Properties has entered into hedging arrangements in relation to its floating rate exposure under the credit agreement, whereby Toys Properties effectively fixed the interest under the Junior Loan at 6.8075% plus mandatory costs per annum. The proceeds from the above-described U.K. transaction, together with other available funds, were used to repay all of the outstanding indebtedness under the bridge facility component of the Senior Facilities Agreement entered into by Toys “R” Us (UK) Limited on July 21, 2005 and to pay part of the transaction costs. In connection with the financing transaction, we revised our estimated amortization period of the $1.0 billion European bridge facility deferred transaction costs and, as a result, recorded an additional $27 million in amortization expense in the thirteen-week period ended January 28, 2006.

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Notes to Consolidated Financial Statements—(Continued)

The board of directors of Toys “R” Us – Japan has proposed a new slate of directors for shareholder approval at its upcoming shareholders meeting, currently scheduled for April 28, 2006. If the new slate of directors is approved by the shareholders of Toys “R” Us – Japan, we (together with our Sponsors) will have control of a majority of the board of directors of Toys “R” Us – Japan. As a result of this control, we will be required to consolidate the results of operations of Toys “R” Us – Japan into our consolidated financial statements, beginning with the first quarter of fiscal 2006.

99

PARENT COMPANY INFORMATION

Toys “R” Us, Inc.

Schedule I – Condensed Statements of Operations

	52 Weeks Ended
(In millions)	January 28, 2006			January 29, 2005			January 31, 2004
Revenues	$	19		$	80		$	102
General and administrative expenses		312			486			514
Transaction and related costs		410			—			—
Depreciation and amortization		59			50			50
Restructuring and other charges		7			26			31
Contract fees and other		22			—			—
Inter-company expense		62			62			62
Total operating expenses		872			624			657
Other (expense) income:
Interest expense		(114	)		(102	)		(114	)
Interest income		8			5			4
Inter-company interest (expense) income, net		64			18			(3	)
Equity in pre-tax earnings of consolidated subsidiaries		390			816			761
(Loss) earnings before income taxes		(505	)		193			93
Income tax (benefit) expense		(121	)		(59	)		30
Net (loss) earnings	$	(384	)	$	252		$	63

See accompanying notes.

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Toys “R” Us, Inc.

Schedule I – Condensed Balance Sheets

(In millions)	January 28, 2006			January 29, 2005
ASSETS
Current Assets:
Cash and cash equivalents	$	152		$	409
Short-term investments		—			384
Accounts and other receivables		56			73
Current deferred taxes		27			2
Prepaid expenses and other current assets		11			18
Total current assets		246			886
Real estate, net		230			271
Investments in and advances to/from subsidiaries		1,504			6,239
Derivative assets		—			44
Deferred tax assets		17			33
Other assets		14			38
	$	2,011		$	7,511
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current Liabilities:
Accounts payable	$	510		$	521
Accrued expenses and other current liabilities		269			297
Income taxes payable		53			48
Current portion of long-term debt		254			405
Total current liabilities		1,086			1,271
Long-term debt		1,529			1,775
Deferred tax liabilities		66			65
Derivative liabilities		—			5
Deferred rent liabilities		11			2
Other non-current liabilities		43			68
Stockholders’ (deficit) equity		(724	)		4,325
	$	2,011		$	7,511

See accompanying notes.

101

Toys “R” Us, Inc.

Schedule I – Condensed Statements of Cash Flows

	52 Weeks Ended
(In millions)	January 28, 2006			January 29, 2005			January 31, 2004
Net cash provided by operating activities	$	773		$	401		$	272
Cash Flows from Investing Activities:
Capital expenditures		(17	)		(45	)		(56	)
Sale (purchase) of short-term investments		384			89			(391	)
Decrease in restricted cash		—			—			60
Investments in subsidiaries		(656	)		(271	)		(310	)
Inter-company loan repayment by subsidiaries		645			100			4
Loans to subsidiaries		(128	)		(117	)		(48	)
Net cash provided by (used in) investing activities	$	228		$	(244	)	$	(741	)
Cash Flows from Financing Activities:
Long-term debt borrowings		3,407			—			792
Borrowings from subsidiaries		770			432			884
Repayment of borrowings from subsidiaries		—			(281	)		(664	)
Long-term debt repayment		(408	)		(507	)		(5	)
Repurchase of common stock		(5,891	)		—			—
Repurchase of stock options and restricted stock		(225	)		—			—
Repurchase of equity security units and warrants		(130	)		—			—
Proceeds received from exercise of stock options		87			27			—
Proceeds received from issuance of common stock		20			—			—
Capital contributed by affiliate		1,279			—			—
Capitalized debt issuance costs		(167	)		—			—
Net cash (used in) provided by financing activities	$	(1,258	)	$	(329	)	$	1,007
Cash and Cash Equivalents:
Net (decrease) increase during period		(257	)		(172	)		538
Cash and cash equivalents at beginning of period		409			581			43
Cash and cash equivalents at end of period	$	152		$	409		$	581
Supplemental Disclosures of Cash Flow Information:
Income taxes paid, net of refunds	$	17		$	(17	)	$	3
Interest paid		104			120			95

See accompanying notes.

102

Toys “R” Us, Inc.

Schedule I – Notes to Condensed Financial Statements

NOTE A – BASIS OF PRESENTATION

Toys “R” Us, Inc. (the “Company”) is a holding company that conducts substantially all of its business operations through its subsidiaries. On July 21, 2005, the Company was acquired by an investment group consisting of entities advised by or affiliated with Bain Capital Partners, LLC, Kohlberg Kravis Roberts & Co., L.P. and Vornado Realty Trust (collectively, the “Sponsors”) along with a fourth investor, GB Holdings I, LLC, an affiliate of Gordon Brothers, a consulting firm that is independent from and unaffiliated with the Sponsors and management, pursuant to the Agreement and Plan of Merger by and among the Company, Global Toys Acquisition, LLC, and Global Toys Acquisition Merger Sub, Inc. (the “Acquisition Co.”), dated as of March 17, 2005 (the “Merger Agreement”). Pursuant to the Merger Agreement, we merged with and into the Acquisition Co. with the Company as the surviving entity (the “Merger”). The Merger has been accounted for as a recapitalization, and accordingly, there was no change in the basis of our assets and liabilities. Immediately following the consummation of the Merger, we implemented an inversion transaction (the “Inversion”) whereby one of our dormant subsidiaries became the new parent of Toys “R” Us, Inc. and is now known as Toys “R” Us Holdings, Inc. For a discussion of the merger transaction and the Inversion, see Note 2 to the Consolidated Financial Statements entitled “MERGER TRANSACTION.”

In conjunction with the Merger, the Company borrowed $3.4 billion under various facility agreements. Immediately following the Merger, subsidiaries of the Company assumed the Company’s obligations under the facility agreements and the Company was released from its obligations, except that the Company continues to be a guarantor under the bridge facility until the bridge loans are converted to term loans on July 21, 2006. In addition, the Company borrowed approximately $770 million from its subsidiaries in connection with the Merger. The proceeds from the borrowings under the facility agreements and from the Company’s subsidiaries together with the capital contributions of approximately $1.3 billion and cash otherwise available to the Company was used to fund the payments required in connection with Merger. In addition, as a result of the borrowings and assumption described above, as well as certain other inter-company transactions, the amount of the Company’s investment in and advances to/from subsidiaries was reduced.

The Company provides certain centralized management functions to its subsidiaries including accounting, human resources, legal, tax, and treasury services. The costs related to these services are allocated to the domestic subsidiaries primarily based on revenues. The Company also has arrangements with its foreign subsidiaries for these and other services whereby it charges a management fee. The management fees from the foreign subsidiaries are based on costs plus a premium. The domestic and foreign management fee have been recorded as revenue on an accrual basis.

In February 2006, all of the centralized corporate functions were transferred to our subsidiary, Toys “R” Us—Delaware, Inc. (“Toys-Delaware”). Toys-Delaware provides the Company certain corporate functions including accounting, human resources, legal, tax, and treasury services.

There are significant restrictions over Toys “R” Us, Inc.’s ability to obtain funds from certain of its subsidiaries through dividends, loans or advances. Accordingly, these condensed financial statements have been presented on a “parent-only” basis. Under a parent-only presentation, Toys “R” Us, Inc.’s investments in its consolidated subsidiaries are presented under the equity method of accounting. These parent-only financial statements should be read in conjunction with Toys “R” Us, Inc.’s audited consolidated financial statements included elsewhere herein.

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NOTE B – DEBT

A summary of the Company’s long-term debt as of January 28, 2006 and January 29, 2005, is outlined in the table below:

(In millions)	2005		2004
6.875% notes, due fiscal 2006	$	250	$	253
Equity security units (including, as a part thereof, 6.25% notes due fiscal 2007) (a)		—		403
7.625% notes, due fiscal 2011		527		531
7.875% notes, due fiscal 2013		389		389
7.375% notes, due fiscal 2018		408		403
8.750% notes, due fiscal 2021		199		199
Other		10		2
		1,783		2,180
Less current portion		254		405
Total	$	1,529	$	1,775

^(a) Refer to Note 14 entitled “ISSUANCE OF COMMON STOCK AND EQUITY SECURITY UNITS” for details on the settlement of the debt component of our Equity security units.

The annual maturities of long-term debt at January 28, 2006 are as follows:

(In millions)	Annual maturities
2006	$	254
2007		3
2008		2
2009		1
2010		—
2011 and subsequent		1,523
Total	$	1,783

On August 29, 1991, Toys-Delaware issued $200 million aggregate principal amount of 8.750% Debentures due September 1, 2021 (the “Debentures”). In connection with an agreement and plan of merger, dated as of December 8, 1995, the Company executed the First Supplemental Indenture, dated as of January 1, 1996, pursuant to which the Company became a co-obligor of the Debentures. For presentation purposes on a parent stand-alone basis, the Company has included this debenture in its balance sheets. However, this debt is recorded and carried by Toys-Delaware, its primary obligor. All future principal and interest payments will be funded through the operating cash flows of Toys-Delaware.

On July 21, 2005, Toys-Delaware, a wholly-owned subsidiary, entered into a one-year term unsecured credit facility of $1.9 billion, carrying an annual interest rate of LIBOR plus 5.25%. The bridge facility is guaranteed by Toys “R” Us, Inc. (until the bridge loans are converted to term loans on July 21, 2006), certain subsidiaries of Toys-Delaware and certain other entities. As of January 28, 2006, there was $973 million outstanding under this bridge facility.

On December 9, 2005, TRU 2005 RE Holding Co. I, LLC, an indirect subsidiary, entered into a Credit Agreement. $1.3 billion was borrowed under the credit agreement. A portion of the proceeds was used to repay $927 million of existing indebtedness under the bridge loan agreement, dated as of July 21, 2005, described above, and the remaining portion was used to repay the indebtedness under the Secured Revolving Credit Facility of Toys-Delaware. Toys “R” Us, Inc. has committed to provide environmental indemnity and a guaranty of recourse obligations to the creditors and certain other parties under this agreement. As of January 28, 2006, all of borrowings under this debt facility were outstanding.

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For a discussion of the debt obligations of the Company, see Note 11 entitled “SEASONAL FINANCING AND LONG-TERM DEBT.”

NOTE C – COMMITMENTS AND CONTINGENCIES

Toys “R” Us, Inc. is a party to several lawsuits. For a discussion of the litigations in which the Company is a party, see Note 24 to the Consolidated Financial Statements entitled “LITIGATION AND LEGAL PROCEEDINGS.”

The Company is a guarantor on certain leases entered by its subsidiaries. For a discussion of the lease obligations of the Company and its subsidiaries, see Note 19 to the Consolidated Financial Statements entitled “LEASES.”

NOTE D – DIVIDENDS AND CAPITAL CONTRIBUTIONS

The Company received cash dividends of $57 million and $1 million during the 52 weeks ended January 28, 2006, and January 31, 2004, respectively. The Company did not receive any cash dividends from its subsidiaries during the 52 weeks ended January 29, 2005.

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QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly financial information:

	For the 13 Weeks Ended
(In millions)	April 30, 2005			July 30, 2005			October 29, 2005			January 28, 2006
2005
Net sales	$	2,132		$	2,099		$	2,157		$	4,887
Gross margin		732			736			694			1,461
Selling, general and administrative		675			627			678			919
Transaction-related costs		—			400			2			8
Depreciation and amortization		92			91			86			131
Restructuring and other charges (income), net		3			2			(1	)		30
Contract settlement fees and other		—			22			—			—
Operating (loss) earnings		(38	)		(406	)		(71	)		373
Net (loss) earnings	$	(41	)	$	(359	)	$	(126	)	$	142
	For the 13 Weeks Ended
(In millions)	May 1, 2004			July 31, 2004			October 30, 2004			January 29, 2005
	(As restated)			(As restated)			(As restated)
2004
Net sales	$	2,058		$	2,022		$	2,214		$	4,806
Gross margin		728			581			739			1,546
Selling, general and administrative		643			661			682			946
Depreciation and amortization		86			86			88			94
Restructuring and other charges (income), net		14			31			(26	)		(15	)
Operating (loss) earnings		(15	)		(197	)		(5	)		521
Net (loss) earnings	$	(28	)	$	42		$	(21	)	$	259

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any system of disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any disclosure controls and procedures will succeed in achieving their stated goals under all potential future conditions.

In connection with the preparation of this Annual Report on Form 10-K, as of the end of the fiscal period covered by this Annual Report on Form 10-K (January 28, 2006), the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.

Based on the Company’s evaluation and the identification of the material weakness in internal control over financial reporting described below, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of January 28, 2006, the Company’s disclosure controls and procedures were not effective as of the end of the fiscal period covered by this Annual Report on Form 10K (January 28, 2006).

The Company employed alternative procedures to enable management to conclude that reasonable assurance exists regarding the reliability of financial reporting and the preparation of the consolidated financial statements included in this Annual Report on Form 10-K filing, Accordingly, management believes that the consolidated financial statements included in this Annual Report on Form 10-K filing fairly present, in all material respects, the company’s financial position, results of operations and cash flows for the periods presented.

Management’s Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control—Integrated Framework.

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A material weakness in internal control over financial reporting is a significant deficiency (within the meaning of the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2), or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Management has determined that a material weakness exists in the Company’s financial reporting process as the result of the inadequacy of staffing and supporting technology in each of the tax accounting, property accounting and consolidation accounting functions and the inadequacy of staffing in the financial reporting and internal audit functions as described below.

The material weakness in the Company’s financial closing and reporting process referenced above is the result of the accumulation of the following significant deficiencies:

• The Tax department did not maintain a sufficient number of technically qualified personnel during the year to facilitate the identification of all issues associated with the Company’s income tax closing process. In addition, the Tax department does not employ adequate supporting technology to enable the existing staff to efficiently perform the tax accounting routines associated with calculating the Company’s income tax provision and tracking the Company’s deferred tax balances. The calculations were performed on non-integrated spreadsheets that lack the automated controls inherent in our integrated information technology production systems and thus increases the risk of human error. Management believes that the staffing and technology issues mentioned above resulted in the need for adjustments that were only identified and recorded by management in the closing process.

• The Property Accounting department did not maintain a sufficient number of technically qualified personnel during the year to ensure that the computations and calculations required to support the lease disclosures and balances in the Company’s periodic financial statements are completed timely and consistently. In addition, the Company did not employ an adequate property management system to consistently track and record the Company’s leases, which necessitated extensive manual intervention. The calculations are performed on non-integrated spreadsheets that lack the automated controls inherent in our integrated information technology production systems and thus increases the risk of human error. Management believes that the staffing and technology issues mentioned above resulted in the need for adjustments that were only identified and corrected by management in the closing process.

• The Corporate Accounting department and Financial Reporting department did not maintain a sufficient number of personnel to support the Company’s periodic consolidation and financial reporting processes particularly in light of the increased complexity of the Company’s consolidation requirements. This has resulted in a significant workload for the existing personnel who manage the consolidation and reporting processes which management does not believe is sustainable over the long-term. Management believes that the staffing issue mentioned above resulted in the need for adjustments, including a reclassification within the Cash Flow Statement, which were recorded by management in the closing process.

• The Company did not maintain an adequate number of personnel on its Internal Audit staff to effectively assist management with the monitoring and assessment of the Company’s operational, financial and compliance-oriented controls, including controls over the financial closing and reporting process. During 2005, Internal Audit’s focus was substantially limited to performing reviews of internal controls over financial reporting to support management’s Sarbanes-Oxley Section 404 assessment.

The Company’s Remediation Plan

As discussed above, management has identified a material weakness in the Company’s internal control over financial reporting and is taking steps to remediate this material weakness. Management is actively engaged in the implementation of remediation efforts to address the material weakness in the Company’s internal control over financial reporting. These remediation efforts, as outlined below, are designed to address the material weakness identified by management and to strengthen the Company’s internal control over financial reporting.

108

Management recognizes the importance of maintaining a staff that is sufficient in number and contains the appropriate complement of accounting, tax, real estate, financial reporting and internal audit expertise. Similarly, management recognizes the importance of ensuring the adequacy and robustness of the Company’s information technology systems that support these functions. Consequently, management has initiated the following remediation steps to address the identified material weakness in the Company’s financial closing and reporting process:

• The Company is in the process of searching for additional employees with the commensurate knowledge, experience and training necessary to complement the current staff in the general accounting, tax accounting, property accounting and financial reporting functions. The Company is actively recruiting accountants to help with the evaluation of ongoing complex financial issues and the application of Generally Accepted Accounting Principles. In the interim, the Company has hired external experts to support the Company’s financial closing and reporting process. The human resources department has identified dedicated personnel who are now responsible for revitalizing existing recruiting methods to address the Company’s staffing challenges.

• The Company is recruiting additional internal auditors to assist management with its ongoing control assessments and risk management responsibilities. In the interim, the Company is utilizing external experts to support the existing Internal Audit staff and is seeking a co-sourcing partner to assist with the management’s ongoing Sarbanes-Oxley Section 404 responsibilities.

• The Company is in the process of upgrading the information technology systems that support the tax, property management and consolidation functions. This will serve to reduce the amount of manual work required to complete these processes, will increase the control over these processes, and mitigate the current requirement to support these processes with external resources.

The Company’s remediation plan has not been in place long enough to show meaningful results. However, it is expected that the remediation will significantly improve the financial closing and reporting process during the current fiscal year.

As a result of this material weakness in the Company’s internal control over financial reporting, management has concluded that, as of January 28, 2006, the Company’s internal control over financial reporting was not effective based on the criteria set forth by the COSO of the Treadway Commission in Internal Control—Integrated Framework.

The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. This report appears below.

/s/ Gerald L. Storch	/s/ Raymond L. Arthur
Gerald L. Storch	Raymond L. Arthur
Chairman of the Board and	Executive Vice President –
Chief Executive Officer	Chief Financial Officer
April 28, 2006	April 28, 2006

Change in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended January 28, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, subsequent to January 28, 2006, the Company continues to make the changes described above under “—The Company’s Remediation Plan.”

109

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of Toys “R” Us, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Toys “R” Us, Inc. and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of January 28, 2006, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

Management has determined that a material weakness exists in the Company’s financial reporting process as the result of the inadequacy of staffing and supporting technology in each of the tax accounting, property accounting and consolidation accounting functions and the inadequacy of staffing in the financial reporting and internal audit functions as described below.

• The tax department did not maintain a sufficient number of technically qualified personnel during the year to facilitate the identification of all issues associated with the Company’s income tax closing

110

process. In addition, the tax department does not employ adequate supporting technology to enable the existing staff to efficiently perform the tax accounting routines associated with calculating the Company’s income tax provision and tracking the Company’s deferred tax balances. The calculations were performed on non-integrated spreadsheets which lack the automated controls inherent in our integrated information technology production systems and thus increase the risk of human error. The staffing and technology issues mentioned above resulted in the need for adjustments that were only identified and recorded by management in the closing process.

• The property accounting department did not maintain a sufficient number of technically qualified personnel during the year to ensure that the computations and calculations required to support the lease disclosures and balances in the Company’s periodic financial statements are completed timely and consistently. In addition, the Company did not employ an adequate property management system to consistently track and record the Company’s leases, which necessitated extensive manual intervention. The calculations are performed on non-integrated spreadsheets that lack the automated controls inherent in our integrated information technology production systems and thus increase the risk of human error. The staffing and technology issues mentioned above resulted in the need for adjustments that were only identified and corrected by management in the closing process.

• The Corporate Accounting department and Financial Reporting department did not maintain a sufficient number of personnel to support the Company’s periodic consolidation and financial reporting processes particularly in light of the increased complexity of the Company’s consolidation requirements. This has resulted in a significant workload for the existing personnel who manage the consolidation and reporting processes which management does not believe is sustainable over the long-term. The staffing issue mentioned above resulted in the need for adjustments, including a reclassification within the Cash Flow Statement and a Balance Sheet reclassification of long term debt to short term debt, which were recorded by management in the closing process.

• The Company did not maintain an adequate number of personnel on its Internal Audit staff to effectively assist management with the monitoring and assessment of the Company’s operational, financial and compliance-oriented controls, including controls over the financial closing and reporting process. During 2005, Internal Audit’s focus was substantially limited to performing reviews of internal controls over financial reporting to support management’s Sarbanes-Oxley Section 404 assessment.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended January 28, 2006, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 28, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of January 28, 2006, the related consolidated statements of operations, stockholder’s equity, and cash flows for the fifty-two week period ended January 28, 2006, and the financial statement schedule of the Company and our report dated April 28, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/    Deloitte & Touche LLP

New York, New York

April 28, 2006

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ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

The following persons are members of our Board of Directors. All directors are elected annually and serve a one-year term until the next annual meeting of the stockholders and until the election and qualification of their successors.

Name	Age	Principal Occupation and Business Experience During Past Five Years and Other Directorships
Joshua Bekenstein	47	Mr. Bekenstein has been a director of the Company since September 12, 2005. Mr. Bekenstein is a founder of Bain Capital LLC and has been a Managing Director of Bain Capital LLC since 1984. Mr. Bekenstein currently serves as a member of the boards of directors of Bombardier Recreational Products Inc., Waters Corporation, Dollarama, Burlington Coat Factory, and Bright Horizons Family Solutions.
Michael M. Calbert	43	Mr. Calbert has been a director of the Company since July 21, 2005. Mr. Calbert has been an Executive of Kohlberg Kravis Roberts & Co. since 2000.
Michael D. Fascitelli	49	Mr. Fascitelli has been a director of the Company since July 21, 2005. Mr. Fascitelli has been President and a Trustee of Vornado Realty Trust since December 1996. Mr. Fascitelli has also been President and a director of Alexanders, Inc. since August 1996. Prior to that, Mr. Fascitelli was a partner at Goldman Sachs & Co. in charge of its real estate practice and was a vice president prior thereto. Mr. Fascitelli serves as a director and a Trustee of GMH Communities Trust.
David M. Kerko	33	Mr. Kerko has been a director of the Company since September 12, 2005. Mr. Kerko joined Kohlberg Kravis Roberts & Co. in 1998 and has been a Principal since 2001.
Matthew Levin	40	Mr. Levin has been a director of the Company since July 21, 2005. Mr. Levin has been a Managing Director at Bain Capital since 2000. Mr. Levin also currently serves as a director of Bombardier Recreational Products Inc.
John Pfeffer	37	Mr. Pfeffer has been a director of the Company since September 12, 2005. Mr. Pfeffer has been an executive of Kohlberg Kravis Roberts & Co. Ltd. since 2000, heading the European Retail Sector Team.
Dwight M. Poler	40	Mr. Poler has been a director of the Company since September 12, 2005. Mr. Poler joined Bain Capital in 1994 and has been a Managing Director since 1999.

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Name	Age	Principal Occupation and Business Experience During Past Five Years and Other Directorships
Steven Roth	64	Mr. Roth has been a director of the Company since September 12, 2005. Mr. Roth has been Chairman of the Board and Chief Executive Officer of Vornado Realty Trust since May 1989 and Chairman of the Executive Committee of the Board of Vornado Realty Trust since April 1980. Mr. Roth is currently the Managing General Partner of Interstate Properties, an owner of shopping centers and investor in securities and partnerships. Mr. Roth has been a general partner of Interstate Properties since 1968. He has also been the Chief Executive Officer of Alexander’s, Inc. since March 1995 and Chairman of the Board of Alexander’s, Inc. since 2005 and a director since 1989.
Wendy Silverstein	45	Ms. Silverstein has been director of the Company since September 12, 2005. Ms. Silverstein has been Executive Vice President – Capital Markets of Vornado Realty Trust since 1998.
Gerald L. Storch	49	Mr. Storch has been Chairman of the Board, Chief Executive Officer and a director of the Company since February 7, 2006. Mr. Storch was Vice Chairman of Target Corporation from 2001 to 2005 and held various other positions at Target Corporation from 1993 (then Dayton-Hudson) to 2001. Prior to joining Target, Mr. Storch was a Principal of McKinsey & Company where he served from 1982 to 1993.

The Sponsors have agreed among themselves that they will have proportional representation on our board of directors.

The directors named above also currently serve as directors of Holdings. Further, Messrs. Levin, Calbert, Fascitelli and Storch serve as directors of Toys “R” Us-Delaware, Inc.

The following persons are our Executive Officers, having been elected to their respective offices by our Board of Directors:

Name	Age	Position with the Registrant
Gerald L. Storch(1)	49	Chairman of the Board and Chief Executive Officer
Raymond L. Arthur	47	Executive Vice President – Chief Financial Officer
John Barbour	46	Executive Vice President – President – Toys “R” Us – U.S.
Deborah M. Derby	42	Executive Vice President – Human Resources, Legal and Corporate Communications; Secretary
Richard L. Markee	52	Vice Chairman, Toys “R” Us, Inc.; President – Babies “R” Us
Antonio Urcelay	54	President – Continental Europe; Managing Director, Toys “R” Us Iberia, S.A.

⁽¹⁾ See “Directors” above for Mr. Storch’s biography.

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The following is a brief description of the business experience during the past five years for each of our Executive Officers:

Mr. Arthur has served as Executive Vice President – Chief Financial Officer of the Company since April 2004. From January 2002 to April 2004, he served as President – Toysrus.com, Inc. From October 2000 through January 2002, he served as Senior Vice President – Chief Financial Officer of Toysrus.com, Inc. From May 2000 to October 2000, he was Vice President – Finance and Administration of Toysrus.com, Inc. From April 2000 to May 2000, he was Vice President – Controller of Toysrus.com, Inc. From January 1999 (when he first joined the Company) to April 2000, he was Vice-President – Controller of Toys “R” Us, Inc.

Mr. Barbour has served as Executive Vice President – President – Toys “R” Us – U.S. since August 2004. From February 2002 to August 2004, he served as Executive Vice President – President – Toys “R” Us International. From August 1999 (when he first joined the Company) to February 2002, he served as President and Chief Executive Officer of Toysrus.com, Inc.

Ms. Derby has served as Executive Vice President – Human Resources, Legal and Corporate Communications and Secretary since September 2005. From May 2003 until September 2005, Ms. Derby served as Executive Vice President – Human Resources. From November 2002 to May 2003, she served as Senior Vice President, Associate Relations and Organizational Effectiveness. From January 2002 to November 2002, she was Vice President, Associate Relations. From June 2000 (when she first joined the Company) to January 2002, she was Vice President – Human Resources, Babies “R” Us division. From 1999 to May 2000, she was Corporate Director, Compensation and Benefits at Whirlpool Corporation.

Mr. Markee has served as President – Babies “R” Us since August 2004 and as Vice Chairman of Toys “R” Us, Inc. since May 2003. Mr. Markee also served as Interim Chief Executive Officer of the Company from July 2005 to February 2006. Mr. Markee served as President – Toys “R” Us U.S. from May 2003 to August 2004. From January 2002 to May 2003, he was Executive Vice President – President – Specialty Businesses and International Operations. From October 1999 to January 2002, he served as Executive Vice President, President of the Babies “R” Us division and the Chairman of Kids “R” Us division. Prior to then, he held various positions since joining the Company in 1990.

Mr. Urcelay has served as President – Continental Europe (Germany, Switzerland, Austria, France, Spain and Portugal) since August 2004. From August 2003 through August 2004, Mr. Urcelay was President of Southern Europe (France, Spain and Portugal). Mr. Urcelay has been the Managing Director of Toys “R” Us Iberia, S.A. since 1996.

On April 5, 2006, we entered into an agreement to hire F. Clay Creasey, Jr. as our Executive Vice President, beginning May 1, 2006. Effective May 15, 2006 (or at such earlier date as may be determined by our board of directors), Mr. Creasey will become our Chief Financial Officer.

Section 16(a) Beneficial Ownership Reporting Compliance

The Company believes that all persons who were subject to Section 16(a) of the Securities Exchange Act of 1934 for the past fiscal year (through July 21, 2005) complied with the filing requirements thereof. In making this disclosure, the Company has relied on copies of the reports submitted to the Company by directors, executive officers and ten percent holders, and in the case of directors and executive officers, oral and written representations.

Code of Ethics

The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or any person performing similar functions (the “Code of Ethics”). The Code of Ethics is available on the Corporate Governance page of the Company’s website at www.toysrusinc.com. If the Company ever were to amend or waive any provision of its Code of Ethics, the Company intends to satisfy its disclosure obligations with respect to any such waiver or amendment by posting such information on its internet website set forth above rather than by filing a Form 8-K.

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Audit Committee

Our Board of Directors has a separately designated audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee consists of David Kerko, Matthew S. Levin and Wendy Silverstein. The Company’s Board of Directors has determined that each member of the Audit Committee is financially literate and that Mr. Levin is an “audit committee financial expert” within the meaning of the regulations adopted by the Securities and Exchange Commission. None of our Audit Committee members is an independent director because of their affiliations with the Sponsors.

ITEM 11.    EXECUTIVE COMPENSATION

Summary Compensation Table

The following table provides information for the last three fiscal years concerning compensation earned for services rendered in all capacities by our Interim Chief Executive Officer, our four other most highly compensated executive officers for the fiscal year ended January 28, 2006 and our former Chief Executive Officer (the “Named Executive Officers”). Mr. Storch, our new Chairman of the Board and Chief Executive Officer, is not represented in the table below because he was hired effective as of February 7, 2006 and accordingly did not have any compensation from us in 2005.

		Annual Compensation					Long-Term Compensation
Name and Principal Position (1)	Fiscal Year	Salary ($)	Bonus ($)		Other Annual Compensation ($)		Restricted Stock ($)(2)(3)	Securities Underlying Stock Options (#)(2)(4)		All Other Compensation ($)
Richard L. Markee Vice Chairman, Toys “R” Us, Inc., President – Babies “R” Us and Interim Chief Executive Officer	2005 2004 2003	850,000 850,000 823,077	3,855,885 1,301,287 800,000	(5)	66,881 51,839 134,066	(6) (7) (8)	—   516,354 1,128,000	286,671 101,341 261,682		263,242 165,330 168,186	(9)
Raymond L. Arthur Executive Vice President – Chief Financial Officer	2005 2004 2003	500,000 450,769 350,000	1,665,380 659,730 223,489	(5)	—   —   —		—   812,325 —	—   25,000 50,000		153,710 91,738 87,499	(10)
John Barbour Executive Vice President – President – Toys “R” Us, U.S.	2005 2004 2003	700,000 624,038 555,000	2,107,240 1,044,002 389,983	(5)	54,753 50,655 —	(11) (12)	—   177,030 225,000	204,747 30,000 60,000		197,051 102,314 117,559	(13)
Deborah M. Derby Executive Vice President – Human Resources , Legal and Corporate Communications	2005 2004 2003	450,000 445,192 398,077	1,598,188 576,847 235,383	(5)	—   52,112 —	(14)	—   177,030 282,000	122,841 30,000 50,000		109,709 64,445 55,836	(15)
Antonio Urcelay(16) President – Continental Europe; Managing Director, Toys “R” Us Iberia, S.A.	2005 2004 2003	529,012 513,604 433,160	889,055 849,825 461,008	(5)	—   —   —		—   47,427 —	160,224 12,500 25,000	(17)	142,052 137,589 113,990	(18)
John H. Eyler, Jr. Former Chairman, President and Chief Executive Officer	2005 2004 2003	496,154 1,000,000 1,000,000	232,916 2,458,587 990,000		6,886,001 291,102 250,150	(19) (20) (21)	—   1,180,200 1,231,500	—   200,000 400,000		11,068,506 203,216 232,364	(22)

⁽¹⁾ All positions represent the capacities in which individuals served as of January 28, 2006, except in the case of Mr. Eyler, who resigned effective as of July 21, 2005, in connection with the Merger. Mr. Markee served as our Interim Chief Executive Officer from July 21, 2005 through February 7, 2006. On February 7, 2006,

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we appointed Gerald L. Storch as Chairman of the Board and our Chief Executive Officer. Mr. Markee continues to serve as our Vice Chairman, as well as President of Babies “R” Us.

⁽²⁾ While the restricted stock and stock options were granted during the fiscal year for which they are disclosed, they were granted as compensation for the Named Executive Officer’s performance during the prior fiscal year.

⁽³⁾ The data in the table for 2003 and 2004 reflects the dollar value of restricted stock and restricted stock unit awards, based on the closing price of our common stock on the date of grant. The grant values in the table for 2003 consist of shares of restricted stock that would have vested as to 50% of the shares on the second and third anniversaries of the grant date, provided the holder remained employed through such dates. The grant values in the table for 2004 consist of two separate awards: (a) the grant on April 1, 2004 of shares of restricted stock that would have vested as to 50% of the shares on the second and third anniversaries of the grant date based on continued employment through such dates; and (b) the grant on April 1, 2004 of performance restricted stock units which represented the opportunity to earn shares of restricted stock on April 1, 2005, depending on the achievement of corporate earnings targets for fiscal year 2004. Actual earnings performance for fiscal year 2004 resulted in a payout of 200% of the target awards under the restricted stock units for the Named Executive Officers, except for Mr. Urcelay who received 100% of the target award. The shares of restricted stock earned from those restricted stock units would have vested as to 50% on April 1, 2006 and 2007, respectively, based on continued employment through such dates. Upon consummation of the Merger, all outstanding shares of restricted stock and restricted stock units were vested and cashed out, as described below in this ITEM 11 under the heading “Treatment of Options, Restricted Stock and Stock Units in connection with the Merger.”

⁽⁴⁾ After the consummation of the Merger on July 21, 2005, new options to purchase strips of common stock of Holdings were granted as follows: Mr. Markee: 286,671, Mr. Barbour: 204,747, Ms. Derby: 122,841, and Mr. Urcelay: 160,224. The strips and the new options to purchase them are described below in this ITEM 11 under the heading “Option Grants – Option Grants by Holdings.” The securities underlying options for 2005 are shown in strips. The options reflected in the table for 2003 and 2004 vested and were cashed out upon consummation of the Merger.

⁽⁵⁾ This amount includes a success or retention bonus as described below in this ITEM 11 under the heading “Employment Contracts and Termination of Employment and Change-in-Control Arrangements – Retention/Success Bonuses.”

⁽⁶⁾ Includes $27,067 for personal use of a Company automobile and $21,541 for financial planning services, both of which are valued based on our aggregate incremental cost.

⁽⁷⁾ Includes $14,749 for personal use of a Company automobile and $29,849 for financial planning services, both of which are valued based on our aggregate incremental cost.

⁽⁸⁾ Includes $97,761 for costs relating to Mr. Markee’s relocation.

⁽⁹⁾ Includes (i) the Company’s contributions under the TRU Partnership Employees’ Savings and Profit Sharing Plan (the “Profit Sharing Plan”) in the amount of $11,396, and (ii) a substitute payment for fiscal year 2005 under Supplemental Executive Retirement Plan (“Substitute SERP Payment”) in the amount of $251,846.

⁽¹⁰⁾ Includes (i) Company contributions under the Profit Sharing Plan in the amount of $11,396, (ii) a Substitute SERP Payment in the amount of $113,723, and (iii) premiums paid by the Company in the amount of $28,591 on a term life insurance policy.

⁽¹¹⁾ Includes $31,066 for personal use of a Company automobile, which is valued based on our aggregate incremental cost.

⁽¹²⁾ Includes $27,613 for personal use of a Company automobile and $17,436 for financial planning services, both of which are valued based on our aggregate incremental cost.

⁽¹³⁾ Includes (i) Company contributions under the Profit Sharing Plan in the amount of $11,396, (ii) a Substitute SERP Payment in the amount of $179,475, and (iii) premiums paid by the Company in the amount of $6,180 on a term life insurance policy.

⁽¹⁴⁾ Includes $21,295 for personal use of a Company automobile and $25,715 for financial planning services, both of which are valued based on our aggregate incremental cost.

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⁽¹⁵⁾ Includes (i) Company contributions under the Profit Sharing Plan in the amount of $11,396 and (ii) a Substitute SERP Payment in the amount of $98,313.

⁽¹⁶⁾ Mr. Urcelay’s compensation is paid in Euros. All Euros were converted to U.S. dollars at a rate of 1 Euro = $1.2376, which is an average of the exchange rates for the entire fiscal year.

⁽¹⁷⁾ Includes 37,383 options for Holdings stock that were granted in the form of rollover options, as described below.

⁽¹⁸⁾ Includes Company pension plan contribution in the amount of $142,052.

⁽¹⁹⁾ Includes a tax-gross up payment of $6,855,609 to cover excise tax liabilities related to the Merger.

⁽²⁰⁾ Includes $224,748 for personal use of Company aircraft, which is valued based on our aggregate incremental cost.

⁽²¹⁾ Includes $197,697 for personal use of Company aircraft, which is valued based on our aggregate incremental cost.

⁽²²⁾ Includes a lump sum severance amount of $11,068,506 paid pursuant to Mr. Eyler’s retention agreement as described below in this ITEM 11 under the heading “Employment Contracts and Termination of Employment and Change-in-Control Arrangements – Retention/Severance Agreements.”

Option Grants

Option Grants by the Company. We did not grant options to the Named Executive Officers in fiscal year 2005.

Option Grants by Holdings. In connection with the Merger, each of the Named Executive Officers was granted options to purchase “strips” of common stock in Holdings. Each strip consists of nine shares of Class A common stock and one share of Class L common stock of Holdings. The shares compromising a strip are in the same proportion as the shares of Class A and Class L common stock held by all stockholders of Holdings. The options are exercisable only for whole strips and cannot be separately exercised for the individual classes of Holdings common stock. The options have an aggregate exercise price of $26.75, which was the market value of a strip as of the date of the grant.

The following table sets forth certain information concerning the options granted by Holdings to the Named Executive Officers during fiscal year 2005.

Option Grants in Last Fiscal Year

	Number of Securities Underlying Options Granted	Percent of Total Options Granted by Holdings to Employees in Fiscal Year 2005		Exercise Price ($/Share)		Expiration Date	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
Name							5%($)		10%($)
Richard L. Markee	245,718	10.41	%	$	26.75	7/21/2015	$	4,133,697	$	10,475,600
Richard L. Markee	40,953	1.74	%	$	26.75	7/22/2015	$	688,950	$	1,745,933
Raymond L. Arthur	—	—			—	—		—		—
John Barbour	204,747	8.68	%	$	26.75	7/21/2015	$	3,444,445	$	8,728,899
Deborah M. Derby	122,841	5.21	%	$	26.75	7/21/2015	$	2,066,546	$	5,237,033
Antonio Urcelay	122,841	5.21	%	$	26.75	7/21/2015	$	2,066,546	$	5,237,033

The securities underlying options are denoted in the table in terms of “strips” as described above. All options, except the grant to Mr. Markee of 40,953 options, which is described below under “Employment Contracts and Termination of Employment and Change-in-Control Arrangements – Special Bonus and Option Agreement with Mr. Markee,” are tranche options divided equally into three separate tranches, as described below (with capitalized terms being defined in Holdings’ Management Equity Plan). The Tranche I options will vest 40% on the second anniversary of the grant date, 60% on the third anniversary of the grant date, 80% on the fourth anniversary of the grant date and 100% on the fifth anniversary of the grant date, based on continued

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employment. The Tranche II options will vest in the same manner as the Tranche I options except that the options will also vest upon the earlier to occur of (i) a Change in Control in which both (A) the Sponsor IRR on consummation of the Change in Control is equal to or greater than 15%, and (B) the Sponsor Inflows prior to and in connection with such Change in Control are at least two times the Sponsor Outflows prior to such Change in Control; or (ii) any day on which both (A) the Sponsor IRR measured as of such measurement is equal to or greater than 15%, and (B) the Sponsor Inflows through such date are at least two times the Sponsor Outflows through such measurement date. The Tranche III options will vest in the same manner as the Tranche I options except that the options will also vest upon the earlier to occur of (i) a Change in Control in which both (A) the Sponsor IRR on consummation of the Change in Control is equal to or greater than 20%, and (B) the Sponsor Inflows prior to and in connection with such Change in Control are at least three times the Sponsor Outflows prior to such Change in Control; or (ii) any day on which both (A) the Sponsor IRR measured as of such measurement is equal to or greater than 20%, and (B) the Sponsor Inflows through such date are at least three times the Sponsor Outflows through such measurement date.

Treatment of Options, Restricted Stock and Stock Units in Connection with the Merger

In connection with the Merger, all outstanding stock options and awards of restricted stock and stock units for Company stock were cashed out, cancelled, or, in limited circumstances, exchanged for new interests in Holdings. Certain stock options held by management of the Company, including Mr. Urcelay, were exchanged for options to purchase common strips, consisting of nine shares of Class A common stock and one share of Class L common stock of Holdings (the “rollover options”). Each rollover option retained its original exercise price and expiration date and was fully vested as of July 21, 2005. For each outstanding option that was not exchanged for Holdings options, the holder received an amount in cash, less applicable withholding taxes, equal to the excess of $26.75 over the exercise price of the option. Each share of restricted stock was converted into the right to receive $26.75, and each restricted stock unit was converted into the right to receive $26.75, less applicable withholding taxes.

The following table shows the number of shares of our common stock subject to options, restricted stock awards and restricted stock units that were held by each of the Named Executive Officers at the time of the Merger and the value of those awards, based on the Merger consideration of $26.75 per share.

Named Executive Officers	Stock Options			Restricted Shares			Restricted Stock Units
Name	Shares (#)	Value($)		Shares (#)	Value($)		Shares (#)	Value($)
Richard L. Markee	888,023	$	7,127,855	105,626	$	2,825,496	0	$	0
Raymond L. Arthur	125,000	$	1,645,250	48,750	$	1,304,063	0	$	0
John Barbour	238,000	$	2,764,620	35,500	$	949,625	0	$	0
Deborah M. Derby	138,000	$	1,786,020	23,000	$	615,250	0	$	0
Antonio Urcelay	147,117	$	1,126,668	2,813	$	75,248	0	$	0
John H. Eyler	2,960,000	$	30,327,300	265,000	$	7,088,750	200,000	$	5,350,000

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In connection with the Merger, Mr. Urcelay received 37,383 rollover options having a value of $601,437.

Aggregate Option Exercises and Year-End Option Value Post-Merger

Name	Number of Securities Underlying Unexercised Options At Year-End (#)(1)			Value of Unexercised In-The-Money Option At Year-End ($)(2)
	Exercisable	Unexercisable		Exercisable		Unexercisable
Richard L. Markee	0	286,671		$	0	$	0
Raymond L. Arthur	0	0		$	0	$	0
John Barbour	0	204,747	(3)	$	0	$	0
Deborah M. Derby	0	122,841		$	0	$	0
Antonio Urcelay	37,383	122,841		$	601,437	$	0
John H. Eyler	0	0		$	0	$	0

⁽¹⁾ The number of securities underlying unexercised options at year-end are denoted in the table in terms of “strips” of Holdings common stock as described above.

⁽²⁾ The value is based on an aggregate amount of $26.75 per strip.

⁽³⁾ Mr. Barbour had the right until March 15, 2006 to purchase certain shares of restricted stock from Holdings. Because he elected not to do so, Holdings has the right to cancel some or all of Mr. Barbour’s 204,747 options at any time.

Aggregate Option Exercises and Year-End Option Value Pre-Merger. No options were exercised by our Named Executive Officers in 2005 prior to the Merger.

Retirement and Deferred Compensation Plans

At the completion of the Merger, we terminated all of our non-qualified deferred compensation plans, including the Toys “R” Us, Inc. Supplemental Executive Retirement Plan (the “SERP”) and any other non-qualified deferred compensation plans in which our executive officers or directors participated, and we caused all accounts under those plans to be distributed to participants. The SERP was a non-qualified defined contribution deferred compensation plan that provided participants, including our Named Executive Officers, with additional retirement benefits that they were precluded from receiving under the qualified 401(k) savings and profit sharing plan as a result of restrictions under the Internal Revenue Code. For each plan year, we contributed to the account of each participant in the SERP an amount equal to 11% of the participant’s eligible pay in excess of the annual compensation limit in Section 401(a)(17) of the Internal Revenue Code ($210,000 in 2005) plus interest at the rate determined under the terms of the SERP. We agreed to provide SERP participants a cash payment equal to the normal contribution that would have been made for fiscal year 2005 under the SERP, provided the participant remained employed by us as of January 28, 2006 (the “Substitute SERP Payment”).

The following table shows the account balances of each of our Named Executive Officers in such non-qualified deferred compensation plans that were distributed when the plans terminated, and the Substitute SERP Payments that were made to such officers for fiscal year 2005.

Name	Account Balances			Substitute SERP Payment
Richard L. Markee	$	4,012,085	(1)	$	251,846
Raymond L. Arthur	$	161,783	(2)	$	113,723
John Barbour	$	287,246	(2)	$	179,475
Deborah M. Derby	$	184,348	(2)	$	98,313
Antonio Urcelay		—			—
John Eyler	$	1,692,755	(3)		—

⁽¹⁾ Includes $1,399,047 of SERP balance, $620,778 of deferred compensation, and $1,992,260 of profit shares.

⁽²⁾ Represents SERP account balance.

⁽³⁾ Includes $1,185,493 of SERP balance and $507,262 of deferred compensation.

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Directors’ Compensation

Upon consummation of the Merger, all of our nine directors then in office resigned from the Board and were replaced by three directors who are representatives of the Sponsors. In September 2005, six additional directors who are representatives of the Sponsors were added to the Board, and in February 2006, our new Chief Executive Officer, Gerald L. Storch, joined the Board as Chairman. All of our directors serve without compensation as directors.

The following paragraphs describe the compensation arrangements that applied for the portion of 2005 preceding the Merger with respect to our directors who were not officers or employees of the Company or any of its subsidiaries (“non-employee directors”).

Each non-employee director was entitled to receive an annual retainer fee of $30,000 in cash or stock units for service on the Board and was entitled to receive meeting fees in the form of stock units valued at $1,500 for each Board meeting attended and $1,000 for each committee meeting attended. Each non-employee director who served as a chair of a committee was entitled to receive additional stock units valued at $10,000 per year, and each non-employee director who served on the Executive Committee was entitled to receive additional stock units valued at $35,000 per year. New non-employee directors received stock units valued at $50,000 after six months of service. Non-employee directors could elect to receive the grant of an option in lieu of the payment of all or any portion of the cash retainer fee or stock unit awards described above (other than the initial award to new non-employee directors). Each outstanding stock option held by our directors that remained unexercised as of the completion of the Merger, whether or not vested or exercisable, was canceled and the director received a cash payment equal to the product of the number of shares of common stock subject to the option as of the effective time of the Merger, multiplied by the excess, if any, of $26.75 over the exercise price per share of common stock subject to such option. Each outstanding stock unit held by our directors at the effective time of the Merger, whether or not vested, was canceled, and the holder received a cash payment of $26.75 per share.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

Retention/Severance Agreements. Each of Messrs. Markee, Barbour, Arthur, and Eyler and Ms. Derby has or had a retention agreement with us, which sets forth the terms of the officer’s employment, including title, duties, compensation and benefits.

Under the retention agreements, if the officer’s employment is terminated by us without “cause” or by the officer for “good reason” (as those terms are defined in the agreements), the officer will be (or was in Mr. Eyler’s case) entitled to receive:

• certain rights accrued through the date of termination, including salary and prior year’s unpaid bonus;

• the officer’s current target annual bonus, pro-rated through the date of termination;

• two times (or, in the case of Mr. Eyler, three times) the officer’s annual base salary and target annual bonus for the year of the termination (and in the case of Mr. Markee, two times the targeted amount of the long-term incentive awards that would have been paid to him with respect to that fiscal year);

• the amount the officer would have received under certain benefit plans, including the SERP, had the officer continued employment throughout the applicable severance period (and in the case of Mr. Markee, two years of additional service credit under such plans);

• continued coverage for a period of time under our health and dental plans (such benefits will terminate if the officer becomes entitled to medical benefits from a subsequent employer); and

• in the case of Messrs. Arthur and Barbour and Ms. Derby, continuation for two years of financial planning services and a leased automobile.

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Each of these retention agreements also contains a tax gross-up provision whereby if the officer incurs an excise tax by reason of his or her receipt of any payment that constitutes an excess parachute payment as defined in Section 280G of the Internal Revenue Code, the officer is entitled to a gross-up payment in an amount that would place the officer in the same after-tax position that he or she would have been in if no excise tax had applied.

Mr. Eyler received the severance benefits described above under his retention agreement when he terminated employment with us shortly after the Merger. The aggregate amount of his severance benefits was $11,068,506, plus a gross-up payment in the amount of $6,855,609 to cover his excise tax liability.

