10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 3, 2007

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	(IRS Employer
incorporation or organization)	Identification Number)
One Geoffrey Way Wayne, New Jersey	07470
(Address of principal executive offices)	(Zip code)

(973) 617-3500

(Registrant’s telephone number, including area code)

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

     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  o         Accelerated filer  o         Non-accelerated filer  þ

     Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes  o      No  þ

     As of November 30, 2007, there were outstanding 1,000 shares of common stock of Toys “R” Us, Inc. (all of which are owned by Toys “R” Us Holdings, Inc., our holding company, and are not publicly traded).

TOYS “R” US, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

	PAGE
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of November 3, 2007, February 3, 2007, and October 28, 2006 (As restated)		3
Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006		4
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended November 3, 2007 and October 28, 2006		5
Condensed Consolidated Statement of Stockholder’s Deficit for the thirty-nine weeks ended November 3, 2007		6
Notes to the Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		34
Item 4. Controls and Procedures		34
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		36
Item 1A. Risk Factors		36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3. Defaults Upon Senior Securities		36
Item 4. Submission of Matters to a Vote of Security Holders		36
Item 5. Other Information		36
Item 6. Exhibits		36
SIGNATURE		37
INDEX TO EXHIBITS		38
EX-3.3: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
EX-10.1: AMENDED AND RESTATED 2005 MANAGEMENT EQUITY PLAN
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TOYS “R” US, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

	November 3,			February 3,			October 28,
	2007			2007			2006
							(As restated)
ASSETS
Current Assets:
Cash and cash equivalents	$	240		$	765		$	393
Accounts and other receivables		179			230			142
Merchandise inventories		3,308			1,690			3,073
Income tax receivable		144			—			—
Current deferred tax assets		77			43			130
Prepaid expenses and other current assets		159			129			137
Total current assets		4,107			2,857			3,875
Property and equipment, net		4,391			4,333			4,331
Goodwill, net		365			365			365
Deferred tax assets		146			95			125
Restricted cash		126			148			151
Other assets		497			497			518
	$	9,632		$	8,295		$	9,365
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current Liabilities:
Short-term borrowings	$	243		$	151		$	285
Accounts payable		2,113			1,303			1,619
Accrued expenses and other current liabilities		900			848			775
Income taxes payable		8			142			125
Current portion of long-term debt		48			66			65
Total current liabilities		3,312			2,510			` 2,869
Long-term debt		6,265			5,722			6,716
Deferred tax liabilities		34			74			29
Deferred rent liabilities		257			248			258
Other non-current liabilities		371			282			265
Minority interest in Toys “R” Us Japan		130			134			131
Stockholder’s deficit		(737	)		(675	)		(903	)
	$	9,632		$	8,295		$	9,365

See accompanying notes to the condensed consolidated financial statements.

3

TOYS “R” US, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions)

	13 Weeks Ended						39 Weeks Ended
	November 3,			October 28,			November 3,			October 28,
	2007			2006			2007			2006
Net sales	$	2,781		$	2,534		$	7,967		$	7,371
Cost of sales		1,804			1,673			5,145			4,813
Gross margin		977			861			2,822			2,558
Selling, general and administrative expenses		924			802			2,536			2,280
Depreciation and amortization		94			92			291			305
Net gains on sales of properties		(18	)		(109	)		(34	)		(109	)
Restructuring charges (reversals) and other		3			(1	)		4			4
Total operating expenses		1,003			784			2,797			2,480
Operating (loss) earnings		(26	)		77			25			78
Other (expense) income:
Interest expense		(136	)		(141	)		(378	)		(401	)
Interest income		3			4			15			17
Loss before income taxes and minority interest		(159	)		(60	)		(338	)		(306	)
Income tax benefit		81			94			170			183
Minority interest		2			7			9			8
Net (loss) income	$	(76	)	$	41		$	(159	)	$	(115	)

See accompanying notes to the condensed consolidated financial statements.

4

TOYS “R” US, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

	39 Weeks Ended
	November 3,			October 28,
	2007			2006
Cash Flows from Operating Activities:
Net loss	$	(159	)	$	(115	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		291			305
Gains on sales of properties		(34	)		(109	)
Amortization of debt issuance costs		23			50
Deferred income taxes		(58	)		(197	)
Other		8			3
Changes in operating assets and liabilities:
Accounts and other receivables		67			106
Merchandise inventories		(1,575	)		(1,366	)
Prepaid expenses and other operating assets		(28	)		(34	)
Accounts payable		746			264
Accrued expenses and other liabilities		(73	)		(113	)
Income taxes payable and receivable		(154	)		(32	)
Net cash used in operating activities		(946	)		(1,238	)
Cash Flows from Investing Activities:
Capital expenditures		(218	)		(170	)
Decrease (increase) in restricted cash		22			(44	)
Acquisition of minority interest in Toysrus.com		—			(6	)
Cash effect of the consolidation of Toys “R” Us-Japan		—			6
Proceeds from sale of fixed assets		56			217
Net cash (used in) provided by investing activities		(140	)		3
Cash Flows from Financing Activities:
Long-term debt borrowings		760			3,298
Short-term debt borrowings		199			126
Long-term debt repayment		(330	)		(2,743	)
Short-term debt repayment		(115	)		(25	)
Dividend paid to Toys “R” Us-Japan minority interest		(1	)		(5	)
Capitalized debt issuance costs		—			(42	)
Net cash provided by financing activities		513			609
Effect of exchange rate changes on cash and cash equivalents		48			38
Cash and cash equivalents:
Net decrease during period		(525	)		(588	)
Cash and cash equivalents at beginning of period		765			981
Cash and cash equivalents at end of period	$	240		$	393

See accompanying notes to the condensed consolidated financial statements.

5

TOYS “R” US, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S DEFICIT

(Unaudited)

(In millions)

							Accumulated
	Common Stock						other						Total
	Issued (1)				Additional		comprehensive			Retained			stockholder’s
($ in millions)	Shares		Amount		paid-in capital		loss			deficit			deficit
Balance, February 3, 2007		—	$	—	$	4	$	(95	)	$	(584	)	$	(675	)
Cumulative effect of change in accounting principle, net of tax (Note 3)		—		—		—		—			(9	)		(9	)
Cumulative effect of adoption of FIN 48 (Note 6)		—		—		—		—			21			21
Net loss		—		—		—		—			(159	)		(159	)
Unrealized loss on hedged transactions, net of tax		—		—		—		(1	)		—			(1	)
Minimum pension liability adjustment, net of tax		—		—		—		(1	)		—			(1	)
Foreign currency translation adjustments, net of tax		—		—		—		83			—			83
Stock compensation expense		—		—		4		—			—			4
Balance, November 3, 2007		—	$	—	$	8	$	(14	)	$	(731	)	$	(737	)

⁽¹⁾ $0.01 par value; authorized 3,000 shares, outstanding 1,000 shares.

See accompanying notes to the condensed consolidated financial statements.

6

TOYS “R” US, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of presentation

As used herein, the “Company,” “we,” “us,” or “our” means Toys “R” Us, Inc., and its subsidiaries, except as expressly indicated or unless the context otherwise requires. The Condensed Consolidated Balance Sheets as of November 3, 2007, February 3, 2007, and October 28, 2006, the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006, the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended November 3, 2007 and October 28, 2006, and the Condensed Consolidated Statement of Stockholder’s Deficit for the thirty-nine weeks ended November 3, 2007, have been prepared by us in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting, and in accordance with the requirements of this Quarterly Report on Form 10-Q. Our interim Condensed Consolidated Financial Statements are unaudited and are subject to year-end adjustments. In the opinion of management, the financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates, and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine weeks then ended. The Condensed Consolidated Balance Sheet at February 3, 2007 presented herein has been derived from our audited balance sheet included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007, but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included within our Annual Report on Form 10-K for the fiscal year ended February 3, 2007. The results of operations for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006 are not necessarily indicative of operating results of the full year.

As of February 4, 2007, we changed our accounting method for valuing our international wholly-owned subsidiaries’ merchandise inventories from the retail inventory method to the weighted average cost method. We have accounted for the change in accounting principle in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). Refer to Note 3 to the Condensed Consolidated Financial Statements entitled “Change in accounting principle” for the impact on our Condensed Consolidated Financial Statements and further details.

As of February 4, 2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (As amended) – “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). Refer to Note 6 to the Condensed Consolidated Financial Statements entitled “Income taxes” for the impact on our Condensed Consolidated Financial Statements.

In the fourth quarter of fiscal 2006, we identified errors in the way we had previously accounted for income taxes. We did not properly record deferred tax accounts on a net basis by legal entity and taxing jurisdiction, as required by SFAS No. 109 “Accounting for Income Taxes” (“SFAS 109”). As a result, we have restated the accompanying Condensed Consolidated Balance Sheet as of October 28, 2006. Refer to Note 13 to the Condensed Consolidated Financial Statements entitled “Restatement of previously issued financial statements” for further details.

In the fourth quarter of fiscal 2006, we adopted Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). As permitted under the transition provisions of SAB 108, in the prior fiscal year, we recorded a cumulative $(24) million adjustment to opening retained deficit as of January 29, 2006 and adjusted our financial results for the first three quarters of fiscal 2006. These adjustments relate principally to tax-related errors from fiscal years 2005 and 2004 with the balance applicable to years prior to fiscal 2004.

The impact of the adoption of SAB 108 and restatement on our interim results for the thirteen and thirty-nine weeks ended October 28, 2006 is summarized below:

7

	October 28, 2006
	Previously			As
(In millions)	reported			adjusted(1)
Deferred tax assets	$	610		$	125
Income taxes payable		107			125
Stockholder’s deficit		(878	)		(903	)

⁽¹⁾ As adjusted amounts include the impact of the restatement (See Note 13 entitled “Restatement of previously issued financial statements”) and the adoption of SAB 108.

	13 Weeks Ended				39 Weeks Ended
	October 28, 2006				October 28, 2006
	Previously		As		Previously
(In millions)	reported		adjusted		reported			As adjusted
Income tax benefit	$	82	$	94	$	184		$	183
Net (loss) income		29		41		(114	)		(115	)

During the first three quarters of fiscal 2006, we presented certain immaterial other non-product revenue as a reduction in Selling, general and administrative expenses. We have restated Net sales and Selling, general and administrative expenses in the thirteen and thirty-nine week periods ended October 28, 2006 to correctly present other non-product revenue in Net sales. This resulted in an increase in Net sales and an increase in Selling, general and administrative expenses. Refer to Note 13 to the Condensed Consolidated Financial Statements entitled “Restatement of previously issued financial statements” for further details.