As a condition to receiving any severance payments or benefits under the retention agreements, the officer must execute a release of claims in respect of his or her employment with us. The retention agreements contain certain restrictive covenants, which will continue to bind certain of the executive officers after the Merger, including an agreement not to disclose confidential information at any time, and covenants not to compete with us, solicit our customers or recruit our employees during the employment term and for a period of two years following the termination of the officer’s employment.

Letter Agreement with Mr. Urcelay. On October 22, 2004, we entered into a letter agreement with Mr. Urcelay, which sets forth the terms of his employment, including title, duties, compensation and benefits.

Under Mr. Urcelay’s letter agreement, if we terminate his employment without cause (as defined in the letter agreement), if his position is eliminated and he is not offered a position with equivalent target compensation, or if he is required to relocate and be based at an office or location outside the Madrid, Spain area, then, Mr. Urcelay will be entitled to receive:

• 18 months of base pay,

• the incentive payment that he would have been entitled to receive for the applicable year based upon actual results, up to a maximum of his target incentive for the 18-month period following termination,

• continued provision of tax advice and use of his Company-provided automobile, lap top computer and cell phone for 18 months,

• continued coverage for 18 months under our health plans, and

• continued Company contributions to his pension plan for 18 months.

If within 12 months following a “change in control” (as defined in the letter agreement, which would include the Merger) we terminate Mr. Urcelay’s employment or he resigns due to our requiring him to relocate, without his consent, to any office or location outside of the Madrid, Spain area, Mr. Urcelay will be entitled to a severance payment equal to 18 months pay (which includes base pay and bonus), paid in 18 equal monthly installments.

As a condition to receiving any payments or benefits under the letter agreement, Mr. Urcelay is subject to a covenant not to compete and a covenant not to solicit our customers or our employees for 18 months following his termination of employment. In the event of a breach of these covenants, Mr. Urcelay is required to pay to us an amount equal to the severance pay corresponding to the remaining time of the covenant obligation.

Employment Agreements with Messrs. Storch and Creasey. On February 6, 2006, we entered into an employment agreement with Mr. Storch, as our new Chairman of the Board and Chief Executive Officer, and on April 5, 2006, we entered into an employment agreement with F. Clay Creasey, Jr., who will be our new Chief Financial Officer as of May 15, 2006. Each of these agreements has an initial term of five years, and provides for automatic one-year renewals unless expressly not renewed. The agreement provides for a minimum base salary, a target annual bonus opportunity payable upon achievement of performance targets established annually by the

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board, and eligibility to participate in our welfare benefit plans and retirement plans on the same basis as other senior executives. The officer will be reimbursed for his relocation expenses and legal expenses in connection with the agreement.

Under the employment agreement, if the officer’s employment is terminated by us without “cause” or by him for “good reason” (as those terms are defined in the agreement), he will be entitled to receive:

• certain rights accrued through the date of termination, including salary and prior year’s unpaid bonus,

• a pro-rated portion of his current year’s annual bonus through the date of termination, based on actual results,

• a severance payment equal to the sum of (x) a multiple of base salary (in Mr. Storch’s case the multiple is two, and in Mr. Creasey’s case, the multiple is the Severance Period (described below), as expressed in years), and (y) a multiple of the amount of the annual bonus received by him in the prior fiscal year (in Mr. Storch’s case the multiple is the Severance Period expressed in years, and in Mr. Creasey’s case, the multiple is one). The “Severance Period” is initially a 12-month period commencing on the date of termination, and is increased by three months on each anniversary of the hire date, up to a maximum of 24 months, and

• continued coverage during the Severance Period under our medical, dental and life insurance plans.

As a condition to receiving the severance payment under the agreement, the officer must execute a release of claims in respect of his employment with us. The agreement provides that the officer will be subject to a covenant not to compete and a covenant not to solicit employees, consultants, suppliers or service providers at all times while employed and during the Severance Period (regardless of whether he is receiving severance payments) or for two years in some termination scenarios, and a covenant not to disclose confidential information during the employment term and at all times thereafter.

Retention/Success Bonuses. Certain of our Named Executive Officers also received a retention/success bonus equal to two times his or her annual salary by reason of remaining employed through the completion of the Merger. Mr. Urcelay received a retention bonus of a fixed amount by remaining employed through November 1, 2005. The following table shows the amount of the bonus that each such officer received upon the completion of the Merger:

	Amount of Retention/ Success Bonus
Richard L. Markee	$	1,700,000
John Barbour	$	1,400,000
Raymond L. Arthur	$	1,000,000
Deborah M. Derby	$	900,000
Antonio Urcelay	$	247,520

Special Bonus and Option Agreement with Mr. Markee. On July 22, 2005, we entered into a special bonus and option agreement with Mr. Markee, pursuant to which he would be entitled to a payment of $2,000,000 on the first to occur of (i) his agreement to serve as Chief Executive Officer on a non-interim basis if so appointed by our board of directors, (ii) 90 days after another person commences employment as Chief Executive Officer; and (iii) the twelve month anniversary of the agreement. Since Gerald L. Storch became our new Chief Executive Officer as of February 7, 2006, the $2,000,000 payment to Mr. Markee will be due 90 days thereafter. This special agreement also provides that any severance payment that Mr. Markee may be entitled to receive from us will be reduced by $1,000,000. In addition, pursuant to the special agreement, Mr. Markee was granted options to acquire 40,953 strips of common stock of Holdings, for an exercise price of $26.75 per strip. These options will vest upon Mr. Markee’s entitlement to the $2,000,000 payment described above.

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Compensation Committee Interlocks and Insider Participation

Our executive committee, which serves as our compensation committee, is comprised of Messrs. Calbert, Fascitelli and Levin. None of the members of the executive committee during fiscal year 2005 or as of the date of this Annual Report on Form 10-K is or has been an officer or employee of the Company or any of its subsidiaries.

Each member of the executive committee is affiliated with one of our Sponsors. Mr. Calbert has served as an executive officer of Kohlberg Kravis Roberts & Co. since 2000. Mr. Fascitelli has been President and trustee of Vornado Realty Trust since December 1996. Mr. Levin has been a Managing Director at Bain Capital since 2000.

None of our executive officers serves as a member of the board of directors or compensation committee, or similar committee, of any other company that has one or more of its executive officers serving as a member of our board of directors or our compensation committee.

ITEM 12. SEC URITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Beneficial Ownership of Holdings

As a result of the Merger, all of our outstanding stock is beneficially owned by Holdings. The following table presents information regarding beneficial ownership of the common stock of Holdings, as of March 31, 2006, by the Named Executive Officers, each of our directors, our current Chief Executive Officer, all of our directors and executive officers as a group and each person who is known by us to beneficially own more than 5% of the common stock of Holdings. The table also sets forth ownership information for these persons regarding unvested stock options for which these persons are not deemed to beneficially own the underlying shares of common stock. Each share or option to purchase shares (as listed below) is comprised of “strips” of common stock in Holdings. Each strip consists of nine shares of Class A common stock and one share of Class L common stock of Holdings. None of our directors, except Gerald Storch, our Chairman of the Board and Chief Executive Officer, beneficially owns any shares (refer to the footnotes below).

Name of Beneficial Owner	Shares Beneficially Owned*	Options Exercisable Within 60 Days	Options Not Exercisable Within 60 Days	Percent of Outstanding Shares(1)
Affiliates of Bain Capital Partners, LLC(2)	16,012,464	0	0	32.85	%
Toybox Holdings, LLC(3).	16,012,464	0	0	32.85	%
Vornado Truck LLC(4)	16,012,464	0	0	32.85	%
Raymond L. Arthur	0	0	0	—
John Barbour	0	0	204,747	—
Deborah M. Derby	14,953	0	122,841	—
Richard L. Markee	20,561	40,953	245,718	—
Gerald L. Storch	74,766	0	747,664	—
Antonio Urcelay	0	37,383	122,841	—
John H. Eyler, Jr.
Directors and executive officers as a group (17 persons)	110,280	145,626	1,633,942	—

* For purposes of this table, “beneficial ownership” is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 pursuant to which a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock with respect to which such person has (or has the right to acquire within 60 days, i.e., by May 30, 2006 in this case) sole or shared voting power or investment power.

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⁽¹⁾ Unless otherwise indicated, the beneficial ownership of any named person does not exceed, in the aggregate, one percent of outstanding equity securities of Holdings on March 31, 2006, as adjusted as required by applicable rules.

⁽²⁾ Includes Bain Capital (TRU) VIII, L.P., Bain Capital (TRU) VIII-E, L.P., Bain Capital (TRU) VIII Coinvestment, L.P., Bain Capital Integral Investors, LLC and BCIP TCV, LLC. The Bain Capital Funds are all affiliates of Bain Capital Partners, LLC. Bain Capital Partners, LLC disclaims beneficial ownership of such shares. The Bain Capital Funds each have an address c/o Bain Capital Partners, LLC, 111 Huntington Avenue, Boston, MA 02199.

⁽³⁾ Shares owned of record by Toybox Holdings, LLC are also beneficially owned by its majority member, KKR Millennium Fund, Limited Partnership. KKR Millennium GP LLC is the general partner of KKR Associates Millennium L.P., which is the general partner of the KKR Millennium Fund, Limited Partnership. Messrs. Henry R. Kravis, George R. Roberts, James H. Greene, Jr., Paul E. Raether, Michael W. Michelson, Perry Golkin, Johannes P. Huth, Todd A. Fisher, Alexander Navab, Marc S. Lipschultz, Reinhard Gorenflos, Jacques Garaialde, Michael M. Calbert and Scott C. Nuttall, as members of KKR Millennium GP LLC, may be deemed to share beneficial ownership of any shares beneficially owned by KKR Millennium GP LLC, but disclaim such beneficial ownership. Mr. Calbert is one of our directors. KKR is also an affiliate of Toybox Holdings, LLC. Mr. Kerko is a Principal of KKR and one of our directors, and Mr. Pfeffer is a Member of KKR and one of our directors. They also disclaim beneficial ownership of any of our shares beneficially owned by KKR Millenium GP LLC. For a description of material relationships between KKR and us over the last three years, see “Certain Relationships and Related Transactions.” The address of KKR Millennium GP LLC and each individual listed above is c/o Kohlberg Kravis Roberts & Co., L.P., 2800 Sand Hill Road, Menlo Park, CA 94025.

⁽⁴⁾ An affiliate of Vornado Realty Trust, having an address of 888 Seventh Avenue, New York, NY 10019.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Officer Loan

John Barbour, Executive Vice President-President-Toys “R” Us U.S., had an outstanding loan from Toysrus.com, Inc. This loan to him was originally incurred in 2000, when he was chief executive officer of Toysrus.com, Inc., in connection with his exercise of options to purchase shares of common stock of Toysrus.com, Inc. in that year. The annual interest rate was 7.0%. This loan was a non-recourse obligation and was secured solely by a pledge of the shares of Toysrus.com, Inc. common stock owned by Mr. Barbour. This loan has since been repaid in full on February 16, 2006.

Consistent with applicable law, the Company and its subsidiaries no longer make loans to the Company’s directors and executive officers.

Advisory Agreement

The Sponsors provide management and advisory services to us pursuant to an advisory agreement executed at the closing of the Merger. Under the terms of the advisory agreement and effective as of July 21, 2005, we are obliged to pay the Sponsors an Advisory Fee (as defined in the advisory agreement). We paid the Sponsors an aggregate advisory fee of $3.75 million for the thirteen weeks ended October 29, 2005, and a fee for the portion of the quarter from the Merger date to July 30, 2005, of $0.4 million. There was no advisory fee for the thirteen weeks ended January 28, 2006. The quarterly fee for the first fiscal quarter of 2006 will be $7.5 million, and the quarterly fees for the second, third, and fourth quarters of 2006 will be $3.94 million per quarter. Thereafter, the $15 million annual fee will increase five percent per year during the ten-year term of the agreement. In addition, upon consummation of the Merger, we paid the Sponsors a fee in the aggregate amount of $81 million for services rendered and out-of-pocket expenses in connection with the debt financing transactions described in Item 8., Note 11 entitled “SEASONAL FINANCING AND LONG-TERM DEBT.”

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In the event that the advisory agreement is terminated by the Sponsors or the Company, the Sponsors will receive all unpaid Advisory Fees, all unpaid Subsequent Transaction Fees (as defined below) and expenses due under the advisory agreement with respect to periods prior to the termination date plus the net present value of the Advisory Fees that would have been payable for the remainder of the term of the advisory agreement. The initial term of the advisory agreement is ten years, and it extends annually for one year unless the Sponsors or the Company provide notice to the other. The advisory agreement provides that affiliates of the Sponsors will be entitled to receive a fee equal to 1% of the aggregate transaction value in connection with certain subsequent financing, acquisition, disposition and change of control transactions. The advisory agreement includes customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates.

Merger of Toysrus.com, Inc.

At January 29, 2005, our current and former employees and directors held approximately 5.0 million shares of Toysrus.com, Inc. common stock and options to acquire an additional 4.9 million shares, representing approximately 2.4% of the authorized common stock of Toysrus.com, Inc. On January 17, 2006, Toys “R” Us—Delaware, Inc., one of our subsidiaries, acquired all of the outstanding stock options and shares of Toysrus.com, Inc. Each holder of shares in Toysrus.com, Inc. received $1.13 per share less applicable withholding taxes. Each option holder received an amount in cash, less applicable withholding taxes, equal to the value of the option calculated using an option-pricing model based on the $1.13 per share. The values ranged from $0.33 to $0.89 for each outstanding option. As a result of the above, we recognized $3 million of compensation expense and $6 million of goodwill.

The following table presents all amounts received by the Named Executive Officers in connection with the Toysrus.com merger:

Named Executive Officer	Amount Received
Richard L. Markee	$	84,750
Raymond L. Arthur	$	422,950
John Barbour	$	2,260,000
John H. Eyler, Jr.	$	168,000
Antonio Urcelay	$	13,200

Other Relationships and Transactions

On August 29, 2005, an affiliate of Vornado Realty Trust acquired by assignment an aggregate of $150 million of the lenders’ rights and obligations under the Bridge Loan Agreement described above in Item 8, Note 11 entitled “SEASONAL FINANCING AND LONG-TERM DEBT.” As of the date of this Annual Report on Form 10-K, $77 million of this amount remains outstanding.

Vornado Realty Trust is handling the disposition of the real estate of the 75 stores being permanently closed in connection with our previously announced store closings.

2005 Management Equity Plan

Our officers and employees participate in Holdings’ 2005 Management Equity Plan (the “2005 Plan”). The 2005 Plan provides for the granting of non-qualified stock options (including “rollover options” (as defined in the 2005 Plan)) to purchase shares of Class A and Class L common stock of Holdings, as well as restricted stock to officers, directors, employees, consultants and advisors of Holdings and its subsidiaries, including the Company. All awards are in the form of one or more common strips. Each common strip consists of nine shares of Class A common stock and one share of Class L common stock of Holdings.

Under the 2005 Plan, options (other than rollover options) vest in three tranches and are either “time options” that vest and become exercisable over a five year period or “performance options” that vest and become exercisable based on the achievement of certain performance targets set forth in the 2005 Plan. However, all

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“time options” become fully vested on a “Change in Control” (as defined in the 2005 Plan) and the “performance options” become fully vested on the eighth anniversary of the date of grant even if the performance targets have not been achieved, provided the optionee is still employed through such date. All options expire ten years from the date of the grant.

As of January 28, 2006, Holdings granted 813,864 time-based and 1,545,822 performance-based options to purchase common strips. All outstanding options expire at dates ranging from September 8, 2008 to October 25, 2015.

The Plan also permits the sale of non-transferable, restricted stock to certain employees at a purchase price equal to fair market value of the common strips. As of January 28, 2006, 62,805 common strips of restricted stock had been purchased by executives of the Company at a fair value of $26.75 per common strip. The restricted stock is subject to certain transfer restrictions, as well as, in some cases, a put right exercisable in certain circumstances by the holder and a call right exercisable by Holdings (and, if not exercised by Holdings , by its equity sponsors—Bain Capital Partners LLC, Toybox Holdings, LLC and Vornado Truck, LLC) in the event the holder is no longer employed by Holdings or any of its subsidiaries.

At January 28, 2006, an aggregate of 1.5 million strips were reserved for future option grants under the Plan.

ITEM 14.     PRIN CIPAL ACCOUNTING FEES AND SERVICES

Appointment of Independent Auditors

The Audit Committee has appointed Deloitte & Touche LLP as the Company’s independent auditors to conduct the audit of the Company’s financial statements for the fiscal year ending January 28, 2006. Ernst & Young LLP served as the Company’s independent auditors for the fiscal year ended January 29, 2005.

Audit Fees

The aggregate fees billed by Deloitte & Touche LLP and Ernst & Young LLP and the member firms of Deloitte & Touche LLP and Ernst & Young LLP, and their respective affiliates (collectively, “Deloitte & Touche LLP” and “Ernst & Young LLP”, respectively) for professional services rendered for the audit of the Company’s annual financial statements for the fiscal years ended January 28, 2006 and January 29, 2005, respectively and for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q for those fiscal years, and for other services rendered during those fiscal years on behalf of the Company were as follows:

	Fiscal Year 2005 (D&T)		Fiscal Year 2004 (D&T)		Fiscal Year 2005 (E&Y)		Fiscal Year 2004 (E&Y)
Audit Fees(a)	$	5,339,000	$	—	$	1,102,000	$	8,220,000
Audit Related Fees(b)	$	1,224,000	$	—	$	706,000	$	124,000
Tax Fees(c)	$	2,373,000	$	53,000	$	466,000	$	628,000
All Other Fees(d)	$	13,443,000	$	3,164,000	$	165,000	$	—

Deloitte & Touche:

^(a) For fiscal year 2005, the audit fees consist of fees for professional services performed in connection with the audit of the Company’s annual financial statements, review of financial statements included in the Company’s 10-Q filings, the Sarbanes-Oxley Section 404 audit and services that are normally provided in connection with statutory and regulatory filings or engagements.

^(b) For fiscal year 2005, audit-related fees consist of fees for consultation on various accounting matters and accounting consultation relating to the sale of the Company.

^(c) For fiscal 2005, tax fees consist of fees of $341,000 for tax returns preparation assistance, $97,000 for tax audits assistance and $1,935,000 for tax consultation. For fiscal 2004, tax fees consist of $25,000 for tax consultation and $28,000 for use of tax software.

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^(d) For fiscal 2005, other fees consist of $13,142,000 for matters associated with the sale of the Company and $301,000 relating to an assessment of store operating procedures. For fiscal 2004, other fees consist of $3,164,000 for assistance with management’s Sarbanes-Oxley Section 404 assessment.

Ernst & Young:

^(a) For fiscal years 2005 and 2004, the audit fees consist of fees for professional services performed in connection with the audit of the Company’s annual financial statements, review of financial statements included in the Company’s 10-Q filings and services that are normally provided in connection with statutory and regulatory filings or engagements. Additionally, fiscal year 2005’s audit fees also include fees for the audit of Toys—Delaware ($675,000), and fiscal year 2004’s audit fees also include fees for professional services performed in connection with the audit procedures related to the Company’s lease accounting restatements ($947,000), Babies “R” Us ($1,225,000) and Toys “R” Us (including the International Division) ($525,000).

^(b) For fiscal year 2005, audit-related fees consist of fees for consultation on various accounting matters and consultation relating to the sale of the Company. For fiscal year 2004, audit-related fees consist of fees for consultation on accounting matters and Sarbanes-Oxley Section 404 compliance.

^(c) For fiscal year 2005, tax fees consist of $85,000 for tax returns preparation assistance, $43,000 for tax audits assistance and $338,000 for tax consultation. For fiscal year 2004, tax fees consist of $107,000 for tax returns preparation assistance, $216,000 for tax audits assistance and $305,000 for tax consultation.

^(d) For fiscal 2005, other fees include $94,000 for matters associated with the sale of the Company, $71,000 for the preparation of workpapers in connection with the Company’s change in auditors and various other matters.

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Audit Committee pre-approves all audit and permissible non-audit services provided by Deloitte & Touche LLP. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted a policy for the pre-approval of services provided by Deloitte & Touche LLP. Under the policy, pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. The Audit Committee may delegate pre-approval authority to one or more of its members. Such member or members must report any decision to the Audit Committee at its next scheduled meeting.

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P ART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements and financial statement schedules

(1) And (2) The financial statements and financial statement schedules required to be filed as part of this report are set forth in Item 8 of Part II of this report.

(3) Exhibits. See Item 15(b) below.

(b) Exhibits required by Item 601 of Regulation S-K

The information required by this item is incorporated herein by reference from the Index to Exhibits beginning on Page 130 of this report on Form 10-K. We will furnish to any stockholder, upon written request, any exhibit listed in the accompanying Index to Exhibits upon payment by such stockholder of our reasonable expenses in furnishing any such exhibit. Written requests should be sent to Investor Relations, Toys “R” Us Inc., One Geoffrey Way, Wayne, New Jersey 07470.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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)

/s/    GERALD L. STORCH        

Gerald L. Storch

Chairman of the Board and

Chief Executive Officer

Date: April 28, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 28th day of April 2006.

Signature	Title
/s/    GERALD L. STORCH         Gerald L. Storch	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)
/s/    RAYMOND L. ARTHUR         Raymond L. Arthur	Executive Vice President – Chief Financial Officer (Principal Financial Officer)
/s/    CHARLES D. KNIGHT         Charles D. Knight	Vice President – Corporate Controller (Principal Accounting Officer)
* Joshua Bekenstein	Director
* Michael M. Calbert	Director
* Michael D. Fascitelli	Director
* David M. Kerko	Director
* Matthew S. Levin	Director
* John Pfeffer	Director
* Dwight M. Poler	Director
* Steven Roth	Director
* Wendy Silverstein	Director

The foregoing constitutes all of the Board of Directors and the Principal Executive, Financial and Accounting Officers of the Registrant.

*By    /s/    GERALD L. STORCH        

Gerald L. Storch

Attorney-In-Fact

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INDEX TO EXHIBITS

The following is a list of all exhibits filed as part of this Report:

Exhibit No.	Document
3.1	Restated Certificate of Incorporation of the Registrant filed with the Delaware Secretary of State of the State of Delaware on July 21, 2005 (filed as Exhibit 3.1 to the Registrant’s Form 8-K, filed on July 27, 2005 and incorporated herein by reference).
3.2	Amended and Restated By-Laws of the Registrant, dated February 6, 2006.
4.1	Form of Indenture between the Registrant and Fleet Bank, as trustee, pursuant to which securities in one or more series up to $300,000,000 in principal amount may be issued by the Registrant (filed as Exhibit 4 to the Registrant’s Registration Statement on Form S-3, No. 33-42237, filed on August 31, 1991 and incorporated herein by reference).
4.2	Form of Registrant’s 8 3/4% Debentures due 2021 (filed as Exhibit 4 to the Registrant’s Current Report on Form 8-K, dated August 29, 1991 and incorporated herein by reference).
4.3	Indenture, dated July 24, 2001, between the Registrant and The Bank of New York, as trustee (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-4, No. 333-73800 filed on November 20, 2001 and incorporated herein by reference).
4.4	Form of Registrant’s 6.875% Notes due 2006 and form of Registrant’s 7.25% Notes due 2011 (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-4, No. 333-73800, filed on November 20, 2001 and incorporated herein by reference).
4.5	Form of Registrant’s 7.875% Notes due 2013 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, filed on April 8, 2003 and incorporated herein by reference).
4.6	Form of Registrant’s 7.375% Notes due 2018 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on September 22, 2003 and incorporated herein by reference).
4.7	Indenture, dated as of May 28, 2002, between the Registrant and The Bank of New York, as trustee (filed as Exhibit 4.13 to the Post-Effective Amendment to the Registrant’s Registration Statement on Form S-3, No. 333-84254, filed on May 28, 2002 and incorporated herein by reference).
4.8	First Supplemental Indenture, dated as of May 28, 2002, between the Registrant and The Bank of New York, as trustee (filed as Exhibit 4.14 to the Post-Effective Amendment to the Registrant’s Registration Statement on Form S-3, No. 333-84254, filed on May 28, 2002 and incorporated herein by reference).
4.9	Lease Agreement dated as of September 26, 2001 between First Union Development Corporation, as Lessor, and the Registrant, as Lessee (filed as Exhibit 4(viii) to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2002 and incorporated herein by reference).
4.10	Participation Agreement dated as of September 26, 2001 among the Registrant, as the Construction Agent and as the Lessee, First Union Development Corporation, as the Borrower and as the Lessor, the various financial institutions and other institutional investors which are parties thereto from time to time, as the Trench A Note Purchasers, the various banks and other lending institutions which are parties thereto from time to time, as the Trench B Lenders, the various banks and other lending institutions which are parties thereto from time to time, as the Cash Collateral Lenders, and First Union National Bank, as the Agent for the Primary Financing Parties and, respecting the Security Documents, as agent for the Secured Parties and First Union National Bank as Escrow Agent Lessee (filed as Exhibit 4(ix) to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2002 and incorporated herein by reference).

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Exhibit No.	Document
4.11	Substantially all other long-term debt of Registrant (which other debt does not exceed on an aggregate basis 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis) is evidenced by, among other things, (i) industrial revenue bonds issued by industrial development authorities and guaranteed by Registrant, (ii) mortgages held by third parties on real estate owned by Registrant, and (iii) yen denominated note payable collateralized by the expected future yen cash flows from license fees from Toys “R” Us – Japan.
10.1	Credit Agreement, dated as of July 21, 2005, among Toys “R” Us, Inc., as the initial borrower, and the other borrowers named therein, Bank of America, N.A. as Administrative Agent, Bank of America, N.A. as Canadian Agent, Deutsche Bank Trust Company Americas as Collateral Agent, the Lenders named therein, Deutsche Bank Securities Inc. and Citigroup Global Markets, Inc., as Co-Syndication Agents, and Credit Suisse First Boston LLC, and General Electric Capital Corporation, as Co-Documentation Agents (filed as Exhibit 10.1 to the Registrant’s Form 8-K, filed on July 27, 2005 and incorporated herein by reference).
10.2	Security Agreement, dated as of July 21, 2005, among Toys “R” Us, Inc., and the borrowers named therein, the guarantors named therein, and Bank of America, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Registrant’s Form 8-K, filed on July 27, 2005 and incorporated herein by reference).
10.3	Bridge Loan Agreement, dated as of July 21, 2005, among Toys “R” Us, Inc., as the initial borrower, Toys “R” Us-Delaware, Inc. as borrower after the Merger and Assumption (as defined therein), Banc of America Bridge, LLC, N.A., as Administrative Agent, Deutsche Bank Securities Inc., as Joint-Administrative Agent, the Lenders named therein, Banc of America Securities LLC, Deutsche Bank AG Cayman Islands Branch, and Credit Suisse, as Joint Lead Arrangers and Joint Book running Managers, and Citigroup Global Markets Inc., as Co-Arranger (filed as Exhibit 10.3 to the Registrant’s Form 8-K, filed on July 27, 2005 and incorporated herein by reference).
10.4	Senior Facilities Agreement, dated as of July 21, 2005, among Toys “R” Us (UK) Limited, as original borrower and original guarantor, and the other borrowers named therein, Deutsche Bank AG, London Branch, Barclays Capital and The Royal Bank of Scotland plc as Mandated Lead Arrangers and Book runners, Banc of America Securities Limited as Arranger, Deutsche Bank AG, London Branch as Facility Agent and as Security Agent and the banks and other institutions named therein as Lenders (filed as Exhibit 10.4 to the Registrant’s Form 8-K, filed on July 27, 2005 and incorporated herein by reference).
10.5	Loan and Security Agreement, dated as of July 21, 2005, between MPO Properties, LLC, as borrower, and German American Capital Corporation, on behalf of the holders of the notes, as lender (filed as Exhibit 10.5 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.6	Mezzanine Loan and Security Agreement (First Mezzanine), dated as of July 21, 2005, between MPO Intermediate, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.6 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.7	Mezzanine Loan and Security Agreement (Second Mezzanine), dated as of July 21, 2005, between MPO Intermediate Holdings, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.7 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.8	Mezzanine Loan and Security Agreement (Third Mezzanine), dated as of July 21, 2005, between MPO Intermediate Holdings, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.8 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).

131

Exhibit No.	Document
10.9	Mezzanine Loan and Security Agreement (Fourth Mezzanine), dated as of July 21, 2005, between MPO Junior Holdings, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.9 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.10	Loan and Security Agreement, dated as of July 21, 2005, between Giraffe Properties, LLC, as borrower, and German American Capital Corporation, on behalf of the holders of the notes, as lender (filed as Exhibit 10.10 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.11	Mezzanine Loan and Security Agreement (First Mezzanine), dated as of July 21, 2005, between Giraffe Intermediate, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.11 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.12	Mezzanine Loan and Security Agreement (Second Mezzanine), dated as of July 21, 2005, between Giraffe Intermediate Holdings, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.12 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.13	Mezzanine Loan and Security Agreement (Third Mezzanine), dated as of July 21, 2005, between Giraffe Junior, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.13 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.14	Mezzanine Loan and Security Agreement (Fourth Mezzanine), dated as of July 21, 2005, between Giraffe Junior Holdings, LLC, as borrower, and German American Capital Corporation, as lender (filed as Exhibit 10.14 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.15	Credit Agreement, dated as of December 9, 2005, among TRU 2005 RE Holding Co. I, LLC, as borrower, MAP Real Estate, LLC, Wayne Real Estate Company, LLC, TRU 2005 RE I, LLC and TRU 2005 RE II Trust, the lenders party thereto from time to time and Deutsche Bank AG, New York Branch, as administrative agent (filed as Exhibit 10.1 to the Registrant’s Form 8-K, filed on December 15, 2005 and incorporated herein by reference).
10.16	Credit Agreement dated as of February 8, 2006 among Toys “R” Us Properties (UK) Limited, as borrower, Vanwall Finance PLC, as senior lender, the Royal Bank of Scotland plc, as junior lender, and Deutsche Bank AG, London Branch, as facility agent and security agent.
10.17*	Toys “R” Us Holdings, Inc. 2005 Management Equity Plan (filed as Exhibit 10.15 to the Registrant’s Form 10-Q, filed on September 14, 2005 and incorporated herein by reference).
10.18*	Amendment No. 1 to the Toys “R” Us Holdings, Inc. 2005 Management Equity Plan.
10.19*	Amended and Restated Toys “R” Us, Inc. Management Incentive Compensation Plan, effective as of February 2, 2003 (filed as Exhibit F to Registrant’s Proxy Statement for the year ended February 1, 2003 and incorporated herein by reference).
10.20*	Amended and Restated Toys “R” Us, Inc. Grantor Trust Agreement, dated as of October 1, 1995, between Registrant and American Express Trust company (filed as Exhibit 10.14 to the Form 8-B filed on January 3, 1996 and incorporated herein by reference).
10.21*	Amended and Restated Toys “R” Us, Inc. Supplemental Executive Retirement Plan, effective as of December 3, 2003 (filed as Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 2004 and incorporated herein by reference).

132

Exhibit No.	Document
10.22*	Amendment to Amended and Restated Toys “R” Us, Inc. Supplemental Executive Retirement Plan, effective as of March 16, 2005 (filed as Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference).
10.23*	Amended and Restated Toys “R” Us, Inc. Grantor Trust Agreement, dated as of January 31, 2003, between Registrant and Wachovia Bank, N.A. (filed as Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 2004 and incorporated herein by reference).
10.24*	Toys “R” Us, Inc. Split Dollar Plan, effective February 1, 1996 and Amendment to Toys “R” Us, Inc. Split Dollar Plan, effective November 5, 2003 (filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 2004 and incorporated herein by reference).
10.25*	Advisory Agreement, dated as of July 21, 2005, among the Registrant, Toys “R” Us Holdings, Inc., Bain Capital Partners, LLC, Bain Capital, Ltd., Kohlberg Kravis Roberts & Co., L.P. and Vornado Truck, LLC (filed as Exhibit 10.20 to the Registrant’s Quarterly Report on Form 10-Q filed on September 14, 2005 and incorporated herein by reference).
10.26*	Employment Agreement among Toys “R” Us Holdings, Inc., Toys “R” Us, Inc. and Gerald Storch, dated as of February 6, 2006.
10.27*	Retention Agreement between Toys “R” Us, Inc. and Richard L. Markee dated as of May 1, 1997 (filed as Exhibit 10P to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 1997 and incorporated herein by reference).
10.28*	Amendment to Retention Agreement between Toys “R” Us, Inc. and Richard L. Markee dated May 6, 1999 (filed as Exhibit 10P to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2000 and incorporated herein by reference).
10.29*	Special Bonus and Option Agreement, dated as of July 22, 2005, among Toys “R” Us Holdings, Inc., Toys “R” Us, Inc and Richard L. Markee (filed as Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2005 and incorporated herein by reference).
10.30*	Amendment to Retention Agreement, dated February 11, 2005, by and between Toys “R” Us, Inc. and Raymond L. Arthur (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 14, 2005 and incorporated herein by reference).
10.31*	Retention Agreement between Toys “R” Us, Inc. and John Barbour, dated as of November 1, 2004 (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 30, 2004 and incorporated herein by reference).
10.32*	Amendment to Retention Agreement, dated February 11, 2005, by and between Toys “R” Us, Inc. and John Barbour (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 14, 2005 and incorporated herein by reference).
10.33*	Amendment to Retention Agreement, dated July 21, 2005, by and between Toys “R” Us, Inc. and John Barbour (filed as Exhibit 10.18 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2005 and incorporated herein by reference).
10.34*	Stock Pledge Agreement, dated as of July 20, 2001, between Toysrus.com, Inc. and John Barbour (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended February 1, 2003 and incorporated herein by reference).
10.35*	Non-Recourse Promissory Note, dated as of July 20, 2001, from John Barbour to Toysrus.com, Inc. (filed as Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K for the year ended February 1, 2003 and incorporated herein by reference).

133

Exhibit No.	Document
10.36*	Retention agreement between Toys “R” Us, Inc. and Raymond L. Arthur, dated as of November 1, 2004 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 30, 2004 and incorporated herein by reference).
10.37*	Amendment to Retention Agreement, dated February 11, 2005, by and between Toys “R” Us, Inc. and Raymond L. Arthur (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 14, 2005 and incorporated herein by reference).
10.38*	Second Amendment to Retention Agreement, dated September 12, 2005, by and between Toys “R” Us, Inc. and Raymond L. Arthur (filed as Exhibit 10.19 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2005 and incorporated herein by reference).
10.39*	Amended and Restated Retention Agreement between Toys “R” Us, Inc. and Deborah M. Derby, dated as of November 1, 2004 (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 30, 2004 and incorporated herein by reference).
10.40*	Amendment to Retention Agreement, dated February 11, 2005, by and between Toys “R” Us, Inc. and Deborah M. Derby (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated February 14, 2005 and incorporated herein by reference).
10.41*	Amendment to Retention Agreement, dated July 21, 2005, between Toys “R” Us, Inc. and Deborah M. Derby (filed as Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2005 and incorporated herein by reference).
10.42*	Memorandum dated February 7, 2005 summarizing the agreement to pay relocation expenses of John Barbour (filed as Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference).
10.43*	Retention Agreement between Toys “R” Us, Inc. and John H. Eyler, Jr., dated January 6, 2000 (filed as Exhibit BB to the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2000 and incorporated herein by reference).
10.44*	Letter Agreement, dated October 20, 2004, between the Company and Antonio Urcelay.
10.45*	Form of Success Bonus Letter between the Registrant and each of Raymond Arthur, John Barbour, Deborah Derby and Richard Markee (filed as Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference).
10.46*	Employment Agreement among Toys “R” Us Holdings, Inc., Toys “R” Us, Inc. and F. Clay Creasey, Jr, dated as of April 5, 2006.
12	Statement re: computation of ratio of earnings to fixed charges.
14	Toys “R” Us, Inc.’s Chief Executive Officer and Senior Financial Officers Code of Ethics, adopted September 2005.
21	Subsidiaries of the Registrant.
24	Power of Attorney, dated March 28, 2006.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities and 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 and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

134

Exhibit No.	Document
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.

* Management contract or compensatory plan, contract or arrangement.

135

EX-3.2

Exhibit 3.2

AMENDED AND RESTATED

BY-LAWS

OF

TOYS “R” US, INC.

A Delaware corporation

(Adopted as of February 6, 2006)

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be located at Delaware is 9 East Loockerman Street, #1-B, in the City of Dover, County of Kent, 19901. The name of the corporation’s registered agent at such address shall be National Registered Agents, Inc. The registered office and/or registered agent of the corporation may be changed from time to time by action of the board of directors.

Section 2. Other Offices. The corporation may also have offices at such other places, both within and without the State of Delaware, as the board of directors may from time to time determine or the business of the corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. Place and Time of Meetings. An annual meeting of the stockholders shall be held each year within one hundred twenty (120) days after the close of the immediately preceding fiscal year of the corporation for the purpose of electing directors and conducting such other proper business as may come before the meeting. The date, time and place of the annual meeting shall be determined by the chief executive officer of the corporation; provided, that if the chief executive officer does not act, the board of directors shall determine the date, time and place of such meeting.

Section 2. Special Meetings. Special meetings of stockholders may be called for any purpose and may be held at such time and place, within or without the State of Delaware, as shall be stated in a notice of meeting or in a duly executed waiver of notice thereof. Such meetings may be called at any time by the board of directors or the chief executive officer and shall be called by the chief executive officer upon the written request of holders of shares entitled to cast not less than a majority of the votes at the meeting, such written request shall state the purpose or purposes of the meeting and shall be delivered to the chief executive officer.

Section 3. Place of Meetings. The board of directors may designate any place, either within or without the State of Delaware, as the place of meeting for any annual meeting or for any special meeting called by the board of directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal executive office of the corporation.

Section 4. Notice. Whenever stockholders are required or permitted to take action at a meeting, written or printed notice stating the place, date, time, and, in the case of special meetings, the purpose or purposes, of such meeting, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. All such notices shall be delivered, either personally or by mail, by or at the direction of the board of directors, the chief executive officer or the secretary, and if mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the stockholder at his, her or its address as the same appears on the records of the corporation. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.

Section 5. Stockholders List. The officer having charge of the stock ledger of the corporation shall make, at least ten (10) days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

Section 6. Quorum. The holders of a majority of the outstanding shares of capital stock, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders, except as otherwise provided by statute or by the certificate of incorporation. If a quorum is not present, the holders of a majority of the shares present in person or represented by proxy at the meeting, and entitled to vote at the meeting, may adjourn the meeting to another time and/or place.

Section 7. Adjourned Meetings. When a meeting is adjourned to another time and place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

Section 8. Vote Required. When a quorum is present, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote

on the subject matter shall be the act of the stockholders, unless the question is one upon which by express provisions of an applicable law or of the certificate of incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question.

Section 9. Voting Rights. Except as otherwise provided by the General Corporation Law of the State of Delaware or by the certificate of incorporation of the corporation or any amendments thereto and subject to Section 3 of Article VI hereof, every stockholder shall at every meeting of the stockholders be entitled to one (1) vote in person or by proxy for each share of common stock held by such stockholder.

Section 10. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. Any proxy is suspended when the person executing the proxy is present at a meeting of stockholders and elects to vote, except that when such proxy is coupled with an interest and the fact of the interest appears on the face of the proxy, the agent named in the proxy shall have all voting and other rights referred to in the proxy, notwithstanding the presence of the person executing the proxy. At each meeting of the stockholders, and before any voting commences, all proxies filed at or before the meeting shall be submitted to and examined by the secretary or a person designated by the secretary, and no shares may be represented or voted under a proxy that has been found to be invalid or irregular.

Section 11. Action by Written Consent. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken and bearing the dates of signature of the stockholders who signed the consent or consents, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in the state of Delaware, or the corporation’s principal place of business, or an officer or agent of the corporation having custody of the book or books in which proceedings of meetings of the stockholders are recorded. Delivery made to the corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested provided, however, that no consent or consents delivered by certified or registered mail shall be deemed delivered until such consent or consents are actually received at the registered office. All consents properly delivered in accordance with this section shall be deemed to be recorded when so delivered. No written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation as required by this section, written consents signed by the holders of a sufficient number of shares to take such corporate action are so recorded. Prompt notice of the taking of the corporate action without a meeting by less than

unanimous written consent shall be given to those stockholders who have not consented in writing. Any action taken pursuant to such written consent or consents of the stockholders shall have the same force and effect as if taken by the stockholders at a meeting thereof.

ARTICLE III

DIRECTORS

Section 1. General Powers. The business and affairs of the corporation shall be managed by or under the direction of the board of directors.

Section 2. Number, Election and Term of Office. The number of directors which shall constitute the first board shall be three (3). Thereafter, the number of directors shall be established from time to time by resolution of the board. The directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote in the election of directors. The directors shall be elected in this manner at the annual meeting of the stockholders, except as provided in Section 4 of this Article III. Each director elected shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided. The board of directors may elect or appoint a chairman (who shall be a director of the corporation) to preside at meetings of the board of directors.

Section 3. Removal and Resignation. Any director or the entire board of directors may be removed at any time, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of any class or series are entitled to elect one or more directors by the provisions of the corporation’s certificate of incorporation, the provisions of this section shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. Any director may resign at any time upon written notice to the corporation.

Section 4. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. Each director so chosen shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as herein provided.

Section 5. Annual Meetings. The annual meeting of each newly elected board of directors shall be held without other notice than this by-law immediately after, and at the same place as, the annual meeting of stockholders.

Section 6. Other Meetings and Notice. Regular meetings, other than the annual meeting, of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the board. Special meetings of the board of directors may be called by or at the request of the chief executive officer or a majority of the directors then in office on at least twenty-four (24) hours notice to each director, either personally, by telephone, by mail, or by telegraph.

Section 7. Quorum, Required Vote and Adjournment. A majority of the total number of directors shall constitute a quorum for the transaction of business. The vote of a majority of directors present at a meeting at which a quorum is present shall be the act of the board of directors. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

Section 8. Committees. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation, which to the extent provided in such resolution or these by-laws shall have and may exercise the powers of the board of directors in the management and affairs of the corporation except as otherwise limited by law. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.

Section 9. Committee Rules. Each committee of the board of directors may fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the board of directors designating such committee. Unless otherwise provided in such a resolution, the presence of at least a majority of the members of the committee shall be necessary to constitute a quorum. In the event that a member and that member’s alternate, if alternates are designated by the board of directors as provided in Section 8 of this Article III, of such committee is or are absent or disqualified, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in place of any such absent or disqualified member.

Section 10. Communications Equipment. Members of the board of directors or any committee thereof may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting pursuant to this section shall constitute presence in person at the meeting.

Section 11. Waiver of Notice and Presumption of Assent. Any member of the board of directors or any committee thereof who is present at a meeting shall be conclusively presumed to have waived notice of such meeting except when such member attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Such member shall be conclusively presumed to have assented to any action taken unless his or her dissent shall be entered in the minutes of the meeting or unless his or her written dissent to such action shall be filed with the person acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action.

Section 12. Action by Written Consent. Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee.

ARTICLE IV

OFFICERS

Section 1. Number. The officers of the corporation shall be elected by the board of directors and shall consist of a chief executive officer and/or a president, one or more vice-chairmen, one or more vice-presidents, a secretary, a treasurer, and such other officers and assistant officers as may be deemed necessary or desirable by the board of directors. Any number of offices may be held by the same person. In its discretion, the board of directors may choose not to fill any office for any period as it may deem advisable, except that the offices of chief executive officer and secretary shall be filled as expeditiously as possible.

Section 2. Election and Term of Office. The officers of the corporation shall be elected annually by the board of directors at its first meeting held after each annual meeting of stockholders or as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the board of directors. Each officer shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided.

Section 3. Removal. Any officer or agent elected by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

Section 4. Vacancies. Any vacancy occurring in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term by the board of directors then in office.

Section 5. Compensation. Compensation of all officers shall be fixed by the board of directors, and no officer shall be prevented from receiving such compensation by virtue of his or her also being a director of the corporation.

Section 6. The Chief Executive Officer. The chief executive officer shall be the chief executive officer of the corporation; shall preside at all meetings of the stockholders and board of directors at which he is present (if he is also a director); subject to the powers of the board of directors, shall have general charge of the business, affairs and property of the corporation, and control over its officers, agents and employees; and shall see that all orders and resolutions of the board of directors are carried into effect. The chief executive officer shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. The chief executive officer shall have such other powers and perform such other duties as may be prescribed by the board of directors or as may be provided in these by-laws.

Section 7. The President. If there is no chief executive officer then in office, the president shall perform the duties of, and shall be subject to all other restrictions of, the chief executive officer. The president shall, in the absence or disability of the chief executive officer, act with all powers and be subject to all other restrictions of the chief executive officer. The president shall have such other powers and perform such other duties as may be prescribed by the board of directors or as may be provided in these by-laws.

Section 8. Vice-presidents. The vice-president, or if there shall be more than one, the vice-presidents in the order determined by the board of directors or by the chief executive officer, shall, in the absence or disability of the president, act with all of the powers and be subject to all the restrictions of the president. The vice-presidents shall also perform such other duties and have such other powers as the board of directors, the chief executive officer or these by-laws may, from time to time, prescribe.

Section 9. Vice-chairmen. The vice-chairman, or if there shall be more than one, the vice-chairmen, shall perform such duties and have such other powers as the board of directors, the chief executive officer or these by-laws may, from time to time, prescribe.

Section 10. The Secretary and Assistant Secretaries. The secretary shall attend all meetings of the board of directors, all meetings of the committees thereof and all meetings of the stockholders and record all the proceedings of the meetings in a book or books to be kept for that purpose. Under the chief executive officer’s supervision, the secretary shall give, or cause to be given, all notices required to be given by these by-laws or by law; shall have such powers and perform such duties as the board of directors, the chief executive officer or these by-laws may, from time to time, prescribe; and shall have custody of the corporate seal of the corporation. The secretary, or an assistant secretary, shall have authority to affix the corporate seal to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors, the chief executive officer, or secretary may, from time to time, prescribe.

Section 11. The Treasurer and Assistant Treasurer. The treasurer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation; shall deposit all monies and other valuable effects in the name and to the credit of the corporation as may be ordered by the board of directors; shall cause the funds of the corporation to be disbursed when such disbursements have been duly authorized, taking proper vouchers for such disbursements; and shall render to the chief executive officer and the board of directors, at its regular meeting or when the board of directors so requires, an account of the corporation; shall have such powers and perform such duties as the board of directors, the chief executive officer or these by-laws may, from time to

time, prescribe. If required by the board of directors, the treasurer shall give the corporation a bond (which shall be rendered every six (6) years) in such sums and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of the office of treasurer and for the restoration to the corporation, in case of death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in the possession or under the control of the treasurer belonging to the corporation. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors, shall in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer. The assistant treasurers shall perform such other duties and have such other powers as the board of directors, the chief executive officer or treasurer may, from time to time, prescribe.

Section 12. Other Officers, Assistant Officers and Agents. Officers, assistant officers and agents, if any, other than those whose duties are provided for in these by-laws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the board of directors.

Section 13. Absence or Disability of Officers. In the case of the absence or disability of any officer of the corporation and of any person hereby authorized to act in such officer’s place during such officer’s absence or disability, the board of directors may by resolution delegate the powers and duties of such officer to any other officer or to any director, or to any other person whom it may select.

ARTICLE V

INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS

Section 1. Nature of Indemnity. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer, of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the corporation to the fullest extent which it is empowered to do so unless prohibited from doing so by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment) against all expense, liability and loss (including attorneys’ fees actually and reasonably incurred by such person in connection with such proceeding) and such indemnification shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in Section 2 hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. The right to indemnification conferred in this Article V shall be a contract right and, subject to Sections 2 and 5 hereof, shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition. The corporation may, by action of its board of directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers.

Section 2. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation under Section 1 of this Article V or advance of expenses under Section 5 of this Article V shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty (60) days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such person’s costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

Section 3. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise.

Section 4. Insurance. The corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, whether or not the corporation would have the power to indemnify such person against such liability under this Article V.

Section 5. Expenses. Expenses incurred by any person described in Section 1 of this Article V in defending a proceeding shall be paid by the corporation in advance of such proceeding’s final disposition unless otherwise determined by the board of directors in the

specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate.

Section 6. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors.

Section 7. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the General Corporation Law of the State of Delaware or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing.

Section 8. Merger or Consolidation. For purposes of this Article V, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.

ARTICLE VI

CERTIFICATES OF STOCK

Section 1. Form. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by the chief executive officer, the president, a vice-chairman or a vice-president and the secretary or an assistant secretary of the corporation, certifying the number of shares of a specific class or series owned by such holder in the corporation. If such a certificate is countersigned (1) by a transfer agent or an assistant transfer agent other than the corporation or its employee or (2) by a registrar, other than the corporation or its employee, the signature of any such chief executive officer, president, vice-president, vice-chairman, secretary, or assistant secretary may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the corporation whether because of death, resignation or otherwise before such certificate or certificates have been delivered by the corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the corporation. All certificates for shares shall be consecutively numbered or

otherwise identified. The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the books of the corporation. Shares of stock of the corporation shall only be transferred on the books of the corporation by the holder of record thereof or by such holder’s attorney duly authorized in writing, upon surrender to the corporation of the certificate or certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer, authorization, and other matters as the corporation may reasonably require, and accompanied by all necessary stock transfer stamps. In that event, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate or certificates, and record the transaction on its books. The board of directors may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both in connection with the transfer of any class or series of securities of the corporation.

Section 2. Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates previously issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his or her legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against the corporation on account of the loss, theft or destruction of any such certificate or the issuance of such new certificate.

Section 3. Fixing a Record Date for Stockholder Meetings. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the next day preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.

Section 4. Fixing a Record Date for Action by Written Consent. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by statute, shall be the first date on which a signed written consent setting forth the

action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by statute, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action.

Section 5. Fixing a Record Date for Other Purposes. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment or any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purposes of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.

Section 6. Registered Stockholders. Prior to the surrender to the corporation of the certificate or certificates for a share or shares of stock with a request to record the transfer of such share or shares, the corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. The corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof.

Section 7. Subscriptions for Stock. Unless otherwise provided for in the subscription agreement, subscriptions for shares shall be paid in full at such time, or in such installments and at such times, as shall be determined by the board of directors. Any call made by the board of directors for payment on subscriptions shall be uniform as to all shares of the same class or as to all shares of the same series. In case of default in the payment of any installment or call when such payment is due, the corporation may proceed to collect the amount due in the same manner as any debt due the corporation.

ARTICLE VII

GENERAL PROVISIONS

Section 1. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing

dividends, or for repairing or maintaining any property of the corporation, or any other purpose and the directors may modify or abolish any such reserve in the manner in which it was created.

Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders for the payment of money by or to the corporation and all notes and other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in such manner, as shall be determined by resolution of the board of directors or a duly authorized committee thereof.

Section 3. Contracts. The board of directors may authorize any officer or officers, or any agent or agents, of the corporation to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

Section 4. Loans. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.

Section 5. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the board of directors.

Section 6. Corporate Seal. The board of directors shall provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

Section 7. Voting Securities Owned By Corporation. Voting securities in any other corporation held by the corporation shall be voted by the chief executive officer, unless the board of directors specifically confers authority to vote with respect thereto, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution.

Section 8. Inspection of Books and Records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation’s stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean any purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in the State of Delaware or at its principal place of business.

Section 9. Section Headings. Section headings in these by-laws are for convenience of reference only and shall not be given any substantive effect in limiting or otherwise construing any provision herein.

Section 10. Inconsistent Provisions. In the event that any provision of these by-laws is or becomes inconsistent with any provision of the certificate of incorporation, the General Corporation Law of the State of Delaware or any other applicable law, the provision of these by-laws shall not be given any effect to the extent of such inconsistency but shall otherwise be given full force and effect.

ARTICLE VIII

AMENDMENTS

These by-laws may be amended, altered, or repealed and new by-laws adopted at any meeting of the board of directors by a majority vote. The fact that the power to adopt, amend, alter, or repeal the by-laws has been conferred upon the board of directors shall not divest the stockholders of the same powers.

EX-10.16

Exhibit 10.16

EXECUTION COPY

UK PROPCO FACILITY AGREEMENT

DATED 8^th FEBRUARY 2006

For

TOYS “R” US PROPERTIES (UK) LIMITED

with

THE ENTITIES NAMED HEREIN

as Original Lenders

ALLEN & OVERY

ALLEN & OVERY LLP

LONDON

CONTENTS

Clause		Page
1.	Definitions and Interpretation	1
2.	The Facility	23
3.	Purpose	25
4.	Conditions of Utilisation	26
5	Utilisation	27
6.	Repayment	28
7.	Prepayment	30
8.	Cancellation	32
9.	Payments	32
10.	Taxes	35
11.	Change in Circumstances	40
12.	Interest	44
13.	Other Indemnities	47
14.	Bank Accounts	50
15.	Representations	56
16.	Information Undertakings	61
17.	General Undertakings	63
18.	Property Undertakings	70
19.	Events of Default	78
20.	Changes to the Parties	82
21.	Role of the Facility Agent and the Security Agent	86
22.	Security	92
23.	Sharing among the Finance Parties	93
24.	Set-Off	95
25.	Notices and Confidentiality	95
26.	Calculations and Certificates	99
27.	Partial Invalidity	99
28.	Remedies and Waivers	99
29.	Amendments and Waivers	99
30.	Counterparts	101
31.	Governing Law	102
32.	Enforcement	102

Schedule

1.	Original Properties and Original Lenders		103
	Part 1	The Original Properties and Allocated Loan Amounts	103
	Part 2	The Original Lenders	106
2.	Conditions Precedent		107
	Part 1	Conditions Precedent to Initial Utilisation	107
	Part 2	Conditions Precedent for an Additional Property	110
	Part 3	Conditions Precedent to drawdown of the Cardiff Loan	113
3.	Requests		115
4.	Form of Transfer Certificate		116
5.	Form of Hedge Counterparty Accession Agreement		118
6.	Form of Quarterly Property Information		119
7.	Security Agreement		120
Signatories			153

THIS AGREEMENT is dated 8^th February 2006 and made

BETWEEN:

(1) TOYS “R” US PROPERTIES (UK) LIMITED, a company incorporated in England (registration number 5410177) with its registered office at Mitre House, 160 Aldersgate Street, London EC1A 4DD (the Company);

(2) THE ENTITIES listed in Part 2 of Schedule 1 (Original Properties and Original Lenders) as lenders (the Original Lenders);

(3) DEUTSCHE BANK AG, LONDON BRANCH as facility agent of the Lenders (the Facility Agent);

(4) DEUTSCHE BANK AG, LONDON BRANCH as counterparty to certain hedging arrangements relating to the B Loan (the Original Hedge Counterparty); and

(5) DEUTSCHE BANK AG, LONDON BRANCH as security agent and trustee for the Finance Parties (the Security Agent).

IT IS AGREED as follows:

SECTION 1

INTERPRETATION

1. DEFINITIONS AND INTERPRETATION

1.1 Definitions

In this Agreement:

A1 Commitment means:

(a) in relation to an Original Lender, the amount set opposite its name under the heading “A1 Commitment” in Part 2 of Schedule 1 (Original Properties and Original Lenders) and the amount of any other A1 Commitment transferred to it in accordance with this Agreement; and

(b) in relation to any other Lender, the amount of any A1 Commitment transferred to it in accordance with this Agreement,

to the extent not cancelled, reduced or transferred by it under or in accordance with this Agreement.

A2 Commitment means:

(a) in relation to an Original Lender, the amount set opposite its name under the heading “A2 Commitment” in Part 2 of Schedule 1 (Original Properties and Original Lenders) and the amount of any other A2 Commitment transferred to it in accordance with this Agreement; and

(b) in relation to any other Lender, the amount of any A2 Commitment transferred to it in accordance with this Agreement,

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to the extent not cancelled, reduced or transferred by it under or in accordance with this Agreement.

A3 Commitment means:

(a) in relation to an Original Lender, the amount set opposite its name under the heading “A3 Commitment” in Part 2 of Schedule 1 (Original Properties and Original Lenders) and the amount of any other A3 Commitment transferred to it in accordance with this Agreement; and

(b) in relation to any other Lender, the amount of any A3 Commitment transferred to it in accordance with this Agreement,

to the extent not cancelled, reduced or transferred by it under or in accordance with this Agreement.

A4 Commitment means:

(a) in relation to an Original Lender, the amount set opposite its name under the heading “A4 Commitment” in Part 2 of Schedule 1 (Original Properties and Original Lenders) and the amount of any other A4 Commitment transferred to it in accordance with this Agreement; and

(b) in relation to any other Lender, the amount of any A4 Commitment transferred to it in accordance with this Agreement,

to the extent not cancelled, reduced or transferred by it under or in accordance with this Agreement.

A5 Commitment means:

(a) in relation to an Original Lender, the amount set opposite its name under the heading “A5 Commitment” in Part 2 of Schedule 1 (Original Properties and Original Lenders) and the amount of any other A5 Commitment transferred to it in accordance with this Agreement; and

(b) in relation to any other Lender, the amount of any A5 Commitment transferred to it in accordance with this Agreement,

to the extent not cancelled, reduced or transferred by it under or in accordance with this Agreement.

A6 Commitment means:

(a) in relation to an Original Lender, the amount set opposite its name under the heading “A6 Commitment” in Part 2 of Schedule 1 (Original Properties and Original Lenders) and the amount of any other A6 Commitment transferred to it in accordance with this Agreement; and

(b) in relation to any other Lender, the amount of any A6 Commitment transferred to it in accordance with this Agreement,

to the extent not cancelled, reduced or transferred by it under or in accordance with this Agreement.

A Loan means any A1 Loan, A2 Loan, A3 Loan, A4 Loan, A5 Loan or A6 Loan.

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A1 Loan means the principal amount of the A1 Commitment borrowed under this Agreement and designated as such in each relevant Request or the principal amount outstanding of each such borrowing.

A2 Loan means the principal amount of the A2 Commitment borrowed under this Agreement and designated as such in each relevant Request or the principal amount outstanding of each such borrowing.

A3 Loan means the principal amount of the A3 Commitment borrowed under this Agreement and designated as such in each relevant Request or the principal amount outstanding of each such borrowing.

A4 Loan means the principal amount of the A4 Commitment borrowed under this Agreement and designated as such in each relevant Request or the principal amount outstanding of each such borrowing.

A5 Loan means the principal amount of the A5 Commitment borrowed under this Agreement and designated as such in each relevant Request or the principal amount outstanding of each such borrowing.

A6 Loan means the principal amount of the A6 Commitment borrowed under this Agreement and designated as such in each relevant Request or the principal amount outstanding of each such borrowing.

A Lender means a Lender under this Agreement which has an A1 Commitment, A2 Commitment, A3 Commitment, A4 Commitment, A5 Commitment or an A6 Commitment or has a participation in any outstanding A Loan.

Account means a CSA Account, the General Account, the Rent Account, the Disposal Account and the Insurance Account.

Accounting Principles means generally accepted accounting principles in the United Kingdom or International Accounting Standards, or, if applicable, at any time, such other accounting principles as have been most recently agreed in accordance with Clause 16.3 (Change in accounting position).

Acquisition means the acquisition of the Original Properties by the Company from the Vendors.

Additional Hedge Counterparty means a bank or financial institution which becomes a Hedge Counterparty after the date of this Agreement.

Additional Property means any real property the security over which is created by a Security Document entered into after the first Utilisation Date, as more fully described in that Security Document and, where the context so requires, includes the buildings on that Additional Property.

Affiliate means, in relation to a body corporate or other entity (other than any of the Sponsors), any of its Holding Companies or Subsidiaries or any other Subsidiary of any of its Holding Companies.

Agreement for Lease means an agreement to grant an Occupational Lease of all or part of a Property.

Allocated Loan Amount means:

(a) with respect to an Original Property, the amount set out opposite that Property in Part 1 of Schedule 1 (Original Properties and Original Lenders); and

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(b) with respect to an Additional Property or the Cardiff Property, the amount agreed by the Company and the Facility Agent as the Allocated Loan Amount for that Property (which shall be an amount equal to 83 per cent, of the market value of that Additional Property contained in the relevant Original Valuation Report) before it becomes a Property.

Applicable Release Pricing Amount has the meaning given to it in Clause 17.13 (Disposals).

Annual Financial Statement has the meaning given to it in Clause 16 (Information Undertakings).

Approved Bank means any account bank, which has the Requisite Rating and which is a bank (as defined by section 840A of the Taxes Act) for the purposes of section 349 of the Taxes Act that may pay interest without withholding or deduction for or on account of Taxes in the ordinary course of its business, selected by the Company as the bank at which an Account may be held.

Assignation of Rent means an assignation of rent entered into or to be entered into by the Company in favour of the Facility Agent.

Auditors means in relation to any entity the auditors appointed by the Company for the purposes of and in accordance with the terms set out in Clause 16.2(b) (Requirements as to financial statements).

Authorisation means an authorisation, consent, approval, resolution, licence, exemption of or by a person by whom the same is required by law.

Availability Period means the period from and including the date of this Agreement to:

(a) in the case of any Loan other than the Cardiff Loan, the date falling six months after the date of this Agreement;

(b) in the case of the Cardiff Loan, the date falling twelve months after the date of this Agreement.

B Commitment means:

(a) in relation to an Original Lender, the amount set opposite its name under the heading “B Commitment” in Part 2 of Schedule 1 (Original Properties and Original Lenders) and the amount of any other B Commitment transferred to it in accordance with this Agreement; and

(b) in relation to any other Lender, the amount of any B Commitment which is transferred to it in accordance with this Agreement,

to the extent not cancelled, reduced or transferred by it under or in accordance with this Agreement.

B Lender means a Lender under this Agreement which has a B Commitment or has a participation in a B Loan.

B Loan means the principal amount of the B Commitment borrowed under this Agreement and designated as such in each relevant Request or the principal amount outstanding of each such borrowing.

Break Costs means:

(a) in relation to an A Loan, the amount (if any) determined by each A Lender concerned which would indemnify that A Lender against any loss or liability that it incurs as a consequence of any part of an A Loan or Unpaid Sum due to that A Lender being repaid or prepaid, and

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includes any costs incurred as a result of that A Lender terminating all or any part of its fixed rate, swap or other hedging arrangements; or

(b) in relation to a B Loan the amount (if any) by which:

(i) the interest which a B Lender should have received for the period from the date of receipt of all or any part of its participation in any B Loan or an Unpaid Sum due to that B Lender to the last day of the current Interest Period in respect of that B Loan or Unpaid Sum, had the principal amount or Unpaid Sum received been paid on the last day of that Interest Period;

exceeds:

(ii) the amount which that B Lender would be able to obtain by placing an amount equal to the principal amount or Unpaid Sum received by it on deposit with a leading bank in the Relevant Interbank Market for a period starting on the Business Day following receipt or recovery and ending on the last day of the current Interest Period.

Business Day means a day (other than a Saturday or Sunday) on which banks and foreign exchange markets are open for general business (including dealing in foreign exchange and foreign currency deposits) in London and Dublin.

Cardiff Property means a property located in Cardiff to be acquired by the Company after the date of and in accordance with this Agreement, as to be more particularly described in the relevant Supplemental Security Agreement.

Cardiff Loan means the principal amount of the Commitments borrowed under this Agreement and designated as such in the relevant Request or the principal amount outstanding of that borrowing.

Cash Management Agreement means the cash management agreement dated on or before Closing between, amongst others, Vanwall Finance plc and HSBC Bank plc as cash manager.

Centre of Main Interests means the “centre of main interests” of an Obligor for the purposes of Council Regulation (EC) No. 1346/2000 of 29 May, 2000.

Charged Property means all of the assets of the Company which from time to time are the subject of the Transaction Security.

Closing means the date on which the notes are issued pursuant to the Securitisation.

Closing Account means an account at Deutsche Bank AG opened in the name of the Company for the purposes of receiving and transferring funds on Closing.

Commitment means the A1 Commitment, A2 Commitment, A3 Commitment, A4 Commitment, A5 Commitment, the A6 Commitment or the B Commitment.

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Confidential Information means any information relating to the Company, the Facility and/or the Acquisition (including, without limitation, the Reports) provided to any Finance Party in whatever form, and includes information given orally and any document, electronic file or any other way of representing or recording information which contains or is derived or copied from such information but excludes information:

(a) that is or becomes public knowledge other than as a direct or indirect result of any breach of this Agreement; or

(b) that is known by such Finance Party before the date the information is disclosed to it or is lawfully obtained by it other than from a source which is connected with the Company or the Sponsors,

and which, in either case, so far as the relevant Finance Party is aware, has not been obtained in violation of, and is not otherwise subject to, any obligation of confidentiality owed to the Company; or

(c) in relation to the Reports, the disclosure of which is anticipated in the addressee, reliance or disclosure language contained in that Report or in any side letter to it; or

(d) that is disclosed for the purpose of syndication of the Facility and the recipient of which has signed a confidentiality agreement in the form agreed by the Loan Market Association at that time.

Credit Support Annex means any credit support annex entered into by the Company and a Hedge Counterparty in connection with the Hedging Agreement.

Credit Support Balance has the meaning given to it in the Hedging Agreement.

CSA Account means each Account designated as such under the terms of this Agreement.

Default means an Event of Default or any event or circumstance which with the giving of notice or the lapse of time (and assuming the Company will not be able to remedy the relevant matter within any applicable grace period) or the making of any determination or fulfilment of any condition provided for in Clause 19 (Events of Default) would constitute an Event of Default.

Default Interest Period has the meaning given to it in Clause 12.6(b) (Default Interest).

Deposit Account has the meaning given to it in Clause 18.8 (Interest Cover).

Designated Website has the meaning given to it in Clause 25.7 (Use of Websites).

Discharged Rights and Obligations has the meaning given to it in Clause 20.6 (Procedure for transfer).

Disposal Account means the account designated as such under the terms of this Agreement.

Disposal Tax Liability means an amount calculated by the Company (acting reasonably and on the basis of professional advice) and notified to the Lenders as payable in tax as a result of any disposal of a Property or part of a Property permitted in accordance with the terms of this Agreement.

Disposed Property has the meaning given to it in Clause 17.12 (Acquisitions and investments).

Dispute has the meaning given to it in Clause 32 (Enforcement).

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Environment means all gases, air, vapours, liquids, water, land, surface and sub-surface soils, rock, flora, fauna, wetlands and all other natural resources or part thereof including artificial or manmade buildings, structures or enclosures.

Environmental Claim means any claim by any person in connection with:

(a) a breach, or alleged breach, of an Environmental Law;

(b) any accident, fire, explosion or other event of any type involving an emission or substance which is capable of causing harm to any living organism or the environment; or

(c) any other environmental contamination.

Environmental Consent means consent required under or in relation to Environmental Laws.

Environmental Law means any law or directive concerning the Environment or health and safety which is at any time binding upon the Company in the jurisdictions in which the Company carries on business or operates (including, without limitation, by the export of its products or its waste thereto).

Equity means any cash contributions of equity by way of subscription for ordinary shares, preference shares or other equity interests issued by the Company and/or Subordinated Loans made to the Company.

Establishment means any place of operations where the Company carries on non-transitory economic activity with human means and goods.

Event of Default means any event or circumstance specified as such in Clause 19 (Events of Default).

Existing Lender has the meaning given to it in Clause 20.2 (Assignments and transfers by the Lenders).

Facility means each credit facility made available under this Agreement (and Facilities means all of them).

Facility Fee means:

(a) an amount equal to the amounts payable by the Issuer on each Interest Payment Date under the notes issued pursuant to the Securitisation as set out:

(i) in schedule 1 of the Cash Management Agreement under paragraphs (a), (b), (c), (d), (e), (f), (m), (n) and (o);

(ii) in schedule 2 of the Cash Management Agreement under paragraphs (a), (b), (c), (d), (e), (m) and (n); and

(iii) in schedule 3 of the Cash Management Agreement under paragraphs (a), (b), (c), (d), (e) and (m); and

(b) an amount equal to the Pre-Funding Commitment Fee,

payable by the Company pursuant to Clause 13.6 (Facility Fee).

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Facility Office means the office or offices notified by a Lender to the Facility Agent in writing on or before the date it becomes a Lender (or, following that date, by not less than five Business Days’ written notice) as the office or offices through which it will perform its obligations under this Agreement.

Final Maturity Date means 7th April, 2013.

Finance Documents means this Agreement, any Security Document, a Subordination Agreement, any Hedging Agreement (except where the term Finance Document is used in Clauses 10.3 (Tax Gross-Up) and 10.4 (Tax Indemnity) in which case no Hedging Agreement will be included) and any other document designated as a Finance Document by the Facility Agent and the Company.

Finance Party means the Facility Agent, the Security Agent, a Lender or any Hedge Counterparty.

Financial Indebtedness means any indebtedness in respect of or arising under:

(a) moneys borrowed; or

(b) moneys raised including moneys raised under or pursuant to any debenture, bond, note or loan stock or other similar instrument; or

(c) any acceptance credit; or

(d) receivables sold or discounted (otherwise than on a non-recourse basis); or

(e) any amount due under any agreement for managing or hedging interest rate risk provided that where such agreement provides for netting to occur this paragraph (e) shall include the net amount of the payment obligation outstanding from the Company thereunder after such netting-off has occurred; or

(f) the amount payable by the Company to any person in respect of the redemption of any share capital or other securities issued by it where the redemption date for such share capital or other securities falls prior to the Final Maturity Date; or

(g) amounts raised under any other transaction required to be accounted for as a borrowing under the Accounting Principles; or

(h) any guarantee, indemnity or similar assurance against financial loss of any person in respect of any indebtedness falling within paragraphs (a) to (g) inclusive of this definition,

and so that, where the amount of Financial Indebtedness falls to be calculated or where the existence (or otherwise) of any Financial Indebtedness is to be established:

(i) Financial Indebtedness in respect of a Subordinated Loan shall not be taken into account; and

(ii) in relation to any bank accounts subject to netting arrangements permitted under this Agreement, the net balance shall be used.

Fitch means Fitch Ratings Ltd. and any successor to its rating business.

Fixed Rate means, in relation to an Interest Period for an A Loan or Unpaid Sum due to an A Lender, the fixed rate of interest per annum specified in the Notional Swap Confirmation.

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Funds Flow Document means the funds flow, in the agreed form and contained within the tax structuring paper, delivered pursuant to Part 1 of Schedule 2 (Conditions Precedent to Initial Utilisation) showing the funds flow on the first Utilisation Date and showing all material intra-group on-loans relating to the proceeds of contributions of any Equity made or to be made on or before that date.

General Account means the account designated as such under the terms of this Agreement and opened and maintained by the Company pursuant to Clause 14 (Bank Accounts).

Headlease means a lease under which the Company holds title to a Property.

Hedge Additional Termination Event means an Additional Termination Event as defined in the relevant Hedging Agreement.

Hedge Counterparty means the Original Hedge Counterparty or an Additional Hedge Counterparty.

Hedge Counterparty Accession Agreement means a letter, substantially in the form of Schedule 5 (Form of Hedge Counterparty Accession Agreement), with such amendments as the Facility Agent may approve or reasonably require.

Hedge Defaulting Party means the Defaulting Party (as defined in the relevant Hedging Agreement).

Hedging Agreement means any interest hedging arrangement entered into by the Company in connection with interest payable under this Agreement in relation to the B Loan.

Holding Company means, in relation to a body corporate or other entity, any other body corporate or other entity in respect of which it is a Subsidiary.

Individual Loan to Value means the Allocated Loan Amount for a Property as a percentage of the value of that Property, determined in accordance with the most recent Valuation at the relevant time.

Insurance Account means the account designated as such under the terms of this Agreement and opened and maintained by the Company pursuant to Clause 14 (Bank Accounts).

Intercreditor Deed means the intercreditor deed dated on or about the date of this Agreement between, amongst others, the A Lender, the B Lender and the Hedge Counterparty (in each case as at the date of this Agreement).

Interest Cover means, on any testing date (as defined below), projected annual rental income as a percentage of projected annual finance costs at that time. For the purposes of this definition:

(a) projected annual finance costs means an estimate by the Company, acting reasonably and based on prudent and appropriate grounds, of the aggregate amount payable to the Finance Parties by way of interest on the Loans (having taken into account any net amounts receivable or payable under any Hedging Agreements) during any period of 12 consecutive months in respect of which the Company has estimated projected annual rental income;

(b) projected annual rental income means an estimate by the Company, acting reasonably and based on prudent and appropriate grounds, as at any testing date, of the passing net rental income that will be received during the period of 12 consecutive months commencing on that testing date; and

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(c) testing date means each Utilisation Date, each Interest Payment Date and any other date on which the terms of this Agreement refer to Interest Cover being tested.

In determining the passing net rental income the Company will assume:

(i) a break clause under any Lease Document will be deemed to be exercised at the earliest date available to the relevant tenant;

(ii) net rental income will be ignored unless payable under an unconditional and binding Lease Document;

(iii) potential net rental income increases as a result of rent reviews will be ignored other than where there are fixed rental increase under the relevant Lease Document;

(iv) net rental income payable by a tenant that is more than one month in arrears will be ignored;

(v) net rental income will be increased by amounts payable as interest on amounts standing to the credit of the Disposals Account; and

(vi) net rental income will be reduced by the amounts (together with any related value added or similar taxes) of approved rent, rates, service charges, insurance premia, maintenance and other outgoings with respect to a Property to the extent that any of these items are not fully funded by the tenants under the Lease Documents,

and will provide details of each determination to the Facility Agent.

Interest Payment Date means 7th January, 7th April, 7th July and 7th October in each year and the Final Maturity Date, with the first Interest Payment Date being 7th April, 2006. If, however, any such day is not a Business Day, the Interest Payment Date will instead be the next Business Day in that calendar month (if there is one) or the preceding Business Day (if there is not).

Interest Period means, in relation to a Loan, each period determined in accordance with Clause 12.1 (Interest Periods) and, in relation to an Unpaid Sum, each period determined in accordance with Clause 12.6(a) (Default Interest).

Investors means the Sponsors (and/or funds managed or advised by any of them or by any Sponsors’ Affiliate) and any of their respective subsequent successors or permitted assigns or transferees.

Lease Document means:

(a) an Agreement for Lease;

(b) an Occupational Lease; or

(c) any other document designated as such by the Facility Agent and the Company.

Lender means:

(a) any Original Lender; and

(b) any bank, financial institution, trust, fund or other entity which has become a Party in accordance with Clause 20 (Changes to the Parties),

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provided that upon (i) termination in full of all of the Commitments of any Lender and (ii) payment in full of all amounts which may be or become payable to such Lender under the Finance Documents such Lender shall not be regarded as being a Lender for the purposes of determining whether any provision of any of the Finance Documents requiring consultation with or the consent or approval of or instructions from the Lenders or the Majority Lenders has been complied with.

LIBOR means, in relation to an Interest Period of a B Loan or an Unpaid Sum due to a B Lender:

(a) the applicable Screen Rate; or

(b) (if no Screen Rate is available for that Interest Period) the arithmetic mean of the rates (rounded upwards to four decimal places) as supplied to the Facility Agent at its request quoted by the Reference Banks to leading banks in the London interbank market,

at 11.00 a.m. on the Quotation Day for the offering of deposits in Sterling and for a period comparable to that Interest Period.

Loan means an A Loan or the B Loan.

Loan to Value means the aggregate Loans as a percentage of the aggregate value of the Original Properties and the Cardiff Property after it has been acquired (or where the percentage is used to calculate the Allocated Loan Amount in accordance with paragraph (b) of the definition of “Allocated Loan Amount”, all the Properties and the relevant Additional Property (or the Cardiff Property)), determined:

(a) (for the purposes of Clause 4.2 (Additional Conditions Precedent)) in accordance with the Original Valuation Report; and

(b) (for any other purposes) in accordance with the most recent Valuations at that time.

Majority Lenders means at any time:

(a) a Lender or Lenders whose Commitments aggregate more than 66 2/3 per cent. of the Total Commitments; or

(b) if the Total Commitments have been reduced to zero, Lenders whose Commitments aggregated more than 66 2/3 per cent. of the Total Commitments immediately prior to that reduction.

Mandatory Cost means, in relation to a Loan or Unpaid Sum, the rate per annum notified by any Lender to the Facility Agent to be the cost to that Lender of compliance with all reserve asset, liquidity or cash margin or other like requirements of the Bank of England, the Financial Services Authority or the European Central Bank.

Margin means:

(a) in relation to the A1 Loan 0.28 per cent, per annum;

(b) in relation to the A2 Loan 0.34 per cent, per annum;

(c) in relation to the A3 Loan 0.60 per cent, per annum;

(d) in relation to the A4 Loan 0.80 per cent, per annum;

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(e) in relation to the A5 Loan 1.10 per cent. per annum;

(f) in relation to the A6 Loan 1.50 per cent. per annum; and

(g) in relation to the B Loan 2.25 per cent. per annum.

Market Disruption Event has the meaning given to it in Clause 11.4 (Change in Market Conditions).

Material Adverse Effect means an event or circumstance which (after taking account of any warranty, indemnity or other right of recourse against any third party with respect to the relevant event or circumstance (including, without limitation, coverage by insurances and any commitment by any person to provide any additional contribution of Equity), where “taking account of” will include a consideration of all relevant facts and circumstances including the timing and likelihood of successful recovery and potential counterclaims and other claims against the Company with respect to the relevant event or circumstance and the creditworthiness of relevant third parties) has or would reasonably be expected to have a material adverse effect on:

(a) the ability of the Company to meet:

(i) its payment obligations under the Finance Documents; or

(ii) the financial covenant contained in Clause 18.8 (Interest Cover); or

(b) the validity or enforceability of the rights and remedies (taken as a whole) of the Lenders under the Finance Documents.

Minor Sale has the meaning given to it in Clause 17.13 (Disposals).

Month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that:

(a) (subject to paragraph (c) below) if the numerically corresponding day is not a Business Day, that period shall end on the next Business Day in that calendar month in which that period is to end if there is one, or if there is not, on the immediately preceding Business Day;

(b) if there is no numerically corresponding day in the calendar month in which that period is to end, that period shall end on the last Business Day in that calendar month; and

(c) if an Interest Period begins on the last Business Day of a calendar month, that Interest Period shall end on the last Business Day in the calendar month in which that Interest Period is to end.

The above rules will only apply to the last Month of any period. Monthly shall be construed accordingly. The above rules will not, for the avoidance or doubt, apply in relation to any periods applicable to financial statements.

Moody’s means Moody’s Investors Services Limited and any successor in its rating business.

Mortgage of Shares means the mortgage of the shares in the Company granted by Toys “R” Us Holdings Limited and delivered under Part 1 of Schedule 2 (Conditions Precedent).

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Net Proceeds means in relation to the disposal of a Property or any part of a Property, the total consideration received in cash by the Company in respect of the disposal to any person but after deduction of:

(a) all reasonable third party costs and expenses properly incurred by the Company in effecting that disposal (all such costs, expenses and payments to be evidenced in reasonable detail by the Company to the Facility Agent promptly upon request); and

(b) an amount equal to any Disposal Tax Liability.

New Lender has the meaning given to it in Clause 20.2 (Assignments and transfers by the Lenders).

Net Rental Income means Rental Income other than Tenant Contributions.

Notional Swap Confirmation means the notional swap confirmation entered into by the relevant A Lender (which, on the date of this Agreement, is the A Lender which is an Original Lender) in relation to the A Loans on or before Closing and from time to time thereafter.

Occupational Lease means each OpCo Lease and any other lease or licence or other right of occupation granted by the Company or right of the Company to receive rent to which a Property may at any time be subject.

Offering Circular means the offering circular issued in relation to the Securitisation.

OpCo Lease means any lease in the agreed form in relation to an Original Property pursuant to which the Principal Tenant is the tenant and the Company is the landlord and any other such lease in respect of an Additional Property or the Cardiff Property where the rent payable thereunder has been approved by the Facility Agent (acting reasonably based on the advice of the Valuer) as being an appropriate market rent.

Original Property means each property listed in Part 1 of Schedule 1 (Original Properties and Original Lenders) as more fully described in a Security Document and, where the context so requires, includes the buildings on that Original Property.

Original Valuation Report means:

(a) in relation to the Original Properties, the property valuation report dated 30th June, 2005 prepared by CB Richard Ellis, together with the side letter dated on or about 8th February, 2006 confirming the valuation given in the Original Valuation Report having reviewed the final form Reports on Title and the OpCo Leases in respect of the Original Properties;

(b) in relation to any Additional Property, the Valuation delivered pursuant to Part 2 of Schedule 2 (Conditions Precedent for an Additional Property) in relation to that Additional Property; and

(c) in relation to the Cardiff Property, the Valuation delivered pursuant to Part 3 of Schedule 2 (Conditions Precedent to the drawdown of the Cardiff Loan),

in each case, addressed to, and/or capable of being relied upon by, the Finance Parties.

Over Collateralised Amount means an amount equal to the lower of:

(a) the net close-out amount due from the Company to the Hedge Counterparty under the relevant Hedging Agreement following the termination of all transactions in respect of the

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Hedging Agreement as a result of the occurrence of an event of default or a termination event under the Hedging Agreement, if any, and otherwise zero;

(b) the Credit Support Balance if any, and otherwise zero; and

(c) the amount standing to the credit of the CSA Account.

Paper Form Lender has the meaning given to it in Clause 25.7 (Use of Websites).

Party means a party to this Agreement.

Permitted Amendment has the meaning given to it in Clause 18.1 (Occupational Leases).

Permitted Contract means any contract relating to a Permitted Amendment or a Permitted Subleasing Arrangement, each as defined in Clause 18.1 (Occupational Leases).

Permitted Subleasing Arrangement has the meaning given to it in Clause 18.1 (Occupational Leases).

Post-Disposal Valuation has the meaning given to it in Clause 17.13 (Disposals).

Pre-Disposal Valuation has the meaning given to it in Clause 17.13 (Disposals).

Pre-funding Commitment Fee has the meaning given to it in the Cash Management Agreement.

Principal Tenant means Toys “R” Us Limited, a company incorporated in England and Wales (registration number 1809223) in its capacity as occupational tenant of the Company pursuant to an OpCo Lease.

Property means an Original Property, the Cardiff Property or an Additional Property.

Property Management Agreement means any document pursuant to which a Property Manager is appointed by the Company in accordance with the terms of this Agreement.

Property Manager means any entity appointed by the Company to manage, monitor, and/or maintain the Properties.

Quotation Day means, in relation to any period for which an interest rate is to be determined, the first date of that period unless market practice differs in the Relevant Interbank Market, in which case the Quotation Day for that currency will be determined by the Facility Agent in accordance with market practice in the Relevant Interbank Market (and if quotations would normally be given by leading banks in the Relevant Interbank Market on more than one day, the Quotation Day will be the last of those days).

Rating Agency means Fitch, S&P or Moody’s or any further or replacement rating agency which is appointed to provide a credit rating for the notes issued pursuant to the Securitisation with the prior written approval of the Company.

Rating Event has, with respect to a Hedging Arrangement or a Hedge Counterparty to a Hedging Arrangement, the meaning given to it in that Hedging Arrangement.

Rating Event Replacement Counterparty means a Hedge Counterparty which has replaced another Hedge Counterparty following the occurrence of a Rating Event with respect to that latter Hedge Counterparty in accordance with the relevant Hedging Arrangement.

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Recovering Finance Party has the meaning given to it in Clause 23.1 (Payments to Finance Parties).

Reference Banks means the principal London offices of the Facility Agent, Barclays Bank plc and The Royal Bank of Scotland plc or such other banks as may be appointed by the Facility Agent in consultation with the Company.

Relevant Interbank Market means the London interbank market.

Remedy Additional Property has the meaning given to in Clause 17.12 (Acquisitions and investments).

Rent Account means the account designated as such under the terms of this Agreement and opened and maintained by the Company pursuant to Clause 14 (Bank Accounts).

Rental Income means all amounts payable to or for the benefit or account of the Company in connection with the occupation of all or part of a Property, including:

(a) rent, licence fees and equivalent amounts paid or payable;

(b) any sum received or receivable from any deposit held as security for performance of a tenant’s obligations;

(c) a sum equal to any apportionment of rent allowed in favour of the Company;

(d) any other moneys paid or payable in respect of occupation and/or usage of a Property and any fixture and fitting on a property including any fixture or fitting on a Property for display or advertisement, on licence or otherwise;

(e) any sum paid or payable under any policy of insurance in respect of loss of rent or interest on rent;

(f) any sum paid or payable, or the value of any consideration given, for the surrender or variation of any Lease Document;

(g) any sum paid or payable by any guarantor of any occupational tenant under any Lease Document;

(h) any Tenant Contributions; and

(i) any interest paid or payable on, and any damages, compensation or settlement paid or payable in respect of, any sum referred to above (which have not been reimbursed by another person) by the Company.

Repayment Date means each date on which a Repayment Instalment is due under Clause 6 (Repayment).

Repayment Instalment means each instalment for repayment of the Loans referred to in Clause 6 (Repayment).

Repeating Representations means those representations referred to in Clause 15.20 (Repetition) which are repeated on the dates set out in that Clause.

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Report on Title means, in respect of any Property, each certificate on title supplied to the Facility Agent under this Agreement on or before the date of the relevant Security Agreement which creates security over that Property.

Reports means each Valuation and each Report on Title.

Required Amount has the meaning given to it in Clause 17.13 (Disposals).

Requisite Rating means a person with long or short term (as appropriate) unsecured debt instruments in issue which are neither subordinated nor guaranteed and which meet the following requirements:

(a) in relation to a bank at which an Account is held:

(i) short term instruments with ratings of F1 (or better) by Fitch P-1 (or better) by Moody’s and A-1+ (or better) by S&P; and

(ii) long term instruments with ratings of A (or better) by Fitch A1 (or better) by Moody’s and A+ (or better) by S&P;

(b) in relation to a Hedge Counterparty or a person guaranteeing the obligations of a Hedge Counterparty:

(i) short term instruments with a rating of A-1 (or better) by S&P;

(ii) short term instruments with a rating of F1 (or better) by Fitch and long term instruments with a rating of A (or better) by Fitch; and

(iii) short term instruments with a rating of Prime-1 (or better) and long term investments with a rating of A1 (or better) by Moody’s; and

(c) in relation to an insurance company, an underwriter, a group of insurance companies or a group of underwriters:

(i) in the case of an insurance company or underwriter, long term instruments with a rating of, or a financial strength rating of; or

(ii) in the case of a group of insurance companies or underwriters, weighted average long term instruments with a rating of, or a financial strength rating of,

A (or better) by Fitch and A (or better) by S&P.

S&P means Standard & Poor’s Rating Services, a division of the McGraw-Hill Companies, Inc. or any successor to its rating business.

Secondary Tax Liabilities means any liability under sections 767A or 767AA of the Income and Corporation Taxes Act 1988 which would not have arisen but for the making of the Loans.

Screen Rate means the British Bankers’ Association Interest Settlement Rate for the relevant currency and Interest Period displayed on the appropriate page of the Reuters screen. If the agreed page is replaced or service ceases to be available, the Facility Agent may specify another page or service displaying the appropriate rate after consultation with the Company and the B Lenders.

Securitisation means the securitisation of the A Loans by the relevant Original Lender.

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Security means any mortgage, charge (fixed or floating), standard security, pledge, lien, hypothecation, security trust, assignment by way of security, reservation of title, or any other security interest whatsoever, howsoever created or arising or any other agreement or arrangement (including the establishment of any rights of set-off) entered into for the purposes of conferring security or placing the beneficiary of such agreement or arrangement in a preferred position in an insolvency vis-à-vis other unsecured creditors (including, without limitation, a sale and repurchase arrangement entered into for such purposes).

Security Agreement means an English and Northern Irish law composite debenture creating first fixed and floating security over the assets and undertaking of the Company in favour of the Security Agent.

Security Document means:

(a) the Security Agreement;

(b) the Mortgage of Shares;

(c) a Standard Security;

(d) an Assignation of Rent;

(e) a Supplemental Security Agreement;

(f) any other document evidencing or creating security over any asset to secure any obligation of the Company to a Finance Party under the Finance Documents; or

(g) any other document designated as such by the Facility Agent and the Company.

Sponsors means, together, Bain Capital Ltd., Kohlberg Kravis Roberts & Co. Ltd. and Vornado Realty Trust and any other private equity sponsors selected by them as part of the equity syndication of the acquisition of Toys “R” Us Inc.

Sponsors’ Affiliate means, in relation to any Sponsor, any of its Holding Companies or Subsidiaries or any other Subsidiary of any of its Holding Companies and includes any fund or partnership represented, managed or controlled by any Sponsor or any of their respective Sponsors’ Affiliates and any Sponsors’ Affiliate of any such fund or partnership but does not include any portfolio company of any Sponsor or of any Affiliate of any Sponsor and, in the context of a person or persons achieving or having control over another person, control for the purposes of this definition means the person or persons acting in concert controlling, or being able to control, the composition of the board or directors or equivalent management board of that other person or the person or persons acting in concert in accordance with whose directions a majority of the board of directors or equivalent management board of that other person are or become accustomed to act.

Standard Security means a standard security entered into or to be entered into by the Company, in favour of the Facility Agent, with respect to any Property located in Scotland.

Structure Chart means the chart in the agreed form setting out the shareholding structure of the Company as at the first Utilisation Date.

Subordinated Loan means a loan to the Company from any person which is subordinated in right, time and priority of payment to amounts outstanding under the Finance Documents pursuant to a Subordination Agreement or otherwise on terms acceptable to the Facility Agent (acting reasonably).

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Subordination Agreement means a subordination agreement in a form agreed by the Company and the Facility Agent (acting reasonably) (including, without limitation, those delivered as conditions precedent to this Agreement).

Subsidiary means, in relation to any person, any corporation, any entity or any partnership, which is controlled directly or indirectly by that person and any entity (whether or not so controlled) treated as a subsidiary in the latest financial statements of that person from time to time, and control for this purpose means the direct or indirect ownership of the majority of the voting share capital of such entity or the right or ability to direct management to comply with the type of material restrictions and obligations contemplated in this Agreement or to determine the composition of a majority of the board of directors (or like board) of such entity, in each case whether by virtue of ownership of share capital, contract or otherwise.

Substitute Additional Property has the meaning given to it in Clause 17.12 (Acquisitions and investments).

Substitution Notice has the meaning given to it in Clause 17.12 (Acquisitions and investments).

Supplemental Security Agreement means a security agreement supplemental to a Security Agreement creating a legal mortgage over an Additional Property or the Cardiff Property substantially in the form approved by the Facility Agent for the purposes of Part 2 of Schedule 2 (Conditions Precedent for an Additional Property) or Part 3 of Schedule 2 (Conditions Precedent to drawdown of the Cardiff Loan).

Taxes includes all present and future income and other Taxes, levies, imposts, duties, or other charges or withholdings of a similar nature wheresoever imposed and together with interest thereon and penalties and fines with respect thereto, if any, and any payments made on or in respect thereof and Tax and Taxation shall be construed accordingly.

Tenant Contributions means any amount paid or payable to the Company by any tenant under a Lease Document or any other occupier of a Property, by way of:

(a) contribution to:

(i) insurance premia;

(ii) the cost of an insurance valuation;

(iii) a service charge in respect of the Company’s costs under any repairing or similar obligation or in providing services to a tenant of, or with respect to, a Property;

(iv) a sinking fund; or

(v) rent or other sums payable under any Headlease; or

(b) value added tax or similar taxes.

Total Commitments means the aggregate of the Commitments.

Transaction Costs means all fees, costs and expenses and stamp, transfer, registration, notarial and similar Taxes incurred by the Company in relation to the Acquisition, the entry into this Agreement and the transactions contemplated by this Agreement.

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Transaction Document means:

(a) a Finance Document;

(b) a Property Management Agreement; or

(c) a Lease Document.

Transaction Security means the Security created or expressed to be created in favour of the Security Agent and/or any other Finance Party pursuant to the Security Documents.

Transfer Certificate means a certificate substantially in the form set out in Part 1 of Schedule 4 (Form of Transfer Certificate) or any other form agreed between the Facility Agent and the Company.

Transfer Date means, in relation to any Transfer Certificate, the date for making the transfer as specified in the Transfer Certificate.

Treaty Lender has the meaning given to it in Clause 10.1 (Tax Definitions).

Unpaid Sum means any sum due and payable but unpaid by the Company under the Finance Documents.

Utilisation Date means each date on which a Facility is utilised.

Utilisation Request means a notice substantially in the form set out in Schedule 3 (Requests).

Valuation means the Original Valuation Report and any other valuation of one or more Properties by a surveyor or valuer acceptable to the Facility Agent (acting reasonably), addressed to the Finance Parties and prepared on the basis of the market value as that term is defined in the then current Statements of Asset Valuation Practice and Guidance Notes issued by the Royal Institution of Chartered Surveyors.

VAT is a reference to value added tax as provided for in the Value Added Tax Act 1994 and legislation supplemental thereto and any other tax levied in accordance with the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of Member States relating to turnover taxes (77/388/EEC) as implemented in the EU Member States under their respective value added tax legislation and legislation supplemental thereto.

Vendor means each of Toys “R” Us Limited and Toys “R” Us Properties Limited.

Vendor’s Completion Loan means each loan made by a Vendor to the Company in relation to (and for the purpose of completing) the Acquisition as referred to in the Funds Flow Document.

Waterfall Trigger Event has the meaning given to it in the Intercreditor Deed.

Website Lenders has the meaning given to it in Clause 25.7 (Use of Websites).

1.2 Construction

(a) Unless a contrary indication appears a reference in this Agreement to:

(i) the Facility Agent, the Security Agent, any Finance Party, any Lender, any Hedge Counterparty, the Company, any Party or any other person shall be construed so as to include its successors in title, permitted assigns and permitted transferees and, in the case of

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the Security Agent, any person for the time being appointed as a security agent or trustee in accordance with this Agreement;

(ii) an agency of a state includes any local or other authority, self regulating or other recognised body or agency, central or federal bank, department, government, legislature, minister, ministry, self regulating organisation, official or public or statutory person (whether autonomous or not) of, or of the government of, that state or any political sub-division in or of that state;

(iii) a document in agreed form is a document which is in a form agreed and/or approved on or before the date of this Agreement by the Company and the Facility Agent or, if not so agreed or approved, as approved or agreed by the Facility Agent (acting reasonably);

(iv) an agreement includes any legally binding agreement, arrangement, concession, contract, deed or franchise (in each case whether oral or written);

(v) assets includes property and rights of every kind, present, future and contingent (including uncalled share capital);

(vi) continuing in relation to an Event of Default or Default shall be construed as a reference to such an event which is continuing unremedied and unwaived;

(vii) currency equivalent means the equivalent in Sterling of an amount in another currency as determined by reference to the Facility Agent’s spot rate of exchange for the purchase of Sterling with the relevant currency in the London foreign exchange market as of 11.00 a.m. on the date of determination;

(viii) a directive includes any regulation, rule, official directive, order, request or guideline (whether or not having the force of law but if not having the force of law being one with which it is the practice of the relevant person to comply) of any agency of any state;

(ix) a disposal in respect of a Property includes any disposal pursuant to a compulsory purchase order;

(x) a filing includes any relevant filing, registration, recording or notice (and references to making or renewing “filings” shall be construed accordingly) required by law or regulation;

(xi) a guarantee includes:

(A) an indemnity; and

(B) any other obligation (whatever called) of any person:

I. to pay, purchase, provide funds (whether by the advance of money, the purchase of or subscription for shares or other investments, the purchase of assets or services, the making of payments under an agreement or otherwise) for the payment of, indemnify against the consequences of default in the payment of, or otherwise be responsible for, any indebtedness of any other person; or

II. to be responsible for the performance of any obligations by or the solvency of any other person,

(and guaranteed and guarantor shall be construed accordingly);

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(xii) indebtedness includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or future, actual or contingent;

(xiii) a participation of a Lender in a Loan, means the amount of the relevant Loan which such Lender has made or is to make available and thereafter that part of that Loan which is owed to such Lender;

(xiv)  reservations means the principle that equitable remedies are remedies which may be granted or refused at the discretion of the court, the limitation on enforcement as a result of laws relating to bankruptcy, insolvency, liquidation, reorganisation, court schemes, moratoria, administration and other laws affecting the rights of creditors generally, the time-barring of claims under applicable statutes of limitation, rules against penalties and similar principles and generally applicable limitations of law which are provided for as qualifications in the legal opinions delivered to the Facility Agent pursuant to Clause 4.1 (Initial Conditions Precedent), Schedule 2 (Conditions Precedent) or delivered in relation to any Security Document;

(xv) unwaived means not expressly waived in writing by the Facility Agent (and in giving any written waiver confirming that it is acting on the instructions of the Majority Lenders or all the Lenders, as the case may be);

(xvi)  a provision of law is a reference to that provision as amended, restated or re-enacted; and

(xvii)  a time of day is a reference to London time.

(b) Section, Clause and Schedule headings are for ease of reference only.

(c) Unless a contrary indication appears, a term used in any other Finance Document or in any notice given under or in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement.

(d) Save where a contrary intention appears, in this Agreement:

(i) a reference to any agreement (including, without limitation, any of the Finance Documents) is to be construed as a reference to that agreement as it may from time to time be amended, varied, supplemented, restated or novated but excluding for this purpose any amendment, variation, supplement or modification which is contrary to any provision of any of the Finance Documents including, for the avoidance of doubt, any amendment of any agreement referred to as being in the agreed form or dated on the date of this Agreement;

(ii) a reference to a statute or statutory instrument or any provision thereof is to be construed as a reference to that statute or statutory instrument or such provision thereof as the same may have been, or may from time to time hereafter be, amended or re-enacted;

(iii) the index to and the headings in this Agreement are inserted for convenience only and are to be ignored in construing this Agreement;

(iv) words importing the plural shall include the singular and vice versa; and

(v) in the event that compliance with any monetary limit specified in this Agreement shall fall to be determined, any conversion from any currency to Sterling necessary for that purpose shall be by reference to the Facility Agent’s spot rate of exchange for the purchase of Sterling with the relevant currency in the London foreign exchange market as of 11.00 a.m. on the date of determination.

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1.3 Currency Symbols and Definitions

£ and Sterling means the lawful currency of the United Kingdom.

1.4 Third party rights

(a) Unless expressly provided to the contrary in a Finance Document a person who is not a Party has no right under the Contracts (Rights of Third Parties) Act 1999 (the Third Parties Act) to enforce or enjoy the benefit of any term of any Finance Document.