8

2. Restructuring and other charges

Our Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006 included the following pre-tax charges related to restructuring initiatives from prior years:

	13 weeks ended					39 weeks ended
	November 3,		October 28,			November 3,		October 28,
(In millions)	2007		2006			2007		2006
2005 initiative
Restructuring charges (reversals) and other	$	1	$	(4	)	$	2	$	2
Depreciation and amortization		—		—			—		24
Cost of sales		—		—			—		3
Total charges related to 2005 initiative	$	1	$	(4	)	$	2	$	29
2003 and prior years’ initiatives
Restructuring charges and other	$	2	$	3		$	2	$	2
Total charges related to 2003 and prior years’ initiatives	$	2	$	3		$	2	$	2
Total	$	3	$	(1	)	$	4	$	31

During the thirteen weeks ended November 3, 2007, we recorded charges of $3 million based on changes in estimated lease commitments. During the thirteen weeks ended October 28, 2006, we recorded charges of $3 million for changes in estimated lease commitments and disposal charges, which were offset by the reversal of $4 million of reserves primarily for previously recorded lease commitments on properties sold during the third quarter of 2006.

During the thirty-nine weeks ended November 3, 2007, we recorded charges of $7 million and reversed $3 million of previously recorded reserves based on changes in estimated lease commitments. For the thirty-nine weeks ended October 28, 2006, we incurred $10 million of charges relating to lease commitments and disposal charges, which were partially offset by the reversal of $6 million of previously recorded reserves primarily related to lease commitments and severance. For the thirty-nine weeks ended October 28, 2006, we also incurred $3 million of inventory markdowns and liquidator fees that were recorded in Cost of sales, and $24 million of accelerated depreciation related to the closed and converted stores from our 2005 initiative.

Restructuring charges (reversals) related to prior years’ initiatives are primarily due to changes in management’s estimates for events such as lease terminations, assignments and sublease income adjustments.

Our Condensed Consolidated Balance Sheets as of November 3, 2007, February 3, 2007 and October 28, 2006 included the following restructuring reserves in Accrued expenses and other current liabilities and Other non-current liabilities, which we believe are adequate to cover our commitments:

	November 3,		February 3,		October 28,
(In millions)	2007		2007		2006
2005 initiative	$	10	$	11	$	10
2003 and prior years’ initiatives		51		63		67
Total	$	61	$	74	$	77

We currently expect to utilize our remaining reserves through January 2019. The following is a description of our individual restructuring initiatives and a roll-forward of the related charges and reserves.

2005 initiative

On January 5, 2006, our Board of Directors approved the closing of 87 Toys “R” Us stores in the United States. As of April 2, 2006, all 87 stores had been closed. Twelve of these stores were converted into Babies “R” Us stores, which reopened in the fall of 2006, resulting in the permanent closure of 75 stores. As a result of the store closings, approximately 3,000 employee positions were eliminated.

A reconciliation of the activity by major type of cost during the thirty-nine weeks ended November 3, 2007 and October 28, 2006 is provided for this initiative below:

9

				Asset						Inventory			Accelerated
(In millions)	Lease commitments			impairment			Severance			markdowns			depreciation			Total
Beginning balance at February 3, 2007	$	11		$	—		$	—		$	—		$	—		$	11
Charges		3			—			—			—			—			3
Reversals		(1	)		—			—			—			—			(1	)
Utilized		(3	)		—			—			—			—			(3	)
Ending balance at November 3, 2007	$	10		$	—		$	—		$	—		$	—		$	10
Beginning balance at January 28, 2006	$	1		$	—		$	8		$	34		$	—		$	43
Charges		5			1			—			3			24			33
Reversals		(3	)		—			(1	)		—			—			(4	)
Utilized		(6	)		(1	)		(6	)		(37	)		(24	)		(74	)
Reclassification (1)		12			—			—			—			—			12
Ending balance at October 28, 2006	$	9		$	—		$	1		$	—		$	—		$	10

⁽¹⁾     Reclassification of straight-line lease reserves recorded in prior periods related to the restructured properties.

2003 and prior years’ initiatives

In fiscal 2003, we decided to close all 146 freestanding Kids “R” Us stores and all 36 freestanding Imaginarium stores, as well as three distribution centers that supported these stores, due to deterioration in their financial performance. In fiscal 2001, we closed stores, eliminated a number of staff positions, and consolidated five store support center facilities into our Global Store Support Center facility in Wayne, New Jersey. In fiscal 1998 and fiscal 1995, we had strategic initiatives to reposition our worldwide operations.

The following is a reconciliation of the activity during the thirty-nine weeks ended November 3, 2007 and October 28, 2006:

	2003			2001			1998 and
(In millions)	initiative			initiative			1995			Total
Beginning balance at February 3, 2007	$	4		$	43		$	16		$	63
Charges		—			4			—			4
Reversals		—			—			(2	)		(2	)
Utilized		(2	)		(8	)		(4	)		(14	)
Ending balance at November 3, 2007	$	2		$	39		$	10		$	51
Beginning balance at January 28, 2006	$	8		$	51		$	22		$	81
Charges		3			1			—			4
Reversals		(1	)		(1	)		—			(2	)
Utilized		(5	)		(7	)		(4	)		(16	)
Ending balance at October 28, 2006	$	5		$	44		$	18		$	67

10

3. Change in accounting principle

As of February 4, 2007, we changed our accounting method for valuing merchandise inventories of our international wholly-owned subsidiaries from the retail inventory method to the weighted average cost method. This change followed the implementation of a perpetual inventory system in our international locations, excluding Toys “R” Us Japan, Ltd. (“Toys-Japan”), which already utilizes a similar system and follows the weighted average cost method. The weighted average cost method utilizes the newly available perpetual inventory records to value inventories. We plan to change our accounting method for valuing merchandise inventories for our U.S. divisions from the retail inventory method to the weighted average cost method in fiscal 2008 when our perpetual inventory system is implemented domestically.

Management believes the weighted average cost method is preferable over the retail inventory method because it results in greater precision in the determination of cost of sales and merchandise inventories. Our newly instituted perpetual inventory system provides management product level detail by store on both a weighted average cost and retail price basis. Management believes the weighted average cost method provides for a better matching of cost of sales with related sales. Cost of sales under the weighted average cost method will represent the weighted average cost of the individual item sold rather than the cost of an item based on an average margin realized on an entire department as under the retail method. As of November 3, 2007, February 3, 2007 and October 28, 2006, we valued approximately 38%, 10% and 9%, respectively, of merchandise inventories under the weighted average cost method, with the remainder valued under the retail inventory method.

In accordance with SFAS 154, we recorded the cumulative effect of the change in accounting principle as of February 4, 2007. We determined that retrospective application for periods prior to fiscal year 2007 is impracticable, as the period-specific information necessary to value the international merchandise inventories under the weighted average cost method is unavailable. As of February 4, 2007, the cumulative effect of this change in accounting principle was a reduction in merchandise inventory of $13 million, an increase in deferred tax assets of $4 million and a net increase in Stockholder’s deficit of $9 million.

For comparability purposes, the following table sets forth the effects of the change in accounting principle by comparing our Condensed Consolidated Balance Sheet (as reported under the weighted average cost method) to pro forma Condensed Consolidated Balance Sheet (as if merchandise inventories were valued under the retail inventory method) as of November 3, 2007:

Condensed Consolidated Balance Sheet

							Increase (decrease)
(In millions)							from change in
As of November 3, 2007	As reported			Pro forma			accounting(1)
Merchandise inventories	$	3,308		$	3,310		$	(2	)
Total current assets		4,107			4,109			(2	)
Total assets		9,632			9,634			(2	)
Stockholder’s deficit		(737	)		(735	)		(2	)
Total liabilities and stockholder’s deficit		9,632			9,634			(2	)

⁽¹⁾ Includes the cumulative effect of the change in accounting principle.

11

The effects of the change in accounting principle on our Condensed Consolidated Statement of Operations (as reported under the weighted average cost method) to pro forma Condensed Consolidated Statement of Operations (as if merchandise inventories were valued under the retail inventory method) for the thirteen weeks ended November 3, 2007 were immaterial. The effects of the change in accounting principle for the thirty-nine weeks ended November 3, 2007 are as follows:

							Increase (decrease)
(In millions)							from change in
For the 39 Weeks Ended November 3, 2007	As reported			Pro forma			accounting
Cost of sales	$	5,145		$	5,156		$	(11	)
Gross margin		2,822			2,811			11
Operating earnings		25			14			11
Loss before income taxes and minority interest		(338	)		(349	)		11
Income tax benefit		170			174			(4	)
Net loss		(159	)		(166	)		7

12

4. Short-term borrowings and long-term debt

A summary of the Company’s consolidated short-term borrowings and long-term debt as of November 3, 2007, February 3, 2007 and October 28, 2006 is outlined in the table below:

	November 3,		February 3,		October 28,
(In millions)	2007		2007		2006
Short-term borrowings
Toys “R” Us Japan, Ltd. 0.75%-0.89% short-term bank loans due fiscal 2007	$	243	$	151	$	285
Long-term debt
Note at an effective cost of 2.23% due in semi-annual installments through February 20, 2008		19		49		50
LIBOR plus 3.00%-4.00% asset sale facility, due July 19, 2008		—		44		44
LIBOR plus 1.30% secured real estate loan, due August 9, 2008 (a)		800		800		800
LIBOR plus 3.00% unsecured credit agreement, due December 9, 2008 (b)		1,300		1,300		1,300
LIBOR plus 1.50%-2.00% multi-currency revolving credit facility, expires fiscal 2010		28		—		190
LIBOR plus 1.00%-3.75% $2.0 billion secured revolving credit facility, expires fiscal 2010		489		—		836
7.625% notes, due fiscal 2011 (c)		518		522		523
LIBOR plus 4.25% secured term loan facility, due fiscal 2012		797		800		800
LIBOR plus 5.00% unsecured credit facility, due fiscal 2012		180		180		—
EURIBOR plus 1.50% French real estate credit facility, due fiscal 2012		93		84		82
EURIBOR plus 1.50% Spanish real estate credit facility, due fiscal 2012		193		173		171
5.02% U.K. real estate credit facility, due fiscal 2013		741		700		675
LIBOR plus 2.25% U.K. real estate credit facility, due fiscal 2013		132		121		118
7.875% notes, due fiscal 2013 (c)		392		391		390
Toys “R” Us-Japan, Ltd. 1.20%-2.80% loans due fiscal 2007-2020		161		152		156
7.375% notes, due fiscal 2018 (c)		407		408		408
8.75% debentures, due fiscal 2021 (d)		22		22		199
Capital leases and other		41		42		39
		6,313		5,788		6,781
Less current portion		48		66		65
Total long-term debt	$	6,265	$	5,722	$	6,716

(a)	We have classified this loan as long-term debt because we have the contractual ability and intent to extend the due date to August 9, 2010.
(b)	We have the contractual ability and intent to extend the due date to December 7, 2010.
(c)	Represents obligations of the Toys “R” Us, Inc. legal entity.
(d)	Represents obligations of Toys “R” Us, Inc. and our subsidiary Toys “R” Us-Delaware, Inc. (“Toys-Delaware”).

As of November 3, 2007, we were in compliance with all of our financial covenants related to our outstanding debt. The total fair market value of our short-term borrowings and long-term debt, with a carrying value of $6.6 billion at November 3, 2007, was $6.2 billion. The total fair market value of our short-term borrowings and long-term debt approximated carrying value at February 3, 2007. The fair market values of our long-term debt are estimated using quoted market prices for the same or similar issues and other pertinent information available to management as of the end of the respective periods.