(b) Notwithstanding any term of any Finance Document, the consent of any person who is not a Party is not required to rescind or vary any Finance Document at any time.

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SECTION 2

THE FACILITIES

2. THE FACILITY

2.1 The Facility

Subject to the terms of this Agreement, the Lenders make available to the Company:

(a) the A1 Loan in an amount equal to the A1 Commitment;

(b) the A2 Loan in an amount equal to the A2 Commitment;

(c) the A3 Loan in an amount equal to the A3 Commitment;

(d) the A4 Loan in an amount equal to the A4 Commitment;

(e) the A5 Loan in an amount equal to the A5 Commitment;

(f) the A6 Loan in an amount equal to the A6 Commitment; and

(g) the B Loan in an amount equal to the B Commitment,

each a term loan facility and in an aggregate amount equal to the Total Commitments.

2.2 The Cardiff Loan

(a) The Company may, at any time during the relevant Availability Period, request the Cardiff Loan in a maximum amount which complies with paragraph (b) below.

(b) The Cardiff Loan requested pursuant to paragraph (a) above must not exceed an amount equal to the lower of:

(i) £10,800,000;

(ii) 83.00 per cent. of the market value of the Cardiff Property as set out in the relevant Original Valuation Report;

(iii) 89.88 per cent. of the vacant possession value of the Cardiff Property as set out in the relevant Original Valuation Report; and

(iv) the aggregate of the maximum available amounts under the Commitments.

(c) The Lenders shall only be obliged to comply with Clause 5.3 (Lenders’ participation) in relation to the Cardiff Loan if the conditions set out in Clauses 4.1(c) (Initial Conditions Precedent) and 4.2 (Additional Conditions Precedent) have been, or will on the relevant Utilisation Date be, satisfied.

(d) Any Utilisation Request relating to the Cardiff Loan issued pursuant to paragraph (a) above must comply with the provisions of Clause 5 (Utilisation).

(e) The Cardiff Loan, once advanced, will form part of each of the A1 Loan, A2 Loan, A3 Loan, A4 Loan, A5 Loan, the A6 Loan and B Loan in each case in the maximum amount set out in Schedule 1 under the heading “Maximum share of Cardiff Loan”.

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(f) The amount of the Cardiff Loan to be drawn under each Commitment will be:

(i) the relevant pro rata amount for that Loan up to a maximum amount set out in Schedule 1 under the heading “Maximum share of Cardiff Loan”; and

(ii) in the case of the B Loan, a further amount up to a maximum aggregate amount equal to that set out in Schedule 1 under the heading “Maximum share of Cardiff Loan”.

2.3 Finance Parties’ rights and obligations

(a) The obligations of each Finance Party under the Finance Documents are several. Failure by a Finance Party to perform its obligations under the Finance Documents does not affect the obligations of any other Party under the Finance Documents. No Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents.

(b) The rights of each Finance Party under or in connection with the Finance Documents are separate and independent rights and any debt arising under the Finance Documents to a Finance Party from the Company shall be a separate and independent debt.

(c) A Finance Party may, except as otherwise stated in the Finance Documents, separately enforce its rights under the Finance Documents.

2.4 Basis of Participation

Subject to the other provisions of this Agreement, each Lender will participate in each Loan in the proportion which its relevant Commitment bears to the aggregate relevant Commitments as at the relevant Utilisation Date.

2.5 Facility Offices

(a) Subject as provided in Clause 2.6 (Lending Affiliates) below, each Lender will participate in each Loan through its Facility Office.

(b) Subject as provided in Clause 2.6(d) (Lending Affiliates) below, any Lender may only use its nominated Facility Office for the purposes of making a Loan.

2.6 Lending Affiliates

(a) A Lender may nominate a branch or Affiliate to discharge its obligations to participate in a Loan:

(i) in this Agreement; or

(ii) in the Transfer Certificate pursuant to which such Lender becomes a Party.

(b) Any branch or Affiliate nominated by a Lender to participate in a Loan shall:

(i) participate in compliance with the terms of this Agreement; and

(ii) be entitled, to the extent of its participation, to all the rights and benefits of a Lender under the Finance Documents provided that such rights and benefits shall be exercised on its behalf by its nominating Lender save where law or regulation requires the branch or Affiliate to do so.

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(c) Each Lender shall remain liable and responsible for the performance of all obligations assumed by a branch or Affiliate on its behalf and non-performance of a Lender’s obligations by its branch or Affiliate shall not relieve such Lender from its obligations under this Agreement.

(d) The Company shall not be liable to pay any amount being required to be paid by the Company under Clause 10 (Taxes) or Clause 11.2 (Increased Costs) (arising as a result of laws or regulations in force or known to be coming into force on the date the relevant branch or Affiliate was nominated) in excess of the amount it would have been obliged to pay if that Lender had not nominated its branch or Affiliate to participate in the Facility. Each Lender shall promptly notify the Facility Agent and the Company of the Tax jurisdiction from which its branch or Affiliate will participate in the Loan and such other information regarding that branch or Affiliate as the Company may reasonably request.

(e) Any notice or communication to be made to a branch or an affiliate of a Lender pursuant to Clause 25 (Notices and Confidentiality):

(i) may be served directly upon the branch or Affiliate, at the address supplied to the Facility Agent by the nominating Lender pursuant to its nomination of such branch or Affiliate, where the Lender or the relevant branch or Affiliate requests this in order to mitigate any legal obligation to deduct withholding Tax from any payment to such branch or Affiliate or any payment obligation which might otherwise arise pursuant to Clause 11 (Change in Circumstances); or

(ii) in any other circumstance, may be delivered to the Facility Office of the Lender.

(f) If a Lender nominates an Affiliate, that Lender and that Affiliate:

(i) will be treated as having single Commitments (being the relevant Commitment of that Lender) but for all other purposes other than those referred to in paragraphs (c) and (e)(ii) above will be treated as separate Lenders; and

(ii) will be regarded as a single Lender for the purpose of (A) voting in relation to any matter in connection with a Finance Party or (B) compliance with Clause 20.2 (Assignments and transfers by the Lenders).

2.7 Enforcement of Rights

Subject to any provision of the Finance Documents to the contrary, each Finance Party has the right to protect and enforce its rights arising out of the Finance Documents and it will not be necessary for any other Finance Party to be joined as an additional party in any proceedings brought for the purpose of protecting or enforcing such rights.

3. PURPOSE

3.1 Purpose

The Company shall apply each Loan towards the consideration payable by it to the Vendors pursuant to the Acquisition and the funding or reimbursement of Transaction Costs.

3.2 Monitoring

No Finance Party is bound to monitor or verify the application of any amount borrowed pursuant to this Agreement.

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4. CONDITIONS OF UTILISATION

4.1 Initial Conditions Precedent

The Lenders shall only be obliged to comply with Clause 5.3 (Lenders’ participation) in relation to a Loan if:

(a) the Facility Agent has notified the Company that it has received all of the documents and other evidence listed in Part 1 of Schedule 2 (Conditions Precedent) in the agreed form (to the extent agreed at or prior to signing of this Agreement) or otherwise in form and substance satisfactory to the Facility Agent, in each case acting reasonably;

(b) Closing has occurred; and

(c) in the case of the Cardiff Loan, the Facility Agent has notified the Company that it has received all of the documents and other evidence listed in Part 3 of Schedule 2 (Conditions Precedent to the drawdown of the Cardiff Loan) in form and substance satisfactory to the Facility Agent, acting reasonably.

The Facility Agent and the relevant Original Lender shall notify the Company and the Lenders as set out in paragraphs (a), (b) and (c) above promptly upon being so satisfied (in the case of paragraph (a) and (c)) or promptly upon Closing having occurred (in the case of paragraph (b)).

4.2 Additional Conditions Precedent

In addition, the Lenders shall be under no obligation to make a Loan available to the Company unless, on both the date of the relevant Utilisation Request and the relevant Utilisation Date:

(a) no Default has occurred and is continuing and no Default will occur as a result of making the relevant Loan;

(b) the Repeating Representations that are required under this Agreement to be repeated on those dates are true and accurate (in all material respects in the case of any representation or warranty which is not subject to a materiality test in accordance with its terms as provided for in Clause 15 (Representations)) in each case by reference to the facts and circumstances then subsisting and will remain true and accurate immediately after the relevant Loan is made;

(c) immediately following the making of the relevant Loan, the Loan to Value does not exceed 83 per cent; and

(d) immediately following the making of the relevant Loan, Interest Cover will not be less than 110 per cent.

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SECTION 3

UTILISATION

5. UTILISATION

5.1 Delivery of a Utilisation Request

The Company may utilise a Facility by delivery to the Facility Agent of a duly completed Utilisation Request not later than 9.30 a.m. on the proposed Utilisation Date.

5.2 Completion of a Utilisation Request

(a) Each Utilisation Request is irrevocable and will not be regarded as having been duly completed unless:

(i) the proposed Utilisation Date is a Business Day and within the relevant Availability Period;

(ii) the amount of the Loan requested does not exceed the maximum undrawn amount available under the relevant Commitment on the proposed Utilisation Date or, in the case of the Cardiff Loans, the maximum amount available pursuant to Clauses 2.2 (The Cardiff Loan) and 4.2(c) and (d) (Additional Conditions Precedent); and

(iii) it specifies details of the bank and account to which the proceeds of the Loan are to be paid.

5.3 Lenders’ participation

(a) If the conditions set out in this Agreement have been met, each Lender shall make its participation in each Loan available by the relevant Utilisation Date through its Facility Office.

(b) The amount of each Lender’s participation in each Loan will be equal to the proportion borne by its relevant Commitment to the relevant aggregate Commitments immediately prior to making the relevant Loan.

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SECTION 4

REPAYMENT, PREPAYMENT AND CANCELLATION

6. REPAYMENT

6.1 Repayment

(a) In this Clause Anniversary Date means an anniversary of the first Utilisation Date.

(b) Subject to paragraph (d) below, the Company must, from the first Anniversary Date, repay the A Loans by quarterly instalments in accordance with the table set out below, such that on each Interest Payment Date falling in a period referred to in Column A of the table below, the Company shall repay an amount equal to one quarter of the amount equal to the percentage of the outstanding principal amount of the A Loans (as at the first day after the Availability Period for the Cardiff Loan has ended) identified next to that period in Column B in the table below.

Column A	Column B
Interest Payment Dates	Percentage of A Loans to be repaid in the relevant year
From (but excluding) the first Anniversary Date to (and including) the second Anniversary Date	0.30	%
From (but excluding) the second Anniversary Date to (and including) the third Anniversary Date	0.35	%
From (but excluding) the third Anniversary Date to (and including) the fourth Anniversary Date	0.50	%
From (but excluding) the fourth Anniversary Date to (and including) the fifth Anniversary Date	0.50	%
From (but excluding) the fifth Anniversary Date to (and including) the sixth Anniversary Date	0.55	%
From (but excluding) the sixth Anniversary Date to (and including) the seventh Anniversary Date	0.55	%

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(c) Subject to paragraph (d) below, the Company must, from the first Anniversary Date, repay the B Loan by quarterly instalments in accordance with the table set out below, such that on each Interest Payment Date falling in a period referred to in Column A of the table below, the Company shall repay an amount equal to one quarter of the amount equal to the percentage of the outstanding principal amount of the B Loan (as at the first day after

the Availability Period for the Cardiff Loan has ended) identified next to that period on Column B in the table below:

Column A	Column B
Interest Payment Dates	Percentage of B Loans to be repaid in the relevant year
From (but excluding) the first Utilisation Date to (and including) the first Anniversary Date	1.00%
From (but excluding) the first Anniversary Date to (and including) the second Anniversary Date	1.00%
From (but excluding) the second Anniversary Date to (and including) the third Anniversary Date	1.00%
From (but excluding) the third Anniversary Date to (and including) the fourth Anniversary Date	1.00%
From (but excluding) the fourth Anniversary Date to (and including) the fifth Anniversary Date	1.00%
From (but excluding) the fifth Anniversary Date to (and including) the sixth Anniversary Date	1.00%
From (but excluding) the sixth Anniversary Date to (and including) the seventh Anniversary Date	1.00%

(d) The Company must repay the then outstanding amount of the Loans in full on the Final Maturity Date.

(e) Amounts repaid pursuant to paragraph (b) above will be applied against the A Loans in the following order:

(i) first, in prepayment of the A1 Loan;

(ii) secondly, in prepayment of the A2 Loan;

(iii) thirdly, in prepayment of the A3 Loan;

(iv) fourthly, in prepayment of the A4 Loan;

(v) fifthly, in prepayment of the A5 Loan; and

(vi) sixthly, in prepayment of the A6 Loan.

6.2 Miscellaneous

(a) The provisions of Clause 7.5 (Miscellaneous) shall apply to any repayment under this Clause 6.

(b) All repayments in respect of each Loan are to be made pro rata to all the Lenders in relation to that Loan.

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7. PREPAYMENT

7.1 Voluntary Prepayments

(a) The Company may prepay or procure the prepayment of any Loan or any part thereof at any time provided that the Facility Agent has received not less than twelve (12) Business Days’ prior written notice from the Company of the proposed date and amount of the prepayment and further provided that any partial prepayment of the relevant Loan will be in a minimum amount of £1,000,000 (and an integral multiple of £100,000) or if less, the outstanding amount of the relevant Loan and, in each case, if paid other than on the last day of an Interest Period, is made together with any amount payable under Clause 13.5 (General Indemnity).

(b) Any prepayment under paragraph (a) above shall be applied against the Loans in accordance with Clause 7.4(a) (Prepayments: Order of Application).

7.2 Mandatory prepayment – compulsory purchase

(a) If all or any part of a Property is subject to a compulsory purchase order and the compensation received in respect of that compulsory purchase order is in excess of £100,000 then the Company must immediately give notice of the compulsory purchase order to the Facility Agent.

(b) Unless the Facility Agent agrees otherwise, if all or any part of a Property is subject to a compulsory purchase order of the type described in paragraph (a) above, the total amount the compensation received (up to a maximum amount equal to what the Applicable Release Pricing Amount (as defined in Clause 17.13 (Disposals)) would be for the relevant Property or part of a Property if the compulsory purchase had been a disposal made in accordance with this Agreement) must be paid into the Disposal Account for application in accordance with Clause 14.5 (Disposal Account) (giving the Facility Agent not less than twelve (12) Business Days’ prior written notice of that prepayment).

(c) Any prepayment under paragraph (b) above shall be applied against the Loans in accordance with Clause 7.4(b) (Prepayments: Order of Application).

7.3 Mandatory prepayments – disposals and insurance proceeds

(a) If all or part of a Property is disposed of in accordance with this Agreement, the Company must apply the proceeds of that disposal in prepayment of the Loans to the extent required in Clause 17.13 (Disposals) and in accordance with the other terms of this Agreement.

(b) The Company must apply the proceeds of any insurance policy in prepayment of the Loan to the extent required by Clause 18.4(n) (Insurances) (giving the Facility Agent not less than twelve (12) Business Days’ prior written notice of that prepayment).

(c) Any prepayment under paragraph 7.4(b) above shall be applied against the Loans in accordance with Clause 7.4(b) (Prepayments: Order of Application)

7.4 Prepayments: Order of Application

(a) Prepayments made pursuant to Clause 7.1 (Voluntary Prepayments) shall, unless the Facility Agent notifies the Company otherwise after the occurrence of an Event of Default:

(i) be made

(A) prior to a Waterfall Trigger Event:

I. firstly, to the B Lenders; and

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II. secondly, to the A Lenders,

and;

(B) if a Waterfall Trigger Event exists:

I. firstly, to the A Lenders; and

II. secondly, to the B Lenders; and

(ii) shall be applied by the A Lenders towards the A Loans in the following order:

(A) first, in prepayment of the A6 Loan;

(B) secondly, in prepayment of the A5 Loan;

(C) thirdly, in prepayment of the A4 Loan;

(D) fourthly, in prepayment of the A3 Loan;

(E) fifthly, in prepayment of the A2 Loan;

(F) sixthly, in prepayment of the A1 Loan; and

(iii) shall be applied against the amount of principal payable in relation to each Loan on the Final Maturity Date detailed in Clause 6 (Repayment).

(b) Prepayments made pursuant to Clauses 7.2 (Mandatory prepayment – compulsory purchase) and 7.3 (Mandatory prepayments – disposals and insurance proceeds) shall, unless the Facility Agent notifies the Company otherwise after the occurrence of an Event of Default:

(i) be made:

(A) prior to a Waterfall Trigger Event to the A Lenders and the B Lenders pro rata; and

(B) if a Waterfall Trigger Event exists:

I. firstly, to the A Lenders; and

II. secondly, to the B Lenders; and

(ii) shall be applied by the A Lenders towards prepayment of the A Loans in the following order:

(A) first, in prepayment of the A1 Loan;

(B) secondly, in prepayment of the A2 Loan;

(C) thirdly, in prepayment of the A3 Loan;

(D) fourthly, in prepayment of the A4 Loan;

(E) fifthly, in prepayment of the A5 Loan;

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(F) sixthly, in prepayment of the A6 Loan; and

(iii) shall be applied against the amount of principal payable in relation to each Loan on the Final Maturity Date detailed in Clause 6 (Repayment).

The Commitments of the Lenders prepaid shall be cancelled in an amount equal to each amount prepaid pursuant to this Clause 7.4.

7.5 Miscellaneous

(a) No prepayment of any Loan may be made except at the times and in the manner expressly provided by this Agreement.

(b) Any repayment or prepayment must be accompanied by accrued interest on the amount repaid or prepaid, any applicable Break Costs and any other sum then due and payable under the Finance Documents including, without limitation, any payment due to the Hedge Counterparty pursuant to the Company’s compliance with Clause 12.5(c) (Hedging).

(c) Any repayment or prepayment of a Loan (or part thereof) shall be made in Sterling.

(d) No amount of a Loan repaid or prepaid may be redrawn.

8. CANCELLATION

(a) At the close of business on the last Business Day of the Availability Period for the Loans other than the Cardiff Loan any portion of any Commitment in excess of an amount equal to the relevant pro rata share of £10,800,000 (being the maximum amount of the Cardiff Loan) remaining undrawn will be cancelled.

(b) At the close of business on the last Business Day of the Availability Period for the Cardiff Loan, any portion of any Commitment remaining undrawn will be cancelled.

(c) No amounts cancelled may subsequently be reinstated.

9. PAYMENTS

9.1 By Lenders

(a) On each Utilisation Date, each Lender shall make its share of the relevant Loan (net, to the extent applicable in respect of any A5 Loan, of any discount arising as a result of the arrangements entered into by the A Lender in connection with the funding of that A5 Loan) available to the Facility Agent for payment to the Company by payment in Sterling and in immediately available cleared funds to such account as the Facility Agent shall specify and at the time specified by the Facility Agent as being customary for settlement of transactions in Sterling in the place for payment.

(b) The Facility Agent shall make the amounts so made available to it available to the Company before close of business in the place of payment on that date by payment in Sterling to such account of the Company as shall have been specified in the Utilisation Request. If any Lender makes its share of a Loan available to the Facility Agent later than required by paragraph (a) above, the Facility Agent shall make that share available to the Company as soon as practicable after receipt of such funds.

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9.2 By the Company

(a) On each date on which any sum is due from the Company (other than where the sum is to be paid on its behalf by the Facility Agent from the balance standing to the credit of an Account in accordance with this Agreement), it shall make that sum available to the Facility Agent by payment in Sterling and in immediately available cleared funds to such account as the Facility Agent shall specify at the time specified by the Facility Agent as being customary for settlement of transactions in Sterling in the place for payment by not less than five Business Days’ notice in advance of the due date.

(b) The Facility Agent shall make available to each Finance Party before close of business in that place on that date its pro rata share (if any) of any sum so made available to the Facility Agent in Sterling as received by the Facility Agent to such account of that Finance Party with such bank in that place as it shall have specified to the Facility Agent. If any sum is made available to the Facility Agent later than required by paragraph (a) above, the Facility Agent shall make each Finance Party’s share (if any) available to it as soon as practicable after receipt of such funds.

9.3 Refunding of Payments

The Facility Agent shall not be obliged to make available to any person any sum that it is expecting to receive for the account of that person until it has been able to establish that it has received that sum. However, it may do so if it wishes. If and to the extent that the Facility Agent does so but it transpires that the Facility Agent has not then received the sum which it paid out:

(a) the person to whom the Facility Agent made that sum available shall on request refund such corresponding amount to the Facility Agent; and

(b) the person by whom that sum should have been made available or, if that person fails to do so the person to whom that sum should have been made available, shall on request pay to the Facility Agent the amount (as certified by the Facility Agent) which will indemnify the Facility Agent against any funding cost incurred by it as a result of paying out that sum before receiving it,

provided that the Company will have no obligation to refund any such amount received by it on the relevant Utilisation Date and paid by it (or on its behalf) to any third party in accordance with the Funds Flow Document.

9.4 Distributions to the Company

The Facility Agent may (with the consent of the Company or in accordance with Clause 24 (Set-Off)) apply any amount received by it for the Company in or towards payment (on the date and in the currency and funds of receipt) of any amount due from the Company under the Finance Documents or in or towards purchase of any amount of any currency to be so applied.

9.5 Partial payments

(a) If, prior to a Waterfall Trigger Event, the Facility Agent receives a payment that is insufficient to discharge all the amounts then due and payable by the Company under the Finance Documents, the Facility Agent shall apply that payment towards the obligations of the Company under the Finance Documents in the following order:

(i) first, in or towards payment pro rata and pari passu of any unpaid costs, fees and expenses of the Facility Agent, the Security Agent and any Property Manager and of any other due but unpaid Facility Fee; and

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(ii) secondly, payment pro rata:

(A) to the Hedge Counterparties of any net amount (not being an amount due as a result of termination or closing out) due but unpaid under the Hedging Agreements; and

(B) to the Facility Agent for the relevant Finance Parties of any accrued interest, due but unpaid under the Finance Documents;

(iii) thirdly, payment pro rata:

(A) to the Hedge Counterparties of any net amount (not being payments referred to in paragraph (iv) below) as a result of termination or closing out due but unpaid under the Hedging Agreements; and

(B) to the Facility Agent for the relevant Finance Parties of any amount of principal due but unpaid under the Finance Documents and any other amounts due but unpaid to the Finance Parties under the Finance Documents (other than those referred to in paragraph (iv) below);

(iv) fourthly, payment pro rata to each Hedge Counterparty of any payments due but unpaid as a result of termination or closing out under the Hedging Agreement to which that Hedge Counterparty is a party as a result of:

(A) the occurrence of an Event of Default (as defined in the Hedging Agreement) where that Hedge Counterparty is the Defaulting Party; and

(B) the occurrence of a Hedge Additional Termination Event following a failure of the Hedge Counterparty to comply with the requirements of the ratings downgrade provisions set out in the Hedging Agreement; and

(v) fifthly, in or towards payment pro rata of any other sum due but unpaid under the Finance Documents,

or, if a Waterfall Trigger Event exists, in accordance with Clause 3.3 of the Intercreditor Deed.

(b) The Facility Agent shall, if so directed by the Majority Lenders, vary the order set out in paragraphs (ii) to (iv) above.

(c) Paragraphs (a) and (b) above will override any appropriation made by the Company.

(d) The provisions of paragraph (a) above shall not apply to any Over Collateralised Amount and, in respect of any such Over Collateralised Amount, the Facility Agent shall make the payments referred to in Clause 14.6(c)(ii) (CSA Account).

9.6 No set-off by the Company

All payments to be made by the Company under the Finance Documents shall be calculated and be made without (and subject to Clause 10 (Taxes), free and clear of any deduction for) set-off or counterclaim.

9.7 Currency of account

(a) Subject to paragraph (b) below, Sterling is the currency of account and payment for any sum due from the Company under any Finance Document.

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(b) Each payment in respect of costs, expenses or Taxes shall be made in the currency in which the costs, expenses or Taxes are incurred.

(c) Each other amount payable under the Finance Documents is payable in Sterling.

9.8 Non-Business Days

(a) The duration of an Interest Period shall not be changed after 11.00 a.m. on the Quotation Day for that Interest Period unless it later becomes apparent to the Facility Agent that the day on which that Interest Period would otherwise end is not a Business Day. In that event, that Interest Period shall instead end on the Business Day succeeding that day unless such Business Day shall fall in the next succeeding calendar month, in which case such interest period shall instead end on the Business Day preceding that day (such determination to be notified by the Facility Agent to the Company and the Lenders).

(b) Any Repayment Date which would otherwise fall on a day which is not a Business Day shall be adjusted on the same basis so as to fall on a Business Day which is the last day of an Interest Period.

(c) Any payment to be made by the Company on a day which is not the last day of an Interest Period or a Repayment Date and which would otherwise be due on a day which is not a Business Day shall instead be due on the next Business Day.

(d) During any extension of the due date for payment of any principal or an Unpaid Sum under this Clause, interest is payable on the principal at the rate payable on the original due date.

9.9 Change in Currency

If a change in any currency of any relevant country occurs (including in consequence of European Monetary Union) after the date of this Agreement, this Agreement will be amended to the extent to which the Facility Agent, in good faith, determines to be necessary to reflect the change in currency or any financial market practices relating to dealing in the new currency and to put the Lenders and the Company in the same position, so far as is possible, that they would have been in if no change in currency had occurred.

10. TAXES

10.1 Tax Definitions

In this Agreement:

Qualifying Person means a Lender that is:

(a) a U.K. Lender; or

(b) a Treaty Lender; or

(c) a building society which is entitled to receive interest under this Agreement without deduction or withholding for or on account of U.K. income tax pursuant to section 477A(7) of the Taxes Act;

Tax Credit means a credit against, relief or remission for, or repayment of any Tax;

Tax Deduction means a deduction or withholding for or on account of Tax from a payment under a Finance Document;

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Taxes Act means the Income and Corporation Taxes Act 1988;

Tax Payment means an increased payment made by the Company to a Finance Party under Clause 10.3(d) (Tax Gross-Up) or a payment made under Clause 10.4(a) (Tax Indemnity);

Treaty Lender means a Lender in respect of a Loan:

(a) which is treated as resident (for the purposes of the appropriate double Taxation agreement) in a jurisdiction having a double Taxation agreement with the jurisdiction of incorporation of the Company which makes provision for full exemption from, or a full refund of, Tax imposed by the jurisdiction of incorporation of the Company on interest (subject only to completion of procedural formalities); and

(b) which is fully entitled to the benefits of that double taxation agreement in respect of all payments made under a Finance Document;

(c) in respect of which, the Borrower has received a direction from Her Majesty’s Revenue & Customs that it may pay all amounts on a Loan free of United Kingdom withholding tax.

U.K. Lender means a Lender:

(a) a Lender:

(i) which is a bank (as defined for the purpose of section 349 of the Taxes Act) making an advance under a Finance Document; or

(ii) by a person that was a bank for the purposes of section 349 of the Taxes Act (as currently defined in section 840A of the Taxes Act) at the time the advance was made.

and which, in the case of (i) and (ii) above, is beneficially entitled to and within the charge of UK corporation tax as respects any payments of interest made in respect of that advance; or

(b) a U.K. Non-Bank Lender; and

U.K. Non-Bank Lender means:

(a) a company resident in the U.K. for U.K. tax purposes;

(b) a partnership, each member of which is a company resident in the U.K. for U.K. tax purposes or a company not resident in the U.K. for U.K. tax purposes but which carries on a trade in the U.K. through a permanent establishment and brings into account in computing its chargeable profits (for the purpose of section 11(2) of the Taxes Act) the whole of any share of interest payable to it under this Agreement which falls to it by reason of sections 114 and 115 of the Taxes Act; or

(c) a company not resident in the U.K. for U.K. tax purposes which carries on a trade in the U.K. through a permanent establishment and brings into account interest payable to it under this Agreement in computing its chargeable profits for the purpose of section 11(2) of the Taxes Act,

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which, in the case of paragraphs (a), (b) and (c), is beneficially entitled to interest payable to it under this Agreement and which has provided to the Company and not retracted confirmation of one of the above in accordance with this Agreement.

10.2 Payments to be free and clear

All payments to be made by the Company under each Finance Document shall be paid free and clear of and without any Tax Deduction (in each case except to the extent required by law).

10.3 Tax Gross-Up

(a) The Company shall promptly upon it becoming aware that it is required by law to make a Tax Deduction (or that there is a change in the rate or the basis of any Tax Deduction) notify the Facility Agent of such requirement or change.

(b) A Lender, upon becoming aware that it has ceased to be a Qualifying Person, shall promptly notify the Facility Agent of this. If the Facility Agent receives such notification from a Lender it shall promptly notify the Company.

(c) If the Company is required by law to make a Tax Deduction it shall make the Tax Deduction in the minimum amount required by law and shall make any payment required in connection with any Tax Deduction within the time period and in the amount required by law.

(d) Except as provided by paragraphs (f) and (g) below, if a Tax Deduction is required by law to be made by the Company or the Facility Agent the amount of the payment due from the Company shall be increased to an amount which ensures that, after the making of that Tax Deduction, each relevant Party receives on the due date and retains (free from any liability in respect of such Tax Deduction) a net sum equal to the amount of the payment which it would have received and so retained had no such Tax Deduction been required.

(e) Within 30 days after making any Tax Deduction or a payment which it is required to make in connection with any Tax Deduction, the Company shall deliver to the Facility Agent for the relevant Party, an original receipt or certified copy thereof, or, if unavailable evidence satisfactory to that Party (acting reasonably) that the Tax Deduction has been made and that any payment which is required in connection with any Tax Deduction has been made to the relevant Tax authority or other person.

(f) The Company is not required to make any increased payment under paragraph (d) above as a result of a Tax Deduction in respect of Tax imposed by the jurisdiction of incorporation of the Company from a payment on a Loan if at the time that Tax Deduction is made the Lender is not a Qualifying Person and that Tax Deduction would not have been required or would have been fully refunded had that Lender been a Qualifying Person, unless the reason that such Lender is not a Qualifying Person is a change after the date on which it became a Lender under this Agreement in (or in the interpretation, administration or application of) any law or double taxation agreement or any published practice or published concession of any relevant Tax authority.

(g) The Company is not required to make an increased payment under paragraph (d) above for a Tax Deduction in respect of tax imposed by the U.K. to a Lender which is a U.K. Non-Bank Lender if:

(i) the Board of the Inland Revenue has given (and not revoked) a direction under section 349C of the Taxes Act (as that provision has effect on the date on which the relevant Lender became a party to this Agreement) which relates to the relevant payment;

(ii) the Lender has received from the Company a certified copy of that direction; and

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(iii) the payment could have been made to the Lender without any Tax Deduction in the absence of that direction.

(h) If a Lender is expressed to be a U.K. Non-Bank Lender when it becomes a party to this Agreement as a Lender, it will be deemed to have confirmed its status for the purpose of the definition of U.K. Non-Bank Lender. A U.K. Non-Bank Lender must promptly notify the Company and the Facility Agent of any change to its status that may affect any confirmation made by it.

10.4 Tax Indemnity

(a) Except as provided by paragraph (b) below, the Company shall, on demand by the Facility Agent indemnify a Finance Party against any loss, liability or cost which that Finance Party (in its absolute discretion) determines will be or has been (directly or indirectly) suffered for or on account of Tax by that Finance Party in relation to a payment received or receivable (or any payment deemed to be received or receivable) under a Finance Document.

(b) Paragraph (a) above shall not apply:

(i) with respect to any Tax assessed on a Finance Party under the laws of the jurisdiction in which:

(A) that Finance Party is incorporated or, if different, the jurisdiction (or jurisdictions) in which that Finance Party is treated as resident or having a permanent establishment for Tax purposes; or

(B) that Finance Party’s Facility Office is located or otherwise treated as having a taxable presence in respect of amounts received or receivable in that jurisdiction,

if that Tax is imposed on or calculated by reference to the net income (or similar insurance) received or receivable by that Finance Party. Any sum deemed to be received or receivable, including, for the avoidance of doubt, any amount treated as income but not actually received by the Finance Party (such as a Tax Deduction), is not income received or receivable for this purpose; or

(ii) if and to the extent that any such loss, liability or cost:

(A) is compensated for by an increased payment pursuant to Clause 10.3(d) (Tax Gross-Up) or would have been so compensated but for the operation of Clause 10.3(f) (or 10.3(g) (Tax Gross-Up); or

(B) is suffered or incurred by a Lender and would not have been suffered or incurred if such Lender had been a Qualifying Person in relation to the relevant Borrower at the relevant time unless the reason such Lender was not such a Qualifying Person at the relevant time is a change after the date on which it became a Lender under this Agreement in (or in the interpretation, administration or application of) any law or double Taxation agreement or any published practice or published concession of any relevant Tax authority of a jurisdiction with which such Lender has a connection.

(c) A Finance Party making, or intending to make, a claim under paragraph (a) above shall promptly notify the Facility Agent of the event which will give, or has given, rise to the claim, following which the Facility Agent will notify the Company.

(d) A Finance Party shall, on receiving a payment from the Company under paragraph (a) above notify the Facility Agent.

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10.5 Tax Credits

(a) If the Company makes a Tax Payment and the relevant Finance Party determines, in good faith, that it has obtained, utilised and retained on an affiliated group basis a Tax Credit which is attributable to that Tax Payment, that Finance Party shall pay to the Company such amount as that Finance Party determines, in good faith, to be attributable to the relevant Tax Payment and as will leave that Finance Party (after that payment) in the same after-Tax position as it would have been in if the Tax Payment had not been required to be made by the Company.

(b) Without prejudice to paragraph (a) above and subject to Clause 10.6 (Filings) and 11.3 (Mitigation), no provision of this Agreement will:

(i) interfere with the right of any Finance Party to arrange its tax affairs in whatever manner it thinks fit;

(ii) oblige any Finance Party to investigate or claim any credit, relief, remission or repayment available to it or the extent, order and manner of any claim; or

(iii) oblige any Finance Party to disclose any information relating to its tax affairs or any computations in respect of Tax.

10.6 Filings

A Qualifying Person and the Company shall cooperate in a timely manner in submitting such forms and documents (and renewal document, if required) and completing such procedural formalities and doing all such other things as may be required by the appropriate Tax authority for (a) the Company to obtain authorisation to make that payment without having to make a Tax Deduction or (b) such Lender to receive a refund of such Tax Deduction.

10.7 Stamp Taxes

The Company shall pay and, on demand by the Facility Agent, immediately indemnify each Finance Party against any cost, loss or liability that Finance Party incurs in relation to any stamp duty, stamp duty reserve tax, registration and any other similar Tax or notarial fees payable in connection with any Finance Document, except for any such stamp duty, stamp duty reserve tax, registration or other Tax or notarial fees payable directly or indirectly in connection with the entry into a Transfer Certificate.

10.8 VAT

(a) All amounts expressed to be payable under a Finance Document by any party hereto to a Finance Party shall be deemed to be exclusive of any VAT. If VAT is chargeable on any supply made by any Finance Party to any party hereto in connection with a Finance Document that party shall pay to the Finance Party (in addition to and at the same time as paying the consideration for that supply) an amount equal to the amount of the VAT.

(b) Where a Finance Document requires any party hereto to reimburse a Finance Party for any costs or expenses, that party shall also at the same time pay and indemnify the Finance Party against any VAT incurred by the Finance Party in respect of the costs or expenses to the extent that the Finance Party determines in its sole discretion that it is not entitled to credit for or repayment of the VAT.

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11. CHANGE IN CIRCUMSTANCES

11.1 Illegality

If at any time it becomes, after the date of this Agreement, unlawful in any applicable jurisdiction for any Lender to allow all or part of its Commitments to remain outstanding and/or to make, fund or allow to remain outstanding all or part of its share of any Loan and/or to carry out all or any of its other obligations under this Agreement:

(a) upon that Lender notifying the Company, its Commitments shall be cancelled to the extent of the illegality; and

(b) the Company shall prepay that Lender’s portion of each relevant Loan on the last day of the relevant Interest Period or, if earlier, the date specified by the Lender in its notice as may be necessary to comply with the relevant law or directive (being no earlier than the last day of any applicable grace period permitted by law) with accrued interest thereon and any other sum then due to that Lender under this Agreement.

11.2 Increased Costs

(a) If, as a result of the introduction of or any change in, or in the interpretation or application or administration of (in each case, after the date of this Agreement), any law or (whether or not having the force of law but, if not having the force of law, being one with which it is the practice of banks in the relevant jurisdiction to comply) any directive of any agency of any state including, without limitation, any law or directive relating to Taxation, reserve asset, special deposit, cash ratio, liquidity or capital adequacy requirements or other forms of banking, fiscal, monetary, or regulatory controls:

(i) the cost to any Lender of maintaining all or any part of its Commitment and/or of making, maintaining or funding all or any part of its share of the Loan or overdue sum under the Finance Documents is increased; and/or

(ii) any sum received or receivable by the Facility Agent or any Lender under the Finance Documents or the effective return to it under the Finance Documents is reduced; and/or

(iii) the Facility Agent or any Lender makes any payment or foregoes any interest or other return on or calculated by reference to the amount of any sum received or receivable by it under the Finance Documents,

the Company shall, within five Business Days of a demand by the Facility Agent, indemnify the Facility Agent or that Lender against that increased cost, reduction, payment or foregone interest or other return and, accordingly, shall from time to time, within five Business Days of a demand by the Facility Agent (whenever made), pay to the Facility Agent for its own account or for the account of that Lender the amount certified by it to be necessary so to indemnify it (such demand to include reasonable details of the calculation of the amounts demanded).

(b) The Company will not be obliged to compensate the Facility Agent or any Lender pursuant to paragraph (a) above in respect of any increased cost, reduction, payment, foregone interest or other return:

(i) compensated for by payment of the Mandatory Cost;

(ii) attributable to a change (whether of basis, timing or otherwise) in the Tax on the net income of the Facility Agent or that Lender or compensated for under Clause 10 (Taxes) or which

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would have been compensated for under Clause 10 (Taxes) but for the exceptions contained therein;

(iii) which is a Tax cost arising as a result of a Lender ceasing to be a Qualifying Person in relation to the Company unless the reason such Lender was not such a Qualifying Person at the relevant time is a change after the date on which it became a Lender under this Agreement in (or in the interpretation, administration or application of) any law or double Taxation agreement or any published practice or published concession of any relevant Tax authority of a jurisdiction with which such Lender has a connection; or

(iv) attributable to any wilful breach by the relevant Finance Party or any of its Affiliates of any law or directive.

(c) To the extent that any holding company of the Facility Agent or any Lender suffers a cost which would have been recoverable by the Facility Agent or that Lender under this Clause 11.2 had that cost been imposed on the Facility Agent or that Lender the Facility Agent or that Lender shall be entitled to recover that amount under this Clause 11.2 on behalf of the relevant holding company.

11.3 Mitigation

If in respect of any Lender, circumstances arise which would, or would upon the giving of notice, result in:

(a) an obligation to make any payment under Clause 10 (Taxes); or

(b) an obligation to make payment under Clause 11.1 (Illegality); or

(c) an obligation to make a payment under Clause 11.2 (Increased Costs); or

(d) the rate of interest being determined under Clause 11.4 (Change in Market Conditions),

then, without in any way limiting, reducing or otherwise qualifying the obligations of the Company under those Clauses, upon the request of the Company, such Lender, in consultation with the Facility Agent and the Company, shall take such reasonable steps as may be open to it to mitigate the effects of such circumstances (including changing its Facility Office or transferring its rights and obligations under the Finance Documents to an Affiliate) provided that the Lender concerned will not be obliged to take any action if to do so would or might in the opinion of the Lender have an adverse effect upon its business, operations or financial condition or cause it to incur liabilities or obligations (including, without limitation, Tax liabilities) which, in its opinion, are material or cause it to incur any costs or expenses for which it has not been indemnified to its satisfaction by the Company.

11.4 Change in Market Conditions

(a) If in relation to any Interest Period for a Loan:

(i) where LIBOR is to be determined by reference to the Reference Banks, none or only one Reference Bank supplies a quotation in accordance with the definition of LIBOR; or

(ii) Lenders whose participations in the relevant Loan exceed 50 per cent. of that Loan notify the Facility Agent that by reason of circumstances affecting the Relevant Interbank Market the cost to them of obtaining matching deposits in the Relevant Interbank Market in sufficient amounts to fund their respective shares of the amount to which that Interest Period relates is in excess of LIBOR,

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the Facility Agent shall promptly notify the Company and the Lenders and any such event shall be a “Market Disruption Event”.

(b) If a Market Disruption Event occurs in relation to a Loan for any Interest Period, then the rate of interest on each Lender’s share of the relevant Loan for the Interest Period shall be the rate per annum which is the sum of:

(i) the Margin;

(ii) the rate notified to the Facility Agent by that Lender as soon as practicable and in any event before interest is due to be paid in respect of that Interest Period, to be that which expresses as a percentage rate per annum the cost to that Lender of funding its participation in the relevant Loan from whatever source it may reasonably select; and

(iii) the Mandatory Cost, if any, applicable to that Lender’s participation in the relevant Loan.

(c) If a Market Disruption Event occurs and the Facility Agent or the Company so requires, the Facility Agent and the Company shall enter into negotiations (for a period of not more than thirty days) with a view to agreeing a substitute basis for determining the rate of interest.

(d) Any alternative basis agreed pursuant to paragraph (c) above shall, with the prior consent of all the Lenders and the Company, be binding on all parties to this Agreement.

11.5 Replacement of Lender

(a) If at any time the Company becomes obliged to pay additional amounts described in Clause 10 (Taxes), 11.1 (Illegality), Clause 11.2 (Increased Costs) or Clause 11.4 (Change in Market Conditions) to any Lender, then the Company may on 10 Business Days’ prior written notice to the Facility Agent and such Lender replace such Lender by requiring such Lender to (and such Lender shall) transfer pursuant to Clause 20.2 (Assignments and transfers by the Lenders) all of its rights and obligations under this Agreement to a Lender or another bank, financial institution, trust fund or other entity selected by the Company (following consultation with the Facility Agent) which confirms its willingness to assume and does assume all the obligations of the transferring Lender (including the assumption of the transferring Lender’s participation on the same basis as the transferring Lender) for a purchase price equal to the outstanding principal amount of such Lender’s participation in the outstanding Loan and all accrued interest and fees and other amounts payable to that Lender hereunder.

(b) The replacement of a Lender pursuant to this Clause 11.5 shall be subject to the following conditions:

(i) neither the Facility Agent nor the Security Agent (in their capacities as such) may be replaced without the consent of the Majority Lenders;

(ii) neither the Facility Agent nor any Lender shall have any obligation to the Company to find a replacement Lender or other such entity;

(iii) such replacement must take place no later than 180 days after the date the relevant Lender has demanded payment of additional or increased amounts under Clause 10 (Taxes), Clause 11.1 (Illegality) or Clause 11.2 (Increased Costs) as the case may be;

(iv) the Lender hereby replaced shall not be required to pay or surrender to such replacement Lender or other entity any of the fees received by or accrued due to such Lender replaced pursuant to this Agreement; and

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(v) to the extent that the replacement of a Lender results from the Company becoming obliged to pay additional amounts pursuant to Clause 10 (Taxes) or Clause 11.2 (Increased Costs) this provision will not release the Company from its obligations to pay any such additional amounts to such Lender prior to such Lender being replaced and the payment of such additional amounts (which have been notified to the Company) shall be a condition to the replacement of such Lender.

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SECTION 5

COSTS OF UTILISATION

12. INTEREST

12.1 Interest Periods

(a) Interest shall be calculated and payable on each Loan by reference to successive Interest Periods.

(b) Each Interest Period for each Loan will start on its Utilisation Date or on the expiry of its preceding Interest Period and end on the next Interest Payment Date.

(c) No Interest Period may extend beyond the Final Maturity Date.

12.2 Interest Rate

The rate of interest applicable to a Loan for a particular Interest Period shall be the rate per annum determined by the Facility Agent to be the sum of:

(a) the applicable Mandatory Cost (to the extent incurred by the relevant Lender);

(b) the applicable Margin; and

(c) (i)       in respect of an A Loan, the Fixed Rate; or

(ii) in respect of a B Loan, LIBOR for that Interest Period.

Interest will accrue daily and shall be calculated on the basis of a 365 day year or on the basis of such other calculation period as market convention dictates.

12.3 Notification of Interest Periods and Rates

The Facility Agent shall promptly notify the Company and the Lenders of the duration of each Interest Period and the rate of interest applicable to such Interest Period.

12.4 Payment of Interest

Except where it is provided to the contrary in this Agreement, the Company must pay accrued interest on each Loan on each Interest Payment Date.

12.5 Hedging

(a) From and including the first Utilisation Date the Company must maintain Hedging Agreements in relation to the B Loan in accordance with this Clause at all times.

(b) All Hedging Agreements must be:

(i) with a Hedge Counterparty and that Hedge Counterparty, or a person acceptable to the Facility Agent that has unconditionally guaranteed the obligations of that Hedge Counterparty under the Hedging Arrangements in form and substance satisfactory to the Facility Agent (acting reasonably), must have a Requisite Rating (or, in the case of a Rating Event Replacement Counterparty or where a guarantee has been provided as a result of the occurrence of a Rating Event, such other rating as is approved by the Facility Agent);

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(ii) in form and substance satisfactory to the Facility Agent;

(iii) in a notional principal amount at least equal to 100 per cent, of the amount of the B Loan; and

(iv) charged or assigned by way of security under a Security Agreement.

(c) If, at any time, the notional principal amount of the Hedging Agreements exceeds 100 per cent. of the amount of the B Loan at that time, the Company must, at the request of the Facility Agent, promptly reduce the notional principal amount of the Hedging Agreements by an amount and in a manner satisfactory to the Facility Agent so that it no longer exceeds the amount of the B Loan then outstanding.

(d) The Company shall, subject to agreement with the relevant Hedge Counterparty, be entitled to terminate Hedging Arrangements provided that the Company has (if required) entered into substitute Hedging Arrangements which comply with this Clause.

(e) (i)     The parties to each Hedging Agreement must comply with the terms of that Hedging Agreement.

(ii) Neither a Hedge Counterparty nor the Company may amend or waive the terms of any Hedging Agreement without the consent of the Facility Agent.

(f) Neither a Hedge Counterparty nor the Company may terminate or close out any Hedging Agreement (in whole or in part) except:

(i) in accordance with paragraph (c) or (d) above;

(ii) if it becomes illegal for that party to continue to comply with its obligations under that Hedging Agreement;

(iii) if the B Loan and all other amounts outstanding under the Finance Documents in relation to the B Loan (other than the Hedging Agreements) have been unconditionally and irrevocably paid and discharged in full;

(iv) in the case of termination or closing out by a Hedge Counterparty:

(A) if the Facility Agent serves notice under Clause 19.18 (Acceleration) or, having served notice under Clause 19.18 (Acceleration), makes a demand; or

(B) on the occurrence of a Failure to Pay Event of Default (as defined in the 1992 ISDA Master Agreement (Multicurrency-Cross Border)) in respect of the Company; or

(C) on the occurrence of a Bankruptcy Event of Default (as defined in Clause 5(a)(vii)(1)(3), (4) or (8) (except to the extent analogous to Section 5(a)(vii)(2), (5), (6) or (7)) of the 1992 ISDA Master Agreement (Multicurrency-Cross Border)) in respect of the Company; or

(D) on the occurrence of a Termination Event (as defined in the 1992 ISDA Master Agreement (Multicurrency-Cross Border)); or

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(v) in the case of termination or closing out by the Company:

(A) with the consent of the Facility Agent (and where the new Hedge Counterparty accedes to the Intercreditor Deed); or

(B) as a result of a Rating Event occurring with respect to a Hedge Counterparty failing to comply with the provisions of the relevant Hedging Arrangement regarding Rating Events.

(g) In the case of termination or closing out by the Company pursuant to paragraph (f)(v)(B) above, the Company must enter into substitute Hedging Agreements which comply with this Clause within 30 days of the relevant termination unless a Rating Agency has confirmed that not to do so will not result in a downgrade to the then current ratings of the notes issued pursuant to the Securitisation. The Company must use all reasonable endeavours to ensure that the new Hedge Counterparty accedes to the Intercreditor Deed.

(h) A Hedge Counterparty may not suspend making payments under a Hedging Agreement on the occurrence of a Potential Event of Default (as defined in the 1992 ISDA Master Agreement (Multicurrency Cross Border)).

(i) A Hedge Counterparty may only suspend making payments under a Hedging Agreement if the Company is in breach of its payment obligations under that Hedging Agreement.

(j) Each Hedge Counterparty acknowledges that the rights of the Company under the Hedging Agreements to which it is party have been charged or assigned by way of security under a Security Agreement and that payments due to the Hedge Counterparty are governed by the terms of both this Agreement and the Intercreditor Deed (as applicable).

(k)    (i)   Each Hedge Counterparty must promptly notify the Facility Agent upon becoming aware in the context of this Clause that a Rating Event has occurred in relation to it, or any person that has unconditionally guaranteed its obligations under the relevant Hedging Arrangement.

(ii) If a Rating Event has occurred in relation to a Hedge Counterparty, or any person that has unconditionally guaranteed the obligations of a Hedge Counterparty under the relevant Hedging Arrangement, the Hedge Counterparty must comply with its obligations in that regard under that Hedging Arrangement.

(iii) A Hedge Counterparty shall immediately on demand pay all reasonable costs and expenses (including legal fees) incurred by the Company and the Facility Agent as a result of the occurrence of a Rating Event with respect to such Hedge Counterparty and the operation of this subparagraph (i).