Borrowing availability

At November 3, 2007, under our $2 billion secured revolving credit facility, we had $489 million in borrowings outstanding, $125 million of outstanding letters of credit, and remaining availability of $1,380 million. In addition, under our multi-currency revolving credit facilities, we had $28 million in borrowings outstanding and $380 million of remaining availability. We have classified borrowings under these revolving credit facilities as long-term, as the revolving credit facilities expire in fiscal 2010. However, we may pay these facilities down within the next twelve months if we have the ability to do so either through additional long-term financing or through cash from operating activities.

Secured real estate loan, due August 9, 2008 ($800 million at November 3, 2007)

On July 9, 2007, we notified the lenders for our $800 million secured real estate loan that we were exercising our first maturity date extension option (the “First Extension Option”), which extended the maturity date of the loan from August 9, 2007 to August 9, 2008. The other key terms of the loan were not changed as a result of the extension. We have the ability and intent to exercise our two remaining maturity date extension options to August 2009 and August 2010. Pursuant to the First Extension Option, we were also required to extend our current interest rate cap through the end of the first maturity extension. Refer to Note 5 to the Condensed Consolidated Financial Statements entitled “Derivative instruments and hedging activities” for further details.

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Asset sale facility, due July 19, 2008 ($0 at November 3, 2007)

On June 1, 2007, Toys-Delaware repaid $9 million of principal of the $200 million asset sale facility with proceeds from the properties sold in the second quarter of fiscal 2007. On August 23, 2007, Toys-Delaware repaid an additional $10 million of principal with proceeds from the lease termination agreement consummated during the second quarter of fiscal 2007. On November 2, 2007, Toys-Delaware repaid the remaining $25 million outstanding principal balance with a portion of the $29 million proceeds from the property sold during the third quarter of fiscal 2007. Refer to Note 10 to the Condensed Consolidated Financial Statements entitled “Net gains on sales of properties” for additional information on each transaction. As of November 3, 2007, we had fully repaid the $200 million asset sale facility

Secured term loan facility, due fiscal 2012 ($797 million at November 3, 2007)

On November 2, 2007, Toys-Delaware used the remaining $4 million of the $29 million proceeds from property sold during the third quarter of fiscal 2007 (refer to Note 10 to the Condensed Consolidated Financial Statements entitled “Net gains on sales of properties”) to repay a portion of the secured term loan facility.

U.K. real estate credit facility, due fiscal 2013 ($741 million at November 3, 2007)

As previously described in our fiscal 2006 Annual Report on Form 10-K, during fiscal 2006, we identified Vanwall Finance PLC (“Vanwall”) as a variable interest entity established with the limited purpose of issuing the notes under the credit agreement with Toys “R” Us Properties (UK) Limited (“Toys Properties”), our indirect wholly-owned subsidiary, and certain related transactions. Our loan agreement with Vanwall requires the Company to indemnify Vanwall against any loss or liability that Vanwall incurs as a consequence of any part of the loan being repaid or prepaid, including costs relating to terminating all or part of their interest rate swap. Management has performed an analysis of Vanwall in accordance with Financial Interpretation (“FIN”) No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46(R)”) and has concluded that the Company is not the primary beneficiary of any gains or losses from Vanwall’s interest rate swap and the entity should not be consolidated.

U.K. real estate credit facility, due fiscal 2013 ($132 million at November 3, 2007)

On February 8, 2007, Toys Properties borrowed an additional $4 million from the Junior Lender of our U.K. real estate credit facility under conditions previously specified in the original loan agreement dated February 8, 2006.

Guarantees

Toys “R” Us, Inc. currently guarantees 80% of Toys-Japan’s three installment loans from a third party in Japan, totaling $41 million. These loans have annual interest rates of 2.6% – 2.8%, are due from 2012 to 2014, and are reported as part of the Toys-Japan loans of $161 million at November 3, 2007.

5. Derivative instruments and hedging activities

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 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, as other assets and other non-current liabilities within our Condensed Consolidated Balance Sheets. The changes in fair value of our derivatives are recorded in the Condensed Consolidated Statements of Operations in Interest expense, unless the derivative is designated as a hedge. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The effective portion of a cash flow hedge is recorded to Other comprehensive loss; the ineffective portion of a cash flow hedge is recorded to Interest expense. For our derivatives that are designated under SFAS 133 as cash flow hedges, no material ineffectiveness existed at November 3, 2007 and October 28, 2006. We recorded less than $1 million and $1 million to Interest expense related to these cash flow hedges for the thirteen and thirty-nine weeks ended November 3, 2007, respectively. We reduced Interest expense by less than $1 million and $1 million related to these cash flow hedges for the thirteen and thirty-nine weeks ended October 28, 2006, respectively.

For the thirteen and thirty-nine weeks ended November 3, 2007, we recorded net charges to Interest expense of $12 million and $22 million, respectively, related to the change in fair value of our derivatives that do not qualify for hedge accounting. For the thirteen and thirty-nine weeks ended October 28, 2006 we recorded net charges to Interest expense of $2 million and $1 million, respectively, related to the change in fair value of our derivatives that did not qualify for hedge accounting.

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Secured real estate loan, due August 9, 2008 ($800 million at November 3, 2007)

On July 27, 2007, we extended the interest rate caps on the $800 million notional amount related to the secured real estate loan. The amount paid to extend the caps was less than $1 million. The interest rate caps manage the variable cash flows associated with changes in the one-month LIBOR above 7.00% and mature in August 2008. The derivative contracts do not qualify for hedge accounting under SFAS 133.

Unsecured credit facility, due fiscal 2012 ($180 million at November 3, 2007)

On May 24, 2007, we entered into an interest rate cap for $91 million notional amount related to the $180 million unsecured credit facility due fiscal 2012, as required by the credit agreement. The amount paid to enter into the cap was less than $1 million. The interest rate cap manages the variable cash flows associated with changes in the one month LIBOR above 7.00% and matures in May 2009. The derivative contract does not qualify for hedge accounting under SFAS 133.

U.K. real estate credit facility, due fiscal 2013 ($132 million at November 3, 2007)

On April 5, 2007, we entered into an interest rate swap for $4 million notional amount related to the additional borrowings on the U.K. real estate credit facility made in February 2007 (See Note 4 entitled “Short-term borrowings and long-term debt”). The interest rate swap hedges the variable LIBOR for a fixed rate of interest of 5.69% until April 2013. The derivative contract is designated as a cash flow hedge under the long-haul method under SFAS 133.  

6. Income taxes

The following table summarizes our income tax benefit and effective tax rates for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006:

	13 Weeks Ended						39 Weeks Ended
	November 3,			October 28,			November 3,			October 28,
($ in millions)	2007			2006			2007			2006
Loss before income taxes and minority interest	$	(159	)	$	(60	)	$	(338	)	$	(306	)
Income tax benefit		81			94			170			183
Effective tax rate		(50.9	)%		(156.7	)%		(50.3	)%		(59.8	)%

The effective tax rates for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006, respectively, were based primarily on our forecasted annualized effective tax rates, adjusted for discrete items that occurred within the periods presented. Our forecasted annualized effective tax rate was 50.3% compared to 34.5% in the same period last year. The difference between our forecasted annualized effective tax rates was primarily due to our current year determination to deduct rather than claim credits for foreign taxes.

For the thirteen weeks ended November 3, 2007, our effective tax rate was impacted primarily by additional income tax benefit resulting from the reversal of valuation allowance of $10 million related to foreign tax credits. The additional income tax benefit was partially offset by income tax expense of $3 million from adjustments to our FIN 48 liability and our current taxes payable. For the thirteen weeks ended October 28, 2006, our effective tax rate was impacted by additional income tax benefits primarily related to the reversal of valuation allowance of $80 million. The income tax benefits were partially offset by income tax expense of $10 million related to adjustments in certain estimated tax reserves and non-deductible officer compensation.

For the thirty-nine weeks ended November 3, 2007, our effective tax rate was primarily impacted by additional income tax benefits of $11 million related to the reversal of valuation allowance and changes in tax laws. The additional income tax benefits were partially offset by income tax expense of $8 million related to adjustments to our FIN 48 liability, adjustments to our current income taxes payable, and settlements of certain tax audits. For the thirty-nine weeks ended October 28, 2006, our effective tax rate was impacted by additional income tax benefits primarily related to the reversal of valuation allowance of $86 million. The income tax benefits were offset by income tax expense of $8 million related to adjustments in certain estimated tax reserves, non-deductible officer compensation, and changes in state tax laws.

In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that we recognize in our financial statements the impact of a tax position taken or expected to be taken in a tax return, if that

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position is more likely than not of being sustained on audit, based on the technical merits of the position. We adopted the provisions of FIN 48 on February 4, 2007.

Upon adoption of FIN 48, we decreased our liability for unrecognized tax benefits by $21 million (from $133 million to $112 million), which was accounted for as a cumulative effect reduction of retained deficit as of February 4, 2007. In addition, we have reflected additional unrecognized tax benefits and corresponding tax assets of $148 million. As a result, the total amount of unrecognized tax benefits was $260 million at February 4, 2007 (date of adoption).

Of the $260 million of unrecognized tax benefits, the amount that, if recognized, would affect our effective tax rate is $112 million. The remaining $148 million would affect our deferred tax accounts. Included within the unrecognized tax benefits recorded on February 4, 2007 was accrued interest and penalties of $28 million and $4 million, respectively. We accrue interest and penalties related to unrecognized tax benefits as a component of Income tax benefit on the Condensed Consolidated Statement of Operations.

We believe that it is reasonably possible that the total amount of unrecognized tax benefits will decrease by as much as $47 million during the next 12 months as a result of settling uncertain intercompany tax positions in several of the jurisdictions in which we pay taxes.

At February 3, 2007, we reported tax reserves in the Income taxes payable line of our Condensed Consolidated Balance Sheet. As of November 3, 2007, we reported $47 million of the reserve for unrecognized tax benefits in Accrued expenses and other current liabilities and $109 million of the reserve for unrecognized tax benefits in Other non-current liabilities of our Condensed Consolidated Balance Sheet. These amounts do not include a portion of our unrecognized tax benefits, which have been recorded as a reduction of Deferred tax assets related to net operating losses. As of November 3, 2007, there have been no material changes to our unrecognized tax benefits since the date of adoption.

The Company or its subsidiaries are subject to taxation in the United States and various foreign jurisdictions. Of the major tax jurisdictions, the Company or its subsidiaries are subject to examination by the United States and Canada for the fiscal years 2003 to 2006, by France, Germany, and Spain for the fiscal years 2000 to 2006, by Japan for the fiscal years 2004 to 2006, and by the United Kingdom for fiscal years 2001 to 2006.