(l) The Company and a Hedge Counterparty may, after prior consultation with the Facility Agent, agree to the transfer by the Hedge Counterparty of all or a portion of its rights and obligations under a Hedging Arrangement to another Hedge Counterparty provided that the Company will at all times be in compliance with this Clause and provided that the new Hedge Counterparty accedes to the Intercreditor Deed.

(m) A failure on the part of a Hedge Counterparty to comply with its obligations under this Clause will not affect the obligations of the Company under the Finance Documents (other than under the Hedge Agreement with that Hedge Counterparty to the extent applicable as a result of the non-compliance).

(n) No Hedge Counterparty may be appointed unless it has first become a party to the Intercreditor Deed.

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12.6 Default Interest

In relation to any Unpaid Sum (including, without limitation, any sum payable by the Company pursuant to this Clause 12.6), the Company will pay default interest from the due date of such Unpaid Sum to the date of actual payment (as well after as before judgment) at a rate determined by the Facility Agent to be one per cent, per annum above:

(a) where the Unpaid Sum is principal which has fallen due prior to the expiry of the relevant Interest Period, the rate applicable to such principal immediately prior to the date it so fell due (but only for the period from such due date to the end of the relevant Interest Period); or

(b) in any other case (including principal falling within paragraph (a) above once the relevant Interest Period has expired), the rate which would be payable if the Unpaid Sum was a Loan made for a period equal to the period of non-payment divided into successive Interest Periods of such duration as shall be selected by the Facility Agent (each a Default Interest Period).

Default interest will be payable on demand by the Facility Agent and will be compounded at the end of each Default Interest Period.

13. OTHER INDEMNITIES

13.1 Currency indemnity

Without prejudice to Clause 13.5 (General Indemnity), if:

(a) any amount payable by the Company under or in connection with any Finance Document is received by any Finance Party (or by the Facility Agent on behalf of any Finance Party) in a currency (the Payment Currency) other than that agreed in the relevant Finance Document (the Agreed Currency), whether as a result of any judgment or order or the enforcement thereof, the liquidation of the Company or otherwise and the amount produced by converting the Payment Currency so received into the Agreed Currency is less than or greater than the relevant amount of the Agreed Currency; or

(b) any amount payable by the Company under or in connection with any Finance Document has to be converted from the Agreed Currency into another currency for the purpose of (i) making or filing a claim or proof against the Company, (ii) obtaining an order or judgment in any court or other tribunal or (iii) enforcing any order or judgment given or made in relation to any Finance Document,

then:

(i) if the amount produced or payable by the operation of paragraphs (a) and (b) above is less than the relevant amount of the Agreed Currency, the Company will, as an independent obligation, indemnify the relevant Finance Party for the deficiency and any loss sustained as a result; and

(ii) if the amount produced or payable by the operation of paragraphs (a) and (b) above is greater than the relevant amount of the Agreed Currency, the relevant Finance Party will refund any such amount to the Company.

Any conversion required will be made at such prevailing rate of exchange on such date and in such market as is determined by the relevant Finance Party as being most appropriate for the conversion. The Company will, in addition, pay any costs incurred as a result of any conversion.

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The Company waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency or currency unit other than that in which it is expressed to be payable.

13.2 Indemnity to the Facility Agent

The Company will promptly indemnify the Facility Agent against any cost, loss or liability incurred by the Facility Agent (acting reasonably) as a result of:

(a) the investigation of any Default provided that if the investigation shows that no Default had occurred, then such costs and expenses shall be for the account of the Lenders;

(b) entering into or performing any foreign exchange contract for the purposes of Clause 9.9 (Change in Currency); or

(c) acting or relying on any notice, request or instruction which it reasonably believes to be genuine, correct and appropriately authorised.

13.3 Enforcement Expenses

Except as provided otherwise, the Company will on demand pay to and reimburse each Finance Party, on the basis of a full indemnity:

(a) all reasonable costs and expenses (including reasonable legal fees and other out of pocket expenses and any value added Tax or other similar Tax thereon) properly incurred by such Finance Party in connection with the preservation of any of such Finance Party’s rights under any of the Finance Documents; and

(b) all costs and expenses (including legal fees and other out of pocket expenses and any value added Tax or other similar Tax thereon) properly incurred by such Finance Party in connection with the enforcement of any such Finance Party’s rights under any Finance Documents.

13.4 Valuations

(a) The Facility Agent may request a Valuation at any time when the Lenders reasonably believe that an Event of Default has occurred and is outstanding.

(b) Any Valuation referred to in paragraph (a) above will be at the cost of the Company.

13.5 General Indemnity

The Company will promptly following demand indemnify each of the Finance Parties against any cost, loss, expense or liability including, without limitation, any costs incurred as a result of a termination of all or any part of any fixed rate, swap or other hedging arrangements incurred by a Lender in relation to the Loans (in each case not then due and payable by reason of the operation of any other provision of this Agreement) sustained or incurred by it as a result of:

(a) a Loan not being made by reason of non-fulfilment of any of the conditions in Clause 4.1 (Initial Conditions Precedent) or 4.2 (Additional Conditions Precedent);

(b) any sum payable by the Company under the Finance Documents not being paid when due;

(c) the occurrence of any Event of Default or any breach of the Finance Documents;

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(d) the accelerated repayment of the advances under Clause 19.18 (Acceleration);

(e) the receipt or recovery by any Finance Party (or the Facility Agent on its behalf) of all or part of a Loan or Unpaid Sum including, for the avoidance of doubt, any prepayment made under Clause 7 (Prepayment) otherwise than on the last day of an Interest Period relating to that Loan or Unpaid Sum; or

(f) any prepayment payable by the Company under the Finance Documents not being paid after notice of such prepayment has been given to the Facility Agent.

13.6 Facility Fee

(a) The Company will on each Interest Payment Date following receipt of an itemised demand in relation to the relevant Interest Period pay to the Lender of the A Loans the Facility Fee in an amount set out in that itemised demand.

(b) The Facility Agent will deliver the itemised demand referred to in paragraph (a) above on the first day of each month in which any payment of Facility Fee falls due on an Interest Payment Date, and may, up to and including the relevant Interest Payment Date, update that itemised demand.

13.7 Initial Expenses

(a) The Company will, on Closing, pay and reimburse to:

(i) the Arrangers, the Facility Agent and the Security Agent all reasonable costs and expenses (and in relation to paragraph (A) below and upon presentation of invoices, all reasonable disbursements and VAT (if applicable) relating thereto) in each case, properly incurred by the Facility Agent, Security Agent or the Arrangers; and

(ii) the B Lender an amount not exceeding £30,000 (plus VAT and any reasonably incurred disbursements) in relation to its legal fees;

in connection with:

(A) the negotiation, preparation, execution and perfection of each of the Finance Documents (subject to caps agreed in certain separate letters); and

(B) any variation, amendment, restatement, waiver, consent or suspension of rights (or any proposal for any of the same) relating to any of the Finance Documents which is requested by or on behalf of the Company or which becomes necessary as a result of circumstances affecting the Company.

The Facility Agent and the Security Agent must notify the Company of the amount of the initial expenses set out above prior to Closing.

(b) The Company will, promptly following demand, reimburse the A Lender for any pre-agreed up-front costs incurred by the A Lender on Closing in respect of any basis swap arrangements entered into in connection with the funding of the Loans.

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SECTION 6

BANK ACCOUNTS

14. BANK ACCOUNTS

14.1 Designation of Accounts

(a) The Company must maintain (in the case of a CSA Account, on and from the date on which any amount is due from a Hedge Counterparty to the Company under the Credit Support Annex) the following bank accounts in the name of the Company with an Approved Bank:

(i) a rent account designated the Rent Account;

(ii) a current account designated the General Account;

(iii) a deposit account designated the Disposal Account;

(iv) a deposit account designated the Insurance Account; and

(v) a collateral support account designated a CSA Account.

(b) The Company must not, without the prior consent of the Facility Agent, maintain any other bank account other than:

(i) a Deposit Account opened with an Approved Bank for the purposes of curing a failure to comply with Clause 18.8 (Interest Cover); and

(ii) the Closing Account, provided that there is no balance in the Closing Account at the end of the Business Day on which Closing occurs, and that the Closing Account is closed on or before the date falling 15 Business Days after the date on which Closing occurs.

14.2 Rent Account

(a) The Facility Agent has sole signing rights in relation to the Rent Account and is only entitled to exercise this right in accordance with the terms of this Agreement (or as otherwise directed by the Majority Lenders).

(b) The Company must ensure that:

(i) all Rental Income (other than amounts in respect of VAT which are payable by a tenant in connection with a Lease Document, which will be paid into the General Account); and

(ii) any amounts payable to it under any Hedging Agreements other than those which are required to be paid into the CSA Account,

are paid into the Rent Account.

(c) If any payment of any amount referred to in paragraph (b) above is paid into an Account other than the Rent Account, that payment must be paid promptly into the Rent Account.

(d) On any day on which an amount is due to be paid by the Company (and has not otherwise been paid by or on behalf of the Company) under a Headlease, the Facility Agent may, and is irrevocably authorised by the Company to:

(i) withdraw from the Rent Account an amount necessary to meet that due amount; and

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(ii) apply that amount in payment of that due amount.

(e) Except as provided in Clause 9.5 (Partial payments), on each Interest Payment Date, the Facility Agent must (and at any time after the security created by the Security Agreement is enforced in accordance with its terms the Security Agent may), and is irrevocably authorised by the Company to, withdraw from, and apply amounts standing to the credit of, the Rent Account, in the following order:

(i) first, in or towards payment pro rata and pari passu of any unpaid costs, fees and expenses of the Facility Agent, the Security Agent, any Property Manager and of any other due put unpaid Facility Fee;

(ii) secondly, payment pro rata:

(A) to the Hedge Counterparty of any net amount (not being an amount due as a result of termination or closing out and not being amounts referred to in subparagraph (iv) below) due but unpaid under the Hedging Agreements; and

(B) to the Facility Agent for the relevant Finance Parties of any accrued interest, due but unpaid under the Finance Documents;

(iii) thirdly, payment pro rata:

(A) to the Hedge Counterparty of any net amount (not being payments referred to in subparagraph (iv) below) as a result of termination or closing out due but unpaid under the Hedging Agreements; and

(B) to the Facility Agent for the relevant Finance Parties of any amount of principal due but unpaid under the Finance Documents and any other amounts due but unpaid to the Finance Parties under the Finance Documents (other than those referred to in sub-paragraph (iv) below);

(iv) fourthly, payment pro rata to the Hedge Counterparty of any payments due but unpaid as a result of termination or closing out under the Hedging Agreement to which that Hedge Counterparty is a party as a result of:

(A) the occurrence of an Event of Default (as defined in the relevant Hedge Agreement) where the Hedge Counterparty is the Defaulting Party; and

(B) the occurrence of a Hedge Additional Termination Event following a failure by the Hedge Counterparty to comply with the requirements of the ratings downgrade provisions set out in the relevant Hedging Agreement; and

(v) fifthly, payment of any surplus into the General Account.

(f) The Facility Agent must allow withdrawals at any time from the Rent Account to pay any amount due but unpaid under the Finance Documents.

14.3 General Account

(a) Except as provided in paragraph (c) below, the Company has signing rights in relation to the General Account.

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(b) Subject to paragraph (d) below, if no Event of Default is outstanding, the Company may withdraw any amount from the General Account and apply it at its discretion including, without limitation, making payments in relation to any Subordinated Loan.

(c) At any time when an Event of Default is outstanding, the Facility Agent may, and is irrevocably authorised by the Company to:

(i) operate the General Account; and

(ii) withdraw from, and apply amounts standing to the credit of, the General Account in or towards any purpose for which moneys in any Account may be applied.

(d) If an Event of Default under Clause 19.1 (Payment Default) can be remedied by the application of an amount standing to the credit of the General Account, the Company may withdraw amounts from the General Account and apply them so as to remedy that Event of Default.

(e) Amounts standing to the credit of the General Account shall bear interest at the rate normally offered by the Facility Agent to corporate depositors of amounts similar to the relevant amount for periods of deposit similar to the anticipated period of deposit of the relevant amount. The interest earned on such account will be for the account of the Company and, if no Event of Default is outstanding, shall be paid into the General Account.

14.4 Insurance Account

(a) The Facility Agent has sole signing rights in relation to the Insurance Account.

(b) Payments into the Insurance Account shall be made in the circumstances referred to in Clause 18.4(n) (Insurances).

(c) The Facility Agent must allow withdrawals from the Insurance Account to meet the costs of replacing, restoring or reinstating the Property in respect of which the relevant insurance proceeds were received against receiving appropriate evidence from the Company that such costs have been incurred or fallen due for payment.

(d) Amounts standing to the credit of the Insurance Account shall bear interest at the rate normally offered by the Facility Agent to corporate depositors of amounts similar to the relevant amount for periods of deposit similar to the anticipated period of deposit of the relevant amount. The interest earned on such account will be for the account of the Company and, if no Event of Default is outstanding, shall be paid into the General Account.

14.5 Disposal Account

(a) The Facility Agent has sole signing rights in relation to the Disposal Account.

(b) Where, following a disposal of the whole of a Property permitted under this Agreement or a compulsory purchase as contemplated by Clause 7.2 (Mandatory prepayment – compulsory purchase), any amount (a Disposal Amount) required to be paid into the Disposal Account under Clause 17.13 (Disposals) or Clause 7.2 (Mandatory prepayment – compulsory purchase) is received into the Disposal Account during an Interest Period, subject to paragraph (c) below, the Facility Agent must, on the next Interest Payment Date:

(i) apply an amount of that Disposal Amount equal to the Required Amount in respect of the relevant disposal towards:

(A) prepayment of the Loans, in an amount equal to the Applicable Release Pricing Amount in respect of the relevant disposal; and

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(B) payment of all other amounts then due to the Finance Parties under the Finance Documents as a result of such prepayment; and

(ii) thereafter, apply any remaining portion of that Disposal Amount still standing to the credit of the Disposal Account, if no Event of Default is outstanding, to the General Account.

(c) If a Disposal Amount is received into the Disposal Account from the proceeds of the disposal of a Disposed Property (i.e. a disposal in respect of which a Substitution Notice has been delivered in accordance with this Agreement) or the whole or part of a Property in relation to which compensation has been received pursuant to a compulsory purchase order, paragraph (b) above shall not apply and that Disposal Amount may be utilised in or towards the acquisition by the Company of a Substitute Additional Property within six months of the receipt into the Disposal Account. The Company may utilise the Disposal Amount for that purpose by requesting that the amount of that Disposal Amount required to enable it to complete the acquisition of the relevant Substitute Additional Property, subject to any restriction in paragraph (d) or (e) below, is withdrawn from the Disposal Account on the relevant completion date. If no Event of Default is then outstanding, the Facility Agent shall comply with that request. If no such request has been made within six months of the receipt into the Disposal Account of the Disposal Amount, that amount shall cease to be available for that purpose and paragraph (b) shall then apply to that Disposal Amount, except that the application of funds shall occur on the Interest Payment Date after the expiry of that six month period.

(d) If a Disposal Amount is to be utilised in accordance with paragraph (c) above towards the purchase of a Substitute Additional Property in circumstances where the relevant Disposed Property MV is lower than the relevant Substitute Additional Property MV, the amount of the Disposal Amount which is available for utilisation towards the purchase of the Substitute Additional Property will be the amount equal to the Allocated Loan Amount in respect of that Substitute Additional Property (or, if the Disposal Amount is less than the Allocated Loan Amount in respect of the Substitute Additional Property, the whole Disposal Amount will be available for that purpose). Any balance of the Disposal Amount not so utilised (or, if the whole Disposal Amount has not been utilised within the time period provided in paragraph (c) above, the whole Disposal Amount) will, on the next Interest Payment Date, be applied in prepayment of the Loans and all other amounts then due to the Finance Parties under the Finance Documents in respect of such prepayment.

(e) If a Disposal Amount is to be utilised in accordance with paragraph (c) above towards the purchase of a Substitute Additional Property in circumstances where the relevant Disposed Property MV is higher than the relevant Substitute Additional Property MV, the Facility Agent will not be required to allow the withdrawal of the relevant portion of that Disposal Amount for that purpose in accordance with paragraph (c) above unless either:

(i) an amount at least equal to the aggregate of (A) the relevant MV Adjustment Amount and (B) the amount of all other payments which will be due to the Finance Parties under the Finance Documents as a result of the prepayment referred to below, remains from the balance of the relevant Disposal Amount still standing to the credit of the Disposal Account in respect of the relevant Disposed Property; or

(ii) if (i) above is not satisfied, the amount required to increase the remaining balance of the relevant Disposal Amount to an amount at least equal to the aggregate of (A) the MV Adjustment Amount and (B) the amount of all other payments which will be due to the Finance Parties under the Finance Documents as a result of the prepayment referred to below, is placed on deposit in the Disposal Account no later than the completion date for the acquisition of the relevant Substitute Additional Property.

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Following the application of funds in the Disposal Account for the purpose of acquiring a Substitute Additional Property in the circumstances envisaged in this paragraph (e), an amount equal to the relevant MV Adjustment Amount will, on the next Interest Payment Date, be applied in prepayment of the Loans and all other amounts due to the Finance Parties under the Finance Documents in respect of such prepayment.

(f) Amounts standing to the credit of the Disposal Account shall bear interest at the rate normally offered by the Facility Agent to corporate depositors of amounts similar to the relevant amount for periods of deposit similar to the anticipated period of deposit of the relevant amount. The interest earned on such account will be for the account of the Company and, if no Event of Default is outstanding, shall be paid into the General Account.

(g) In this Agreement:

Disposed Property MV means the market value of a Disposed Property, as determined from the aggregate consideration received (or, where the Disposed Property was disposed of pursuant to a compulsory purchase order, the aggregate compensation received) on its sale.

MV Adjustment Amount means, in respect of the acquisition of a Substitute Additional Property in accordance with this Agreement, the amount equal to the relevant MV Proportion multiplied by the Allocated Loan Amount in respect of the relevant Disposed Property multiplied by 110 per cent.

MV Proportion means, in respect of the acquisition of a Substitute Additional Property in accordance with this Agreement, the proportion (expressed as a fraction) which:

(a) the amount by which the Disposed Property MV exceeds the Substitute Additional Property MV;

bears to:

(b) the Disposed Property MV.

Substitute Additional Property MV means the market value of a Substitute Additional Property, as determined from the Valuation delivered under this Agreement as a condition precedent document in respect of that Substitute Additional Property.

14.6 CSA Account

(a) The Facility Agent has sole signing rights on the CSA Account.

(b) The Company shall ensure that any amount paid to it by the Hedge Counterparty under the Credit Support Annex is paid into the CSA Account.

(c) The Facility Agent must, and is irrevocably authorised by the Company to, withdraw from, and apply amounts standing to the credit of the CSA Account:

(i) on any date on which an amount is due from the Company to the Hedge Counterparty under the Credit Support Annex:

(A) to the Hedge Counterparty to the extent that such amount is not net against any amount payable by the Hedge Counterparty to the Company under the Hedging Agreement; and

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(B) to the Rent Account to the extent that such amount is net against any amount payable by the Hedge Counterparty to the Company under the Hedging Agreement; and

(ii) following the termination of all transactions in respect of the Hedging Agreement with the Hedge Counterparty, the relevant Over Collateralised Amount to the Hedge Counterparty.

14.7 Miscellaneous Accounts provisions

(a) The Company must ensure that no Account goes in to overdraft.

(b) The monies standing to the credit of each Account may be applied by the Facility Agent on the date any repayment of the Loans is due to be made (and has not been made from other means) in or towards repayment of the Loans and all other amounts due to a Finance Party under the Finance Documents, but no such amounts may be withdrawn from the Insurance Account or the VAT Account for that purpose unless all amounts standing to the credit of each other Account have been utilised for that purpose.

(c) No Finance Party is responsible or liable to the Company for:

(i) any non-payment of any liability of the Company which could be paid out of moneys standing to the credit of an Account; or

(ii) any withdrawal wrongly made,

in the absence of negligence or wilful misconduct.

14.8 Change of Bank Accounts

(a) The Company must promptly notify the Facility Agent upon becoming aware that a bank at which an Account is held does not have a Requisite Rating.

(b) If a bank at which an Account is held does not have a Requisite Rating, the Facility Agent will require that that Account be moved, within 30 Business Days, to another bank of its choice which does have a Requisite Rating and which company interest without withholding or deduction for or on account of Taxes.

(c) The Company may, with the prior written consent of the Facility Agent, move any Account to another bank of its choice provided that the Facility Agent’s consent may not be unreasonably withheld or delayed if:

(i) the proposed new bank is an Approved Bank; and

(ii) the accounts are charged to the Facility Agent pursuant to the terms of the Security Documents.

(d) A change of Account only becomes effective when the proposed new bank agrees with the Facility Agent and the Company in a manner reasonably satisfactory to the Facility Agent, to fulfil the role of the bank holding that Account.

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SECTION 7

REPRESENTATIONS, UNDERTAKINGS AND EVENTS OF DEFAULT

15. REPRESENTATIONS

The Company represents and warrants to each of the Finance Parties as follows.

15.1 Incorporation

It is duly incorporated with limited liability and validly existing under the laws of England and Wales and has the power to own its assets and carry on its business as it is now being conducted.

15.2 Power

It has power to enter into, exercise its rights under, and perform and comply with its obligations under, each of the Transaction Documents to which it is party and to carry out the transactions contemplated by such Transaction Documents.

15.3 Authority

All actions, conditions and things required to be taken, fulfilled and done by it in order:

(a) to enable it to enter into, exercise its rights under, and perform and comply with its obligations under, the Transaction Documents to which it is party and to carry out the transactions contemplated by such Transaction Documents;

(b) to ensure that those obligations are, subject to the reservations, valid, legally binding and enforceable in accordance with their terms;

(c) to make each of the Transaction Documents to which it is party admissible in evidence in the courts of the jurisdiction to which it has submitted in such Transaction Document; and

(d) to create the security constituted by the Security Documents to which it is party and, subject to the reservations, to ensure that such security has the ranking specified therein,

have (subject as provided in Clause 15.7 (Consents and Filings) in relation to the security constituted by the Security Documents) been taken, fulfilled and done or will be taken, fulfilled and done on a timely basis.

15.4 Obligations Binding

Its obligations under the Finance Documents to which it is a party are, subject to the reservations, valid, legally binding and enforceable in accordance with their terms and each of the Security Documents to which it is party constitutes valid security ranking, subject to the reservations and subject as provided in Clause 15.7 (Consents and Filings) in relation to the security constituted by such Security Document, in accordance with the terms of such document.

15.5 No misleading information

(a) All written, factual information supplied by it or on its behalf to any Finance Party in connection with the Transaction Documents (or for the purposes of the Offering Circular or any investor presentations in relation to the Securitisation) was true and accurate in all material respects as at its date or (if appropriate) as at the date (if any) at which it is stated to be given and is not misleading in any material respect;

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(b) any financial projections contained in the information referred to in paragraph (a) above have been prepared as at their date, on the basis of recent historical information and assumptions reasonably believed by it to be fair and reasonable;

(c) no information has been omitted to be supplied which, if disclosed, would reasonably be expected to make any other information referred to in paragraph (a) above untrue or misleading in any material respect; and

(d) at the first Utilisation Date (and, except for any matter disclosed to the Lenders, as at the date of the Offering Circular), nothing has occurred since the date the information referred to in paragraph (a) above was supplied which, if disclosed, would make that information untrue or misleading in any material respect.

15.6 Non-Conflict

Its entry into, exercise of its rights under and performance and compliance with its obligations under each of the Transaction Documents to which it is party and the carrying out of the transactions contemplated by the Transaction Documents do not:

(a) contravene any law, directive, judgment or order to which it is subject to an extent which would have a Material Adverse Effect;

(b) contravene its memorandum or articles of association or other constitutional documents; or

(c) breach any agreement or the terms of any consent to which it is a party or which is binding upon it or any of its assets, in each case, to an extent which would have a Material Adverse Effect.

15.7 Consents and Filings

All consents and filings required:

(a) for its entry into, exercise of its rights under, and performance and compliance with its obligations under, each of the Transaction Documents to which it is party; and

(b) for it to carry out the transactions contemplated by the Transaction Documents,

have been obtained or made and are in full force and effect save for any filings required in relation to the security constituted by the Security Documents which filings will be made promptly after execution of the relevant documents and in any event within applicable time limits.

15.8 Litigation

No litigation (including any Environmental Claim), arbitration, administrative, regulatory or similar proceeding is current, pending or, to its knowledge, threatened in respect of itself:

(a) to restrict its entry into, the exercise of its rights under and performance and compliance with its obligations under, or the enforcement by it of, any of the Transaction Documents or the carrying out of the transactions contemplated by the Transaction Documents; or

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(b) which has, or if determined adversely to it could reasonably be expected to have a Material Adverse Effect or to materially adversely affect the market value of the Properties as a whole.

15.9 No Defaults

(a) No Event of Default has occurred and is continuing.

(b) No event has occurred and is continuing which constitutes a default under any agreement to which it is party and which has a Material Adverse Effect.

15.10 Accounts

(a) The Annual Financial Statements (together with the notes thereto) most recently delivered pursuant to Clause 16,1(a) (Financial Statements) in the case of audited financial statements, present a true and fair view of the financial position of the Company and, in the case of the annual unaudited financial statements of the Company, fairly represent the financial position of the Company, in each case as at the date to which they were prepared and for the financial year then ended.

(b) Any financial statements (together with the notes thereto) most recently delivered pursuant to paragraph Clause 16.1(b) (Financial Statements), were prepared in accordance with the applicable Accounting Principles.

15.11 Environmental warranties

As far as it is aware and subject to the matters disclosed in the environmental report delivered pursuant to Clause 4.1 (Initial Conditions Precedent) it is in compliance with all Environmental Laws, and all Environmental Consents necessary in connection with the ownership and operation of its business are in full force and effect, in each case where failure to do so could reasonably be expected to have a Material Adverse Effect.

15.12 No other business

(a) It has not traded or carried on any business since the date of its incorporation except for the ownership and management of, and where relevant the development by the Principal Tenant of, its interests in the Properties.

(b) As at the date of this Agreement, it is not party to any agreement other than the Transaction Documents.

(c) As at the date of this Agreement, it does not have any Subsidiaries.

(d) It does not have, nor has it had, any employees (excluding its directors).

15.13 Title to Property

(a) It will from the first Utilisation Date, subject to due registration (in the case of each Original Property), or from the date of the relevant Security Document (in the case of each Additional Property and the Cardiff Property):

(i) be the legal and beneficial owner of that Property; and

(ii) have good and marketable title to that Property,

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in each case free from Security Interests (other than those set out in the Security Documents) and restrictions and onerous covenants (other than those set out in the Report on Title in relation to that Property).

(b) From the first Utilisation Date (in the case of an Original Property) or from the date of the relevant Security Document (in the case of each Additional Property and the Cardiff Property) and except as disclosed in the Report on Title relating to a Property, so far as the Company is aware after due and careful enquiry:

(i) no material breach of any law or regulation is outstanding which adversely affects or might adversely affect the value of that Property;

(ii) there is no covenant, agreement, stipulation, reservation, condition, interest, right or other matter materially adversely affecting that Property;

(iii) nothing has arisen or has been created or is outstanding which would be a material overriding interest, or a material unregistered interest which overrides first registration or registered dispositions, over that Property;

(iv) no facility necessary for the enjoyment and use of any Property is enjoyed by that Property on terms entitling any person to terminate or curtail its use;

(v) no adverse claim has been made by any person in respect of the ownership of that Property or any interest in it; and

(vi) each Property is held by the Company free from any lease or licence other than those permitted to exist under this Agreement.

(c) Other than as set out in the relevant Report on Title, all deeds and documents necessary to show good and marketable title to its interests in a Property will from the first Utilisation Date (in the case of each Original Property) or from the date of the relevant Security Document (in the case of each Additional Property and the Cardiff Property) be:

(i) in possession of the Facility Agent; or

(ii) held to the order of the Facility Agent or at the appropriate land registry.

15.14 Taxation

(a) No claims are being asserted against it with respect to Taxes which are reasonably likely to be determined adversely to it and which, if so adversely determined and after taking into account any indemnity or claim against any third party with respect to such claim, would have a Material Adverse Effect and all reports and returns on which such Taxes are required to be shown have been filed within any applicable time limits and all Taxes required to be paid have been paid within any applicable time limits save, in each case, to the extent that failure to do so would not have a Material Adverse Effect.

(b) The Company is not a member of any VAT group.

15.15 Reports

(a) All factual information furnished by or on behalf of the Company to any of the firms which prepared any of the Reports and contained or referred to therein was, so far as the Company is aware, accurate in all material respects at the time supplied.

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(b) So far as the Company is aware after due and careful enquiry, the Reports do not omit to take account of any factual information where failure to take account of such factual information would result in the Reports, or the forecasts or projections in the Reports, taken as a whole being misleading in any material respect (provided that nothing in this paragraph (b) shall require the Company to review or make any enquiry in relation to matters within the technical or professional expertise of the adviser preparing the relevant Report).

15.16 Ownership

(a) As at the date of this Agreement, the Company’s entire issued share capital is ultimately beneficially owned and controlled by Toys “R” Us Holdings Limited (registered number 01826057).

(b) As at the date of this Agreement, all of Toys “R” Us Holdings Limited’s issued share capital is ultimately beneficially owned and controlled by Toys “R” Us (UK) Limited (registered number 05410173).

(c) The shares in the capital of the Company are fully paid,

15.17 Pari passu ranking

The payment obligations of the Company under each of the Finance Documents rank and will at all times rank at least pari passu in right and priority of payment with all its other present and future unsecured and unsubordinated indebtedness (actual or contingent) except indebtedness preferred by laws of general application.

15.18 Centre of Main Interests

Its Centre of Main Interests is situated in England and Wales and it has no Establishment in any other jurisdiction.

15.19 No undisclosed liabilities

It did not have, at the date as of which its accounts were last prepared (to the extent such accounts have been prepared), any material liabilities (contingent or otherwise) which were not disclosed by those accounts (or by the notes thereto) or reserved against in those accounts nor were there at that date any material unrealised anticipated losses arising from commitments entered into by it which were not so reserved or disclosed against which non-disclosure, failure to reserve or unrealised anticipated losses would be reasonably likely to have a Material Adverse Effect.

15.20 Repetition

Unless expressed to be given as at a specific date and subject as provided below, each of the representations and warranties in this Clause 15 shall be deemed repeated on the date of each Utilisation Request, on each Utilisation Date and on the last day of each Interest Period by reference to the facts and circumstances existing on such date provided that:

(a) the representations and warranties set out in Clause 15.1 (Incorporation) to Clause 15.7 (Consents and Filings) (inclusive) shall in addition be repeated on each date on which an additional Security Document is entered into with reference to such document and the Company;

(b) the representations and warranties set out in Clause 15.8 (Litigation), Clause 15.11 (Environmental warranties), Clause 15.12(a) (No other business), Clause 15.13 (Title to Property) and Clause 15.15 (Reports) shall only be made on the date of this Agreement and

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the first Utilisation Date provided that the representation and warranties set out in Clause 15.15 (Reports) in relation to a Report on Title or a Valuation delivered in relation to an Additional Property or the Cardiff Property shall be made on the date of the additional Security Document in relation to that Additional Property or the Cardiff Property, as appropriate; and

(c) insofar as it relates to the Offering Circular only, the representation and warranty set out in Clause 15.5(a) to (c) (inclusive) (No misleading information) shall only be made on the date of the Offering Circular.

16. INFORMATION UNDERTAKINGS

The undertakings in this Clause 16 remain in force from the date of this Agreement for so long as any amount is outstanding under the Finance Documents or any Commitment is in force.

16.1 Financial Statements

The Company shall supply to the Facility Agent in sufficient copies for all the Lenders:

(a) as soon as they are available, but in any event within 180 days after the end of each of its financial years, the audited financial statements of the Company for that financial year; and

(b) as soon as they are available, but in any event within 45 days after the end of each of the Company’s financial quarters, the quarterly management accounts of the Company for that financial quarter.

16.2 Requirements as to financial statements

(a) Each set of financial statements and management accounts delivered by the Company shall be certified by an authorised signatory of the Company as presenting a true and fair view (in the case of audited annual financial statements) or (in the case of quarterly management accounts) fairly representing its financial condition and operations as at the date as at which those financial statements were drawn up.

(b) The Company shall procure that each set of annual financial statements provided under paragraph (a) of Clause 16.1 (Financial Statements) shall be audited by an internationally recognised firm of independent auditors licensed to practice in the jurisdiction of incorporation of the Company.

16.3 Change in accounting position

(a) The Company must notify the Facility Agent of any change to the manner in which its audited financial statements are prepared.

(b) If requested by the Facility Agent, the Company must supply to the Facility Agent:

(i) a full description of any change notified under paragraph (a) above; and

(ii) sufficient information to enable the Finance Parties to make a proper comparison between the financial position shown by the set of financial statements prepared on the changed basis and its most recent audited financial statements supplied to the Facility Agent under this Agreement.

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16.4 Compliance Certificate

The Company must supply to the Facility Agent, with each set of its quarterly management accounts delivered under Clause 16.1(b) (Financial Statements), a certificate signed by two authorised signatories evidencing that it is in compliance with its obligations under Clause 18.8 (Interest Cover) (and including details of the relevant determination) and confirming that no Default has occurred and is continuing (or, if that is not the case, any steps being taken to remedy the Default).

16.5 Information: miscellaneous

The Company will promptly upon becoming aware of them or receiving them, as the case may be, deliver to the Facility Agent for distribution to the Lenders:

(a) details of any litigation, arbitration, administrative or regulatory proceedings or warranty claims which, if resolved against it, would have or be reasonably likely to have a Material Adverse Effect;

(b) promptly (and in any event within 30 days) following receipt by the Company from the Principal Tenant, a copy of the annual and quarterly financial statements in respect of the Principal Tenant delivered by or on behalf of the Principal Tenant;

(c) at the same time as sent to its shareholders, any other document or information of a general nature required by law to be sent to its shareholders in their capacity as shareholders; and

(d) such other financial information relating to the Company as the Facility Agent may from time to time reasonably request.

16.6 Notification of Default

(a) The Company shall notify the Facility Agent of any Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence.

(b) Promptly upon a request by the Facility Agent, if the Facility Agent has reasonable grounds for believing a Default has occurred, the Company shall supply to the Facility Agent a certificate signed by two of its directors or senior officers on its behalf certifying that no Default is continuing (or if a Default is continuing, specifying the Default and the steps, if any, being taken to remedy it),

16.7 Know your customer requirements

(a) The Company must:

(i) notify the Facility Agent promptly upon becoming aware of any person (directly or indirectly) acquiring an ownership interest in the Company of more than 10 per cent, of the issued share capital of the Company; and

(ii) promptly on the request of any Finance Party supply to that Finance Party any documentation or other evidence which is reasonably requested by that Finance Party (whether for itself, on behalf of any Finance Party or any prospective new Lender) to enable a Finance Party or prospective new Lender to carry out and be satisfied with the results of all applicable know your customer requirements.

(b) Each Lender must promptly on the request of the Facility Agent or the Security Agent supply to that party any documentation or other evidence which is reasonably required by that party to carry out and be satisfied with the results of all applicable know your customer requirements.

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17. GENERAL UNDERTAKINGS

The undertakings in this Clause 17 remain in force from the date of this Agreement for so long as any amount is outstanding under the Finance Documents or any Commitment is in force.

17.1 Authorisations and Consents

The Company will apply for, obtain and promptly renew from time to time and maintain in full force and effect all consents and comply with the terms of all such consents, and promptly make and renew from time to time all such filings, as may be required under any applicable law or directive (a) to enable it to enter into, exercise its rights, and perform and comply with its obligations, under the Transaction Documents to which it is party and to carry out the transactions contemplated by the Transaction Documents to which it is a party, and (b) to ensure that its obligations under the Transaction Documents to which it is party are, subject to the reservations, valid, legally binding and enforceable and that each of the Security Documents to which it is party constitutes valid Security ranking, subject to the reservations (and save to the extent of any permitted prior ranking security), in accordance with its terms, in each case save (other than with respect to the Finance Documents) to the extent that failure to do so would not have a Material Adverse Effect.

17.2 Taxes

The Company will pay within any applicable time limit all Taxes imposed by any agency of any state upon it or any of its assets, income or profits or any transactions undertaken or entered into by it save in the event of a bona fide dispute with regard to any Tax in respect of which proper provision has, if appropriate, been made in the accounts of the Company, in each case where failure to do so would have a Material Adverse Effect.

17.3 Maintenance of status and authorisation

The Company will:

(a) do all such things as are necessary to maintain its corporate existence;

(b) ensure that it has the right to conduct its business, obtain and maintain all material consents and make all filings necessary for the carrying on of its business, and take all reasonable steps necessary to ensure that the same are in full force and effect in each case where failure to do so would have a Material Adverse Effect; and

(c) comply in all material respects with all laws and directives binding upon it and applicable to its business, in each case where failure to do so would have a Material Adverse Effect.

17.4 Pari passu ranking

The Company will ensure that its payment obligations under each of the Finance Documents rank and will at all times rank at least pari passu in right and priority of payment with all its other present and future unsecured and unsubordinated indebtedness (actual or contingent) except indebtedness preferred solely by laws of general application.

17.5 Environmental Compliance

The Company will comply with the terms and conditions of all Environmental Consents and all Environmental Laws applicable to it, in each case where failure so to do would have a Material Adverse Effect.

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17.6 Investigations

If an Event of Default shall have occurred and be continuing or if the Majority Lenders believe in good faith and on reasonable grounds that any financial statements provided by the Company are inaccurate or incomplete in any material respect then at reasonable times and upon reasonable notice being given by the Facility Agent to the Company (after consultation with the Company and reasonable attempts to remedy such Event of Default (if remediable)), the Company will procure that any one or more representatives of the Facility Agent and/or accountants or other professional advisers reasonably appointed by the Facility Agent be allowed access, in the presence of a representative of the Company if the Company so requires, during normal business hours to:

(a) the executive officers; and

(b) the books and records of the Company to inspect and copy the same,

in each case to the extent that the Facility Agent (acting reasonably) considers them to be relevant to that Event of Default or the accuracy or incorrectness concerned (provided that, for the avoidance of doubt, all information obtained as a result of such access shall be subject to the confidentiality restrictions set out in Clause 25.9 (Confidentiality)).

17.7 Further assurance

(a) The Company will promptly do all such acts or execute all such documents (including assignments, transfers, mortgages, charges, notices and instructions) as the Security Agent may reasonably specify (and in such form as the Security Agent may reasonably require) in favour of the Security Agent or its nominee(s):

(i) to perfect the Security created or intended to be created under or evidenced by the Security Documents (which may include the execution of a mortgage, charge, assignment or other Security over all or any of the assets which are, or are intended to be, the subject of the Transaction Security) or for the exercise of any rights powers and remedies of the Security Agent or the Finance Parties provided by or pursuant to the Finance Documents or by law;

(ii) to confer on the Security Agent or confer on the Finance Parties Security over any property and assets of the Company located in any jurisdiction equivalent or similar to the Security intended to be conferred by or pursuant to the Security Documents; and/or

(iii) to facilitate the realisation of the assets which are, or are provided they have been perfected, intended to be, the subject of the Transaction Security.

(b) The Company will take all such action as is available to it (including making all filings and registrations) as the Security Agent may reasonably request for the purpose of the creation, perfection, protection or maintenance of any Security conferred or intended to be conferred on the Security Agent or the Finance Parties by or pursuant to the Finance Documents.

17.8 Merger

The Company will not enter into any amalgamation, demerger, merger or corporate reconstruction.

17.9 Financial Indebtedness

(a) Except as permitted under Clause 17.10(b) below, the Company must not incur any Financial Indebtedness.

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(b) Paragraph (a) does not apply to:

(i) any Financial Indebtedness incurred under the Finance Documents;

(ii) liability for the payment for goods or services acquired in the ordinary course of business in connection with the day to day management and operation of the Properties;

(iii) a Vendor’s Completion Loan;

(iv) any Subordinated Loan; or

(v) any Financial Indebtedness incurred with the prior consent of the Majority Lenders.

17.10 Loans or credit

(a) Except as permitted under paragraph (b) below, the Company will not make any loan or permit to be outstanding any loans made by it, or grant or agree to grant any credit.

(b) Paragraph (a) above does not apply to any loan made by the Company:

(i) to any person out of amounts standing to the credit of the General Account; or

(ii) with the prior consent of the Majority Lenders.

17.11 Negative pledge

The Company will not create or permit to subsist any Security on or over the whole or any part of its undertaking or assets (present or future) except for:

(a) any Security arising under the Finance Documents;

(b) any Security Interest constituted by title retention arrangements in relation to goods acquired by the Company in connection with the Properties and which do not form part of the Properties or any buildings on the Properties; or

(c) any Security Interest created with the prior consent of the Majority Lenders.

17.12 Acquisitions and investments

(a) Except as provided below, the Company must not make any acquisition or investment.

(b) Paragraph (a) does not apply to:

(i) the Company’s acquisition of the Original Properties or Additional Properties acquired in accordance with paragraph (c) below;

(ii) the Company’s acquisition of the Cardiff Property in accordance with the provisions of Clause 2.2 (The Cardiff Loan); or

(iii) acquisitions of goods or services in the ordinary course of the Company’s business as a property investment or owning company or in connection with the day to day management and operation of the Properties.

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(c) Subject to the terms of this Agreement, the Company may acquire an Additional Property:

(i) for the purposes of remedying a breach (or potential breach) of Clause 18.8(a) (Interest Cover) (the acquired Additional Property being a Remedy Additional Property); or

(ii) in substitution of another Property (the acquired Additional Property being a Substitute Additional Property),

provided that:

(A) the following provisions of this Clause 17.12 are complied with; and

(B) the Facility Agent has received all of the documents and evidence set out in Part 2 of Schedule 2 (Conditions Precedent for an Additional Property) in the agreed form (to the extent agreed at or prior to signing of this Agreement) or, in the case of a Security Document, in substantially the same form as an equivalent Security Document delivered under Part 1 of Schedule 2 (The Original Properties and Allocated Loan Amounts) or otherwise in form and substance satisfactory to the Facility Agent, in each case acting reasonably. The Facility Agent shall notify the Company and the Lenders promptly upon the Facility Agent being so satisfied (upon which the relevant property shall become an Additional Property).

(d) A Substitute Additional Property may only be acquired by the Company in substitution for another Property (a Disposed Property) if:

(i) the Substitute Additional Property is either freehold or long leasehold with a remaining term in excess of 75 years;

(ii) the Substitute Additional Property will on completion of the acquisition be subject to an OpCo Lease for which the unexpired lease term will be no shorter than the unexpired lease term of the Disposed Property as at the date the lease of the Substitute Additional Property comes into effect;

(iii) the annual rent payable under the OpCo Lease on that Property is at least sufficient to ensure that, from the date of that acquisition, Interest Cover would be no lower than that in effect prior to the disposal of the relevant Disposed Property, taking into account any amount of the Loan to be prepaid from the Net Proceeds of the Disposed Property in accordance with this Agreement;

(iv) the market value of that Substitute Additional Property (as determined from the Valuation delivered under Clause 17.12(c)(ii)(B) (Acquisitions and investments) above), when aggregated with the value of each other Substitute Additional Property, does not exceed the amount equal to 15 per cent, of the aggregate valuation of the Original Properties contained in the Original Valuation Report; and

(v) the requirements of Clause 14.5 (Disposal Account) are or will have been complied with on the date of completion of the acquisition.

(e) A Remedy Additional Property may only be acquired by the Company if the Remedy Additional Property is either freehold or long leasehold with a remaining term in excess of 75 years and on unconditional and binding OpCo Lease is in place under which annual rent is contractually payable.

(f) If the Company wishes to substitute a Substitute Additional Property for a Disposed Property, it must give a notice (a Substitution Notice) to the Facility Agent to that effect at least 10 Business Days prior to the disposal of the Disposed Property.

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17.13 Disposals

(a) In this Clause:

Applicable Release Pricing Amount means:

(i) in respect of a disposal of the whole of a Property, the amount equal to 110 per cent, of the Allocated Loan Amount for that Property; and

(ii) in respect of a disposal of part of a Property (other than a Minor Sale), the amount equal to 110 per cent, of the Allocated Loan Amount for that Property, multiplied by the Disposed Proportion.

Disposed Proportion means the proportion (expressed as a fraction) which:

(i) the amount (if any) by which the Pre-Disposal Valuation of that Property exceeds the Post-Disposal Valuation of that Property;

bears to:

(ii) the Pre-Disposal Valuation of that Property.

Minor Sale means the sale by the Company of part of a Property where:

(i) the proceeds of sale do not, when aggregated with proceeds of sale from any other Minor Sale made in the same financial year of the Company, exceed £100,000;

(ii) the sale is made for cash at arm’s length and not to a related entity of the Company;

(iii) the rent payable under each Occupational Lease on that Property is unaffected by the sale;

(iv) the land the subject of the sale does not form part of a building on the relevant Property or part of a key access route, and will not alter the then applicable access route(s) to that Property;

(v) the sale would not result in visibility to a Property being reduced to any material extent or impair the operation, usage or enjoyment of the Property in any way which would result in an adverse impact on trading of the business being carried on at the Property by the existing tenant(s); and

(vi) the sale would not breach a planning condition affecting the Property or be made in breach of any planning regulations or requirements.

Post-Disposal Valuation means, in respect of a disposal of part of a Property, the market value of that Property (assuming the disposal has then occurred) contained in the Valuation of that Property delivered to the Facility Agent in accordance with this Clause prior to the making of that disposal.

Pre-Disposal Valuation means, in respect of a disposal of part of a Property, the market value of that Property (assuming the disposal has not then occurred) contained in the Original Valuation Report in relation to that Property.

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Required Amount means, in relation to a disposal of the whole or part of a Property, the aggregate of:

(i) the Applicable Release Pricing Amount; and

(ii) the Facility Agent’s determination (based on information to be provided by each relevant Lender and supported by reasonable evidence of the calculations used) of the Break Costs and any other amounts payable under any Finance Document in respect of the prepayment of the Loans on the next Interest Payment Date in an amount equal to the Applicable Release Pricing Amount.

(b) Except as permitted in this Agreement, the Company may not, either in a single transaction or in a series of transactions and whether related or not, dispose of all or any part of its assets.

(c) Paragraph (b) above does not apply to:

(i) a disposal made with the consent of the Majority Lenders;

(ii) a disposal of cash by way of a payment out of an Account in accordance with this Agreement;

(iii) the disposal or replacement of moveable plant and machinery and fixtures and fittings which are obsolete or redundant or otherwise in accordance with the principles of good estate management;

(iv) the entry into an Occupational Lease in accordance with the Finance Documents;

(v) a disposal which is being made pursuant to a compulsory purchase order in relation to which the other relevant provisions of this Agreement are complied with;

(vi) a disposal (other than a disposal of a Property) of assets in the ordinary course of the Company’s business as a property investment or owning company; or

(vii) a disposal of a Property, in whole or in part, which is a Minor Sale or otherwise is made in accordance with paragraph (d) below.

(d) A Property may be disposed of, in whole or in part, if:

(i) no Event of Default is outstanding or would arise as a result of the disposal;

(ii) the Company has confirmed in writing to the Facility Agent that:

(A) Interest Cover would not be reduced; and

(B) the Loan to Value will not be increased as a result of the proposed disposal (taking into account the amount by which the Loans will be prepaid following that disposal);

(iii) in the case of a disposal of part of a Property (other than a Minor Sale or a disposal made pursuant to a compulsory purchase order) a Valuation of that Property is delivered to the Facility Agent at least 10 Business Days prior to that disposal, indicating the Post-Disposal Valuation of that Property;

(iv) where the market value of relevant Property as set out in the Post-Disposal Valuation is less than that set out in the Pre-Disposal Valuation, the Net Proceeds together with:

(A) the proceeds of any loan permitted by Clause 17.9(b)(iv) (Financial Indebtedness) or equity contribution to the Company for such purposes; and/or

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(B) the amount standing to the credit of the General Account,

(together, Additional Amounts), in each case which, on completion of the disposal, have been or are to be made available to the Facility Agent, at least equal the Required Amount; and

(v) on completion of the disposal, an amount of the Net Proceeds (plus any such Additional Amounts) in aggregate at least equal to the Required Amount are paid directly into the Disposal Account for application towards prepayment of the Loans or otherwise in accordance with Clause 14.5 (Disposal Account) and any Net Proceeds not required to be so applied will be paid into the General Account.

(e) A Property (or part-of a Property) disposed of in accordance with this Clause shall cease to be a Property.

17.14 Change of business

(a) The Company must not carry on any business other than the ownership and management of (and, where relevant, the development by the Principal Tenant of) its interests in the Properties.

(b) The Company must not have any Subsidiary.

17.15 Share Capital

The Company must not:

(a) declare or pay any dividend or make any other distribution in respect of any of its shares (other than out of amounts standing to the credit of the General Account which it is, pursuant to the terms of this Agreement, permitted to withdraw);

(b) issue any further shares or alter any rights attaching to its issued shares as at the date of this Agreement (unless, in the case of an issue of shares, the shares issued are subject to the Mortgage of Shares); or

(c) repay or redeem any of its share capital (other than out of amounts standing to the credit of the General Account which it is, pursuant to the terms of this Agreement, permitted to withdraw).