7. Comprehensive (loss) income

Comprehensive loss, net of taxes, is comprised of:

	13 Weeks Ended						39 Weeks Ended
	November 3,			October 28,			November 3,			October 28,
(In millions)	2007			2006			2007			2006
Net (loss) income	$	(76	)	$	41		$	(159	)	$	(115	)
Foreign currency translation adjustments, net of tax		49			(16	)		83			(36	)
Unrealized loss on hedged transactions, net of tax		(1	)		(5	)		(1	)		(7	)
Minimum pension liability adjustment, net of tax		(1	)		—			(1	)		—
Comprehensive (loss) income	$	(29	)	$	20		$	(78	)	$	(158	)

8. Segments

Our reportable segments are: Toys “R” Us-U.S. (“Toys – U.S.”), which operates toy stores in 49 states and Puerto Rico and is responsible for our internet operations; Toys “R” Us-International (“International”), which operates and licenses or franchises toy stores in 34 foreign countries with wholly-owned operations in Australia, Austria, Canada, France, Germany, Portugal, Spain, Switzerland, and the United Kingdom, and consolidates the results of Toys-Japan; and Babies “R” Us (“Babies”), which operates stores in 42 states. We identify segments based on the information used by our chief operating decision maker to analyze performance and to allocate resources among each business unit of the Company. 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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A summary of operations by reportable segment is as follows: 

	13 Weeks Ended						39 Weeks Ended
	November 3,			October 28,			November 3,			October 28,
(In millions)	2007			2006			2007			2006
Net sales
Toys “R” Us — U.S.	$	1,040		$	986		$	3,058		$	2,981
Toys “R” Us — International		1,107			948			3,013			2,630
Babies “R” Us		634			600			1,896			1,760
Total net sales	$	2,781		$	2,534		$	7,967		$	7,371
Operating (loss) earnings
Toys “R” Us — U.S.	$	(95	)	$	(54	)	$	(91	)	$	(63	)
Toys “R” Us — International		37			(6	)		31			(18	)
Babies “R” Us		93			87			275			243
Corporate and other charges		(76	)		(60	)		(220	)		(189	)
Net gains on sales of properties		18			109			34			109
Restructuring and other charges		(3	)		1			(4	)		(4	)
Operating (loss) earnings		(26	)		77			25			78
Interest expense		(136	)		(141	)		(378	)		(401	)
Interest income		3			4			15			17
Loss before income taxes and minority interest	$	(159	)	$	(60	)	$	(338	)	$	(306	)

	November 3,		February 3,		October 28,
(In millions)	2007		2007		2006
Merchandise inventories
Toys “R” Us — U.S.	$	1,663	$	716	$	1,631
Toys “R” Us — International (1)		1,260		637		1,104
Babies “R” Us		385		337		338
Total merchandise inventories	$	3,308	$	1,690	$	3,073

⁽¹⁾ Refer to Note 3 Condensed Consolidated Financial Statement entitled “Change in accounting principle” for the impact of the change in accounting method for valuing our international subsidiaries’ inventories.

9. Litigation and legal proceedings

During the third quarter of fiscal 2007, we adjusted certain legal reserves due to changes in facts and circumstances of pending legal actions yielding no material change to the overall amount of our legal reserves.

As of the end of our fiscal 2005 year, Toysrus.com operated three co-branded on-line stores under a strategic alliance agreement with Amazon.com. On May 21, 2004, we filed a lawsuit against Amazon.com and its affiliated companies in the Superior Court of New Jersey, Chancery Division, Passaic County (the “New Jersey Trial Court”) to terminate our strategic alliance agreement with 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 New Jersey Trial Court entered its order granting our request for termination of the agreement and denying Amazon.com’s request for relief on its counterclaim. On or about March 2, 2007, Amazon.com filed a Notice of Appeal of the New Jersey Trial Court’s March 31, 2006 order and certain other related orders. On or about March 16, 2007, we filed a Notice of Cross-Appeal on the issue of whether the New Jersey Trial Court erred in denying our claim for damages caused by Amazon.com’s material breach of the parties’ strategic alliance agreement.

On June 2, 2006, Amazon.com filed a lawsuit against us in the Superior Court of Washington, County of King, (the “Washington Court”) for money damages allegedly arising from services it was required to provide to us during the wind-down period pursuant to the final order entered in the New Jersey Trial Court. The Washington Court stayed proceedings before it in favor of the New Jersey Trial Court, and the New Jersey Trial Court has ruled that Amazon.com is not entitled to the fees it sought for services it was required to provide during the wind-down period. The Washington Court has directed

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that any further litigation over these issues proceed in the New Jersey courts. We believe that Amazon.com’s maintenance of the Washington Court lawsuit is without merit.

In addition to the litigation discussed above, we are involved in various other 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, result 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 financial statements taken as a whole.

10. Net gains on sales of properties

During the third quarter of fiscal 2007, we sold our interest in an idle distribution center for gross proceeds of approximately $29 million, resulting in a gain of $18 million for the thirteen and thirty-nine weeks ended November 3, 2007.

During the second quarter of fiscal 2007, we consummated a lease termination agreement resulting in a net gain of $10 million.

In the third quarter of fiscal 2006, Toys-Delaware and MAP 2005 Real Estate, LLC (“MAP”) (collectively referred to herein as “Seller”), both wholly-owned subsidiaries, consummated the sale of its interest in 38 properties, out of a total agreed upon sale of 42 properties, to Vornado Surplus 2006 Realty LLC, a Delaware limited liability company, an affiliate of Vornado Realty Trust, an indirect equity owner of the Company and the Seller for gross proceeds of approximately $178 million. As a result of the sale of these properties, the Company recorded a gain of $91 million for the thirteen and thirty-nine weeks ended October 28, 2006. In the first quarter of fiscal 2007, the Seller sold two additional properties for gross proceeds of approximately $5 million and recorded a gain of $3 million. During the second quarter of fiscal 2007, the Seller completed the sale of the two remaining properties for gross proceeds of $9 million and recorded a gain of $2 million.

In addition, during the third quarter of 2006, Toys “R” Us Properties Ltd. sold its interest in and assets related to a leased property in Cardiff, U.K. to an unrelated third party for gross proceeds of approximately $26 million, resulting in a gain of $21 million for the thirteen and thirty-nine weeks ended October 28, 2006.

11. Related party transactions

Transactions with the Sponsors

We are indirectly owned 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”). The Sponsors provide management and advisory services to us pursuant to an advisory agreement executed at the closing of the Merger Transaction on July 21, 2005. We recorded management and advisory fees of $4 million and $12 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively. For the thirteen and thirty-nine weeks ended October 28, 2006, we recorded management and advisory fees of $4 million and $15 million, respectively.

From time to time, the Sponsors or their affiliates may acquire debt or debt securities issued by the Company or its subsidiaries in open market transactions or through loan syndications. On December 1, 2006, Toys-Delaware entered into an unsecured credit facility with a syndicate of financial institutions and other lenders. The syndicate includes affiliates of Vornado Realty Trust and Kohlberg Kravis Roberts & Co. L.P., all indirect equity owners of the Company, which each participated in 15% of the loan amount. At November 3, 2007, we owed $180 million under the unsecured credit facility due fiscal 2012. Refer to Note 4 to the Condensed Consolidated Financial Statements entitled “Short-term borrowings and long-term debt.”

During the thirty-nine weeks ended November 3, 2007 and October 28, 2006, we sold properties to Vornado Surplus 2006 Realty LLC. Refer to Note 10 to the Condensed Consolidated Financial Statements entitled “ Net gains on sales of properties”.

Equity restructuring

Effective August 3, 2007, management amended the charter of our parent company, Toys “R” Us Holdings, Inc., by replacing the existing two classes of stock (“Class A Common and Class L Common Stock”) with a single class of new common stock (the “New Common Stock”).  The New Common Stock does not have a yield accrual, interim distribution, or liquidation preference. Each award outstanding under the previous Management Equity Plan converted into awards of the

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New Common Stock. The number of shares of the New Common Stock with respect to all such awards is based on the conversion ratios. Each option to acquire shares of the New Common Stock has the same aggregate exercise price as the corresponding option to acquire shares of Class A and Class L Common Stock. The equity restructuring at Toys “R” Us Holdings, Inc. had no impact on our equity structure or our Condensed Consolidated Financial Statements.

12. Recent accounting pronouncements

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) states that all business combinations (whether full, partial or step acquisitions) will result in all assets and liabilities of an acquired business being recorded at their fair values. Certain forms of contingent considerations and certain acquired contingencies will be recorded at fair value at the acquisition date. SFAS 141(R) also states acquisition costs will generally be expensed as incurred and restructuring costs will be expensed in periods after the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of SFAS 141(R) on our Condensed Consolidated Financial Statements.

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently assessing the impact that SFAS 160 will have on our Condensed Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits entities to choose to measure eligible items at fair value at specified election dates. The statement requires reporting of unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact that SFAS 159 will have on our Condensed Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). This statement requires recognition of the funded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position. Funded status is determined as the difference between the fair value of plan assets and the benefit obligation. Changes in that funded status should be recognized in the year in which the changes occur, in other comprehensive income. This recognition provision and the related disclosures are effective for the Company as of the end of the fiscal year ending after June 15, 2007. The statement also requires the measurement of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position. This measurement provision is effective for fiscal years ending after December 15, 2008. We are currently assessing the effect that SFAS 158 will have on our Condensed Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact that SFAS 157 will have on our Condensed Consolidated Financial Statements.

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13. Restatement of previously issued financial statements

In the fourth quarter of fiscal 2006, we identified errors in the way we had previously accounted for income taxes. We did not properly record deferred tax accounts on a net basis by legal entity and taxing jurisdiction, as required by SFAS 109. The errors resulted in an overstatement of current and non-current deferred tax assets and liabilities as of October 28, 2006. As a result we have restated the accompanying Condensed Consolidated Balance Sheet. These restatement adjustments did not impact our previously reported interim Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statement of Stockholder’s Deficit.

The following table presents the aggregate impact of the errors related to accounting for deferred income taxes on our Consolidated Balance Sheet as of October 28, 2006:

(In millions)	Previously
As of October 28, 2006	reported		Adjustments			As restated(1)
Prepaid expenses, derivative assets and other current assets (2)	$	315	$	(59	)	$	256
Total current assets		3,934		(59	)		3,875
Deferred tax assets		610		(478	)		132
Total assets		9,909		(537	)		9,372
Accrued expenses and other current liabilities		834		(59	)		775
Total current liabilities		2,910		(59	)		2,851
Deferred tax liabilities		507		(478	)		29
Total liabilities and stockholder’s deficit		9,909		(537	)		9,372

(1)

As restated amounts do not include the impact of the adoption of SAB 108. Refer to Note 1 to the Condensed Consolidated Financial Statements entitled “Basis of presentation” for the combined impact of the restatement and the adoption of SAB 108.

(2)

Previously reported as a single line in our Quarterly Report on Form 10-Q Condensed Consolidated Balance Sheet. However, our current Condensed Consolidated Balance Sheet as of October 28, 2006 presents separately $130 million of Current deferred tax assets and $137 million of Prepaid expenses and other current assets (which includes $11 million of assets held for sale), as restated and adjusted for SAB 108.

During the first three quarters of fiscal 2006, we presented certain immaterial other non-product revenue as a reduction in Selling, general and administrative expenses. We have restated Net sales and Selling, general and administrative expenses by increases of $17 million and $52 million for the thirteen and thirty-nine weeks ended October 28, 2006, respectively, to correctly present other non-product revenue in Net sales. This resulted in an increase in Net sales and an increase in Selling, general and administrative expenses.  

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our historical results of operations during the periods presented and our financial condition. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying notes, and contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” below.

Our Business

We generate sales, earnings, and cash flows by retailing toys, baby-juvenile products and children’s apparel worldwide. Our reportable segments are Toys “R” Us – U.S. (“Toys — U.S.”), which operates toy stores in 49 states and Puerto Rico and sells merchandise through our Internet sites; Toys “R” Us – International (“International”), which operates and licenses or franchises stores in 34 foreign countries; and Babies “R” Us (“Babies”), which operates specialty baby-juvenile stores in 42 states. As of November 3, 2007, there were 1,553 “R” Us branded retail stores worldwide.

Restatement of Previously Issued Financial Statements

In the fourth quarter of fiscal 2006, we identified errors in the way we had previously accounted for income taxes. We did not properly record deferred tax accounts on a net basis by legal entity and taxing jurisdiction, as required by Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes” (“SFAS 109”). As a result, we have restated the accompanying Condensed Consolidated Balance Sheet as of October 28, 2006. The restatement adjustments did not impact our previously reported Consolidated Statements of Operations, Consolidated Statements of Cash Flows, or Consolidated Statements of Stockholder’s Deficit. Refer to Note 13 to the Condensed Consolidated Financial Statements entitled “Restatement of previously issued financial statements” for further details.

Adoption of SAB 108

In the fourth quarter of fiscal 2006, we adopted Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). As permitted under the transition provisions of SAB 108, in the prior fiscal year, we recorded a cumulative $(24) million adjustment to opening retained deficit as of January 29, 2006 and adjusted our financial results for the first three quarters of fiscal 2006. These adjustments relate principally to tax-related errors from fiscal years 2005 and 2004 with the balance applicable to years prior to fiscal 2004. We have restated our previously issued financial statement information included in this document. Refer to Note 1 of the Condensed Consolidated Financial Statements entitled “Basis of presentation” for further details.

Financial Performance

As discussed in more detail in this MD&A, the following financial data presents an overview of our financial performance for the thirteen and thirty-nine weeks ended November 3, 2007 compared to the thirteen and thirty-nine weeks ended October 28, 2006:

	13 Weeks Ended						39 Weeks Ended
($ in millions)	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
Net sales growth versus prior year		9.7	%		16.8	%		8.1	%		14.7	%
Gross margin as a percentage of Net sales		35.1	%		34.0	%		35.4	%		34.7	%
Selling, general and administrative expenses as a percentage of Net sales		33.2	%		31.6	%		31.8	%		30.9	%
Net (loss) income	$	(76	)	$	41		$	(159	)	$	(115	)

Consolidated Net sales for the thirteen and thirty-nine weeks ended November 3, 2007 increased due to comparable store net sales improvements at our International and Babies divisions, increased net sales from new store openings, and benefits in foreign currency translation. Net sales were positively impacted by the shift of our fiscal calendar, which includes early November sales in our fiscal third quarter 2007 results, as compared to fiscal 2006 in which November sales fell into the fourth quarter. The fiscal calendar shift primarily impacted our Toys – U.S. and International divisions because of the seasonal nature of the toy industry. Prior year net sales growth for the periods presented were positively impacted by the consolidation of Toys “R” Us-Japan Ltd. (“Toys-Japan”) beginning in the first quarter of 2006.

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Gross margin as a percentage of Net sales for the thirteen and thirty-nine weeks ended November 3, 2007 increased due to improvements in initial markup at all of our divisions, partially offset by increases in markdowns at our Toys – U.S. and Babies divisions.

Selling, general and administrative expenses (“SG&A”) as a percentage of net sales for the thirteen and thirty-nine weeks ended November 3, 2007 increased primarily due to increases in store occupancy and payroll-related expenses as a result of new store openings, as well as increases in corporate-related and advertising expenses.

Net loss for the thirteen and thirty-nine weeks ended November 3, 2007 increased primarily due to increases in SG&A and decreases in Net gains on sales of properties, partially offset by increased Net sales, improvements in Gross margin, and decreases in Interest expense. Net loss for the thirty-nine weeks ended November 3, 2007 was also impacted by decreased Depreciation and amortization expenses.

During the second and third quarters of fiscal 2007, we, along with our vendors, issued recalls for certain products that may not meet or exceed our high safety and quality assurance standards. The direct impact of these recalls has not had a material impact on our results of operations for the thirteen and thirty-nine weeks ended November 3, 2007, since the terms and conditions of our current standard form of purchase order require vendors to reimburse us for all of the costs incurred by us in connection with a recall of such vendor’s merchandise. Concerns over recalls may have had, and may continue to have, an indirect impact on consumer demand for toys in general. However, we are unable to specifically quantify any such impact.

Comparable Store Net 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. A 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 the impact of store openings and closings.

When measuring comparable store net sales, we use sales for the comparable calendar period, regardless of when our fiscal period ends. Therefore, comparable store net sales for fiscal 2007 are calculated by measuring the variances between the thirteen and thirty-nine weeks ended November 3, 2007 with the thirteen and thirty-nine weeks ended November 4, 2006. We feel this is a more accurate reflection of our core businesses.

Various factors affect comparable store net 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 net 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 net sales to fluctuate significantly in the past on an annual, quarterly and monthly basis and, as a result, we expect that comparable store net sales will continue to fluctuate in the future.

The percentages, as set forth in the table below, represent changes in comparable store net sales compared to the same periods in the prior year.

	13 Weeks Ended						39 Weeks Ended
	November 3, 2007			October 28, 2006 vs.			November 3, 2007			October 28, 2006 vs.
Comparable Store Net Sales Performance(1)	vs. 2006			2005(3)			vs. 2006			2005(3)
Toys “R” Us — U.S.		(2.2	)%		0.4	%		1.2	%		(2.3	)%
Toys “R” Us — International(2)		2.0	%		5.3	%		3.8	%		2.9	%
Babies “R” Us		1.2	%		6.2	%		2.1	%		5.5	%

(1)	Measures the variances between the thirteen and thirty-nine weeks ended November 3, 2007 and the thirteen and thirty-nine weeks ended November 4, 2006.
(2)	Includes wholly-owned operations. Toys-Japan is considered a wholly-owned operation beginning fiscal 2006. The inclusion of Toys-Japan reduced comparable store net sales for International by 4.5 and 3.8 percentage points for the thirteen and thirty-nine weeks ended November 3, 2007, respectively.
(3)	Comparable store net sales performance for the thirteen and thirty-nine weeks ended October 28, 2006, as compared to the same periods in fiscal 2005, excludes the operations of Toys-Japan, whose results we began consolidating in fiscal 2006.

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Store Count by Division (Segment)

	Divisional Store Count
	November 3,		October 28,
	2007		2006		Change
Toys “R” Us — U.S.		587		587		—
Toys “R” Us — International (1)		709		662		47
Babies “R” Us		257		245		12
Total		1,553		1,494		59

⁽¹⁾ Store count as of November 3, 2007 includes 502 wholly-owned (including 169 in Japan) and 207 licensed and franchised stores. Store count as of October 28, 2006 includes 478 wholly-owned (including 164 in Japan) and 184 licensed and franchised stores.

Net (Loss) Income

	13 Weeks Ended								39 Weeks Ended
	November 3,			October 28,					November 3,			October 28,
(In millions)	2007			2006		$ Change			2007			2006			$ Change
Net (loss) income	$	(76	)	$	41	$	(117	)	$	(159	)	$	(115	)	$	(44	)

Net income decreased by $117 million to a loss for the thirteen weeks ended November 3, 2007, compared to the same period last year. The decrease was primarily due to increases in SG&A of $122 million as a result of increases in corporate-related, store occupancy, payroll-related, and advertising expenses, a decrease in net gains on sales of properties of $91 million, and a decrease in income tax benefit of $13 million. Partially offsetting the decreases was an increase in our gross margin of $116 million as a result of increased overall net sales.

Net loss increased by $44 million for the thirty-nine weeks ended November 3, 2007, compared to the same period last year. The net loss increased primarily due to increases in SG&A of $256 million primarily as a result of increases in payroll-related, store occupancy, corporate-related, and advertising expenses, and a decrease in net gains on sales of properties of $75 million, and a decrease in income tax benefit of $13 million. Partially offsetting these increases to our net loss was an increase in our gross margin of $264 million as a result of increased overall net sales; a decrease in interest expense of $23 million primarily due to reduced borrowings and lower amortization of deferred financing costs in fiscal 2007; and a decrease in depreciation and amortization expense of $14 million primarily due to accelerated depreciation related to the fiscal 2005 restructuring initiative recorded in the first quarter of fiscal 2006.  

Net Sales

During the second and third quarters of fiscal 2007, we, along with our vendors, issued recalls for certain products that may not meet or exceed our high safety and quality assurance standards. The direct impact of these recalls has not had a material impact on our results of operations for the thirteen and thirty-nine weeks ended November 3, 2007, since the terms and conditions of our current standard form of purchase order require vendors to reimburse us for all of the costs incurred by us in connection with a recall of such vendor’s merchandise. Concerns over recalls may have had, and may continue to have, an indirect impact on consumer demand for toys in general. However, we are unable to specifically quantify any such impact.

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	13 Weeks Ended
										Percentage of Net Sales
	November 3,		October 28,							November 3,			October 28,
($ in millions)	2007		2006		$ Change		% Change			2007			2006
Toys “R” Us - U.S.	$	1,040	$	986	$	54		5.5	%		37.4	%		38.9	%
Toys “R” Us - International		1,107		948		159		16.8	%		39.8	%		37.4	%
Babies “R” Us		634		600		34		5.7	%		22.8	%		23.7	%
Total net sales	$	2,781	$	2,534	$	247		9.7	%		100.0	%		100.0	%

For the thirteen weeks ended November 3, 2007, net sales increased by $247 million, or 9.7%, to $2.8 billion from $2.5 billion for the same period last year. Net sales for the thirteen weeks ended November 3, 2007 included the impact of foreign currency translation that increased net sales by $71 million.

The increase in net sales for thirteen weeks ended November 3, 2007, excluding foreign currency translation, was primarily the result of net sales increases at all of our divisions compared to the same period last year. These increases were primarily related to new store openings at our International and Babies divisions, increases in our internet-based net sales, and improved comparable store net sales. Reported results also improved due to the one-week shift of our fiscal 2007 calendar, which primarily impacted our Toys – U.S. and International divisions and represented approximately $80 million of the increase in net sales.

	39 Weeks Ended
										Percentage of Net Sales
	November 3,		October 28,							November 3,			October 28,
($ in millions)	2007		2006		$ Change		% Change			2007			2006
Toys “R” Us - U.S.	$	3,058	$	2,981	$	77		2.6	%		38.4	%		40.4	%
Toys “R” Us - International		3,013		2,630		383		14.6	%		37.8	%		35.7	%
Babies “R” Us		1,896		1,760		136		7.7	%		23.8	%		23.9	%
Total net sales	$	7,967	$	7,371	$	596		8.1	%		100.0	%		100.0	%

For the thirty-nine weeks ended November 3, 2007, net sales increased by $596 million, or 8.1%, to $8.0 billion from $7.4 billion for the same period last year. Net sales for the thirty-nine weeks ended November 3, 2007 included the impact of foreign currency translation that increased net sales by $135 million.