17.16 Other Contracts

The Company must not enter into any contract other than:

(a) the Transaction Documents;

(b) any Permitted Contract;

(c) a contract entered into in connection with the day to day management and operation of the Properties;

(d) a contract entered into in connection with, or as a result of, the Company performing its obligations under this Agreement; or

(e) any other contract expressly allowed under any other term of this Agreement.

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17.17 Arm’s length transactions

(a) The Company will not enter into any transaction with any person except on arm’s length terms and for full market value.

(b) The following transactions shall not be a breach of this Clause:

(i) any loan permitted to be made under Clause 17.10 (Loans or credit); or

(ii) any transaction or arrangement entered into on terms more favourable to the Company than would have been the case had such transaction or arrangement been entered into on arm’s length terms.

17.18 VAT Group

The Company must not be a member of a value added tax group.

18. PROPERTY UNDERTAKINGS

18.1 Occupational Leases

(a) In this Clause:

Permitted Amendment means an amendment or waiver in respect of a Lease Document which does not:

(i) provide for any reduction in rent or term or have the effect of reducing the amount of any payment due from the tenant under the relevant Lease Document;

(ii) have the effect of the tenant’s obligations under the relevant Lease Document with respect to repair and maintenance, insurance, decoration, alienation or sub-letting becoming less onerous;

(iii) have the effect of the terms relating to rent reviews under the relevant Lease Document becoming less favourable to the Company;

(iv) have the effect of increasing the relevant tenant’s right to terminate or determine the relevant Lease Document; or

(v) result in any stamp duty land tax liability on the part of the Company.

Permitted Subleasing Arrangement means:

(i) any letting, licence or other right of occupation in respect of a Property subject to and with benefit of which an OpCo Lease is granted; and

(ii) any other subletting, licence or other right of occupation in respect of a Property in respect of a Property which is authorised under, and in accordance with, the terms of an OpCo Lease and where the amount of rental income payable under that OpCo Lease by the Principal Tenant is not reduced as a result of that subletting, licence or other arrangement.

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(b) The Company must not without the consent of the Facility Agent (such consent not to be unreasonably withheld or delayed and, if such consent is not refused within 10 Business Days, such consent shall deemed to have been given):

(i) enter into or permit any Agreement for Lease other than an Agreement for Lease in respect of an OpCo Lease;

(ii) other than pursuant to an Agreement for Lease, grant, permit or agree to grant any new Occupational Lease in respect of a Property (for which purposes an extension of an Occupational Lease on unamended terms pursuant to automatic renewal provisions shall not constitute the grant of a new Occupational Lease) other than an OpCo Lease or another Occupational Lease granted in respect of an Additional Property or the Cardiff Property in accordance with the other provisions of this Agreement;

(iii) agree to any amendment, waiver or surrender in respect of any Lease Document other than a Permitted Amendment or an amendment, waiver or surrender which relates to a disposal of part of a Property permitted pursuant to this Agreement;

(iv) commence any forfeiture proceedings in respect of any Lease Document;

(v) grant or agree to the granting of any sublease, contractual licence or right to occupy any part of a Property other than a Permitted Subleasing Arrangement;

(vi) consent to any assignment of any tenant’s interest under any Lease Document;

(vii) agree to any downward rent review in respect of any Lease Document; or

(viii) (in relation to any Property in England or Wales) serve any notice on any former tenant under any Lease Document under section 17(2) of the Landlord and Tenant (Covenants) Act 1995 or on any guarantor of any such former tenant under section 17(3) of that Act.

(c) The prior consent of the Facility Agent shall not be required under paragraph (b) above if:

(i) the Company is contractually obliged, or obliged by the terms of the relevant Lease Document; or

(ii) is legally obliged pursuant to the Landlord and Tenant Act 1927, the Landlord and Tenant Act 1954 Part II or the Landlord and Tenant Act 1988 or the grant of an overriding lease pursuant to the Landlord and Tenant (Covenants) Act 1995 or, in Northern Ireland, the Business Tenancies (Northern Ireland) Order 1996,

to enter into the relevant transaction or arrangement.

(d) The Company must supply to the Facility Agent each Lease Document, each amendment to a Lease Document and each document recording any rent review in respect of a Lease Document promptly upon entering into the same.

(e) The Company may agree to a rent review in relation to a Property if the same is an upward rent review or if the Company is otherwise obliged to agree to that rent review.

18.2 Monitoring of Property

On or before the date five Business Days before each Interest Payment Date, the Company must supply to the Facility Agent the following information (in the form of the pro forma schedule set out in Schedule 6 (Form of Quarterly Property Information)), in respect of the quarterly period ending 10 Business Days before that Interest Payment Date:

(a) details of any arrears of rent or service charges under any Lease Document and any step being taken to recover them;

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(b) details of any rent reviews with respect to any Lease Document in progress or agreed;

(c) details of any Lease Document which has expired or been determined or surrendered and any new letting proposed;

(d) details of any proposed material capital expenditure incurred or to be incurred by the Company with respect to each Property and any permitted development works;

(e) copies of any valuation of any Property prepared by an external adviser;

(f) details of any material repairs required to each Property to be carried out by the Company;

(g) details of any proposed sub-letting;

(h) details of any Permitted Amendments;

(i) details of the budget for any Permitted Development (as defined in Clause 18.3 (Development)), and progress against that budget;

(j) such further information relating to the Properties as the Facility Agent may reasonably request (upon reasonable notice); and

(k) any financial information provided to it by the Principal Tenant pursuant to the tax deed dated on or about the date of this Agreement, between, amongst others, the Company and the Principal Tenant.

18.3 Development

(a) In this Clause:

Permitted Development means any building or development works (excluding non-structural alterations and other matters permitted under the relevant OpCo Lease) carried out on a Property provided that:

(i) all necessary consents, including but not limited to any consents required under the Planning Acts, have been obtained;

(ii) no fees, costs and expenses incurred in relation to the building or development are for the account of the Company and all contractual arrangements and liabilities in relation to the building or development works are carried out or undertaken by the Principal Tenant;

(iii) any building or development works to be carried out for the purpose of being let to a person other than the Principal Tenant are carried out on a pre-let (rather than a speculative) basis;

(iv) the Rental Income receivable under each Occupational Lease on that Property is not, as a result of the building or development, reduced; and

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(v) no Security on the relevant Property will need to be released as a result of the building or development works.

Planning Acts means the Town and Country Planning Act 1990, the Planning (Listed Buildings and Conservation Areas) Act 1990, the Planning (Hazardous Substances) Act 1990, the Planning (Consequential Provisions) Act 1990 and the Planning and Compensation Act 1991, or, in Northern Ireland, the Planning (Northern Ireland) Order 1991, or, in Scotland, the Town and Country Planning (Scotland) Act 1997, the Planning (Listed Buildings and Conservation Areas) (Scotland) Act 1997, the Planning (Hazardous Substances) (Scotland) Act 1997 and the Planning (Consequential Provisions) (Scotland) Act 1997 and any subordinate legislation made (before or after this Deed) under those statutes and any other statute governing or controlling the use or development of land and property.

(b) The Company must not carry out or allow to be carried out on any part of any Property any development (within the meaning of the Planning Acts and being development for which the permission of the local planning authority is required excluding non-structural alterations and other matters permitted under the relevant OpCo Lease), in each case, other than in connection with any Permitted Development where the total budgeted (and unspent) costs of that Permitted Development do not and would not, when aggregated with the total budgeted (and unspent) costs of each other Permitted Development ongoing at the same time, exceed £10,000,000.

18.4 Insurances

(a) In this Clause, insurance policy means an insurance policy or contract required under this Clause.

(b) Subject to the following provisions of this Clause, the Company must ensure that at all times from the first Utilisation Date:

(i) each Property and the plant and machinery on each Property (including fixtures and improvements) are insured on a full replacement cost basis, such insurance to include:

(A) cover for site clearance, professional fees and value added tax together with adequate allowance for inflation;

(B) loss of rent insurance which, if limited in duration must be for a duration of at least three years, and including provision for increases in rent during the period of insurance; and

(C) cover against acts of terrorism (if the same is available in the relevant insurance market); and

(ii) such other insurances (including third party insurance) are in force as a prudent company in the same business as the Company would effect.

(c) The Borrower may comply with paragraph (b) above by enforcing the requirements relating to insurance in any relevant Headlease.

(d) The Borrower shall not be obliged to obtain or maintain any of the insurances required by Clause 18.4(b) above if and to the extent that:

(i) such insurance is not commercially available in the U.K. or European insurance markets; or

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(ii) the cost of such insurance is so great that, in the reasonable opinion of the Company, other property investment companies are not at the relevant time obtaining or maintaining such insurances;

(iii) such insurance is not available as a result of such exceptions, conditions and limitations as at the relevant time are commonly imposed by insurers agreeing to give such insurance; or

(iv) the Facility Agent (acting reasonably) agrees that such insurance need not be obtained or maintained.

(e)     (i)     All insurance policies required under this Clause must be:

(A) in an amount and form acceptable to the Facility Agent (acting reasonably);

(B) with an insurance company or underwriter which has a Requisite Rating or (in respect of any replacement insurance) with an insurance company or underwriter, or group of insurance companies or underwriters, that:

I. has a Requisite Rating; or

II. to the extent no insurance company or underwriter has a Requisite Rating, is otherwise acceptable to the Facility Agent (acting reasonably).

(ii)    (A)   The Company must promptly notify the Facility Agent upon becoming aware that any insurance company or underwriter (as appropriate), with whom any insurance required by Clause 18.4(b) (Insurances) is maintained, ceases to have a Requisite Rating.

(B) If an insurance company or underwriter, or group of insurance companies or underwriters, as the case may be, with whom any insurance required by Clause 18.4(b) (Insurances) is maintained does not have a Requisite Rating, the Company on request by the Facility Agent must put in place replacement insurances in accordance with this Clause with an insurance company or underwriter or group of insurance companies or underwriters, as the case may be, which:

I. does have a Requisite Rating; or

II. to the extent no insurance company or underwriter has a Requisite Rating, is otherwise acceptable to the Facility Agent (acting reasonably),

by no later than:

III. if the Company is unable to recover the cost of the replacement insurance from tenants under the Occupational Leases, the expiry date of the relevant policy; and

IV. in all other cases, the date falling 90 days after the notification under subparagraph (e)(ii)(A) above.

(f) The Company must procure that the Security Agent (as agent and trustee for the Finance Parties) is named as mortgagee and loss payee on each insurance policy.

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(g) The Company must procure that each insurance policy contains:

(i) a standard mortgagee clause under which the insurance will not be vitiated or avoided as against the Security Agent as a result of any misrepresentation, act or neglect or failure to disclose, or breach of any policy term or condition, on the part of any insured party or any circumstances beyond the control of an insured party; and

(ii) terms providing that it will not, so far as any Finance Party is concerned, be invalidated for failure to pay any premium due without the insurer first giving to the Facility Agent not less than 10 days’ notice in writing; and

(iii) a waiver of the rights of subrogation of the insurer as against the Company, the Finance Parties and the tenants in respect of each Property.

(h) The Company must use its best endeavours to ensure that the Security Agent receives copies of the insurance certificates and any information in connection with the insurances and claims under them which the Facility Agent may reasonably require.

(i) The Company must promptly notify the Security Agent of any renewal, variation (other than a variation of an immaterial or administrative nature) or cancellation of any insurance policy made or, to its knowledge, threatened or pending.

(j) The Company must not do or permit anything to be done (other than acts or omissions of a Finance Party) which may make void or voidable any insurance policy.

(k) The Company must ensure that:

(i) each premium for insurance is paid promptly upon falling due; and

(ii) all other things necessary to keep each insurance policy in force are done.

(l) If the Company fails to comply with any term of this Clause, the Facility Agent may, at the expense of the Company, effect any insurance and generally do such things and take such other action as the Facility Agent may reasonably consider necessary or desirable to prevent or remedy any breach of this Clause.

(m) Provided that no Default is continuing, any claim under any insurance policy shall be managed by the Company following consultation with the Facility Agent.

(n)     (i)     Except as provided below, the Relevant Amount of proceeds of any insurance policy must, if the Facility Agent so requires, be used to prepay the Loans in the order set out in Clause 7.4(b) (Prepayments: Order of Application) (and pending such prepayment, the Company must pay those proceeds to the Insurance Account). For these purposes the Relevant Amount in relation to any one claim is the amount of the proceeds of the claim (if such proceeds exceed £250,000) up to a maximum of the Allocated Loan Amount for the Property in respect of which the proceeds are received.

(ii) To the extent required by the basis of settlement under any insurance policy or Lease Document, the Company must apply moneys received under any insurance policy in respect of a Property towards replacing, restoring or reinstating that Property (and pending such application, if they are in excess of £250,000 for any individual claim, the Company must pay those proceeds to the Insurance Account).

(iii) The proceeds of any loss of rent insurance will be treated as Rental Income and applied in such manner as the Facility Agent (acting reasonably) requires to have effect as if it were Rental Income received over the period of the loss of rent.

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(iv) Moneys received under liability policies which are required by the Company to satisfy established liabilities of the Company to third parties, must be used to satisfy these liabilities.

18.5 Occupational Leases

(a) The Company must duly and diligently implement the material terms and provisions of each Occupational Lease including, if instructed to do so by the Facility Agent, to petition the Court for leave to forfeit the relevant Occupation Lease in the event of the Principal Tenant going into administration,

(b) The Facility Agent will not give an instruction pursuant to subparagraph (a) above unless the Principal Tenant has failed to pay any rent due under an Occupational Lease (including as a consequence of the exercise of any right of set off).

18.6 Headleases

In relation to any Headlease, the Company must:

(a) observe and perform all covenants, stipulations and obligations on the lessee and enforce all covenants on the part of the lessor;

(b) not, without the prior written consent of the Facility Agent:

(i) waive, release or vary any obligation under, or the terms of; or

(ii) exercise any option or power to break, determine or extend,

any such Headlease;

(c) not do or permit anything which may allow that Headlease to be forfeited;

(d) not agree any change in the rent payable without the prior written consent of the Facility Agent (such consent not to be unreasonably withheld or delayed); and

(e) promptly notify the Facility Agent of any matter or event under or by reason of which any such Headlease has or may become subject to determination or to the exercise of any right of re-entry or forfeiture and, if so requested by the Facility Agent apply for relief against forfeiture.

18.7 Entry and power to remedy breaches

(a) If the Company has failed to perform any obligation under this Clause 18 (Property Undertakings), and that failure will affect a Property or the rights of the Finance Parties in respect of that Property, the Facility Agent and/or the Security Agent may (without any obligation to do so) enter upon a Property, with or without agents appointed by it as it may determine, and take such steps as may, in the reasonable opinion of the Facility Agent and/or the Security Agent, be required to remedy or rectify such failure.

(b) The exercise by the Facility Agent or the Security Agent of its powers under this Clause 18.7 (Entry and power to remedy breaches) shall not render the Facility Agent, the Security Agent or any Lender liable to account as mortgagee in possession.

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18.8 Interest Cover

(a) The Company must ensure that Interest Cover is, as at each testing date (as defined in the definition of Interest Cover), at least 110 per cent.

(b) Breach of paragraph (a) above shall not constitute an Event of Default if, within ten Business Days, the Company remedies such breach by:

(i) prepaying the Loans in an amount such that, taking into account the resulting reduction in the projected annual finance costs (as defined in the definition of Interest Cover), Interest Cover is at least 110 per cent.;

(ii) depositing into a blocked account with the Facility Agent (the Deposit Account) the amount which, if the interest payable on that amount were treated as projected annual rental income (as defined in the definition of Interest Cover), would result in Interest Cover being at least 110 per cent.;

(iii) (where Interest Cover as at that testing date is not less than 105 per cent.) depositing into the Deposit Account the amount which, if such amount were treated as projected annual rental income (as defined in the definition of Projected Interest Cover), would result in Interest Cover being at least 110 per cent.; or

(iv) acquiring a Remedy Additional Property in accordance with Clause 17.12 (Acquisitions and investments) where Interest Cover, if recalculated taking into account the rental income projected to be received in respect of that Remedy Additional Property, would be at least 110 per cent.

(c) The Company may not remedy a breach of paragraph (a) by way of making a deposit into the Deposit Account under subparagraph (b)(iii) above:

(i) on more than two occasions in any two consecutive Interest Periods; or

(ii) on more than six occasions in total prior to the Final Maturity Date.

(d) Amounts standing to the credit of the Deposit Account shall bear interest at the rate normally offered by the Facility Agent to corporate depositors of amounts similar to the relevant amount for periods of deposit similar to the anticipated period of deposit of the relevant amount. The interest earned on such account will be for the account of the Company and shall be transferred to the Rent Account and will be treated as Rental Income and applied in such manner as the Facility Agent (acting reasonably) requires to have effect as if it were Rental Income received during the period of deposit.

(e) Where the Company remedies a breach of paragraph (a) above by making a deposit into the Deposit Account, the Facility Agent shall, provided no Event of Default is then outstanding, transfer all or part of that amount to the General Account to the extent that the amount, or part of the amount is no longer required to ensure that the Interest Cover is at least 110 per cent.

(f) The Junior Lender (as defined in the Intercreditor Deed) may cure a breach of this Clause in accordance with the terms of the Intercreditor Deed by payment into the Rent Account and shall be entitled to repayment of an amount equal to any monies paid into the Rent Account upon such breach ceasing to exist in accordance with either Clause 14.2 (Rent Account) or clause 3.3 of the Intercreditor Deed (as applicable).

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18.9 Property manager

(a) If the Property Manager is in default of its obligations under the relevant Property Management Agreement or an Insolvency Event (as defined in the relevant Property Management Agreement) is outstanding and, as a result, the Company is entitled to terminate that Property Management Agreement, then, if the Facility Agent so requires, the Company must promptly use all reasonable endeavours to:

(i) terminate the relevant Property Management Agreement; and

(ii) appoint a new Property Manager whose identity and terms of appointment are acceptable to the Facility Agent (acting reasonably).

(b) If the Company terminates a Property Management Agreement in accordance with its terms, it must use all reasonable endeavours to promptly appoint a new Property Manager whose identity and terms of appointment are acceptable to the Facility Agent (acting reasonably).

(c) Any Property Management Agreement entered into by the Company must first be approved by the Facility Agent (acting reasonably).

19. EVENTS OF DEFAULT

Each of the events or circumstances set out in this Clause is an Event of Default.

19.1 Payment Default

The Company fails to pay on the due date any amount payable by it under any of the Finance Documents at the place and in the currency at or in which it is expressed to be payable unless:

(a) in relation to a payment of principal or interest, such amount is paid within three Business Days of its due date; or

(b) in relation to any other payment, the payment is made within seven Business Days of its due date.

19.2 Breach of other Obligations

(a) The Company fails to comply with any of its obligations in Clause 17.11 (Negative pledge); or

(b) the Company fails to observe or perform any of its obligations or undertakings under any of the Finance Documents (other than those referred to in Clause 19.1 (Payment Default) and, if such failure is capable of remedy, is not remedied within 20 Business Days of the Company becoming aware of the relevant matter and that it constitutes a default.

19.3 Misrepresentation

Any representation, warranty or written statement which is made by the Company in any of the Finance Documents or is contained in any certificate, statement or notice provided under or pursuant to any of the Finance Documents proves to be incorrect (in the case of any representation, warranty or statement which is not subject to a materiality threshold in accordance with its terms, in any material respect) when made (or when repeated or deemed to be repeated) by reference to the facts and circumstances then existing unless the circumstances giving rise to that default are capable of remedy and are remedied within 20 Business Days of the Company becoming aware of the relevant matter and that it constitutes a default.

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19.4 Invalidity and unlawfulness

(a) Any provision of any Finance Document is or becomes invalid or unenforceable (subject, in each case, to the reservations) for any reason or shall be repudiated or the validity or enforceability of any provision of any Finance Document shall at any time be contested by any party thereto (other than a Finance Party) in circumstances or to an extent which the Majority Lenders reasonably consider to be materially prejudicial to the interests of any Finance Party under the Finance Documents.

(b) At any time it is or becomes unlawful for the Company to perform any of its obligations under any of the Finance Documents in circumstances or to an extent which the Majority Lenders reasonably consider to be materially prejudicial to the interests of any Finance Party under the Finance Documents.

(c) At any time any act, condition or thing required to be done, fulfilled or performed in order (i) to enable the Company lawfully to enter into, exercise its rights under or perform the obligations expressed to be assumed by it under any of the Finance Documents to which it is party, (ii) to ensure that the obligations expressed to be assumed by the Company under any Finance Document to which it is party are legal, valid and binding (subject, in each case, to the reservations) (iii) to make each Finance Document admissible in evidence in the English or other relevant courts and (iv) to create the security constituted by the Security Documents to which the Company is party, is not done, fulfilled or performed within any applicable prescribed time periods and the Majority Lenders reasonably consider such failure is materially prejudicial to the interests of any Finance Party under the Finance Documents.

19.5 Cross Default

Any Financial Indebtedness of the Company:

(a) is not paid when due or within any applicable grace period in any agreement relating to that Financial Indebtedness; or

(b) becomes due and payable (or capable of being declared due and payable) before its normal maturity or is placed upon demand (or any commitment for any such indebtedness is cancelled or suspended) by reason of a default or event of default however described.

19.6 Insolvency

The Company stops or suspends or threatens or announces in writing an intention to stop or suspend payment of its debts or shall admit its inability to pay its debts as they fall due or shall for the purpose of any applicable law be or be deemed to be unable to pay its debts or shall otherwise be or be deemed to be insolvent or a moratorium is declared in respect of indebtedness of the Company.

19.7 Bankruptcy, Suspension of Payments, Receivership and Administration

(a) An insolvency administrator or receiver or other administrator or similar officer is appointed over or in respect of all or any part of the business or assets of the Company.

(b) A petition is presented or meeting convened or application made for the purpose of appointing an insolvency administrator, interim insolvency administrator or receiver or other administrator or other similar officer of, or for the making of an administration order in respect of, the Company and (other than in the case of a petition to appoint an administrator) such petition or application (unless frivolous or vexatious) is not contested on bona fide grounds with due diligence and, in the case of any such petition or application (whether or not frivolous or vexatious) is not stayed or discharged within 21 days.

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19.8 Compositions and Arrangements

(a) The Company proposes or makes any arrangement or composition with, or any assignment for the benefit of, its creditors generally or convenes a meeting for such purpose.

(b) The Company enters into any negotiations for or in connection with the re-scheduling, restructuring or readjustment of any Financial Indebtedness by reason of, or with a view to avoiding, financial difficulties.

19.9 Winding-up

Any meeting of the Company is convened for the purpose of considering any resolution for (or to petition for) its winding up or the Company passes such a resolution or a petition is presented for the winding-up of the Company (other than a frivolous or vexatious petition or any other petition which is contested in good faith on bona fide grounds with due diligence and, in either case, is discharged or stayed within 21 days) or an order is made for the winding-up of the Company.

19.10 Similar Events Elsewhere

There occurs in relation to the Company or any of its assets in any country or territory in which it is incorporated or carries on business or to the jurisdiction of whose courts it or any of its assets is subject any event which the Facility Agent reasonably considers to correspond in that country or territory with any of those mentioned in Clause 19.6 (Insolvency) to 19.9 (Winding-up) (inclusive).

19.11 Attachment or Process

A creditor attaches or takes possession of, or a distress, execution, sequestration or other process is levied or enforced upon or sued out against, any material part of the assets of the Company and is not discharged within 21 days.

19.12 Cessation of Business

The Company ceases, or proposes to cease, to carry on all of its business.

19.13 Major damage

Any part of any Property is destroyed or damaged and, taking into account the amount and timing of receipt of the proceeds of insurance effected in accordance with the terms of this Agreement, the destruction or damage could reasonably be expected to have a Material Adverse Effect or to materially adversely affect the market value of the Properties as a whole.

19.14 Headlease

Any proceedings are commenced relating to the forfeiture of any Headlease (other than in circumstances where the Facility Agent and the Company agree that relief from forfeiture will be obtained) or any Headlease is forfeited.

19.15 Litigation

Any litigation (including an Environmental Claim), arbitration, or administrative or regulatory proceeding is commenced by or against the Company which is reasonably likely to be adversely determined against the Company and, if so determined, (whether by itself or together with any related claims) could reasonably be expected to have a Material Adverse Effect or to materially adversely affect the market value of the Properties as a whole.

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19.16 Material Adverse Change

At any time there occurs an event or circumstance not otherwise referred to in this Clause 19 (Events of Default) which has a Material Adverse Effect.

19.17 Judgment

(a) Monetary judgments of a final non-appealable court of competent jurisdiction or which are not being contested in excess of £50,000 (or its currency equivalent) in an aggregate amount are made against the Company; or

(b) any non-monetary judgment of a final non-appealable court of competent jurisdiction which is not being contested is entered against the Company and which would have a Material Adverse Effect,

and, in each case, shall remain unsatisfied or unstayed for 10 Business Days after the date of such judgment or, if later, the relevant date for satisfaction of the relevant judgment.

19.18 Acceleration

At any time after the occurrence of an Event of Default (whilst the same is continuing) the Facility Agent may, and will if so directed by the Majority Lenders, by written notice to the Company do all or any of the following in addition and without prejudice to any other rights or remedies which it or any other Finance Party may have under this Agreement or any of the other Finance Documents:

(a) terminate all or part of the availability of the Facilities whereupon the Facilities shall cease to be available for drawing, the undrawn portion of each of the Commitments of each of the Lenders shall be cancelled and no Lender shall be under any further obligation to make any Loan under this Agreement; and/or

(b) declare all or part of any or all of the Loans, accrued interest thereon and any other sum then payable under this Agreement and any of the other Finance Documents to be immediately due and payable, whereupon such amounts shall become so due and payable; and/or

(c) declare all or part of any or all of the Loans to be payable on demand whereupon the same shall become payable on demand.

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SECTION 8

CHANGES TO PARTIES

20. CHANGES TO THE PARTIES

20.1 Assignment and Transfers by the Company

The Company may not assign any of its rights or transfer any of its rights or obligations under the Finance Documents.

20.2 Assignments and transfers by the Lenders

Subject to this Clause 20 and the terms of the Intercreditor Deed, a Lender (the Existing Lender) may:

(a) assign any of its rights and benefits; or

(b) transfer by novation any of its rights, benefits and obligations,

(each a Transfer) under any Finance Documents to another bank or financial institution (the New Lender) other than Toys “R” Us Holdings Inc. and any of its Subsidiaries provided that a Lender may not enter into any Transfer without the prior written consent of the Company (other than in relation to the B Loan).

20.3 Conditions of assignment or transfer

(a) Save as otherwise agreed by the Company and the Facility Agent the participation (net of any retransfer) of each Lender participating in the Facility shall be a minimum of £5,000,000 (or its currency equivalent).

(b) An assignment will only be effective on performance by the Facility Agent of all “know your customer” or other checks relating to any person that it is required to carry out in relation to such assignment to a New Lender, the completion of which the Facility Agent shall promptly notify to the Existing Lender and the New Lender.

(c) An assignment will only be effective on receipt by the Facility Agent of written confirmation from the New Lender (in form and substance satisfactory to the Facility Agent and the Company) that the New Lender will assume the same obligations to the other Finance Parties as it would have been under if it was an Original Lender.

(d) A transfer will only be effective if the procedure set out in Clause 20.6 (Procedure for transfer) is complied with.

(e) If:

(i) a Lender assigns or transfers any of its rights, benefits or obligations under the Finance Documents or changes its Facility Office; and

(ii) as a result of circumstances existing at the date the assignment, transfer or change occurs, the Company would be obliged to make a payment to the New Lender or Lender acting through its new Facility Office under Clause 10 (Taxes) or 11.2 (Increased Costs),

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then the New Lender or Lender acting through its new Facility Office is only entitled to receive payment under those Clauses to the same extent as the Existing Lender or Lender acting through its previous Facility Office would have been if the assignment, transfer or change had not occurred.

20.4 Assignment or transfer fee

The New Lender shall, on the date upon which an assignment or transfer takes effect, pay to the Facility Agent (for its own account) a fee of £1,000 except no such fee shall be payable in connection with an assignment or transfer to a New Lender in connection with any primary syndication of the Facility.

20.5 Limitation of responsibility of Existing Lenders

(a) Unless expressly agreed to the contrary, an Existing Lender makes no representation or warranty and assumes no responsibility to a New Lender for:

(i) the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents, the Transaction Security or any other documents;

(ii) the financial condition of the Company;

(iii) the performance and observance by the Company of its obligations under the Finance Documents or any other documents;

(iv) the accuracy of any statements (whether written or oral) made in or in connection with any Finance Document or any other document; and

(v) any representations or warranties implied by law are excluded.

(b) Each New Lender confirms to the Existing Lender and the other Finance Parties that it:

(i) has made (and shall continue to make) its own independent investigation and assessment of the financial condition and affairs of the Company and its related entities in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the Existing Lender or any other Finance Party in connection with any Finance Document or the Transaction Security; and

(ii) will continue to make its own independent appraisal of the creditworthiness of the Company and its related entities whilst any amount is or may be outstanding under the Finance Documents or any Commitment is in force.

(c) Nothing in any Finance Document obliges an Existing Lender to:

(i) accept a re-transfer from a New Lender of any of the rights and obligations assigned or transferred under this Clause 20; or

(ii) support any losses directly or indirectly incurred by the New Lender by reason of the non-performance by the Company of its obligations under the Finance Documents or otherwise.

20.6 Procedure for transfer

(a) Subject to the conditions set out in Clause 20.3 (Conditions of assignment or transfer) a transfer is effected in accordance with paragraph (b) below when the Facility Agent executes an otherwise duly completed Transfer Certificate delivered to it by the Existing Lender and the New Lender. The

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Facility Agent shall, subject to paragraph (b) below, as soon as reasonably practicable after receipt by it of a duly completed Transfer Certificate appearing on its face to comply with the terms of this Agreement and delivered in accordance with the terms of this Agreement, execute that Transfer Certificate. Each Party (other than the Existing Lender and the New Lender) irrevocably authorises the Facility Agent to execute any duly completed Transfer Certificate on its behalf,

(b) The Facility Agent shall only be obliged to execute a Transfer Certificate delivered to it by the Existing Lender and the New Lender upon its completion of all “know your customer” or other checks relating to any person that it is required to carry out in relation to the transfer to such New Lender.

(c) On the Transfer Date:

(i) to the extent that in the Transfer Certificate the Existing Lender seeks to transfer by novation its rights, benefits and obligations under the Finance Documents and in respect of the Transaction Security each of the Company and the Existing Lender shall be released from further obligations towards one another under the Finance Documents and in respect of the Transaction Security and their respective rights against one another under the Finance Documents and in respect of the Transaction Security shall be cancelled (being the Discharged Rights and Obligations);

(ii) each of the Company and the New Lender shall assume obligations towards one another and/or acquire rights and benefits against one another which differ from the Discharged Rights and Obligations only insofar as the Company and the New Lender have assumed and/or acquired the same in place of the Company and the Existing Lender;

(iii) the Facility Agent, the Security Agent, the New Lender, the other Lenders and each Hedge Counterparty shall acquire the same rights and assume the same obligations between themselves and in respect of the Transaction Security as they would have acquired and assumed had the New Lender been an Original Lender with the rights, and/or obligations acquired or assumed by it as a result of the transfer and to that extent the Facility Agent, the Security Agent, each Hedge Counterparty and the Existing Lender shall each be released from further obligations to each other under this Agreement; and

(iv) the Existing Lender shall cease to be a Party as a “Lender” and the New Lender shall become a Party as a “Lender”.

20.7 Copy of Transfer Certificate to the Company

The Facility Agent shall, as soon as reasonably practicable after it has executed a Transfer Certificate, send to the Company a copy of that Transfer Certificate.

20.8 Disclosure of information

Any Lender may disclose to any of its Affiliates and any other person:

(a) to (or through) whom that Lender assigns or transfers (or may potentially assign or transfer) all or any of its rights and obligations under the Finance Documents; or

(b) with (or through) whom that Lender enters into (or may potentially enter into) any sub-participation in relation to, or any other transaction under which payments are to be made by reference to, the Finance Documents or the Company,

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any information about the Company and the Finance Documents as that Lender shall consider appropriate provided that the person to whom such information is given has entered into a confidentiality undertaking in a form satisfactory to the Company (acting reasonably).

20.9 Affiliates of Lenders as Hedge Counterparties

(a) An Affiliate of a Lender which becomes a Hedge Counterparty shall accede to this Agreement by delivery to the Security Agent of a duly completed accession undertaking in the form set out in Schedule 5 (Form of Hedge Counterparty Accession Agreement).

(b) Where this Agreement or any other Finance Document imposes an obligation on a Hedge Counterparty and the relevant Hedge Counterparty is an Affiliate of a Lender and is not a party to that document, the relevant Lender shall ensure that the obligation is performed by its Affiliate.

20.10 Sub-participation

Nothing in this Agreement shall restrict the ability of a Lender to participate, sub-participate or sub-contract any or all of its rights and/or obligations hereunder so long as such Lender remains liable under this Agreement in relation to those obligations provided that if, as a result of laws or regulations in force or known to be coming into force at the time of the sub-participation the Company would be obliged to make payment to the Lender of any amount required to be paid by the Company under Clauses 10 (Taxes) or 11.2 (Increased Costs), that Lender shall not be entitled to receive or claim any amount under that Clause in excess of the amount that it would have been entitled to receive or claim if that sub-participation had not occurred.

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SECTION 9

THE FINANCE PARTIES

21. ROLE OF THE FACILITY AGENT AND THE SECURITY AGENT

21.1 Appointment of the Facility Agent and the Security Agent

(a) The Lenders appoint the Facility Agent and the Security Agent to act as its agent under and in connection with the Finance Documents.

(b) The Lenders authorise the Facility Agent and the Security Agent to exercise the rights, powers, authorities and discretions specifically given to the Facility Agent or the Security Agent under or in connection with the Finance Documents together with any other incidental rights, powers, authorities and discretions.

21.2 Duties of the Facility Agent and the Security Agent

(a) The Facility Agent and the Security Agent shall promptly forward to a Party the original or a copy of any document which is delivered to the Facility Agent or the Security Agent for that Party by any other Party.

(b) Except where a Finance Document specifically provides otherwise, neither the Facility Agent nor the Security Agent is obliged to review or check the adequacy, accuracy or completeness of any document it forwards to another Party.

(c) If the Facility Agent or the Security Agent receives notice from a Party referring to this Agreement, describing a Default and stating that the circumstance described is a Default, it shall promptly notify the other Finance Parties.

(d) If the Facility Agent is aware of the non-payment of any principal, interest, commitment fee or other fee payable to a Finance Party (other than the Facility Agent or the Security Agent) under this Agreement it shall promptly notify the other Finance Parties.

(e) The Facility Agent’s and the Security Agent’s duties under the Finance Documents are solely mechanical and administrative in nature.

21.3 No fiduciary duties

(a) Subject to Clause 22.1 (Security Agent as holder of security) and any other provision relating to the Security Agent’s role as trustee, nothing in this Agreement constitutes the Facility Agent or the Security Agent as a trustee or fiduciary of any other person.

(b) Neither the Facility Agent nor the Security Agent shall be bound to account to any Lender for any sum or the profit element of any sum received by it for its own account.

21.4 Business with the Company

The Facility Agent and the Security Agent may each accept deposits from, lend money to and generally engage in any kind of banking or other business with the Company.

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21.5 Rights and discretions

(a) The Facility Agent and the Security Agent may each rely on:

(i) any representation, notice or document believed by it to be genuine, correct and appropriately authorised; and

(ii) any statement made by a director, authorised signatory or employee of any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify.

(b) The Facility Agent and the Security Agent may each assume (unless it has received notice to the contrary in its capacity as agent for the Lenders) that:

(i) no Default has occurred (unless it has actual knowledge of a Default arising under Clause 19.1 (Payment Default)); and

(ii) any right, power, authority or discretion vested in any Party or the Majority Lenders (as appropriate) has not been exercised.

(c) The Facility Agent and the Security Agent may each engage, pay for and rely on the advice or services of any lawyers, accountants, surveyors or other experts.

(d) The Facility Agent and the Security Agent may act in relation to the Finance Documents through its personnel and agents. The Facility Agent and the Security Agent shall not be liable for the negligence or misconduct of such agents that it has chosen using reasonable skill and care.

(e) The Facility Agent and the Security Agent may each disclose to any other Party any information it reasonably believes it has received in its capacity as Facility Agent or Security Agent under this Agreement.

(f) Notwithstanding any other provision of any Finance Document to the contrary, neither the Facility Agent nor the Security Agent is obliged to do or omit to do anything if it would or might in its reasonable opinion constitute a breach of any law, regulation or directive or a breach of a fiduciary duty or duty of confidentiality.

21.6 Majority Lenders’ instructions

(a) Subject to paragraph (f) or unless a contrary indication appears in a Finance Document, the Facility Agent and the Security Agent shall each (i) act in accordance with any instructions given to it by the Majority Lenders (or, if so instructed by the Majority Lenders, refrain from acting or exercising any right, power, authority or discretion vested in it as Facility Agent or Security Agent) and (ii) not be liable for any act (or omission) if it acts (or refrains from taking any action) in accordance with such instructions of the Majority Lenders.

(b) Subject to paragraph (f) or unless a contrary indication appears in a Finance Document, any instructions given by the Majority Lenders will be binding on all the Finance Parties.

(c) The Facility Agent and the Security Agent may each refrain from acting in accordance with the instructions of the Majority Lenders (or, if appropriate, the Lenders) until it has received such security as it may require for any cost, loss or liability (together with any associated VAT) which it may incur in complying with the instructions.

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(d) In the absence of instructions from the Majority Lenders, (or, if appropriate, the Lenders) the Facility Agent and the Security Agent may each act (or refrain from taking action) as it considers to be in the best interest of the Lenders.

(e) Neither the Facility Agent nor the Security Agent is authorised to act on behalf of a Lender (without first obtaining that Lender’s consent) in any legal or arbitration proceedings relating to any Finance Document. This paragraph (e) shall not apply to any legal or arbitration proceeding relating to the perfection, preservation or protection of rights under the Security Documents or enforcement of the Transaction Security or Security Documents.

(f) In the event that:

(i) the Facility Agent sends a written notice to the relevant Lenders requesting consent from the Majority Lenders in respect of any amendment or waiver that may be made with the consent of the Majority Lenders under the terms of this Agreement;

(ii) the notice sent by the Facility Agent requests instructions are provided to it by the relevant Lenders within a period of at least 10 Business Days from the date of the notice (the Notice Period); and

(iii) the Facility Agent has not received instructions from all the relevant Lenders at the end of the Notice Period and the instructions it has received from those Lenders who have responded (the Applicable Lenders) do not constitute instructions from the Majority Lenders in either the affirmative or the negative,

then at the close of business on the last day of the Notice Period the Agent shall determine:

(A) if no Loan is then outstanding, the proportion of Commitments of the Applicable Lenders who have given consent to the Total Commitments of all Applicable Lenders; and

(B) at any other time, the proportion of the participations in the Loans then outstanding of the Applicable Lenders who have given the consent to the amount of all the participations in the Loans then outstanding of those Applicable Lenders.

If such calculations show that consent has been received from 66 2/3 per cent, of the Applicable Lenders by Commitment, then the Facility Agent shall be deemed to have received consent from the Majority Lenders for all purposes under this Agreement.

21.7 Responsibility for documentation

Neither the Facility Agent nor the Security Agent:

(a) is responsible for the adequacy, accuracy and/or completeness of any information (whether oral or written) supplied by the Facility Agent, the Security Agent or the Company or any other person given in or in connection with any Finance Document or the Reports or the transactions contemplated in the Finance Documents; or

(b) is responsible for the legality, validity, effectiveness, adequacy or enforceability of any Finance Document or the Transaction Security or any other agreement, arrangement or document entered into, made or executed in anticipation of or in connection with any Finance Document or the Transaction Security.

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21.8 Exclusion of liability

(a) Without limiting paragraph (b) below, neither the Facility Agent nor the Security Agent will be liable to any of the Finance Parties for any action taken by it under or in connection with any Finance Document or the Transaction Security, unless directly caused by its negligence or wilful misconduct.

(b) No Party (other than the Facility Agent or the Security Agent) may take any proceedings against any officer, employee or agent of the Facility Agent or the Security Agent, in respect of any claim it might have against the Facility Agent or Security Agent or in respect of any act or omission of any kind by that officer, employee or agent in relation to any Finance Document or any Transaction Document and any officer, employee or agent of the Facility Agent or the Security Agent may rely on this Clause 21,8 subject to Clause 1.4 (Third party rights) and the provisions of the Third Parties Act.

(c) Neither the Facility Agent nor the Security Agent will be liable for any delay (or any related consequences) in crediting an account with an amount required under the Finance Documents to be paid by the Facility Agent or the Security Agent if the Facility Agent or the Security Agent has taken all necessary steps as soon as reasonably practicable to comply with the regulations or operating procedures of any recognised clearing or settlement system used by the Facility Agent or Security Agent for that purpose.

(d) Nothing in this Agreement shall oblige the Facility Agent or the Security Agent to carry out any “know your customer” or other checks in relation to any person on behalf of any Lender and each Lender confirms to the Facility Agent and the Security Agent that it is solely responsible for any such checks it is required to carry out and that it may not rely on any statement in relation to such checks made by the Facility Agent or the Security Agent.

21.9 Lenders’ indemnity to the Facility Agent and the Security Agent

Each Lender shall (in proportion to its aggregate share of each of the Commitments or, if the Total Commitments are then zero, to its share of each of the Commitments immediately prior to their reduction to zero) indemnify each of the Facility Agent and the Security Agent, within three Business Days of demand, against any cost, loss or liability incurred by the Facility Agent or the Security Agent (otherwise than by reason of the Facility Agent’s or the Security Agent’s gross negligence or wilful misconduct) in acting as Facility Agent or as Security Agent under the Finance Documents (unless the Facility Agent or the Security Agent has been reimbursed by the Company pursuant to a Finance Document).

21.10 Resignation of the Facility Agent or the Security Agent

(a) The Facility Agent or the Security Agent may, after consultation with the Company, resign and appoint one of its Affiliates acting through an office in the United Kingdom being a reputable bank or other financial institution experienced in transactions of this type as successor by giving notice to the Lenders and the Company.

(b) Alternatively the Facility Agent or the Security Agent may, after consultation with the Company, resign by giving notice to the Lenders and the Company, in which case the Majority Lenders (with consent of the Company, such consent not to be unreasonably withheld) may appoint a successor Facility Agent or Security Agent.

(c) If the Majority Lenders have not appointed a successor Facility Agent or Security Agent in accordance with paragraph (b) above within 30 days after notice of resignation was given, the Facility Agent or Security Agent (after consultation with the Company) may appoint a successor

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Facility Agent or Security Agent (acting through an office in the United Kingdom being a reputable bank or other financial institution experienced in transactions of this type).

(d) The retiring Facility Agent or Security Agent shall, at its own cost, make available to the successor Facility Agent or Security Agent such documents and records and provide such assistance as the successor Facility Agent or Security Agent may reasonably request for the purposes of performing its functions as Facility Agent or Security Agent under the Finance Documents.

(e) The Facility Agent’s or Security Agent’s resignation notice shall only take effect upon the appointment of a successor in accordance with this Agreement.

(f) Upon the appointment of a successor, the retiring Facility Agent or Security Agent shall be discharged from any further obligation in respect of the Finance Documents but shall remain entitled to the benefit of this Clause 21.10. Its successor and each of the other Parties shall have the same rights and obligations amongst themselves as they would have had if such successor had been an original Party.

(g) After consultation with the Company, the Majority Lenders may, by notice to the Facility Agent or the Security Agent, require it to resign in accordance with paragraph (b) above. In this event, the Facility Agent or Security Agent shall resign, and the Majority Lenders shall appoint a successor Facility Agent or Security Agent in accordance with paragraph (b) above.

21.11 Confidentiality

(a) In acting as agent for the Finance Parties, the Facility Agent and the Security Agent shall each be regarded as acting through its agency division which shall be treated as a separate entity from any other of its divisions or departments.

(b) If information is received by another division or department of the Facility Agent or Security Agent, it may be treated as confidential to that division or department and the Facility Agent or Security Agent shall not be deemed to have notice of it.

(c) Notwithstanding any other provision of any Finance Document to the contrary, neither the Facility Agent nor the Security Agent is obliged to disclose to any other person (i) any information, disclosure of .which might, in the opinion of the Facility Agent or the, Security Agent, result in a breach of any law or directive or be otherwise actionable at the suit of any person, or (ii) any information supplied by the Company to the Facility Agent or the Security Agent which is identified by the Company at the time of supply as being unpublished, confidential, or price sensitive information relating to a proposed transaction by the Company and supplied solely for the purpose of evaluating in consultation with the Facility Agent or the Security Agent whether such transaction might require a waiver or amendment to any of the provisions of the Finance Documents, or (iii) any other information if the disclosure would or might in its reasonable opinion constitute a breach of any law or a breach of a fiduciary duty.

21.12 Relationship with the Lenders

(a) The Facility Agent and the Security Agent may each treat each Lender as a Lender, entitled to payments under this Agreement and acting through its Facility Office unless it has received not less than five Business Days prior notice from that Lender to the contrary in accordance with the terms of this Agreement and provided that such Lender is not lending through a Facility Office which is in any country designated by the Financial Action Taskforce on Money Laundering as “Non-Cooperative Countries and Territories”.

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(b) Each Lender shall supply the Facility Agent with any information required by the Facility Agent in order to calculate the Mandatory Cost.

(c) Each Finance Party shall supply the Facility Agent with any information that the Security Agent may reasonably specify (through the Facility Agent) as being necessary or desirable to enable the Security Agent to perform its functions as Security Agent. Each Lender shall deal with the Security Agent exclusively through the Facility Agent and shall not deal directly with the Security Agent.

21.13 Credit appraisal by the Finance Parties

Without affecting the responsibility of the Company for information supplied by it or on its behalf in connection with any Finance Document, each Finance Party confirms to the Facility Agent and the Security Agent that it has been, and will continue to be, solely responsible for making its own independent appraisal and investigation of all risks arising under or in connection with any Finance Document including but not limited to:

(a) the financial condition, status and nature of the Company;

(b) the legality, validity, effectiveness, adequacy or enforceability of any Finance Document and the Transaction Security and any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document or the Transaction Security;

(c) whether that Finance Party has recourse, and the nature and extent of that recourse, against any Party or any of its respective assets under or in connection with any Finance Document, the Transaction Security, the transactions contemplated by the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document;

(d) the adequacy, accuracy and/or completeness of the Reports and any other information provided by the Facility Agent, the Security Agent, any Party or by any other person under or in connection with any Finance Document, the transactions contemplated by the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document; and

(e) the right or title of any person in or to, or the value or sufficiency of any part of the Charged Property, the priority of any of the Transaction Security or the existence of any Security affecting the Charged Property.

21.14 Reference Banks

If a Reference Bank (or, if a Reference Bank is not a Lender, the Lender of which it is an Affiliate) ceases to be a Lender, the Facility Agent shall (in consultation with the Company) appoint another Lender or an Affiliate of a Lender to replace that Reference Bank.

21.15 Deduction from amounts payable by the Facility Agent

If any Party owes an amount to the Facility Agent or the Security Agent under the Finance Documents the Facility Agent may, after giving notice to that Party, deduct an amount not exceeding that amount from any payment to that Party which the Facility Agent would otherwise be obliged to make under the Finance Documents and apply the amount deducted in or towards satisfaction of the amount owed. For the purposes of the Finance Documents that Party shall be regarded as having received any amount so deducted.

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21.16 Reliance and Engagement Letters

Each Finance Party confirms that the Facility Agent has authority to accept on its behalf the terms of any reliance letter or engagement letters relating to the Reports or any reports or letters provided by any accountants appointed in connection with the Finance Documents or the transactions contemplated in the Finance Documents and to bind it in respect of those Reports, reports or letters and to sign such letters on its behalf and further confirms that it accepts the terms and qualifications set out in such letters.

22. SECURITY

22.1 Security Agent as holder of security

Unless expressly provided to the contrary, the Security Agent holds any security created by a Security Document on trust for the Finance Parties.

22.2 Responsibility

The Security Agent is not liable or responsible to any other Finance Party for:

(a) any failure in perfecting or protecting the security created by any Security Document; or

(b) any other action taken or not taken by it in connection with any Security Document,

unless directly caused by its gross negligence or wilful misconduct.

22.3 Title

The Security Agent may accept, without enquiry, the title (if any) any charger may have to any asset over which security is intended to be created by any Security Document.

22.4 Possession of documents

The Security Agent is not obliged to hold in its own possession any Security Document, title deed or other document in connection with any asset over which security is intended to be created by a Security Document. Without prejudice to the above, the Security Agent may allow any bank providing safe custody services or any professional adviser to the Security Agent to retain any of those documents in its possession.

22.5 Investments

Except as otherwise provided in any Security Document, all moneys received by the Security Agent under a Security Document may be invested in the name of, or under the control of, the Security Agent in any investments selected by the Security Agent. Additionally, those moneys may be placed on deposit in the name of, or under the control of, the Security Agent at any bank or institution (including itself) and upon such terms as it may think fit.

22.6 Approval

Each Finance Party confirms its approval of each Security Document.