The increase in net sales for thirty-nine weeks ended November 3, 2007, excluding foreign currency translation, was primarily the result of net sales increases in our International and Babies divisions compared to the same period last year related to new store openings at our International and Babies divisions, improved comparable store net sales, and increases in our internet-based net sales. Reported results also improved due to the one-week shift of our fiscal 2007 calendar, which primarily impacted our Toys – U.S. and International divisions and accounted for approximately $94 million of the increase in net sales, and also increases in our internet-based net sales.

Toys “R” Us – U.S.

Net sales for the Toys – U.S. division increased by $54 million, or 5.5%, to $1,040 million for the thirteen weeks ended November 3, 2007 compared to $986 million in the same period last year. The increase in net sales was primarily a result of the one-week shift in the current year’s quarter end, which represented approximately $53 million of the increase in net sales, and increases in our internet-based net sales, partially offset by a decrease in comparable store net sales.

The comparable store net sales decrease was primarily due to lower sales in our learning, core toys, juvenile and seasonal categories, which were primarily impacted by changes in product assortments. These decreases were partially offset by strong demand for the Nintendo Wii video game system and related accessories in the entertainment category.

Net sales for the Toys – U.S. division increased by $77 million, or 2.6%, to $3,058 million for the thirty-nine weeks ended November 3, 2007 compared to $2,981 million in the same period last year. The increase in net sales was primarily a result of the one-week shift in the current year’s quarter end, which represented approximately $54 million of the increase in net sales, increases in our internet-based net sales, and an increase in comparable store net sales. These increases were partially offset by decreased net sales as a result of the closing of 84 stores during the first quarter of 2006.

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The comparable store net sales increase was primarily a result of an increase in our entertainment category as a result of strong demand for the Nintendo Wii video game system and related accessories. These increases were partially offset by lower sales in our juvenile category, which was primarily impacted by a change in product assortments, along with lower sales in our learning and core toys categories, primarily due to a decline in sales of older product lines.

Toys “R” Us – International

Net sales for the International division increased by $159 million, or 16.8%, to $1,107 million for the thirteen weeks ended November 3, 2007, compared to $948 million in the same period last year. Excluding a $71 million increase in net sales due to foreign currency translation, net sales of our International division increased primarily due to new store openings, an increase in comparable store net sales, and the one-week shift in the current year’s quarter end, which represented approximately $25 million of the increase in net sales.

The comparable store net sales increase was primarily a result of increases in our entertainment, infant care and core toys categories. The entertainment category increased due to continued strong demand for the Nintendo Wii and Sony PlayStation 3 video game systems and related accessories. The increase in the infant care category was primarily due to increased infant consumables, bedding and furniture. The core toys category increased primarily due to higher sales of licensed action figures.

Net sales for the International division increased by $383 million, or 14.6%, to $3,013 million for the thirty-nine weeks ended November 3, 2007, compared to $2,630 million in the same period last year. Excluding a $135 million increase in net sales due to foreign currency translation, net sales of our International division increased primarily due to new store openings, an increase in comparable store net sales, and the one-week shift in the current year’s quarter end, which represented approximately $42 million of the increase in net sales.

The comparable store net sales increase was primarily impacted by increases in our entertainment, infant care and core toys categories. The entertainment category increased due to continued strong demand for the Nintendo Wii and Sony PlayStation 3 video game systems and related accessories. The increase in the infant care category was primarily due to increased infant consumables, bedding and furniture. The core toys category increased primarily due to higher sales of licensed action figures. These increases were partially offset by decreases in our seasonal category due to decreased demand for outdoor products and bicycles.

Babies “R” Us

Net sales for the Babies division increased by $34 million, or 5.7%, to $634 million, for the thirteen weeks ended November 3, 2007, compared to $600 million in the same period last year. The increase was primarily a result of net sales from new store openings, as well as an increase in comparable store net sales.

The comparable store net sales increase was primarily a result of increases in our commodities and infant care categories. The commodities category was positively impacted by continued strong trends in diapers and wipes, new feature space dedicated to baby food and other new products. The infant care category increased primarily due to safety products, monitors and infant feeding products. These increases were partially offset by lower sales in the furniture and apparel categories.

Net sales for the Babies division increased by $136 million, or 7.7%, to $1,896 million, for the thirty-nine weeks ended November 3, 2007, compared to $1,760 million in the same period last year. The increase was primarily a result of net sales from new store openings, as well as an increase in comparable store net sales.

The comparable store net sales increase was primarily a result of increases in our commodities and infant care categories. The commodities category increased primarily due to continued strong demand for baby foods, and value-packaged products. The infant care category increased primarily due to strong demand for safety products, monitors and infant feeding products. Increases in these categories were partially offset by lower sales in the furniture category.

Cost of Sales and Gross Margin

The following costs are included in Cost of sales and Gross margin:

• The cost of acquired merchandise from vendors;

• Freight in;

• Markdowns;

• Provision for inventory shortages; and

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• Credits and allowances from our merchandise vendors.

	13 Weeks Ended
							Percentage of Net Sales
	November 3,		October 28,				November 3,			October 28,			Percentage of Net
($ in millions)	2007		2006		$ Change		2007			2006			Sales Change
Toys “R” Us - U.S.	$	314	$	294	$	20		30.2	%		29.8	%		0.4	%
Toys “R” Us - International		407		330		77		36.8	%		34.8	%		2.0	%
Babies “R” Us		256		237		19		40.4	%		39.5	%		0.9	%
Total gross margin	$	977	$	861	$	116		35.1	%		34.0	%		1.1	%

Gross margin increased by $116 million to $977 million for the thirteen weeks ended November 3, 2007, compared to $861 million in the same period last year. Gross margin, as a percentage of net sales, increased by 1.1 percentage points for the thirteen weeks ended November 3, 2007, compared to the same period last year. Gross margin as a percentage of net sales was positively impacted by improvements in initial markup at all of our divisions, partially offset by increased markdowns at our Toys – U.S. and Babies divisions.

	39 Weeks Ended
							Percentage of Net Sales
	November 3,		October 28,				November 3,			October 28,			Percentage of Net
($ in millions)	2007		2006		$ Change		2007			2006			Sales Change
Toys “R” Us - U.S.	$	988	$	955	$	33		32.3	%		32.0	%		0.3	%
Toys “R” Us - International		1,086		926		160		36.0	%		35.2	%		0.8	%
Babies “R” Us		748		677		71		39.5	%		38.5	%		1.0	%
Total gross margin	$	2,822	$	2,558	$	264		35.4	%		34.7	%		0.7	%

Gross margin increased by $264 million to $2,822 million for the thirty-nine weeks ended November 3, 2007, compared to $2,558 million in the same period last year. Gross margin, as a percentage of net sales, increased by 0.7 percentage points for the thirty-nine weeks ended November 3, 2007, compared to the same period last year. Gross margin as a percentage of net sales was positively impacted by improvements in initial markup at all of our divisions, partially offset by increased markdowns at our Toys – U.S. and Babies divisions.

Toys “R” Us – U.S.

Gross margin increased by $20 million to $314 million for the thirteen weeks ended November 3, 2007, compared to $294 million in the same period last year. Gross margin, as a percentage of net sales, for the thirteen weeks ended November 3, 2007 increased 0.4 percentage points compared to the same period last year. The increase in gross margin as a percentage of net sales was primarily due to improved initial markup, which contributed a 1.1 percentage point increase, partially offset by increased markdowns, which contributed a 0.7 percentage point decrease.

Gross margin increased by $33 million to $988 million for the thirty-nine weeks ended November 3, 2007, compared to $955 million in the same period last year. Gross margin, as a percentage of net sales, for the thirty-nine weeks ended November 3, 2007 increased 0.3 percentage points compared to the same period last year. The increase in gross margin as a percentage of net sales was primarily due to improved initial markup, which contributed a 1.2 percentage point increase, partially offset by increased markdowns, which contributed a 0.9 percentage point decrease.

The improved initial markup was primarily a result of increased sales of private label products. The increase in markdown costs was the result of planned increases in promotional events and clearance markdowns taken to keep inventory current.

Toys “R” Us – International

Gross margin increased by $77 million to $407 million for the thirteen weeks ended November 3, 2007, compared to $330 million in the same period last year. Gross margin, as a percentage of net sales, for the thirteen weeks ended November 3, 2007 increased 2.0 percentage points.

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The increase in gross margin as a percentage of net sales was primarily a result of improved initial markup in certain markets due to favorable changes in our sales mix toward higher margin products such as juvenile furniture in our infant care category and licensed products in our core toy category. Our change in accounting method for valuing merchandise inventories of our international wholly-owned subsidiaries from the retail inventory method to the weighted average cost method (see Note 3 to the Condensed Consolidated Financial Statements entitled “Change in accounting principle”) had no material effect on our gross margin for the thirteen weeks ended November 3, 2007.

Gross margin increased by $160 million to $1,086 million for the thirty-nine weeks ended November 3, 2007, compared to $926 million in the same period last year. Gross margin, as a percentage of net sales, for the thirty-nine weeks ended November 3, 2007 increased 0.8 percentage points.

The increase in gross margin as a percentage of net sales was primarily a result of improved initial markup in certain markets due to favorable changes in our sales mix toward higher margin products such as juvenile furniture and apparel in our infant care category and licensed products in our core toy category. Additionally, our change in accounting method for valuing merchandise inventories of our international wholly-owned subsidiaries from the retail inventory method to the weighted average cost method (see Note 3 to the Condensed Consolidated Financial Statements entitled “Change in accounting principle”) contributed an approximate $11 million increase to our gross margin for the thirty-nine weeks ended November 3, 2007.

Babies “R” Us

Gross margin increased by $19 million to $256 million for the thirteen weeks ended November 3, 2007 compared to $237 million for the same period last year. Gross margin, as a percentage of net sales, increased 0.9 percentage points compared to the same period last year. The increase in gross margin as a percentage of net sales was primarily due to improved initial markup, which contributed a 1.9 percentage point increase, partially offset by increased markdowns, which contributed a 1.0 percentage point decrease.

Gross margin increased by $71 million to $748 million for the thirty-nine weeks ended November 3, 2007 compared to $677 million for the same period last year. Gross margin, as a percentage of net sales, increased 1.0 percentage point compared to the same period last year. The increase in gross margin as a percentage of net sales was primarily due to an increase in initial markup, which contributed a 1.9 percentage point increase, partially offset by increased markdowns, which contributed a 0.9 percentage point decrease.

The improved initial markup was primarily a result of a favorable change in our sales mix toward higher margin products in the infant care category. This increase in gross margin percentage was partially offset by additional markdowns to keep inventory current, as well as markdowns from additional marketing events.