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22.7 Release of security

(a) If a disposal of any asset or part of an asset (including any Property) subject to security created by a Security Document is made to a person in the following circumstances:

(i) the Majority Lenders agree to the disposal;

(ii) the disposal is allowed by the terms of the Finance Documents;

(iii) the disposal is being made at the request of the Security Agent in circumstances where any security created by the Security Documents has become enforceable; or

(iv) the disposal is being effected by enforcement of a Security Document,

the asset or part of that asset being disposed of will be released from any security over it created by a Security Document.

(b) If the Security Agent is satisfied that a release is allowed under this Subclause, the Security Agent must execute (at the request and expense of the Company) any document which is reasonably required to achieve that release. Each other Finance Party irrevocably authorises the Security Agent to execute any such document.

23. SHARING AMONG THE FINANCE PARTIES

23.1 Payments to Finance Parties

If a Finance Party (a Recovering Finance Party) receives or recovers any amount from an the Company other than in accordance with Clause 9.2 (By the Company) or Clause 9.5 (Partial payments) and applies that amount to a payment due under the Finance Documents then:

(a) the Recovering Finance Party shall, within three Business Days, notify details of the receipt or recovery to the Facility Agent;

(b) the Facility Agent shall determine whether the receipt or recovery is in excess of the amount the Recovering Finance Party would have been paid had the receipt or recovery been received or made by the Facility Agent and distributed in accordance with Clause 9.5 (Partial payments), without taking account of any Tax which would be imposed on the Facility Agent in relation to the receipt, recovery or distribution; and

(c) the Recovering Finance Party shall, within three Business Days of demand by the Facility Agent, pay to the Facility Agent an amount (the Sharing Payment) equal to such receipt or recovery less any amount which the Facility Agent determines may be retained by the Recovering Finance Party as its share of any payment to be made, in accordance with Clause 9.5 (Partial payments).

23.2 Redistribution of payments

The Facility Agent shall treat the Sharing Payment as if it had been paid by the Company and distribute it between the Finance Parties (other than the Recovering Finance Party) in accordance with Clause 9.5 (Partial payments).

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23.3 Recovering Finance Party’s rights

(a) On a distribution by the Facility Agent under Clause 23.2 (Redistribution of payments), the Recovering Finance Party will be subrogated to the rights of the Finance Parties which have shared in the redistribution.

(b) If and to the extent that the Recovering Finance Party is not able to rely on its rights under paragraph (a) above, the Company shall be liable to the Recovering Finance Party for a debt equal to the Sharing Payment upon such date that the underlying amount which resulted in the Sharing Payment arising became due and payable or otherwise capable of receipt or recovery,

23.4 Reversal of redistribution

If any part of the Sharing Payment received or recovered by a Recovering Finance Party becomes repayable and is repaid by that Recovering Finance Party, then:

(a) each Finance Party which has received a share of the relevant Sharing Payment pursuant to Clause 23.2 (Redistribution of payments) shall, upon request of the Facility Agent, pay to the Facility Agent for account of that Recovering Finance Party an amount equal to its share of the Sharing Payment (together with an amount as is necessary to reimburse that Recovering Finance Party for its proportion of any interest on the Sharing Payment which that Recovering Finance Party is required to pay); and

(b) that Recovering Finance Party’s rights of subrogation in respect of any reimbursement shall be cancelled and the Company will be liable to the reimbursing Finance Party for the amount so reimbursed.

23.5 Exceptions

(a) This Clause 23 shall not apply to the extent that the Recovering Finance Party would not, after making any payment pursuant to this Clause 23, have a valid and enforceable claim against the Company.

(b) A Recovering Finance Party is not obliged to share with any other Finance Party any amount which the Recovering Finance Party has received or recovered as a result of taking legal or arbitration proceedings, if:

(i) it notified the other Finance Party of the legal or arbitration proceedings; and

(ii) the other Finance Party had an opportunity to participate in those legal or arbitration proceedings but did not do so as soon as reasonably practicable having received notice or did not take separate legal or arbitration proceedings.

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SECTION 10

ADMINISTRATION

24. SET-OFF

After an Event of Default has occurred and so long as it is continuing a Finance Party may set off any matured obligation due from the Company under the Finance Documents (to the extent beneficially owned by that Finance Party) against any matured obligation owed by that Finance Party to the Company, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.

25. NOTICES AND CONFIDENTIALITY

25.1 Communications in writing

Any communication to be made under or in connection with the Finance Documents shall be made in writing and, unless otherwise stated, may be made by fax or letter.

25.2 Addresses

The address and fax number (and the department or officer, if any, for whose attention the communication is to be made) of each Party for any communication or document to be made or delivered under or in connection with the Finance Documents is:

(a) in the case of the Company, that identified with its name in the signature block below;

(b) in the case of each Lender and Hedge Counterparty, that notified in writing to the Facility Agent on or prior to the date on which it becomes a Party; and

(c) in the case of the Facility Agent or the Security Agent, that identified with its name in the signature block below,

or any substitute address or fax number or department or officer as the Party may notify to the Facility Agent (or the Facility Agent may notify to the other Parties, if a change is made by the Facility Agent) by not less than five Business Days’ notice.

25.3 Delivery

(a) Any communication or document made or delivered by one person to another under or in connection with the Finance Documents will only be effective:

(i) if by way of fax, when received in legible form; or

(ii) if by way of letter, when it has been left at the relevant address or five Business Days after being deposited in the post postage prepaid in an envelope addressed to it at that address,

and, if a particular department or officer is specified as part of its address details provided under Clause 25.2 (Addresses), if addressed to that department or officer.

(b) Any communication or document to be made or delivered to the Facility Agent or the Security Agent will be effective only when actually received by the Facility Agent or Security Agent and then only

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if it is expressly marked for the attention of the department or officer identified with the Facility Agent’s or Security Agent’s signature below (or any substitute department or officer as the Facility Agent or Security Agent shall specify for this purpose).

(c) All notices from or to the Company shall be sent through the Facility Agent.

25.4 Notification of address and fax number

Promptly upon receipt of notification of an address and fax number or change of address or fax number pursuant to Clause 25.2 (Addresses) or changing its own address or fax number, the Facility Agent shall notify the other Parties.

25.5 Electronic communication

(a) Any communication to be made between the Facility Agent or the Security Agent and a Lender under or in connection with the Finance Documents may be made by electronic mail or other electronic means, if the Facility Agent, the Security Agent and the relevant Lender:

(i) agree that, unless and until notified to the contrary, this is to be an accepted form of communication;

(ii) notify each other in writing of their electronic mail address and/or any other information required to enable the sending and receipt of information by that means; and

(iii) notify each other of any change to their address or any other such information supplied by them.

(b) Any electronic communication made between the Facility Agent and a Lender or the Security Agent will be effective only when actually received in readable form and in the case of any electronic communication made by a Lender to the Facility Agent or the Security Agent only if it is addressed in such a manner as the Facility Agent or Security Agent shall specify for this purpose.

25.6 English language

(a) Any notice given under or in connection with any Finance Document must be in English.

(b) All other documents provided under or in connection with any Finance Document must be:

(i) in English; or

(ii) if not in English, and if so required by the Facility Agent, accompanied by a certified English translation and, the English translation will prevail unless the document is a binding agreement, a constitutional, statutory or other official document.

25.7 Use of Websites

(a) The Company may satisfy its obligation under this Agreement to deliver any information in relation to those Lenders (the Website Lenders) who accept this method of communication by posting this information onto an electronic website designated by the Company and the Facility Agent (the Designated Website) if:

(i) the Facility Agent expressly agrees (after consultation with each of the Lenders) that it will accept communication of the information by this method;

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(ii) both the Company and the Facility Agent are aware of the address of and any relevant password specifications for the Designated Website; and

(iii) the information is in a format previously agreed between the Company and the Facility Agent.

If any Lender (a Paper Form Lender) does not agree to the delivery of information electronically then the Facility Agent shall notify the Company accordingly and the Company shall supply the information to the Facility Agent (in sufficient copies for each Paper Form Lender) in paper form. In any event the Company shall supply the Facility Agent with at least one copy in paper form of any information required to be provided by it.

(b) The Facility Agent shall supply each Website Lender with the address of and any relevant password specifications for the Designated Website following designation of that website by the Company and the Facility Agent.

(c) The Company shall promptly upon becoming aware of its occurrence notify the Facility Agent if:

(i) the Designated Website cannot be accessed due to technical failure;

(ii) the password specifications for the Designated Website change;

(iii) any new information which is required to be provided under this Agreement is posted onto the Designated Website;

(iv) any existing information which has been provided under this Agreement and posted onto the Designated Website is amended; or

(v) the Company becomes aware that the Designated Website or any information posted onto the Designated Website is or has been infected by any electronic virus or similar software.

If the Company notifies the Facility Agent under subparagraph (c)(i) or subparagraph (c)(v) above, all information to be provided by the Company under this Agreement after the date of that notice shall be supplied in paper form unless and until the Facility Agent and each Website Lender is satisfied that the circumstances giving rise to the notification are no longer continuing.

(d) Any Website Lender may request, through the Facility Agent, one paper copy of any information required to be provided under this Agreement which is posted onto the Designated Website. The Company shall comply with any such request within 10 Business Days.

25.8 “Know your customer” checks

(a) The Company shall promptly, upon the request of the Facility Agent or any Lender, supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Facility Agent (for itself or on behalf of any Lender) or any Lender (for itself or on behalf of any prospective New Lender (provided that it has entered into a confidentiality undertaking in a form satisfactory to the Company (acting reasonably)) in order for the Facility Agent, such Lender or any prospective New Lender to carry out and be satisfied with the results of all necessary “know your customer” or other checks in relation to any person that it is required by directive or law to carry out pursuant to the transactions contemplated in the Finance Documents.

(b) Each Lender shall promptly, upon the request of the Facility Agent, supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Facility Agent (for itself) in order for the Facility Agent to carry out and be satisfied with the results of all necessary “know your customer” or other checks in relation to any person that it is required to carry out pursuant to the transactions contemplated in the Finance Documents.

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25.9 Confidentiality

(a) Subject to Clause 20.8 (Disclosure of information), the Finance Parties will:

(i) keep the Confidential Information confidential and, subject as set out below, not disclose it to anyone and to ensure that the Confidential Information is protected with security measures and degree of care that it would apply to its own confidential information;

(ii) use the Confidential Information only for the purpose of appraising the business, financial condition, creditworthiness, status and affairs of the Company in connection with its participation in the Facility; and

(iii) use all reasonable endeavours to ensure that any person to whom they pass any Confidential Information (unless disclosed under paragraph (b) below) acknowledges and complies with the provisions of this Clause 25.9 as if that person were also a party to it and you undertake to be responsible for any breach of this agreement by such person.

(b) The Confidential Information may be disclosed:

(i) if so required by law or, regulation or, if requested by any regulator with jurisdiction over any Finance Party or any Affiliate of any Finance Party;

(ii) if it comes into the public domain (other than as a result of a breach of this Clause 25.9);

(iii) to auditors, professional advisers or rating agencies but, in the case of rating agencies, only for the purposes of preparing a private or shadow rating;

(iv) in connection with any legal proceedings;

(v) to any Holding Company or Affiliate of the Company and any director or employee or prospective director or employee of the or any Holding Company or Affiliate of the Company; and

(vi) to Investors or prospective Investors and any prospective new lender which may become a party to this Agreement pursuant to Clause 20 (Changes to the Parties).

(c) The provisions of this Clause 25.9 shall supersede any undertakings with respect to confidentiality previously given by any Finance Party in favour of the Company.

25.10 Publicity

Each of the Parties agrees that no public announcements may be made by any Party regarding the Facility, or any of the roles of any of the Finance Parties, without the prior written consent of the Company.

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26. CALCULATIONS AND CERTIFICATES

26.1 Accounts

In any litigation or arbitration proceedings arising out of or in connection with a Finance Document, the entries made in the accounts maintained by a Finance Party are prima facie evidence of the matters to which they relate.

26.2 Certificates and Determinations

Any certification or determination by a Finance Party of a rate or amount under any Finance Document is, in the absence of manifest error, prima facie evidence of the matters to which it relates.

26.3 Day count convention

Any interest, commission or fee accruing under a Finance Document will accrue from day to day and is calculated on the basis of the actual number of days elapsed and a year of 365 days or, in any case where the practice in the Relevant Interbank Market differs, in accordance with that market practice.

26.4 Certificates by Directors

Any certificate or notice given by a director or other authorised signatory of the Company on behalf of the Company shall be given without personal liability.

27. PARTIAL INVALIDITY

If, at any time, any provision of the Finance Documents is or becomes illegal, invalid or unenforceable in any respect under any law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions nor the legality, validity or enforceability of such provision under the law of any other jurisdiction will in any way be affected or impaired.

28. REMEDIES AND WAIVERS

No failure to exercise, nor any delay in exercising, on the part of any Finance Party, any right or remedy under the Finance Documents shall operate as a waiver, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise or the exercise of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.

29. AMENDMENTS AND WAIVERS

29.1 Required consents

(a) Subject to Clause 29.2 (Exceptions) any term of the Finance Documents may be amended or waived with the consent of the Majority Lenders and the Company and any such amendment or waiver will be binding on all Parties.

(b) The Facility Agent may effect, on behalf of any Finance Party, any amendment or waiver permitted by this Clause 29.

(c) The Company acknowledges that the Lenders, the Facility Agent and the Security Agent have each appointed a servicer in relation to this Agreement and the Loans pursuant to a servicing agreement (the Servicing Agreement), that the servicer under the Servicing Agreement is required to act in accordance with the Servicing Standard (as defined in the Servicing Agreement), and that a special

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servicer may be appointed pursuant to the terms of the Servicing Agreement. The Company further acknowledges that the servicer and special servicer may exercise the rights and discretions of the Lenders, the Facility Agent and the Security Agent under this Agreement in accordance with the Servicing Standard subject to certain matters which require the prior approval of the Junior Lender and which may differ from those set out in Clause 29.2 (Exceptions).

29.2 Exceptions

(a) Subject as provided in paragraph (b) below, an amendment or waiver that has the effect of changing or which relates to:

(i) the definition of Majority Lenders in Clause 1.1 (Definitions);

(ii) to the date of payment of any amount of principal, interest, fees or commission payable under the Finance Documents;

(iii) any Margin or a change in the amount of any payment of principal, interest, fees or commission payable;

(iv) a change in currency of payment or method of calculation of any amount of principal, interest, fees or commission payable under the Finance Documents;

(v) an increase in or an extension of any Commitment or extension of any Availability Period;

(vi) a release of the Company or of any Security Document (in whole or in part);

(vii) any material provision of any Security Document;

(viii) any waiver of a right of prepayment under Clause 7.3 (Mandatory prepayments – disposals and insurance proceeds);

(ix) any amendment relating to the ability of a Lender to transfer its rights and obligations under the Finance Documents;

(x) the provisions of Clause 18.8 (Interest Cover);

(xi) any provision which expressly requires the consent of all the Lenders; or

(xii) Clause 2.3 (Finance Parties’ rights and obligations), Clause 20 (Changes to the Parties), Clause 23 (Sharing among the Finance Parties), Clause 31 (Governing Law), Clause 32 (Enforcement) or this Clause 29,

shall not be made without the prior consent of all the Lenders.

(b) An amendment or waiver which relates to the rights or obligations of the Facility Agent, any Hedge Counterparty or the Security Agent may not be effected without the consent of the Facility Agent, that Hedge Counterparty or the Security Agent, as the case may be, at such time.

29.3 Amendments by Security Agent

Unless the provisions of any Finance Document expressly provide otherwise, the Security Agent may, if authorised by the Majority Lenders, amend the terms of, waive any of the requirements of, or grant consents under, any of the Security Documents, any such amendment, waiver or consent being binding on all the parties to this Agreement except that no waiver or amendment may impose any new or additional obligations on any person without the consent of that person.

100

30. COUNTERPARTS

Each Finance Document may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document.

101

SECTION 11

GOVERNING LAW AND ENFORCEMENT

31. GOVERNING LAW

This Agreement is governed by English law.

32. ENFORCEMENT

32.1 Jurisdiction of English Courts

(a) The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) (a Dispute).

(b) The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the contrary.

(c) This Clause 32.1 shall not (and shall not be construed so as to) limit the right of any Finance Party to take proceedings against the Company in the courts of any country in which the Company has assets or in any other court of competent jurisdiction nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction (whether concurrently or not) if and to the extent permitted by applicable law.

THIS AGREEMENT has been entered into on the date stated at the beginning of this Agreement.

102

Terms defined in the Facility Agreement shall bear the same meaning when used herein.

Signed:
	DIRECTOR
Date:
Signed:
	[SECRETARY]
Date:

Schedule

[List of documents to be certified.]

SIGNATORIES

Chargor
EXECUTED AS A DEED by	)
TOYS “R” US PROPERTIES	)
(UK) LIMITED
acting by	)
Director
Director/Secretary
Security Agent
DEUTSCHE BANK AG,
LONDON BRANCH
By:

SIGNATORIES

The Company
TOYS “R” US PROPERTIES (UK) LIMITED
By:
Address:	Geoffrey House
	Vanwall Business Park
	Vanwall Road
	Maidenhead
	Berkshire SL6 4UB
Fax:	01628 414097
Attention:	Frank Muzika
The Facility Agent
DEUTSCHE BANK AG, LONDON BRANCH
By:
Address:	Deutsche Bank AG, London Branch
	Servicing Department
	European Commercial Real Estate Group
	Winchester House
	1 Great Winchester Street
	London EC2N 2DB
Fax:	020 7547 0665
Attention:	Paul Lloyd
The Security Agent
DEUTSCHE BANK AG, LONDON BRANCH
By:
Address:	Deutsche Bank AG, London Branch
	Servicing Department
	European Commercial Real Estate Group
	Winchester House
	1 Great Winchester Street
	London EC2N 2DB

Fax:	020 7547 0665
Attention:	Paul Lloyd
The Original Hedge Counterparty
DEUTSCHE BANK AG, LONDON BRANCH
By:
Address:	Deutsche Bank AG, London Branch
	Servicing Department
	European Commercial Real Estate Group
	Winchester House
	1 Great Winchester Street
	London EC2N 2DB
Fax:	020 7547 0665
Attention:	Paul Lloyd
The Original Lenders
VANWALL FINANCE PLC
	per pro SFM Directors (No.2) Limited                                                          as Director
By:
Address:	Vanwall Finance Plc
	35 Great St. Helen’s
	London EC3A 6AP
Fax:	020 7085 3728
Attention:	The Directors
THE ROYAL BANK OF SCOTLAND PLC
By:
Address:	The Royal Bank of Scotland
	Real Estate Finance
	5th Floor, 135 Bishopsgate
	London EC2M 3UR
Fax:	020 7085 3728
Attention:	The Manager

Fax:	020 7547 0665
Attention:	Paul Lloyd
The Original Hedge Counterparty
DEUTSCHE BANK AG, LONDON BRANCH
By:
Address:	Deutsche Bank AG, London Branch
	Servicing Department
	European Commercial Real Estate Group
	Winchester House
	1 Great Winchester Street
	London EC2N 2DB
Fax:	020 7547 0665
Attention:	Paul Lloyd
The Original Lenders
VANWALL FINANCE PLC
By:
Address:	Vanwall Finance Plc
	35 Great St. Helen’s
	London EC3A 6AP
Fax:	020 7085 3728
Attention:	The Directors
THE ROYAL BANK OF SCOTLAND PLC
By:
Address:	The Royal Bank of Scotland
	Real Estate Finance
	5th Floor, 135 Bishopsgate
	London EC2M 3UR
Fax:	020 7085 3728
Attention:	The Manager

EX-10.18

Exhibit 10.18

AMENDMENT NO. 1 TO THE

TOYS “R” US HOLDINGS, INC.

2005 MANAGEMENT EQUITY PLAN

This Amendment No. 1 (this “Amendment”) to the Toys “R” Us Holdings, Inc. 2005 Management Equity Plan (the “Plan”) shall become effective as of February 6, 2006, concurrent with its adoption by the board of directors of Toys “R” Us Holdings, Inc. (the “Company”) on such date. Capitalized terms used but not otherwise defined in this Amendment have the meanings given to such terms in the Plan.

1. Amendment of Article II. Article II of the Plan is hereby amended by deleting the definition of the term “Applicable Amount”.

2. Amendment of Section 4.2(b). Section 4.2(b) of the Plan is hereby amended by replacing the reference to “20%” in each of subparagraphs 4.2(b)(i) and 4.2(b)(ii) with “15%”.

3. Amendment of Section 4.2(c). Section 4.2(c) of the Plan is hereby amended by replacing the reference to “25%” in each of subparagraphs 4.2(c)(i) and 4.2(c)(ii) with “20%”.

4. Amendment of Section 9.4. Section 9.4 of the Plan is hereby amended by replacing the first sentence thereof in its entirety with the following sentence:

“Unless otherwise specified in an Award Agreement if a Participant is no longer employed by the Company or any of its Subsidiaries as a result of such Participant’s resignation (for any reason other than Retirement), then on or after the Termination Date, the Company may elect to purchase all or any portion of the Award Stock issued or issuable to such Participant at a price per share equal to the Fair Market Value thereof, in each case as determined as of a date determined by the Board that is the anticipated date of the Repurchase Closing (as defined in Section 9.6 below).”

5. Continuing Force and Effect. The Plan, as modified by the terms of this Amendment, shall continue in full force and effect from and after the date of the adoption of this Amendment set forth above.

* * *

EX-10.26

EXECUTION COPY

Exhibit 10.26

EMPLOYMENT AGREEMENT

Gerald Storch

This EMPLOYMENT AGREEMENT (the “Agreement”) is dated as of February 6, 2006 (the “Execution Date”) by and between Toys “R” Us, Inc. (the “Company”), a subsidiary of Toys “R” Us Holdings, Inc. (“Holdings”), and Gerald Storch (the “Executive”).

WHEREAS, as of the Execution Date, the Company and Holdings desire to employ Executive and to enter into an agreement embodying the terms of such employment and Executive desires to accept such employment and enter into such an agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows:

1. Term of Employment. Subject to the provisions of Section 7 of this Agreement, Executive shall be employed by the Company and, as described below, Holdings and designated indirect subsidiaries of the Holdings, for a period commencing on February 7, 2006 (the “Hire Date”) and ending on the fifth anniversary of the Hire Date (the “Initial Term”), on the terms and subject to the conditions set forth in this Agreement. Following the Initial Term, the term of Executive’s employment hereunder shall automatically be renewed on the terms and conditions hereunder for additional one year periods commencing on each anniversary of the last day of the Initial Term (the Initial Term and any annual extensions of the term of this Agreement, subject to the provisions of Section 7 hereof, together, the “Employment Term”), unless either party gives written notice of non-renewal at least 60 days prior to such anniversary.

2. Position.

a. During the Employment Term, Executive shall serve as the Chief Executive Officer of each of Holdings, the Company, Toys “R” Us – Delaware, Inc. and any other indirect subsidiaries of Holdings that the board of directors of Holdings (the “Board”) designates (such entities collectively referred to as the “TRU Group”). In such positions, Executive shall have such duties and authority as determined by the Board and the board of directors of each subsidiary of Holdings, as applicable (each, a “Subsidiary Board”) and commensurate with the position of chief executive officer of a company of similar size and nature to that of the TRU Group. During the Employment Term, the Executive shall report solely to the Board and each Subsidiary Board, as applicable, and shall serve as the Chairman of the Board and each Subsidiary Board, as applicable.

b. During the Employment Term, Executive will devote Executive’s full business time and reasonable best efforts to the performance of Executive’s duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere in any material respect with the rendition of such services

either directly or indirectly, without the prior written consent of the Board; provided that nothing herein shall preclude Executive from continuing to serve on any board of directors or trustees, advisory board or government commission which is listed on Exhibit A attached hereto, or, subject to the prior approval of the Board, from accepting appointment to serve on any board of directors or trustees of any business corporation or any charitable organization; and provided, further that, the Company understands that Executive will be traveling to the Minneapolis, Minnesota area many weekends during the Employment Term; provided in each case in the aggregate, that such activities do not conflict or interfere with the performance of Executive’s duties hereunder or conflict with Section 8.

3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $1,000,000, payable in substantially equal periodic payments in accordance with the Company’s practices for other executive employees, as such practices may be determined from time to time. Executive shall be entitled to such increases in Executive’s base salary, if any, as may be determined from time to time in the sole discretion of the Board, which shall at least annually review Executive’s rate of base salary to determine if any such increase shall be made. Executive’s annual base salary, as in effect from time to time hereunder, is hereinafter referred to as the “Base Salary.”

4. Annual Bonus. During the Employment Term, Executive shall be eligible to earn an annual bonus award in respect of each fiscal year of the Company (an “Annual Bonus”), in a target amount of up to 200% of Executive’s Base Salary (the “Target Bonus”), payable upon the Company’s achievement of certain performance targets established by the Board, after consultation with Executive, and pursuant to the terms of the Company’s incentive plan, as in effect from time to time. Notwithstanding the foregoing, in the event the Company’s performance exceeds such performance targets, Executive shall be eligible to earn an Annual Bonus in an amount in excess of the Target Bonus, as determined by the Board in accordance with the Company’s incentive plan, as in effect from time to time. The Annual Bonus, if any, shall be paid to Executive not later than two and one-half (2 ¹/2) months after the end of the applicable fiscal year of the Company.

5. Employee Benefits; Perquisites; Business and Relocation Expenses.

a. Employee Benefits. During the Employment Term, Executive and his spouse and dependents, as applicable, shall be entitled to participate in the Company’s welfare benefit plans and retirement plans, including, without limitation, the Company’s 401(k) and supplemental executive retirement plans and medical, dental and life insurance plans, as in effect from time to time (collectively, the “Employee Benefits”), on the same basis as those benefits are or may be made available to the other senior executives of the Company (other than benefits which have been terminated or for which participation has been frozen). The Company shall be permitted to modify such benefits from time to time consistent with any modifications that impact other senior executives of the Company.

b. Perquisites. During the Employment Term, Executive shall be entitled to receive such perquisites as are made available to other senior executives of the Company in accordance with the Company’s policies, as in effect from time to time. Executive shall be entitled to not less than four (4) weeks of paid vacation per year, which vacation shall be taken at

Executive’s discretion, having regard to the Company’s operations, Executive’s performance of his duties, and in accordance with the terms of the Company’s vacation policy, as in effect from time to time, applicable to Executive.

c. Business Expenses. During the Employment Term, reasonable business expenses incurred by Executive in the performance of Executive’s duties hereunder shall be reimbursed by the Company in accordance with the Company’s policies, as in effect from time to time, applicable to senior executive officers of the Company.

d. Relocation Expenses. The Company shall reimburse Executive for all relocation costs he reasonably incurs in connection with relocating his family to the area in proximity of Wayne, New Jersey, to the extent consistent with the Company’s current relocation policies or as mutually agreed upon by Executive and the Board.

6. Equity. Executive shall purchase equity in Holdings and Holdings shall make an option grant to Executive pursuant to the Toys “R” Us Holdings, Inc. 2005 Management Equity Plan (the “Equity Plan”) and shall enter into certain agreements in connection with such grant (such agreements and the Equity Plan, collectively, the “Equity Documents”).

7. Termination. The Employment Term and Executive’s employment hereunder may be terminated by either party at any time and for any reason; provided that Executive will be required to give the Company at least 30 days’ advance written notice of any resignation of Executive’s employment without Good Reason (as defined in Section 7(c) below) (other than due to Executive’s death or Disability). Notwithstanding any other provision of this Agreement, the provisions of this Section 7 shall exclusively govern Executive’s rights upon termination of employment with the TRU Group; provided, however, that nothing contained in this Section 7 shall alter Executive’s or Holdings’ rights with respect to the Equity Documents, which shall continue to govern Executive’s equity holdings following any termination in accordance herewith.

a. By the Company For Cause or By Executive Without Good Reason.

(i) The Employment Term and Executive’s employment hereunder may be terminated by the Company for Cause (as defined below) and shall terminate automatically upon Executive’s resignation without Good Reason (other than due to Executive’s death or Disability); provided that Executive will be required to give the Company at least 30 days’ advance written notice of such resignation.

(ii) For purposes of this Agreement, “Cause” shall mean (A) Executive’s willful and continued failure to perform his material duties with respect to the TRU Group as provided hereunder (other than any such failure resulting from incapacity due to physical or mental illness resulting in a Disability) which continues beyond 10 days after a written demand for substantial performance is delivered to Executive by the Board, which demand specifically identifies the manner in which the Board believes that Executive has not performed his material duties; (B) the commission of any fraud, misappropriation or misconduct by Executive that causes demonstrable material injury, monetarily or otherwise, to the Company or an affiliate; (C)

the conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude; (D) an act resulting or intended to result, directly or indirectly, in material gain or personal enrichment to the Executive at the expense of the Company or an affiliate; (E) any material breach of Executive’s fiduciary duties to the Company or an affiliate as an employee or officer; (F) a material violation of the Company’s Code of Ethical Standards, Business Practices and Conduct or any other material violation of a TRU Group policy; (G) the failure by the Executive to comply, in any material respect, with the provisions of Sections 8 and 9 of this Agreement or any of the restrictive covenants imposed pursuant to the Equity Documents, which failure continues beyond 10 days after a written demand to cure such failure is delivered to Executive by the Board; or (H) the failure by the Executive to comply with any other undertaking set forth in this Agreement or any other agreement Executive has with the Company or any affiliate or any breach by Executive hereof or thereof if such failure or breach is reasonably likely to result in a material injury to the Company or an affiliate. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board (excluding, however, the Executive, to the extent he is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, Cause exists and specifying the particulars thereof in detail.

(iii) If Executive’s employment is terminated by the Company for Cause, or if Executive resigns without Good Reason, Executive shall be entitled to receive:

(A) a lump sum payment of the Base Salary that is earned by Executive but unpaid as of the date of Executive’s termination of employment, paid in accordance with the Company’s payroll practices, but in no event later than thirty (30) days following Executive’s termination of employment;

(B) a lump sum payment of any Annual Bonus that is earned by Executive but unpaid as of the date of termination for the immediately preceding fiscal year, paid in accordance with Section 4 (except to the extent payment is otherwise deferred pursuant to any applicable deferred compensation arrangement with the Company);

(C) reimbursement, within 30 days following submission by Executive to the Company of appropriate supporting documentation, for any unreimbursed business expenses properly incurred by Executive in accordance with the Company policy referenced in Section 5(c) above prior to the date of Executive’s termination; provided claims for such reimbursement (accompanied by appropriate supporting documentation) are submitted to the Company within ninety (90) days following the date of Executive’s termination of employment; and

(D) such Employee Benefits, if any, as to which Executive may be entitled under the employee benefit plans of the Company (the amounts described in clauses (A) through (D) hereof being referred to as the “Accrued Rights”).

Following such termination of Executive’s employment by the Company for Cause or resignation by Executive without Good Reason, except as set forth in this Section 7(a)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.

b. Disability or Death.

(i) The Employment Term and Executive’s employment hereunder shall terminate upon Executive’s death and may be terminated by the Company upon the Executive’s Disability. For purposes of this Agreement, “Disability” shall mean the determination that the Executive is disabled pursuant to the terms of the Company’s long term disability plan.

(ii) Upon termination of Executive’s employment hereunder for either Disability or death, Executive or Executive’s estate (as the case may be) shall be entitled to receive:

(A) the Accrued Rights; and

(B) a pro rata portion of the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to Section 4 hereof for such year based upon the Company’s actual results for the year of termination and the percentage of the fiscal year that shall have elapsed through the date of Executive’s termination of employment, payable to Executive pursuant to Section 4 had Executive’s employment not terminated.

Following Executive’s termination of employment due to Executive’s death or Disability, except as set forth in this Section 7(b)(ii), Executive or his estate, as applicable, shall have no further rights to any compensation or any other benefits under this Agreement.

c. By the Company Without Cause or by Executive for Good Reason.

(i) Executive’s employment hereunder may be terminated (A) by the Company without Cause (which shall not include Executive’s termination of employment due to his death or Disability) or (B) by Executive for Good Reason (as defined below).

(ii) For purposes of this Agreement, “Good Reason” shall mean, without the consent of the Executive and other than in connection with a termination of the Executive’s employment by the Company for Cause or due to Executive’s death or Disability, (A) a reduction in Executive’s rate of Base Salary or annual incentive compensation opportunity; (B) a material reduction in Executive’s duties and responsibilities as set forth in Section 2 above, an adverse change in some material respect in Executive’s titles as set forth in Section 2 above or the assignment to Executive of duties or responsibilities materially inconsistent with such titles; or (C) notice by the Company pursuant to Section 1 that it is not extending the Employment Term, in each case, that is not cured within 10 days after receipt by the Company of written notice from Executive. Notwithstanding the foregoing, any termination by Executive for Good Reason may only occur if Executive provides a Notice of Termination (as defined in Section 7(d)) for Good Reason within 45 days after Executive learns about the occurrence of the event giving rise to the claim of Good Reason.

(iii) If Executive’s employment is terminated by the Company without Cause (excluding by reason of Executive’s death or Disability) or by Executive for Good Reason, Executive shall be entitled to receive:

(A) the Accrued Rights;

(B) a pro rata portion of the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to Section 4 hereof for such year based upon the Company’s actual results for the year of termination and the percentage of the fiscal year that shall have elapsed through the date of Executive’s termination of employment, payable to Executive pursuant to Section 4 had Executive’s employment not terminated;

(C) subject to Executive’s continued compliance with the provisions of Sections 8 and 9 and Executive’s execution (and non-revocation) of a release of all claims against the TRU Group in a form substantially similar to the Separation and Release Agreement attached hereto as Exhibit B, an amount equal to the sum of (x) two (2) times the Base Salary at the rate in effect immediately prior to the date of Executive’s termination of employment and (y) the product of (I) the actual Annual Bonus received in respect of the fiscal year immediately preceding the year of Executive’s termination of employment (the “Prior Bonus”) and (II) the “Severance Period” (as defined below) as expressed in years, payable in installments following the Executive’s termination in accordance with the Company’s periodic payroll practices; provided, however, that the aggregate amount described in this subsection (C) shall be in lieu of notice or any other severance amounts to which the Executive may otherwise be entitled and shall be reduced by any amounts owed by Executive to the Company or any affiliate. For purposes of clause (y) of this subsection (C), if Executive’s employment is terminated prior to his first opportunity to receive an Annual Bonus, the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to Section 4 hereof for such year based upon the Company’s actual results for the year of termination will be substituted for the Prior Bonus. The “Severance Period” shall initially be a twelve (12) month period commencing on the Executive’s termination of employment, which period shall be increased by three (3) months on each anniversary of the Hire Date prior to such termination of employment, up to a maximum of twenty-four (24) months; and

(D) continuation of medical, dental and life insurance benefits (pursuant to the same benefit plans as in effect for active employees of the Company), with Executive paying a portion of such costs as if Executive’s employment had not terminated, until the earlier to occur of (1) the end of the Severance Period and (2) the date on which Executive commences to be eligible for coverage under substantially comparable medical, dental and life insurance benefit plans from any subsequent employer; provided if such continued coverage is not possible under the general terms and provisions of such plan(s) during such period, the Company shall pay an amount to Executive equal to the Company’s cost of providing such benefits to Executive as if Executive’s employment had not terminated. In order to facilitate such coverage, Executive and his spouse and dependents, as applicable, in accordance with the

Company’s policies in effect at the time of Executive’s termination, shall agree to elect continuation coverage in accordance with the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA Coverage”) and the Company may satisfy its obligations hereunder by paying a portion of the premiums required for such COBRA Coverage.

Following Executive’s termination of employment by the Company without Cause (excluding by reason of Executive’s death or Disability) or by Executive for Good Reason, except as set forth in this Section 7(c)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.

d. Notice of Termination. Any purported termination of employment by the Company or by Executive (other than due to Executive’s death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 12(h) hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated.

e. Board/Committee Resignation. Upon termination of Executive’s employment for any reason, Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board and any Subsidiary Boards (and any committees thereof).

8. Non-Competition.

a. Executive acknowledges and recognizes the highly competitive nature of the businesses of Holdings and its affiliates and accordingly agrees as follows:

(i) During the Employment Term and during the Severance Period (whether or not payments are being made pursuant to Section 7(c) hereof or the Severance Period is otherwise applicable) (the “Restricted Period”), Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever (“Person”), directly or indirectly:

(A) engage in any business that directly or indirectly is a “Competitive Business.” For purposes of this subsection (A) a “Competitive Business” means, with respect to the Executive at any time, any Person engaged wholly or in part (directly or through one or more subsidiaries) in the retail sale or distribution (including in stores or via mail order, e-commerce, or similar means) of “Competing Products,” if more than one-third (1/3) of such Person’s gross sales for the twelve (12) month period preceding such time (or with respect to the period after Executive’s termination date, as of such termination date) are generated by engaging in such sale or distribution of Competing Products. Without limiting the foregoing, Competitive Businesses shall in any event include, Right Start, Zany Brainy, FAO Schwartz, Buy Buy Baby, e-toys, KB Toys, Mattel, Hasbro, Lego, Bandai, Playmobil, Ravensburger, Evenflo, Graco/Little Tikes, Chicco, Cosco, Maclaren, Britax, Woolworths, Argos,

Mothercare, Auchan, Leclerc, La Grande Recre, Karstadt, Real, Kaufhof, Mueller, El Corte Ingles, or any of their respective subsidiaries. Notwithstanding the foregoing, in the event Executive’s employment is terminated (x) by Executive without Good Reason or (y) by the Company for Cause, the term “Competitive Business” shall also in any event include Wal-Mart, K-Mart, Target, Amazon, Zellers, Sears, Carrefour, Tesco, Asda and Loblaws. For purposes of this subsection (A) “Competing Products” means, with respect to the Executive at any time, (1) toys and games, (2) video games, computer software for children, and electronic toys or games, (3) juvenile or baby products, apparel, equipment, furniture, or consumables, (4) wheeled goods for children, and (5) any other product or group of related products that represents more than twenty (20) percent of the gross sales of Holdings and its subsidiaries for the twelve (12) month period preceding such time (or with respect to the period after the Executive’s termination date, as of such termination date);

(B) enter the employ of, or render any services to, any Person (or any division or controlled or controlling affiliate of any Person) who or which engages in a Competitive Business;

(C) acquire a financial interest in, or otherwise become actively involved with, any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or

(D) interfere with, or attempt to interfere with, business relationships (whether formed before, on or after the date of this Agreement) between Holdings or any of its affiliates and customers, clients, suppliers, partners, members or investors of Holdings or its affiliates.

(E) Notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly own, solely as a passive investment, securities of any Person engaged in a Competitive Business which are publicly traded on a national or regional stock exchange or on the over-the-counter market or privately held if Executive (x) is not a controlling Person of, or a member of a group which controls, such Person and (y) does not, directly or indirectly, own 3% or more of any class of securities of such Person who is publicly traded or 5% or more of such Person who is privately held.

(ii) During the Restricted Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any Person, directly or indirectly:

(A) solicit to leave the employment of, or encourage any employee of Holdings or its affiliates to leave the employment of, Holdings or its affiliates; or

(B) hire any such employee (other than clerical or administrative support personnel) who was employed by Holdings or its affiliates as of the date of Executive’s termination of employment with the Company or who left the employment of Holdings or its affiliates coincident with, or within one year prior to, the termination of Executive’s employment with the Company.

(iii) During the Restricted Period, Executive will not, directly or indirectly, solicit to leave the employment of, or encourage to cease to work with, as applicable, Holdings or its affiliates any consultant, supplier or service provider then under contract with Holdings or its affiliates.

b. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 8 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.

9. Confidentiality.

a. Executive will not at any time (whether during or after Executive’s employment with the Company), except when required to perform his or her duties to the TRU Group, (x) retain or use for the benefit, purposes or account of Executive or any other Person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the TRU Group (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information —including without limitation rates, trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals — concerning the past, current or future business, activities and operations of Holdings and its subsidiaries and/or any third party that has disclosed or provided any of same to Holdings and its subsidiaries on a confidential basis (“Confidential Information”) without the prior written authorization of the Board.

b. “Confidential Information” shall not include any information that is (x) generally known to the industry or the public other than as a result of Executive’s breach of this covenant or any breach of other confidentiality obligations by third parties; (y) required by law or judicial process to be disclosed; provided that Executive shall give prompt written notice to Holdings of such requirement, disclose no more information than is so required, and cooperate with any attempts by Holdings to obtain a protective order or similar treatment; or (z) disclosed in connection with a litigation or arbitration proceeding between the parties.

c. Except as required by law or judicial process, Executive will not disclose to anyone, other than Executive’s immediate family, legal and/or financial advisors, the existence or contents of this Agreement; provided that Executive may disclose to any prospective future employer the provisions of Sections 8 and 9 of this Agreement, provided they agree to maintain the confidentiality of such terms.

d. Upon termination of Executive’s employment with the TRU Group for any reason, Executive shall (x) cease and not thereafter commence use of any Confidential Information or intellectual property (including without limitation, any patent, invention, copyright, trade secret, trademark, trade name, logo, domain name or other source indicator) owned by Holdings, its subsidiaries or affiliates; (y) immediately destroy, delete, or return to Holdings, at Holdings’ option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Executive’s possession or control (including any of the foregoing stored or located in Executive’s office, home, laptop or other computer, whether or not Holdings property) that contain Confidential Information or otherwise relate to the business of Holdings, its affiliates or subsidiaries (whether or not the retention or use thereof would reasonably be expected to result in a demonstrable injury to Holdings, its affiliates or subsidiaries), except that Executive may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information; and (z) notify and fully cooperate with Holdings regarding the delivery or destruction of any other Confidential Information of which Executive is or becomes aware.

e. Executive shall not improperly use for the benefit of, bring to any premises of, divulge, disclose, communicate, reveal, transfer or provide access to, or share with the TRU Group any confidential, proprietary or non-public information or intellectual property relating to a former employer or other third party without the prior written permission of such third party. Executive hereby indemnifies, holds harmless and agrees to defend the TRU Group and its respective officers, directors, partners, employees, agents and representatives from any actual breach of the foregoing covenant. During the Employment Term, Executive shall comply with all relevant written policies and guidelines of Holdings and its subsidiaries and affiliates which have been made available or disclosed to him, including regarding the protection of Confidential Information and intellectual property and potential conflicts of interest. Executive acknowledges that Holdings and its subsidiaries and affiliates may amend any such policies and guidelines from time to time, and that Executive remains at all times bound by their most current version; provided, however, that Executive shall not be bound by any such amendments unless and until Executive receives notice of such amendments and copies thereof are made available or disclosed to him.

f. The provisions of this Section 9 shall survive the termination of Executive’s employment for any reason.

10. Specific Performance. Executive acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Sections 8 or 9 would be inadequate and the Company and its subsidiaries and affiliates would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.

11. Arbitration. Except as provided in Section 10, any other dispute arising out of or asserting breach of this Agreement, or any statutory or common law claim by Executive

relating to his employment under this Agreement or the termination thereof (including any tort or discrimination claim), shall be exclusively resolved by binding statutory arbitration in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Such arbitration process shall take place in New York, New York. A court of competent jurisdiction may enter judgment upon the arbitrator’s award. Each party shall pay the costs and expenses of arbitration (including fees and disbursements of counsel) incurred by such party in connection with any dispute arising out of or asserting breach of this Agreement.

12. Miscellaneous.

a. Legal Fees. The Company shall reimburse Executive for all reasonable legal fees in an amount not to exceed $15,000 for the initial negotiation, drafting and review of this Agreement and the Equity Documents.

b. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without regard to conflicts of laws principles thereof.

c. Entire Agreement/Amendments. This Agreement and the Equity Documents contain the entire understanding of the parties with respect to the employment of Executive by the TRU Group. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto.

d. No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party’s rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.

e. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby.

f. Assignment. This Agreement, and all of Executive’s rights and duties hereunder, shall not be assignable or delegable by Executive; provided, however, that if Executive shall die, all amounts then payable to Executive hereunder shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee or other designee or, if there be no such devisee, legatee or designee, to Executive’s estate. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab initio and of no force and effect. This Agreement may be assigned by the Company to a person or entity which is an affiliate, and shall be assigned to any successor in interest to substantially all of the business operations of the Company. Upon such assignment, the rights and obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity. Further, the Company will require any successor (whether, direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the

Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company and any successor to its business and/or assets which is required by this Section 12(f) to assume and agree to perform this Agreement or which otherwise assumes and agrees to perform this Agreement; provided, however, in the event that any successor, as described above, agrees to assume this Agreement in accordance with the preceding sentence, as of the date such successor so assumes this Agreement, the Company shall cease to be liable for any of the obligations contained in this Agreement.

g. Set Off; Mitigation. The Company’s obligation to pay Executive the amounts provided and to make the arrangements provided hereunder shall not be subject to set-off, counterclaim or recoupment, other than amounts loaned or advanced to Executive by the Company or its affiliates, amounts owed by Executive under the Equity Documents, or otherwise as provided in Section 7(c) hereof. Executive shall not be required to mitigate the amount of any payment provided for pursuant to this Agreement by seeking other employment or otherwise and the amount of any payment provided for pursuant to this Agreement shall not be reduced by any compensation earned as a result of Executive’s other employment or otherwise.

h. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

If to the Company:

Toys “R” Us, Inc.

One Geoffrey Way

Wayne, New Jersey 07470

Attention: General Counsel

With a copy to:

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Attention: Alvin H. Brown, Esq.

If to Executive:

To the most recent address of Executive set forth in the personnel records of the Company.

i. Executive Representation. Executive hereby represents to the Company that the execution and delivery of this Agreement by Executive and the performance by Executive of Executive’s duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any employment agreement or other agreement or policy to which Executive is a party or otherwise bound.

j. Prior Agreements. This Agreement supercedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its affiliates regarding the terms and conditions of Executive’s employment with the Company and/or its affiliates; provided, however, that the Equity Documents shall govern the terms and conditions of Executive’s equity holdings in Holdings.

k. Cooperation. Executive shall provide Executive’s reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) which relates to events occurring during Executive’s employment hereunder, but only to the extent the Company requests such cooperation with reasonable advance notice to Executive and in respect of such periods of time as shall not unreasonably interfere with Executive’s ability to perform his duties with any subsequent employer; provided, however, that the Company shall pay any reasonable travel, lodging and related expenses that Executive may incur in connection with providing all such cooperation, to the extent approved by the Company prior to incurring such expenses.

l. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.

m. Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

n. Compliance with Section 409A. Notwithstanding anything herein to the contrary, (i) if at the time of Executive’s termination of employment with the TRU Group Executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent the imposition of any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six months following Executive’s termination of employment with the TRU Group (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payment of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payment or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by the Board (but subject to the reasonable consent of the Executive), that does not cause such an accelerated or additional tax or result in an additional cost to the Company. The Company shall consult with Executive in good faith regarding the implementation of the provisions of this Section 12(n); provided that neither the Company nor any of its employees or representatives shall have any liability to Executive with respect thereto. Notwithstanding anything herein to the contrary, this Section 12(n) shall not apply to any payments or benefits due to Executive under the Equity Documents.

[Signatures on next page.]

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

TOYS “R” US, INC.:		EXECUTIVE:
/s/ Deborah Derby		/s/ Gerald Storch
Deborah Derby		Gerald Storch
By:	EVP — HR, Legal and Communication

EXHIBIT A

The Guthrie Theater

EXHIBIT B

SEPARATION AND RELEASE AGREEMENT

This Separation and Release Agreement (“Agreement”) is entered into as of this      day of                     , 20    , between TOYS “R” US, INC. and any successor thereto (collectively, the “Company”) and Gerald Storch (the “Executive”).

The Executive and the Company agree as follows:

1. The employment relationship between the Executive and the Company and its subsidiaries and affiliates, as applicable, terminated on                                          (the “Termination Date”).

2. In accordance with the Executive’s Employment Agreement, Executive is entitled to receive certain payments and benefits after the Termination Date.

3. In consideration of the above, the sufficiency of which the Executive hereby acknowledges, the Executive, on behalf of the Executive and the Executive’s heirs, executors and assigns, hereby releases and forever discharges the Company and its members, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, and any and all employee pension benefit or welfare benefit plans of the Company, including current and former trustees and administrators of such employee pension benefit and welfare benefit plans, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this Agreement, including, without limitation, any claims the Executive may have arising from or relating to the Executive’s employment or termination from employment with the Company and its subsidiaries and affiliates, as applicable, including a release of any rights or claims the Executive may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the Executive of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Executive’s employment with or resignation or termination from the Company and its subsidiaries and affiliates, as applicable. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended (“ADEA”). The ADEA requires that the Executive be advised to consult with an attorney before the Executive waives any claim under ADEA. In addition, the ADEA provides the Executive with at least 21 days to decide whether to waive claims under ADEA and seven

days after the Executive signs the Agreement to revoke that waiver. This release does not release the Company from any obligations due to the Executive under the Executive’s Employment Agreement or under this Agreement, any rights Executive has to indemnification by the Company and any vested rights Executive has under the Company’s employee pension benefit and welfare benefit plans.

Additionally, in consideration of the foregoing, the Company agrees to release and forever discharge the Executive and the Executive’s heirs, executors and assigns from any claims, charges or demands, and/or causes of action whatsoever, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this Agreement, including, but not limited to, any claim, matter or action related to the Executive’s employment and/or affiliation with, or termination and separation from the Company and its subsidiaries and affiliates; provided that such release shall not release the Executive from any loan or advance by the Company or its subsidiaries or affiliates, as applicable, a breach of Executive’s fiduciary obligations under New Jersey state law or a breach under Section 8 or 9 of the Executive’s Employment Agreement.

4. This Agreement is not an admission by either the Executive or the Company or its subsidiaries or affiliates of any wrongdoing or liability.

5. The Executive waives any right to reinstatement or future employment with the Company and its subsidiaries and affiliates following the Executive’s separation from the Company and its subsidiaries and affiliates on the Termination Date.

6. The Executive agrees not to engage in any act after execution of the Agreement that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company or its subsidiaries or affiliates or their respective officers, directors, stockholders or employees. The Company further agrees that it will engage in no act which is intended, or may reasonably be expected to harm the reputation, business or prospects of the Executive.

7. The Executive shall continue to be bound by Sections 8 and 9 of the Executive’s Employment Agreement.

8. The Executive shall promptly return all Company and subsidiary and affiliate property in the Executive’s possession, including, but not limited to, Company or subsidiary or affiliate keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company or subsidiary or affiliate business.

9. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in the Executive’s Employment Agreement.

10. This Agreement represents the complete agreement between the Executive and the Company concerning the subject matter in this Agreement and supersedes all prior

agreements or understandings, written or oral. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

11. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or unenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement.

12. It is further understood that for a period of 7 days following the execution of this Agreement in duplicate originals, the Executive may revoke this Agreement, and this Agreement shall not become effective or enforceable until the revocation period has expired. No revocation of this Agreement by the Executive shall be effective unless the Company has received within the 7 day revocation period, written notice of any revocation, all monies received by the Executive under this Agreement and the Executive’s Employment Agreement and all originals and copies of this Agreement.

13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Executive acknowledges that the Executive has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, the Executive acknowledges that the Executive has been afforded the opportunity of at least 21 days to consider this Agreement.

The parties to this Agreement have executed this Agreement as of the day and year first written above.

TOYS “R” US, INC.

By:

Name:

Title:

GERALD STORCH

EX-10.44

Exhibit 10.44

John H. Eyler

Chairman and Chief Executive Officer

Toys “R” Us, Inc.

October 20, 2004

Mr. Antonio Urcelay

President – Continental Europe

Dear Antonio,

Further to your current position as Managing Director of Toys “R” Us Iberia, S.A. and Toys “R” Us SARL, on behalf of Toys “R” Us, Inc. (the “Company”), I wish to congratulate you on your nomination as President – Continental Europe. The following letter outlines the terms and conditions of your professional position, which was effective August 16, 2004. Therefore, the valid conditions of your professional services are the ones included in this letter. Accordingly, the agreement entered into between you and the Company on May 13, 1999 (concerning severance payments should a Change in Control occur) and the letter agreement provided you in October 2003 are considered null and void.

• Base pay - Your new annual base pay for your professional services as President – Continental Europe is 415,000 Euro.

• Incentive Target - Your new incentive target is 373,500 Euro or 90% of your annual base pay. Therefore, your target total pay (base plus incentive) is 788,500 Euro, an increase of 142,750 Euro, or 22.1% over your current target total pay.

• Other Benefits - During the time you are providing services as President – Continental Europe, you will continue to be eligible to participate in the other Company benefit programs in which you currently participate subject to the terms of the benefit plans and any subsequent modifications the Company may make to those benefit plans.

• Severance compensation - Your current agreement of professional services provides that if your professional relationship with the Company is terminated by the Company, (for reasons other than gross misconduct in the performance of your position or a violation of the Company’s Code of Ethical Standards and Business Practices and Conduct), or if your professional position is eliminated and you are not offered a professional position with equivalent target compensation, or are required to relocate and be based at an office or location outside of the Madrid, Spain area, the Company will provide you with: (i) compensation amounting to twelve months base monthly

pay, (ii) plus the actual achieved incentive payment up to a maximum of your target incentive in the year of the termination of your professional relationship with the Company. As a result of your nomination as President – Continental Europe, the Company will increase this provision to provide you with (i) eighteen months base monthly pay (ii) plus the actual achieved incentive payment up to a maximum of your target incentive for the eighteen-month period after the termination of your professional relationship with the Company. This provision shall also apply should you voluntarily resign your position as President – Continental Europe as a result of the Company requiring you, without your consent, to relocate and be based at any office or location outside of the Madrid, Spain area. The aforementioned (i) compensation and (ii) incentive payments will include any statutory notice and/or termination pay you would otherwise be entitled to for the termination of your professional relationship with the Company. Please note that the incentive payment(s) will not be paid until after the fiscal year(s) for which it applies, as actual results will not be available until after the fiscal year(s) ends.

• Additionally, for the eighteen-month period after the termination of your professional relationship with the Company (for reasons other than for gross misconduct in the performance of your position or a violation of the Company’s Code of Ethical Standards and Business Practices and Conduct) you will continue to receive (i) your car benefit (although you will be responsible for your own gas, maintenance and other usage-related expenses); (ii) health benefits; and (iii) the use of your Company provided laptop computer and cell phone. (You will be responsible for the cost of any phone calls and will be excluded from logging in to the Company network.) Once this eighteen-month period has elapsed, you are requested to return the car, the laptop computer and the cell phone, in good working condition, to the Company.

• Your stock options and restricted stock will continue vesting for 90 days after the date of termination of your professional relationship with the Company. Once this 90 day period has elapsed, (i) any unvested stock options will be automatically cancelled, however, (ii) you will have up to 30 days following the expiration of the eighteen-month period after the termination of your professional relationship with the Company to exercise any vested stock options, at which time this entitlement will also be lost.

• For the eighteen-month period after the termination of your professional relationship with the Company, the Company will continue making contributions to the pension plan and providing you with tax advice.

• Change in Control¹ - In case of removal from your post of President – Continental Europe due to a Company resolution adopted within the twelve months following the Company’s Change in Control, except for gross misconduct, you shall have the right to a severance compensation of eighteen months gross pay. This compensation will be calculated taking into account the result of dividing the last twelve months gross pay

1 Change in Control shall have the same meaning as defined in the Company’s various Stock Option and Performance Incentive Plans.

and target annual incentive bonus by twelve and multiplying the result of this division by eighteen, and shall be subject to any relevant withholding tax or Social Security payments.

This compensation shall be paid in eighteen equal monthly installments starting the last day of the month following your removal as President – Continental Europe.

No severance compensation shall be due in case of your resignation from your post following a Change in Control, for any reason other than the Company requiring you, without your consent, to relocate and be based at any office or location outside of the Madrid, Spain area.

No severance compensation shall be due in the case of your removal as President – Continental Europe within twelve months following a Change in Control, if you are offered another professional position in the Company with equivalent target compensation in the Madrid, Spain area.

• Non-competition - The severance compensation stated in this letter, is greater than the severance compensation stated by Royal Decree 1382/1985 on Top Executive Personnel (we refer to this legislation only in order to establish an appropriate compensation for the non-competition covenant), and includes severance compensation for your non-competition covenant. This is because said severance compensation is subject to your promise that for a period of eighteen months following your removal as President – Continental Europe you will not (i) carry out any other business, similar or equal to the Company or which otherwise in any way competes with the business of the Company directly or indirectly, individually or as an employee, consultant, advisor, partner, associate or in any other capacity, unless the competitive business represents less than 10% of the whole business turnover; (ii) call upon, communicate with, attempt to communicate with or solicit business from any client or customer of the Company or any person responsible for referring business to the Company, or any competitor of the Company, or for your own interest if you should become a competitor of the Company, and (iii) take any action to assist any successor employer or entity in employment solicitation or recruiting any employee who had worked for the Company during the immediate six months prior to your removal as President – Continental Europe.

For the purposes of this non-competition covenant, the business of the Company shall be defined and limited to the retail sales of toys and juvenile products.

In the event of breaching this non-competition covenant, and in accordance with the exceptional nature of this agreement and the Company’s market activity, it is established with your express acknowledgment and approval, that you will pay to the Company, a penalty clause equal to the amount of the severance compensation corresponding to the remaining time of the obligation. This penalty clause is in accordance with articles 1151 and 1155 of the Civil Code, excluding damages that may arise as a result of your breach

of this non-competition covenant and that will be established, if any, by competent jurisdiction. You agree that the Company may withhold payment of any remaining outstanding severance compensation payments otherwise owed to you under this agreement as payment of the penalty provided herein.

Antonio, I look forward to working with you in your new professional role. I know you will continue to make many contributions to the success of this Company. If you have any questions, please feel free to contact me at (973) 617-5768.

To conclude, we kindly request you to sign below as acknowledgment of receipt and agreement with the terms and conditions of this letter.

Sincerely,

/s/ John H. Eyler, Jr.

John H. Eyler, Jr.

I received the original and I agree with its contents

Signed by Antonio Urcelay

/s/ Antonio Urcelay	Date:	22.10.04
Antonio Urcelay

EX-10.46

Exhibit 10.46

EMPLOYMENT AGREEMENT

F. CLAY CREASEY, JR.

This EMPLOYMENT AGREEMENT (the “Agreement”) is dated as of April 5, 2006 (the “Execution Date”) by and between Toys “R” Us, Inc. (the “Company”), a subsidiary of Toys “R” Us Holdings, Inc. (“Holdings”), and F. Clay Creasey, Jr. (the “Executive”).

WHEREAS, as of the Execution Date, the Company desires to employ Executive and to enter into an agreement embodying the terms of such employment and Executive desires to accept such employment and enter into such an agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows:

1. Term of Employment. Subject to the provisions of Section 7 of this Agreement, Executive shall be employed by the Company and, as described below, designated subsidiaries of the Company, for a period commencing on May 1, 2006 (the “Hire Date”) and ending on the fifth anniversary of the Hire Date (the “Initial Term”), on the terms and subject to the conditions set forth in this Agreement. Following the Initial Term, the term of Executive’s employment hereunder shall automatically be renewed on the terms and conditions hereunder for additional one year periods commencing on each anniversary of the last day of the Initial Term (the Initial Term and any annual extensions of the term of this Agreement, subject to the provisions of Section 7 hereof, together, the “Employment Term”), unless either party gives written notice of non-renewal at least 60 days prior to such anniversary.

2. Position.

a. During the Employment Term, until May 15, 2006, Executive shall serve as Executive Vice President of the Company, Toys “R” Us – Delaware, Inc. and any other subsidiaries of the Company that the board of directors of the Company (the “Board”) designates or in such other capacities as the Company may determine from time to time. Thereafter (or commencing on such earlier date as the Board may determine), during the remainder of the Employment Term, Executive shall serve as the Chief Financial Officer of the Company, Toys “R” Us - Delaware, Inc. and any other subsidiaries of the Company that the Board designates (such entities collectively referred to as the “TRU Group”) or in such other capacities as the Board may determine from time to time. In such position as the Chief Financial Officer, Executive shall have such duties and authority as determined by the Board and the board of directors of each subsidiary of the Company, as applicable (each, a “Subsidiary Board”) and commensurate with the position of chief financial officer of a company of similar size and nature to that of the TRU Group. During the Employment Term, the Executive shall report to the Chief Executive Officer of the Company (“CEO”) and of each Subsidiary, as applicable or such other persons as the Company may determine from time to time.

b. During the Employment Term, Executive will devote Executive’s full business time and reasonable best efforts to the performance of Executive’s duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise

which would conflict or interfere in any material respect with the rendition of such services either directly or indirectly, without the prior written consent of the CEO; provided that nothing herein shall preclude Executive from continuing to serve on any board of directors or trustees, advisory board or government commission which is listed on Exhibit A attached hereto, or, subject to the prior approval of the CEO, from accepting appointment to serve on any board of directors or trustees of any business corporation or any charitable organization; provided in each case in the aggregate, that such activities do not conflict or interfere with the performance of Executive’s duties hereunder or conflict with Section 8.

3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $450,000, payable in substantially equal periodic payments in accordance with the Company’s practices for other executive employees, as such practices may be determined from time to time. Executive shall be entitled to such increases in Executive’s base salary, if any, as may be determined from time to time in the sole discretion of the Board or any appropriate committee or delegee thereof, which shall at least annually review Executive’s rate of base salary to determine if any such increase shall be made. Executive’s annual base salary, as in effect from time to time hereunder, is hereinafter referred to as the “Base Salary.”

4. Annual Bonus. During the Employment Term, Executive shall be eligible to earn an annual bonus award in respect of each fiscal year of the Company (an “Annual Bonus”), in a target amount of up to 90% of Executive’s Base Salary (the “Target Bonus”), payable upon the Company’s achievement of certain performance targets established by the Board or any appropriate committee or delegee thereof and pursuant to the terms of the Company’s incentive plan, as in effect from time to time. Notwithstanding the foregoing, in the event the Company’s performance exceeds such performance targets, Executive shall be eligible to earn an Annual Bonus in an amount in excess of the Target Bonus, as determined by the Board or any appropriate committee or delegee thereof in accordance with the Company’s incentive plan, as in effect from time to time. Executive shall be eligible to earn an Annual Bonus for the Company’s 2006 fiscal year in accordance with the foregoing without any pro-rata reduction relating to the portion of the 2006 fiscal year occurring prior to the Hire Date.

5. Employee Benefits; Perquisites; Business and Relocation Expenses.

a. Employee Benefits. During the Employment Term, Executive and his spouse and dependents, as applicable, shall be entitled to participate in the Company’s welfare benefit plans and retirement plans, including, without limitation, the Company’s 401(k) and supplemental executive retirement plans and medical, dental and life insurance plans, as in effect from time to time (collectively, the “Employee Benefits”), on the same basis as those benefits are or may be made available to the other senior executives of the Company (other than benefits which have been terminated or for which participation has been frozen as of the Hire Date). The Company shall be permitted to modify such benefits from time to time consistent with any modifications that impact other senior executives of the Company.

b. Perquisites. During the Employment Term, Executive shall be entitled to receive such perquisites as are made available to other senior executives of the Company in accordance with the Company’s policies, as in effect from time to time. Executive shall be

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entitled to not less than four (4) weeks of paid vacation per year, which vacation shall be taken at such times as are reasonably acceptable to the Company in light of the Company’s operations, Executive’s performance of his duties, and in accordance with the terms of the Company’s vacation policy, as in effect from time to time, applicable to Executive.

c. Business Expenses. During the Employment Term, reasonable business expenses incurred by Executive in the performance of Executive’s duties hereunder shall be reimbursed by the Company in accordance with the Company’s policies, as in effect from time to time, applicable to senior executive officers of the Company.

d. Relocation Expenses. The Company shall reimburse Executive for relocation costs he reasonably incurs in connection with relocating his family to the area in proximity of Wayne, New Jersey, to the extent consistent with the Company’s current relocation policies or as mutually agreed upon by Executive and the Company.

6. Equity. Executive shall, through one or more acquisitions during the 18 month period following the Hire Date, purchase restricted stock in Holdings in the form of strips of securities containing nine (9) shares of Class A Common Stock of Holdings and one (1) share of Class L Common Stock of Holdings (each a “Strip”) in an aggregate amount of up to $400,000. Holdings shall make one or more grants of options to acquire Strips to Executive on the date of each such purchase, in each case, pursuant to the Toys “R” Us Holdings, Inc. 2005 Management Equity Plan (the “Equity Plan”). The number of Strips covered by any such option grant shall be the amount determined by multiplying 122,841 times the fraction, the numerator of which is the aggregate dollar value of the restricted stock being purchased at such time and the denominator of which is $400,000. Holdings and Executive shall enter into certain agreements in connection with such grants. The price per Strip of all restricted stock so purchased shall be equal to the greater of (i) the sum of the aggregate fair market value of each class of Common Stock of Holdings underlying the one Strip as of the Execution Date hereof or (ii) the sum of the aggregate fair market value of each class of Common Stock of Holdings underlying the one Strip as of the date of purchase (such greater amount, the “Determined Value”). The aggregate per Strip strike price of all stock options so granted shall be equal to the greater of (i) the Determined Value or (ii) $26.75.

7. Termination. The Employment Term and Executive’s employment hereunder may be terminated by either party at any time and for any reason; provided that Executive will be required to give the Company at least 60 days’ advance written notice of any resignation of Executive’s employment without Good Reason (as defined in Section 7(c) below) (other than due to Executive’s death or Disability). Notwithstanding any other provision of this Agreement, the provisions of this Section 7 shall exclusively govern Executive’s rights upon termination of employment with the TRU Group; provided, however, that nothing contained in this Section 7 shall alter Executive’s or Holdings’ rights with respect to the Equity Documents, which shall continue to govern Executive’s equity holdings following any termination in accordance herewith.

a. By the Company For Cause or By Executive Without Good Reason.

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(i) The Employment Term and Executive’s employment hereunder may be terminated by the Company for Cause (as defined below) and shall terminate automatically upon Executive’s resignation without Good Reason (other than due to Executive’s death or Disability); provided that Executive will be required to give the Company at least 60 days’ advance written notice of such resignation.

(ii) For purposes of this Agreement, “Cause” shall mean any of the following, as determined by the CEO: (A) Executive’s willful failure to perform any material portion of his duties; (B) the commission of any fraud, misappropriation or misconduct by Executive that causes demonstrable injury, monetarily or otherwise, to the Company or an affiliate; (C) the conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude; (D) an act resulting or intended to result, directly or indirectly, in material gain or personal enrichment to the Executive at the expense of the Company or an affiliate; (E) any material breach of Executive’s fiduciary duties to the Company or an affiliate as an employee or officer; (F) a violation of the Company’s Code of Ethical Standards, Business Practices and Conduct or any other violation of a TRU Group policy; (G) the failure by the Executive to comply, in any material respect, with the provisions of Sections 8 and 9 of this Agreement or any of the restrictive covenants imposed pursuant to the Equity Documents; or (H) the failure by the Executive to comply with any other undertaking set forth in this Agreement or any other agreement Executive has with the Company or any affiliate or any breach by Executive hereof or thereof if such failure or breach is reasonably likely to result in a material injury to the Company or an affiliate.

(iii) If Executive’s employment is terminated by the Company for Cause, or if Executive resigns without Good Reason, Executive shall be entitled to receive:

(A) a lump sum payment of the Base Salary that is earned by Executive but unpaid as of the date of Executive’s termination of employment, paid in accordance with the Company’s payroll practices, but in no event later than thirty (30) days following Executive’s termination of employment;

(B) reimbursement, within 30 days following submission by Executive to the Company of appropriate supporting documentation, for any unreimbursed business expenses properly incurred by Executive in accordance with the Company policy referenced in Section 5(c) above prior to the date of Executive’s termination; provided claims for such reimbursement (accompanied by appropriate supporting documentation) are submitted to the Company within ninety (90) days following the date of Executive’s termination of employment; and

(C) such Employee Benefits, if any, as to which Executive may be entitled under the employee benefit plans of the Company (the amounts described in clauses (A) through (C) hereof being referred to as the “Accrued Rights”).

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Following such termination of Executive’s employment by the Company for Cause or resignation by Executive without Good Reason, except as set forth in this Section 7(a)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.

b. Disability or Death.

(i) The Employment Term and Executive’s employment hereunder shall terminate upon Executive’s death and may be terminated by the Company upon the Executive’s Disability. For purposes of this Agreement, “Disability” shall mean the determination that the Executive is disabled pursuant to the terms of the Company’s long term disability plan.

(ii) Upon termination of Executive’s employment hereunder for either Disability or death, Executive or Executive’s estate (as the case may be) shall be entitled to receive:

(A) the Accrued Rights;

(B) a lump sum payment of any Annual Bonus that is earned by Executive but unpaid as of the date of termination for the immediately preceding fiscal year, paid in accordance with Section 4 (except to the extent payment is otherwise deferred pursuant to any applicable deferred compensation arrangement with the Company); and

(C) a pro rata portion of the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to Section 4 hereof for such year based upon the Company’s actual results for the year of termination and the percentage of the fiscal year that shall have elapsed through the date of Executive’s termination of employment, payable to Executive pursuant to Section 4 had Executive’s employment not terminated.

Following Executive’s termination of employment due to Executive’s death or Disability, except as set forth in this Section 7(b)(ii), Executive or his estate, as applicable, shall have no further rights to any compensation or any other benefits under this Agreement.

c. By the Company Without Cause or by Executive for Good Reason.

(i) Executive’s employment hereunder may be terminated (A) by the Company without Cause (which shall not include Executive’s termination of employment due to his death or Disability) or (B) by Executive for Good Reason (as defined below).

(ii) For purposes of this Agreement, “Good Reason” shall mean, without the consent of the Executive and other than in connection with a termination of the Executive’s employment by the Company for Cause or due to Executive’s death or Disability, (A) the failure of the Company to pay any undisputed amount due under this Agreement; or (B) a substantial reduction in Executive’s targeted compensation level (other than a general reduction in base

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salary or annual incentive compensation opportunities that affects all members of senior management of the Company proportionally). Notwithstanding the foregoing, any termination by Executive for Good Reason may only occur if Executive provides a Notice of Termination (as defined in Section 7(d)) for Good Reason within 45 days after Executive learns (or reasonably should have learned) about the occurrence of the event giving rise to the claim of Good Reason. Notwithstanding the foregoing, resignation by Executive shall not be deemed for “Good Reason” if the basis for such Good Reason is cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason), but in no event more than thirty (30) business days after the Company receives the Notice of Termination specifying the basis of such Good Reason. The Company’s good faith determination of cure shall be binding. The Company shall notify Executive of the timely cure of any claimed event of Good Reason and the manner in which such cure was effected, and any Notice of Termination delivered by Executive based on such claimed Good Reason shall be deemed withdrawn and shall not be effective to terminate the Employment Term.

(iii) If Executive’s employment is terminated by the Company without Cause (excluding by reason of Executive’s death or Disability) or by Executive for Good Reason, Executive shall be entitled to receive:

(A) the Accrued Rights;

(B) a lump sum payment of any Annual Bonus that is earned by Executive but unpaid as of the date of termination for the immediately preceding fiscal year, paid in accordance with Section 4 (except to the extent payment is otherwise deferred pursuant to any applicable deferred compensation arrangement with the Company);

(C) a pro rata portion of the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to Section 4 hereof for such year based upon the Company’s actual results for the year of termination and the percentage of the fiscal year that shall have elapsed through the date of Executive’s termination of employment, payable to Executive pursuant to Section 4 had Executive’s employment not terminated;

(D) subject to Executive’s continued compliance with the provisions of Sections 8 and 9 and Executive’s execution (and non-revocation) of a release of all claims against the TRU Group in a form substantially similar to the Separation and Release Agreement attached hereto as Exhibit B, an amount equal to the sum of (x) the product of the Severance Period (expressed in years as described below) times the Base Salary at the rate in effect immediately prior to the date of Executive’s termination of employment and (y) one (1) times the actual Annual Bonus received in respect of the fiscal year immediately preceding the year of Executive’s termination of employment (the “Prior Bonus”), payable in equal installments during the Severance Period, in accordance with the Company’s periodic payroll practices; provided, however, that the aggregate amount described in this subsection (D) shall be in lieu of notice or any other

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severance amounts to which the Executive may otherwise be entitled and shall be reduced by any amounts owed by Executive to the Company or any affiliate. For purposes of clause (y) of this subsection (D), if Executive’s employment is terminated prior to his first opportunity to receive an Annual Bonus, the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to Section 4 hereof for such year based upon the Company’s actual results for the year of termination will be substituted for the Prior Bonus. For purposes of this subsection (D), the “Severance Period” shall initially be a twelve (12) month period commencing on the Executive’s termination of employment, which period shall be increased by three (3) months on each anniversary of the Hire Date prior to such termination of employment, up to a maximum of twenty-four (24) months; and

(E) continuation of medical, dental and life insurance benefits (pursuant to the same benefit plans as in effect for active employees of the Company), with Executive paying a portion of such costs as if Executive’s employment had not terminated, until the earlier to occur of (1) the end of the Severance Period and (2) the date on which Executive commences to be eligible for coverage under medical, dental and life insurance benefit plans from any subsequent employer, except to the extent that such continued coverage is not possible under the general terms and provisions of such plan(s) of the Company. In order to facilitate any such possible coverage, Executive and his spouse and dependents, as applicable, in accordance with the Company’s policies in effect at the time of Executive’s termination, shall agree to elect continuation coverage in accordance with the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA Coverage”) and the Company may satisfy its obligations hereunder by paying a portion of the premiums required for such COBRA Coverage.

Following Executive’s termination of employment by the Company without Cause (excluding by reason of Executive’s death or Disability) or by Executive for Good Reason, except as set forth in this Section 7(c)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.

d. Notice of Termination. Any purported termination of employment by the Company or by Executive (other than due to Executive’s death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 12(g) hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated.

e. Board/Committee Resignation. Upon termination of Executive’s employment for any reason, Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board and any Subsidiary Boards (and any committees thereof).

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8. Non-Competition.

a. Executive acknowledges and recognizes the highly competitive nature of the businesses of Holdings and its affiliates and accordingly agrees as follows:

(i) During the Employment Term and (x) during the Severance Period following any termination of the Employment Term pursuant to Section 7(c) hereof or (y) during the two-year period after any termination or expiration of the Employment Period for reason other than pursuant to Section 7(c) hereof (in each case, the “Restricted Period”), Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever (“Person”), directly or indirectly:

(A) engage in any business that directly or indirectly is a “Competitive Business.” For purposes of this subsection (A) a “Competitive Business” means, with respect to the Executive at any time, any Person engaged wholly or in part (directly or through one or more subsidiaries) in the retail sale or distribution (including in stores or via mail order, e-commerce, or similar means) of “Competing Products,” if more than one-third (1/3) of such Person’s gross sales for the twelve (12) month period preceding such time (or with respect to the period after Executive’s termination date, as of such termination date) are generated by engaging in such sale or distribution of Competing Products. Without limiting the foregoing, Competitive Businesses shall in any event include, Wal-Mart, K-Mart, Target, Amazon, Zellers, Sears, Right Start, Zany Brainy, FAO Schwartz, Buy Buy Baby, e-toys, KB Toys, Mattel, Hasbro, Lego, Bandai, Playmobil, Ravensburger, Evenflo, Graco/Little Tikes, Chicco, Cosco, Maclaren, Britax, Woolworths, Argos, Tesco, Asda, Mothercare, Carrefour, Auchan, Leclerc, La Grande Recre, Karstadt, Real, Kaufhof, Mueller, El Corte Ingles, Loblaws, or any of their respective subsidiaries. For purposes of this subsection (A) “Competing Products” means, with respect to the Executive at any time, (1) toys and games, (2) video games, computer software for children, and electronic toys or games, (3) juvenile or baby products, apparel, equipment, furniture, or consumables, (4) wheeled goods for children, and (5) any other product or group of related products that represents more than twenty (20) percent of the gross sales of Holdings and its subsidiaries for the twelve (12) month period preceding such time (or with respect to the period after the Executive’s termination date, as of such termination date);

(B) enter the employ of, or render any services to, any Person (or any division or controlled or controlling affiliate of any Person) who or which engages in a Competitive Business;

(C) acquire a financial interest in, or otherwise become actively involved with, any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or

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(D) interfere with, or attempt to interfere with, business relationships (whether formed before, on or after the date of this Agreement) between Holdings or any of its affiliates and customers, clients, suppliers, partners, members or investors of Holdings or its affiliates.

(E) Notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly own, solely as a passive investment, securities of any Person engaged in a Competitive Business which are publicly traded on a national or regional stock exchange or on the over-the-counter market or which are privately held if Executive (x) is not a controlling Person of, or a member of a group which controls, such Person and (y) does not, directly or indirectly, own 3% or more of any class of securities of such Person which is publicly traded or privately held.

(ii) During the Restricted Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any Person, directly or indirectly:

(A) solicit to leave the employment of, or encourage any employee of Holdings or its affiliates to leave the employment of, Holdings or its affiliates; or

(B) hire any such employee (other than clerical or administrative support personnel) who was employed by Holdings or its affiliates as of the date of Executive’s termination of employment with the Company or who left the employment of Holdings or its affiliates coincident with, or within one year prior to, the termination of Executive’s employment with the Company.

(iii) During the Restricted Period, Executive will not, directly or indirectly, solicit to leave the employment of, or encourage to cease to work with, as applicable, Holdings or its affiliates any consultant, supplier or service provider then under contract with Holdings or its affiliates.

b. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 8 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.

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9. Confidentiality.

a. Executive will not at any time (whether during or after Executive’s employment with the Company), except when required to perform his or her duties to the TRU Group, (x) retain or use for the benefit, purposes or account of Executive or any other Person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the TRU Group (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information —including without limitation rates, trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals — concerning the past, current or future business, activities and operations of Holdings and its subsidiaries and/or any third party that has disclosed or provided any of same to Holdings and its subsidiaries on a confidential basis (“Confidential Information”) without the prior written authorization of the CEO.

b. “Confidential Information” shall not include any information that is (x) generally known to the industry or the public other than as a result of Executive’s breach of this covenant or any breach of other confidentiality obligations by third parties; (y) required by law or judicial process to be disclosed; provided that Executive shall give prompt written notice to Holdings of such requirement, disclose no more information than is so required, and cooperate with any attempts by Holdings to obtain a protective order or similar treatment; or (z) disclosed in connection with a litigation or arbitration proceeding between the parties.

c. Except as required by law or judicial process, Executive will not disclose to anyone, other than Executive’s immediate family, legal and/or financial advisors, the existence or contents of this Agreement; provided that Executive may disclose to any prospective future employer the provisions of Sections 8 and 9 of this Agreement, provided they agree to maintain the confidentiality of such terms.

d. Upon termination of Executive’s employment with the TRU Group for any reason, Executive shall (x) cease and not thereafter commence use of any Confidential Information or intellectual property (including without limitation, any patent, invention, copyright, trade secret, trademark, trade name, logo, domain name or other source indicator) owned by Holdings, its subsidiaries or affiliates; (y) immediately destroy, delete, or return to Holdings, at Holdings’ option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Executive’s possession or control (including any of the foregoing stored or located in Executive’s office, home, laptop or other computer, whether or not Holdings property) that contain Confidential Information or otherwise relate to the business of Holdings, its affiliates or subsidiaries (whether or not the retention or use thereof would reasonably be expected to result in a demonstrable injury to Holdings, its affiliates or subsidiaries), except that Executive may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information; and (z) notify and fully cooperate with Holdings regarding the delivery or destruction of any other Confidential Information of which Executive is or becomes aware.

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e. Executive shall not improperly use for the benefit of, bring to any premises of, divulge, disclose, communicate, reveal, transfer or provide access to, or share with the TRU Group any confidential, proprietary or non-public information or intellectual property relating to a former employer or other third party without the prior written permission of such third party. Executive hereby indemnifies, holds harmless and agrees to defend the TRU Group and its respective officers, directors, partners, employees, agents and representatives from any actual breach of the foregoing covenant. During the Employment Term, Executive shall comply with all relevant written policies and guidelines of Holdings and its subsidiaries and affiliates which have been made available or disclosed to him, including regarding the protection of Confidential Information and intellectual property and potential conflicts of interest. Executive acknowledges that Holdings and its subsidiaries and affiliates may amend any such policies and guidelines from time to time, and that Executive remains at all times bound by their most current version; provided, however, that Executive shall not be bound by any such amendments unless and until Executive receives notice of such amendments and copies thereof are made available or disclosed to him.

f. The provisions of this Section 9 shall survive the termination of Executive’s employment for any reason.

10. Specific Performance. Executive acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Sections 8 or 9 would be inadequate and the Company and its subsidiaries and affiliates would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.

11. Arbitration. Except as provided in Section 10, any other dispute arising out of or asserting breach of this Agreement, or any statutory or common law claim by Executive relating to his employment under this Agreement or the termination thereof (including any tort or discrimination claim), shall be exclusively resolved by binding statutory arbitration in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Such arbitration process shall take place in New York, New York. A court of competent jurisdiction may enter judgment upon the arbitrator’s award. Each party shall pay the costs and expenses of arbitration (including fees and disbursements of counsel) incurred by such party in connection with any dispute arising out of or asserting breach of this Agreement.

12. Miscellaneous.

a. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without regard to conflicts of laws principles thereof.

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b. Entire Agreement/Amendments. This Agreement and the Equity Documents contain the entire understanding of the parties with respect to the employment of Executive by the TRU Group. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto.

c. No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party’s rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.

d. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby.

e. Assignment. This Agreement, and all of Executive’s rights and duties hereunder, shall not be assignable or delegable by Executive; provided, however, that if Executive shall die, all amounts then payable to Executive hereunder shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee or other designee or, if there be no such devisee, legatee or designee, to Executive’s estate. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab initio and of no force and effect. This Agreement may be assigned by the Company to a person or entity which is an affiliate, and shall be assigned to any successor in interest to substantially all of the business operations of the Company. Upon such assignment, the rights and obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity. Further, the Company will require any successor (whether, direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company and any successor to its business and/or assets which is required by this Section 12(e) to assume and agree to perform this Agreement or which otherwise assumes and agrees to perform this Agreement; provided, however, in the event that any successor, as described above, agrees to assume this Agreement in accordance with the preceding sentence, as of the date such successor so assumes this Agreement, the Company shall cease to be liable for any of the obligations contained in this Agreement.

f. Set Off; Mitigation. The Company’s obligation to pay Executive the amounts provided and to make the arrangements provided hereunder shall not be subject to set-off, counterclaim or recoupment, other than amounts loaned or advanced to Executive by the Company or its affiliates, amounts owed by Executive under the Equity Documents, or otherwise as provided in Section 7(c) hereof. Executive shall not be required to mitigate the amount of any payment provided for pursuant to this Agreement by seeking other employment or otherwise and the amount of any payment provided for pursuant to this Agreement shall not be reduced by any compensation earned as a result of Executive’s other employment or otherwise.

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g. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

If to the Company:

Toys “R” Us, Inc.

One Geoffrey Way

Wayne, New Jersey 07470

Attention: General Counsel

With a copy to:

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Attention: Alvin H. Brown, Esq.

If to Executive:

To the most recent address of Executive set forth in the personnel records of the Company.

h. Executive Representation. Executive hereby represents to the Company that the execution and delivery of this Agreement by Executive and the performance by Executive of Executive’s duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any employment agreement or other agreement or policy to which Executive is a party or otherwise bound.

i. Prior Agreements. This Agreement supercedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its affiliates regarding the terms and conditions of Executive’s employment with the Company and/or its affiliates; provided, however, that the Equity Documents shall govern the terms and conditions of Executive’s equity holdings in Holdings.

j. Cooperation. Executive shall provide Executive’s reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) which relates to events occurring during Executive’s employment hereunder, but only to the extent the Company requests such cooperation with reasonable advance notice to Executive and in respect of such periods of time as shall not unreasonably interfere with Executive’s ability to perform his duties with any subsequent employer; provided, however, that the Company shall pay any

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reasonable travel, lodging and related expenses that Executive may incur in connection with providing all such cooperation, to the extent approved by the Company prior to incurring such expenses. Further, Executive hereby consents to the disclosure of information about Executive that the Company is required to disclose in its annual report on Form 10-K or in other reports required to be filed with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities Exchange Act of 1934 and the rules and regulations thereunder.

k. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.

l. Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

m. Compliance with Section 409A. Notwithstanding anything herein to the contrary, (i) if at the time of Executive’s termination of employment with the TRU Group Executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent the imposition of any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six months following Executive’s termination of employment with the TRU Group (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payment of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payment or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by the CEO (but subject to the reasonable consent of the Executive), that does not cause such an accelerated or additional tax or result in an additional cost to the Company. The Company shall consult with Executive in good faith regarding the implementation of the provisions of this Section 12(m); provided that neither the Company nor any of its employees or representatives shall have any liability to Executive with respect thereto. Notwithstanding anything herein to the contrary, this Section 12(m) shall not apply to any payments or benefits due to Executive under the Equity Documents.

n. Legal Fees. The Company shall reimburse Executive for all reasonable legal fees in an amount not to exceed $5,000 for the initial negotiation, drafting and review of this Agreement.

[Signatures on next page.]

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

TOYS “R” US, INC.:		EXECUTIVE:
BY:	/S/    DEBORAH DERBY	/S/    F. CLAY CREASEY, JR.
	DEBORAH DERBY EVP-HR, Legal & Communications	F. CLAY CREASEY, JR.

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EXHIBIT A

[To be provided, as applicable]

EXHIBIT B

SEPARATION AND RELEASE AGREEMENT

This Separation and Release Agreement (“Agreement”) is entered into as of this              day of                                     , 20    , between TOYS “R” US, INC. and any successor thereto (collectively, the “Company”) and F. Clay Creasey, Jr. (the “Executive”).

The Executive and the Company agree as follows:

1. The employment relationship between the Executive and the Company and its subsidiaries and affiliates, as applicable, terminated on                                          (the “Termination Date”).

2. In accordance with the Executive’s Employment Agreement, Executive is entitled to receive certain payments and benefits after the Termination Date.

3. In consideration of the above, the sufficiency of which the Executive hereby acknowledges, the Executive, on behalf of the Executive and the Executive’s heirs, executors and assigns, hereby releases and forever discharges the Company and its members, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, and any and all employee pension benefit or welfare benefit plans of the Company, including current and former trustees and administrators of such employee pension benefit and welfare benefit plans, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this Agreement, including, without limitation, any claims the Executive may have arising from or relating to the Executive’s employment or termination from employment with the Company and its subsidiaries and affiliates, as applicable, including a release of any rights or claims the Executive may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the Executive of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Executive’s employment with or resignation or termination from the Company and its subsidiaries and affiliates, as applicable. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended (“ADEA”). The ADEA requires that the Executive be advised to consult with an

attorney before the Executive waives any claim under ADEA. In addition, the ADEA provides the Executive with at least 21 days to decide whether to waive claims under ADEA and seven days after the Executive signs the Agreement to revoke that waiver. This release does not release the Company from any obligations due to the Executive under the Executive’s Employment Agreement or under this Agreement, any rights Executive has to indemnification by the Company and any vested rights Executive has under the Company’s employee pension benefit and welfare benefit plans.

4. This Agreement is not an admission by either the Executive or the Company or its subsidiaries or affiliates of any wrongdoing or liability.

5. The Executive waives any right to reinstatement or future employment with the Company and its subsidiaries and affiliates following the Executive’s separation from the Company and its subsidiaries and affiliates on the Termination Date.

6. The Executive agrees not to engage in any act after execution of the Agreement that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company or its subsidiaries or affiliates or their respective officers, directors, stockholders or employees.

7. The Executive shall continue to be bound by Sections 8 and 9 of the Executive’s Employment Agreement.

8. The Executive shall promptly return all Company and subsidiary and affiliate property in the Executive’s possession, including, but not limited to, Company or subsidiary or affiliate keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company or subsidiary or affiliate business.

9. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in the Executive’s Employment Agreement.

10. This Agreement represents the complete agreement between the Executive and the Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

11. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or unenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement.

2

12. It is further understood that for a period of 7 days following the execution of this Agreement in duplicate originals, the Executive may revoke this Agreement, and this Agreement shall not become effective or enforceable until the revocation period has expired. No revocation of this Agreement by the Executive shall be effective unless the Company has received within the 7 day revocation period, written notice of any revocation, all monies received by the Executive under this Agreement and the Executive’s Employment Agreement and all originals and copies of this Agreement.

13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Executive acknowledges that the Executive has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, the Executive acknowledges that the Executive has been afforded the opportunity of at least 21 days to consider this Agreement.

The parties to this Agreement have executed this Agreement as of the day and year first written above.

TOYS “R” US, INC.

By:

Name:

Title:

F. CLAY CREASEY, JR.

3

EX-12

EXHIBIT 12

Toys "R" Us, Inc.

Computation of Historical Ratios of Earnings to Fixed Charges (a)

(In Thousands, Except Ratio Data)

	For the year ended
	01/28/06			01/29/05			01/31/04 (As restated)			02/01/03 (As restated)			02/02/02 (As restated)
Consolidated pretax income (loss) from continuing operations	$	(505,542	)	$	193,476		$	93,239		$	332,258		$	98,469
Share of pretax income of less than 50%-owned companies		2,969			(23,181	)		(31,491	)		(29,484	)		(28,732	)
Minority interest in Toysrus—Japan (pre initial public offering)		—			—			—			—			—
Minority interest in Toysrus.com		—			(6,506	)		(7,929	)		(14,049	)		(22,278	)
Interest capitalized during period		(437	)		(1,123	)		(885	)		(1,428	)		(4,225	)
Total fixed charges		508,175			277,485			292,047			261,080			244,856
Adjusted income from continuing operations	$	5,165		$	440,151		$	344,981		$	548,377		$	288,090
Fixed Charges:
Interest expense	$	394,257		$	130,016		$	141,633		$	119,207		$	121,487
Interest capitalized during period		437			1,123			885			1,428			4,225
Adjustment to deferred financing amortization-US bridge debt		(32,455	)
Interest portion of rental expense		145,936			146,346			149,529			140,445			119,144
Total Fixed Charges	$	508,175		$	277,485		$	292,047		$	261,080		$	244,856
Ratio of Earnings to Fixed Charges					1.59			1.18			2.10			1.17
Deficiency of Earnings over Fixed Charges	$	(503,010	)

(a) For purpose of calculating the ratio of earnings to fixed charges, earnings were calculated by adding (i) earnings from continuing operations before minority interest and income taxes, (ii) interest expense, including the portion of rents representative of an interest factor, and (iii) amortization of debt issue costs, and (iv) the amount of the company's undistributed (income) losses of less than 50%-owned companies. Fixed charges consist of interest expense, amortization of debt issue costs, and the portions of rents representative of an interest factor.

Rent expense, net of sublease income	299,050		300,197		306,726		288,091		244,397
Capitalization factor	6.1		6.5		6.5		6.5		6.5
Weighted average cost of long-term debt	8.0	%	7.5	%	7.5	%	7.5	%	7.5	%
Interest in rent expense	145,936		146,346		149,529		140,445		119,144
% of interest to rent expense	49	%	49	%	49	%	49	%	49	%

EX-14

Exhibit 14

Adopted September 2005

TOYS “R” US, INC. CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL

OFFICERS CODE OF ETHICS

Toys “R” Us, Inc. (the “Company”) has a Code of Ethical Standards and Business Practices and Conduct (the “Code”) applicable to all directors and salaried employees of the Company. The Company’s Chief Executive Officer (“CEO”) and senior financial officers are bound by the provisions of the Code. In addition, the CEO and senior financial officers are subject to the following additional specific policies requiring them to:

• act with honesty and integrity and handle ethically any actual or apparent conflicts of interest between personal and professional relationships;

• ensure that all reports and documents filed by the Company with the Securities and Exchange Commission, and any public communications by the Company, contain full, fair, accurate, timely and understandable disclosures;

• comply with all applicable governmental laws, rules and regulations; and

• promptly report violations of the Code or of these policies to the Board of Directors or the Company’s Confidential Ethics Hotline.

The Board of Directors will determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of the Code or of these additional policies by the Company’s CEO and senior financial officers. Such actions will be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code and these additional policies.

CERTIFICATE OF COMPLIANCE WITH REQUIREMENTS OF CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS CODE OF ETHICS

I hereby certify that I have read and understand the Toys “R” Us, Inc. Chief Executive Officer and Senior Financial Officers Code of Ethics, dated September 2005, and certify that I have complied with, and that I will continue to comply with, such code, except as noted below. I also certify my understanding that any failure by me to comply with such code may result in disciplinary action against me, up to and including termination of my employment.

Signature:

Print Name:

Job Title:

Date:

EX-21

Exhibit 21

Subsidiaries of the Registrant

Name	Jurisdiction of Incorporation
Babiesrus.com, LLC	Delaware
Definitive Solutions Company, Inc.	Delaware
Geoffrey Europe, Inc.	Delaware
Geoffrey Holdings, LLC	Delaware
Geoffrey, Inc.	Delaware
Geoffrey International, LLC	Delaware
Giraffe Holdings, LLC	Delaware
Giraffe Intermediate, LLC	Delaware
Giraffe Intermediate Holdings, LLC	Delaware
Giraffe Junior, LLC	Delaware
Giraffe Junior Holdings, LLC	Delaware
Giraffe Properties, LLC	Delaware
MAP Real Estate, LLC	Delaware
MAP 2005 Real Estate, LLC	Delaware
MPO Holdings, LLC	Delaware
MPO Intermediate, LLC	Delaware
MPO Intermediate Holdings, LLC	Delaware
MPO Junior, LLC	Delaware
MPO Junior Holdings, LLC	Delaware
MPO Properties, LLC	Delaware
Toys “R” Us – Belgium, Inc.	Delaware
Toysrus.com, LLC	Delaware
Toys “R” Us – Delaware, Inc.	Delaware
Toys “R” Us Europe, LLC	Delaware
Toys “R” Us International, LLC	Delaware
Toys “R” Us – Service, Inc.	Delaware
Toys “R” Us – Value, Inc.	Virginia
TRU 2005 RE Holding Co. I, LLC	Delaware
TRU 2005 RE I, LLC	Delaware
TRU 2005 RE II, LLC	Delaware
TRU 2005 RE II Trust	Delaware
TRU Australia Holdings, LLC	Delaware
TRU Belgium Holdings II, Inc.	Delaware
TRU Data Services, Inc.	Delaware
TRU Gulf Services, Inc.	Delaware
TRU Hong Kong Holdings, LLC	Delaware
TRU Japan Holdings, Inc.	Delaware
TRU – LSM Redevelopment Corporation	Missouri
TRU – SVC, LLC	Virginia
TRU (Vermont), Inc.	Vermont
Wayne Real Estate Company, LLC	Delaware
Wayne Real Estate Holding Company, LLC	Delaware
Babies “R” Us (Australia) Pty Ltd	Australia
Toys “R” Us (Australia) Pty Ltd	Australia
Toys “R” Us Handelsgesellschaft m.b.H.	Austria
Toys “R” Us – Belgium, SCA	Belgium
G.G. Realty Corp., Ltd.	Canada
Toys “R” Us (Canada) Ltd./	Canada

Toys “R” Us (Canada) Ltee
Geoffrey School SARL	France
Toys “R” Us France Real Estate SAS	France
Toys “R” Us SARL	France
Toys “R” Us GmbH	Germany
Toys “R” Us Logistik GmbH	Germany
Toys “R” Us Operations GmbH	Germany
Pacific Playthings Limited	Hong Kong
TRU (HK) Limited	Hong Kong
IOCA Limited	Ireland
Y.K. Babiesrus Internet Japan	Japan
Y.K. Toysrus Internet Japan	Japan
Toys R Us Portugal, Limitada	Portugal
TRU of Puerto Rico, Inc.	Puerto Rico
Toys R Us Iberia, S.A.	Spain
Toys R Us Iberia Real Estate, S.L.	Spain
Toys R Us Iberia, S.A. Sucursal en Canarias	Spain/Canary Islands
Toys R Us Madrid, S.L.	Spain
Toys “R” Us AG	Switzerland
Toys “R” Us Financial Services Limited	United Kingdom
Toys “R” Us Holdings Limited	United Kingdom
Toys ‘R’ Us Holdings (UK) Limited	United Kingdom
Toys “R” Us (IFSC) Unlimited	United Kingdom
Toys “R” Us Limited	United Kingdom
Toys “R” Us (UK) Limited	United Kingdom
Toys “R” Us Properties Limited	United Kingdom
Toys “R” Us Properties (UK) Limited	United Kingdom
TruToys (UK) Limited	United Kingdom

EX-24

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerald L. Storch, Raymond L. Arthur and Deborah Derby and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Toys “R” Us, Inc. for the fiscal year ended January 28, 2006, and any amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform such and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

This Power of Attorney may be executed in separate counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the 28th day of March, 2006.

Name	Title	Signature
Josh Bekenstein	Director	/s/ Josh Bekenstein
Michael M. Calbert	Director	/s/ Michael M. Calbert
Michael D. Fascitelli	Director	/s/ Michael D. Fascitelli
David Kerko	Director	/s/ David Kerko
Matthew S. Levin	Director	/s/ Matthew S. Levin
John Pfeffer	Director	/s/ John Pfeffer
Dwight Poler	Director	/s/ Dwight Poler
Steven Roth	Director	/s/ Steven Roth
Wendy Silverstein	Director	/s/ Wendy Silverstein

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gerald L. Storch, certify that:

1. I have reviewed this Annual Report on Form 10-K of Toys “R” Us, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2006

/s/ Gerald L. Storch

Gerald L. Storch

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Raymond L Arthur, certify that:

1. I have reviewed this Annual Report on Form 10-K of Toys “R” Us, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 28, 2006

/s/ Raymond L. Arthur

Raymond L. Arthur

Executive Vice President -

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant To 18 U.S.C. Section 1350 By The Chief Executive Officer,

As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.

I, Gerald L. Storch, Chief Executive Officer of Toys “R” Us, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1. The Annual Report on Form 10-K of the Company for the annual period ended January 28, 2006 (the “Report”) fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m); and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Gerald L. Storch

Gerald L. Storch

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

April 28, 2006

EX-32.2

Exhibit 32.2

Certification Pursuant To 18 U.S.C. Section 1350 By The Chief Financial Officer,

As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.

I, Raymond L Arthur, Chief Financial Officer of Toys “R” Us, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1. The Annual Report on Form 10-K of the Company for the annual period ended January 28, 2006 (the “Report”) fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m); and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Raymond L. Arthur

Raymond L. Arthur

Executive Vice President -

Chief Financial Officer

(Principal Financial Officer)

April 28, 2006