Selling, General and Administrative Expenses (“SG&A”)

The following costs are included in SG&A:

• Store payroll and related payroll benefits;

• Rent and other store operating expenses;

• Advertising expenses;

• Other income;

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

• Other corporate-related expenses.

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	13 Weeks Ended
							Percentage of Net Sales
	November 3,		October 28,				November 3,		October 28,		Percentage of Net
($ in millions)	2007		2006		$ Change		2007		2006		Sales Change
Toys “R” Us - Consolidated	$	924	$	802	$	122		33.2%		31.6%		1.6%

SG&A expenses increased $122 million to $924 million, for the thirteen weeks ended November 3, 2007, compared to $802 million for the same period last year. As a percentage of net sales, SG&A expenses increased 1.6 percentage points. SG&A expenses for the thirteen weeks ended November 3, 2007 included the impact of foreign currency translation that increased SG&A by approximately $22 million.

In addition to the impact of foreign currency translation, the increase in SG&A expenses was primarily due to increases in corporate-related, store occupancy, payroll-related, and advertising expenses. Corporate-related expenses increased primarily due to higher professional fees, as well as the filling of higher-level positions at our Corporate division. Store occupancy and payroll-related expenses increased primarily due to new store openings at our International and Babies divisions, increased costs to improve store layouts at our Toys – U.S. division, and higher store staffing at our Toys – U.S. and International divisions to support increased sales and training initiatives. Advertising expenses increased due to increases in print advertising and promotional activities at all of our divisions.

	39 Weeks Ended
							Percentage of Net Sales
	November 3,		October 28,				November 3,		October 28,		Percentage of Net
($ in millions)	2007		2006		$ Change		2007		2006		Sales Change
Toys “R” Us - Consolidated.	$	2,536	$	2,280	$	256		31.8%		30.9%		0.9%

SG&A expenses increased $256 million to $2.5 billion, for the thirty-nine weeks ended November 3, 2007, compared to $2.3 billion for the same period last year. As a percentage of net sales, SG&A expenses increased 0.9 percentage points. SG&A expenses for the thirty-nine weeks ended November 3, 2007 included the impact of foreign currency translation that increased SG&A by approximately $47 million.

In addition to the impact of foreign currency translation, the increase in SG&A expenses was primarily due to increases in payroll-related, store occupancy, corporate-related, and advertising expenses. Payroll-related and store occupancy expenses increased primarily due to new store openings at our International and Babies divisions, along with increased costs at our Toys – U.S. division due to higher store staffing expenditures, and increased costs to improve store layouts. Corporate-related expenses increased primarily due to higher professional fees, as well as the filling of higher-level positions at our Corporate division. Advertising expenses increased due to increases in print advertising and promotional activities at all of our divisions.

Depreciation and Amortization

	13 Weeks Ended						39 Weeks Ended
	November 3,		October 28,				November 3,		October 28,
(In millions)	2007		2006		$ Change		2007		2006		$ Change
Toys “R” Us - Consolidated	$	94	$	92	$	2	$	291	$	305	$	(14)

Depreciation and amortization increased by $2 million, or 2.2%, to $94 million for the thirteen weeks ended November 3, 2007, compared to the same period last year.

Depreciation and amortization decreased by $14 million, or 4.6%, to $291 million for the thirty-nine weeks ended November 3, 2007, compared to the same period last year. The decrease was primarily attributed to $24 million of accelerated depreciation related to the fiscal 2005 restructuring initiative recorded in the first quarter of fiscal 2006, partially offset by higher depreciation expense at Babies and International due to stores opened since October 28, 2006.

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Net gains on sales of properties

	13 Weeks Ended							39 Weeks Ended
	November 3,		October 28,					November 3,		October 28,
(In millions)	2007		2006		$ Change			2007		2006		$ Change
Toys “R” Us - Consolidated	$	18	$	109	$	(91	)	$	34	$	109	$	(75	)

Net gains on sales of properties decreased by $91 million and $75 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively, compared to the same period last year. This decrease was primarily due to the gains of $109 million in the third quarter of fiscal 2006 primarily related to the sale of 38 stores to Vornado Surplus 2006 Realty LLC.

Refer to Note 10 to the Condensed Consolidated Financial Statements entitled “Net gains on sales of properties” for further details.

Restructuring Charges (Reversals) and Other

	13 Weeks Ended							39 Weeks Ended
	November 3,		October 28,					November 3,		October 28,
(In millions)	2007		2006			$ Change		2007		2006		$ Change
Toys “R” Us - Consolidated	$	3	$	(1	)	$	4	$	4	$	4	$	—

During the thirteen weeks ended November 3, 2007, we recorded charges of $3 million based on changes in estimated lease commitments. During the thirteen weeks ended October 28, 2006, we recorded charges of $3 million for changes in estimated lease commitments and disposal charges, which were offset by the reversal of $4 million of reserves primarily for previously recorded lease commitments on properties sold during the third quarter of 2006.

During the thirty-nine weeks ended November 3, 2007, we recorded charges of $7 million and reversed $3 million of previously recorded reserves based on changes in estimated lease commitments. For the thirty-nine weeks ended October 28, 2006, we incurred $10 million of charges relating to lease commitments and disposal charges, which were partially offset by the reversal of $6 million of previously recorded reserves primarily related to lease commitments and severance.

Restructuring charges (reversals) related to prior years’ initiatives are primarily due to changes in management’s estimates for events such as lease terminations, assignments and sublease income adjustments. Refer to Note 2 to the Condensed Consolidated Financial Statements entitled “Restructuring and other charges” for further details.    Interest Expense

	13 Weeks Ended								39 Weeks Ended
	November 3,			October 28,					November 3,			October 28,
(In millions)	2007			2006			$ Change		2007			2006			$ Change
Toys “R” Us - Consolidated	$	(136	)	$	(141	)	$	5	$	(378	)	$	(401	)	$	23

Interest expense decreased $5 million and $23 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively, compared to the same periods last year, primarily due to reduced borrowings and reduced amortization of deferred financing costs in fiscal 2007, which decreased Interest expense by approximately $15 million and $44 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively, compared to the same periods last year. These decreases were partially offset by charges related to changes in the fair values of our derivatives which do not qualify for hedge accounting, which increased Interest expense by approximately $10 million and $21 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively, compared to the same periods last year.

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Interest Income

	13 Weeks Ended							39 Weeks Ended
	November 3,		October 28,					November 3,		October 28,
(In millions)	2007		2006		$ Change			2007		2006		$ Change
Toys “R” Us - Consolidated	$	3	$	4	$	(1	)	$	15	$	17	$	(2	)

Interest income decreased slightly for the thirteen and thirty-nine weeks ended November 3, 2007 compared to the same periods last year, primarily due to more efficient global cash management.

Income tax benefit

The following table summarizes our income tax benefit and effective tax rates for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006:

	13 Weeks Ended						39 Weeks Ended
	November 3,			October 28,			November 3,			October 28,
($ in millions)	2007			2006			2007			2006
Loss before income taxes and minority interest	$	(159	)	$	(60	)	$	(338	)	$	(306	)
Income tax benefit		81			94			170			183
Effective tax rate		(50.9	)%		(156.7	)%		(50.3	)%		(59.8	)%

The effective tax rates for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006, respectively, were based primarily on our forecasted annualized effective tax rates, adjusted for discrete items that occurred within the periods presented. Our forecasted annualized effective tax rate was 50.3% compared to 34.5% in the same period last year. The difference between our forecasted annualized effective tax rates was primarily due to our current year determination to deduct rather than claim credits for foreign taxes.

For the thirteen weeks ended November 3, 2007, our effective tax rate was impacted primarily by additional income tax benefit resulting from the reversal of valuation allowance of $10 million related to foreign tax credits. The additional income tax benefit was partially offset by income tax expense of $3 million from adjustments to our FIN 48 liability and our current taxes payable. For the thirteen weeks ended October 28, 2006, our effective tax rate was impacted by additional income tax benefits primarily related to the reversal of valuation allowance of $80 million. The income tax benefits were partially offset by income tax expense of $10 million related to adjustments in certain estimated tax reserves and non-deductible officer compensation.

For the thirty-nine weeks ended November 3, 2007, our effective tax rate was primarily impacted by additional income tax benefits of $11 million related to the reversal of valuation allowance and changes in tax laws. The additional income tax benefits were partially offset by income tax expense of $8 million related to adjustments to our FIN 48 liability, adjustments to our current income taxes payable, and settlements of certain tax audits. For the thirty-nine weeks ended October 28, 2006, our effective tax rate was impacted by additional income tax benefits primarily related to the reversal of valuation allowance of $86 million. The income tax benefits were offset by income tax expense of $8 million related to adjustments in certain estimated tax reserves, non-deductible officer compensation, and changes in state tax laws.

Liquidity and Capital Resources

Overview

At November 3, 2007, under our $2 billion secured revolving credit facility, we had $489 million in borrowings outstanding, $125 million of outstanding letters of credit, and remaining availability of $1,380 million. In addition, under our multi-currency revolving credit facilities, we had $28 million in borrowings outstanding and $380 million of remaining availability. We have classified borrowings under these revolving credit facilities as long-term, as the revolving credit facilities expire in fiscal 2010. However, we may pay these facilities down within the next twelve months if we have the ability to do so either through additional long-term financing or through cash from operating activities. As part of our normal course of business, we are continuously evaluating opportunities that will allow us to reduce the costs related to our borrowings.

In general, our primary uses of cash are debt servicing, financing construction of new stores and remodeling existing stores, providing for working capital, which principally represents the purchase of inventory, and paying expenses to operate our

30

stores. We will consider additional sources of financing to fund our long-term growth. 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. 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 multi-currency revolving credit facilities.

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 twelve months.

	39 Weeks Ended
	November 3,			October 28,
($ in millions)	2007			2006			$ Change			% Change
Net cash used in operating activities	$	(946	)	$	(1,238	)	$	292			23.6	%
Net cash (used in) provided by investing activities		(140	)		3			(143)			(4,766.7	)%
Net cash provided by financing activities		513			609			(96	)		(15.8	)%
Effect of exchange rate changes on cash and cash equivalents		48			38			10			26.3	%
Net decrease during period in cash and cash equivalents	$	(525	)	$	(588	)	$	63			10.7	%

Cash Flows Used in Operating Activities

During the thirty-nine weeks ended November 3, 2007, net cash used in operating activities was $946 million compared to $1,238 million during the thirty-nine weeks ended October 28, 2006. The $292 million decrease in net cash used in operating activities was primarily the result of changes in accounts payable due to extended payment terms from vendors, and lower interest payments resulting from lower average debt balances. These decreases were partially offset by increased spending on merchandise inventories for new and existing stores.

Cash Flows (Used in) Provided by Investing Activities

During the thirty-nine weeks ended November 3, 2007, net cash used in investing activities was $140 million compared to $3 million provided by investing activities for the thirty-nine weeks ended October 28, 2006. The $143 million increase in net cash used in investing activities was primarily due to a $161 million decrease in cash inflows from the sale of fixed assets and a $48 million increase in capital expenditures. The increase in net cash used in investing activities was partially offset by a $66 million increase in cash flows resulting from a $22 million release of previously restricted cash in the thirty-nine weeks ended November 3, 2007 compared to a $44 million increase in restricted cash related to property financings in the thirty-nine weeks ended October 28, 2006.

Our capital expenditures are primarily for financing construction of new stores and remodeling existing stores. In addition, our capital expenditures include costs to improve and enhance our information technology systems. For the remainder of the fiscal year, we plan to continue to increase our capital spend compared to the prior year as we focus on the turnaround of the Toys – U.S. division, and our investments in our International and Babies divisions.

Cash Flows Provided by Financing Activities

During the thirty-nine weeks ended November 3, 2007, net cash provided by financing activities was $513 million compared to $609 million for the thirty-nine weeks ended October 28, 2006. The $96 million decrease in net cash provided by financing activities was primarily due to a $2,468 million reduction in borrowings, partially offset by a $2,326 million decrease in repayments. The decrease in gross borrowings and repayments reflects a reduction in refinancing activities compared to prior year. The net decrease in borrowings is primarily due to lower borrowings on our revolving credit facilities in the current year due to improved cash flows from operating activities, partially offset by lower cash proceeds from sales of fixed assets.

Debt

During the thirty-nine weeks ended November 3, 2007, we made the following changes to our debt structure:

On February 8, 2007, Toys R Us Properties (UK) Limited borrowed an additional $4 million from the Junior Lender of our U.K. Real Estate Credit Facility under conditions previously specified in the original loan agreement dated February 8, 2006.

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On July 9, 2007, we notified the lenders for our $800 million secured real estate loan that we were exercising our first maturity date extension option (the “First Extension Option”), which extended the maturity date of the loan from August 9, 2007 to August 9, 2008. The other key terms of the loan were not changed as a result of the extension. We have the ability and intent to exercise our two remaining maturity date extension options to August 2009 and August 2010.

On June 1, 2007, Toys-Delaware repaid $9 million of principal of the $200 million asset sale facility with proceeds from the properties sold in the second quarter of fiscal 2007. On August 23, 2007, Toys-Delaware repaid an additional $10 million of principal with proceeds from the lease termination agreement consummated during the second quarter of fiscal 2007. On November 2, 2007, Toys-Delaware repaid the remaining $25 million outstanding principal balance with a portion of the $29 million proceeds from the property sold during the third quarter of fiscal 2007. Refer to Note 10 to the Condensed Consolidated Financial Statements entitled “Net gains on sales of properties” for additional information on each transaction. As of November 3, 2007, we had fully repaid the $200 million asset sale facility.

On November 2, 2007, Toys-Delaware used the remaining $4 million of the $29 million proceeds from property sold during the third quarter of fiscal 2007 (refer to Note 10 to the Condensed Consolidated Financial Statements entitled “Net gains on sales of properties”) to repay a portion of the secured term loan facility, leaving an outstanding balance of $797 million.

Contractual Obligations and Commitments

There have been no significant changes to our contractual obligations and commercial commitments table as disclosed in our Annual Report on Form 10-K for the fifty-three weeks ended February 3, 2007, except for a change related to our adoption of FIN 48. The short-term and long-term net liabilities for uncertain tax positions under FIN 48 were $40 million and $108 million, respectively, as of February 4, 2007. During the thirty-nine weeks ended November 3, 2007, the total unrecognized tax benefits did not change materially (refer to Note 6 to the Condensed Consolidated Financial Statements entitled “Income taxes”). At this time, we are not able to reasonably estimate when cash payments of the long-term liability for uncertain tax positions will occur.

Refer to the “CONTRACTUAL OBLIGATIONS” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007, for details on our contractual obligations and commitments.

Credit Ratings

As of November 2, 2007, our credit ratings, which are considered non-investment grade, were as follows:  

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

On August 24, 2007, Moody’s confirmed our B2 rating and upgraded the outlook to Stable after having previously changed the outlook to Review for possible downgrade as a result of our filing an extension for our Annual Report in Form 10-K. Moody’s stated that the Stable outlook is a result of the significant progress the Company has made in improving its business and reducing financial leverage.

On June 29, 2007, Standard and Poor’s upgraded our corporate credit rating from B- with a Positive outlook to B with a Stable outlook. Prior to this rating, the Company had been placed on CreditWatch with positive implications, as a result of the filing of our Annual Report in Form 10-K. The latest rating change was based on improved operating performance and credit protection metrics.

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 any adverse future actions taken by the rating agencies with respect to our debt ratings, 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.

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The rating agencies may, in the future, revise the ratings in respect of our outstanding debt.

Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that 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 Condensed Consolidated Financial Statements.

Merchandise inventories

On February 4, 2007, we changed our accounting method for valuing our international wholly-owned subsidiaries’ merchandise inventories from the retail inventory method to the weighted average cost method. This change in accounting principle was a result of implementing a perpetual inventory system in our international locations that allows management to track our inventory costs at a product level. We have accounted for the change in accounting principle in accordance with SFAS No.154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). Refer to Note 3 to the Condensed Consolidated Financial Statements entitled “Change in accounting principles” for the impact on our Condensed Consolidated Financial Statements and further details.

As previously described in our fiscal 2006 Annual Report on Form 10-K, merchandise inventories for the Toys – 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. The excess of replacement or current cost over stated LIFO value is immaterial. All other merchandise inventories for our domestic subsidiaries are stated at the lower of FIFO (first-in, first-out) cost or market value as determined by the retail inventory method. As of November 3, 2007, February 3, 2007 and October 28, 2006, approximately 38%, 10% and 9%, respectively, of merchandise inventories were valued under the weighted average cost method.  

Income taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (As amended) – “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, based on the technical merits. This interpretation provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of February 4, 2007, we adopted the provisions in FIN 48. Refer to Note 6 to the Condensed Consolidated Financial Statements entitled “Income taxes” for the impact on our Condensed Consolidated Financial Statements and further discussion related to the adoption of FIN 48.

A summary of other significant accounting policies and a description of accounting policies that we believe are critical may be found in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007, in the “CRITICAL ACCOUNTING POLICIES” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recent Accounting Pronouncements

Refer to Note 12 to the Condensed Consolidated Financial Statements entitled “Recent accounting pronouncements” for a discussion of recent accounting pronouncements and their impact on our Condensed Consolidated Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors 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 developments, future financings, targets and future occurrences and trends.

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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 and the covenants in our debt agreements, availability of adequate financing, our dependence on key vendors of our merchandise, international events affecting the delivery of toys and other products to our stores, economic, political and other developments associated with our international operations, and risks, uncertainties and factors set forth in our reports and documents filed with the United States Securities and Exchange Commission (which reports and documents should be read in conjunction with this Quarterly Report on Form 10-Q). We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict 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 and outcomes may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Exposure

We face transactional currency exposures relating to merchandise purchases in foreign currencies. Through our import merchandise program, we enter into forward exchange contracts to minimize and manage the currency risks associated with the purchase of merchandise inventories. Changes in foreign exchange rates affect interest expense recorded in relation to our foreign currency-denominated derivative instruments and debt instruments. In line with the seasonality of our business, the amount of forward exchange contracts tends to be higher in the first half, than in the second half of the year. As of November 3, 2007, none of our foreign currency-denominated derivatives qualified for hedge accounting treatment. At November 3, 2007, a 10% change in foreign currency rates would have an annualized impact on pre-tax earnings of $14 million.

Interest Rate Exposure

We have a variety of fixed and variable rate debt instruments and are exposed to market risks resulting from interest rate fluctuations. 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 and interest rate caps to maintain that balance. A change in interest rates on variable rate debt impacts our pre-tax earnings and cash flows, whereas a change in interest rates on fixed rate debt impacts the fair value of debt on our Condensed Consolidated Balance Sheet. At November 3, 2007, a 1% increase in interest rates would have an unfavorable annualized impact on pre-tax earnings of $26 million and a 1% decrease in interest rates would have a favorable annualized impact on pre-tax earnings of $30 million. Refer to Notes 4 and 5 to the Condensed Consolidated Financial Statements entitled “Short-term borrowings and long-term debt” and “Derivative instruments and hedging activities”, respectively, for further details.

For further discussion of our exposure to market risk, refer to Item 7A entitled “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles, and to ensure that information required to be disclosed in our 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 our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Quarterly Report on Form 10-Q and as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q (November 3, 2007), we performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.

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Based on our evaluation as of November 3, 2007, the material weakness in internal control over financial reporting described in Item 9A entitled “CONTROLS AND PROCEDURES” of the Annual Report on Form 10-K for the fiscal year ended February 3, 2007 has not been remediated, and, therefore, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q (November 3, 2007).   We employed alternative procedures to enable management to conclude that reasonable assurance exists regarding the reliability of financial reporting and the preparation of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q filing. Accordingly, management believes that the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q filing fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

During the third quarter of fiscal 2007, we continued efforts to remediate the material weakness in our financial closing and reporting process, as disclosed in Item 9A entitled “CONTROLS AND PROCEDURES” of the Annual Report on Form 10-K for the fiscal year ended February 3, 2007. We continued to implement processing protocols associated with the foreign component of our automated tax software package to efficiently calculate the Company’s income tax provision and we hired additional professional tax staff including a Senior Director-Tax Planning. However, management concludes that the control enhancements implemented to date have not been operating effectively for a sufficient period of time in order to fully remediate the material weakness.

Other than the foregoing, there were no changes in the Company’s internal control over financial reporting during the Company’s third quarter of fiscal 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

35

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 9 to the Condensed Consolidated Financial Statements entitled “Litigation and legal proceedings” for a discussion of material legal proceedings.

Item 1A. Risk Factors

At November 3, 2007, there had not been any material changes to the information related to the ITEM 1A. “RISK FACTORS” disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

Required exhibits are listed in the Index to Exhibits and are incorporated by reference.

 

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SIGNATURE

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

	TOYS “R” US, INC. (Registrant)
Date: December 18, 2007	/s/ F. Clay Creasey, Jr.
	F. Clay Creasey, Jr.
	Executive Vice President — Chief Financial Officer

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INDEX TO EXHIBITS

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

Exhibit No.	Description
3.3	Amendment No. 1 to the Amended and Restated Certificate of Incorporation of Toys “R” Us Holdings, Inc., filed with the Secretary of State of the State of Delaware on August 3, 2007.
10.1	Amended and Restated Toys “R” Us Holdings, Inc. 2005 Management Equity Plan, adopted on August 3, 2007.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a — 14(a) and Rule 15d — 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a — 14(a) and Rule 15d — 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

38

EX-3.3

Exhibit 3.3

PAGE 1

     I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF “TOYS “R” US HOLDINGS, INC.”, FILED IN THIS OFFICE ON THE THIRD DAY OF AUGUST, A.D. 2007, AT 8:17 O’CLOCK A.M.

     A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS.

/s/ Harriet Smith Windsor  

Harriet Smith Windsor, Secretary of State 
                 AUTHENTICATION: 5899645
                                      DATE: 08-03-07

2581085 8100
070886704

State of Delaware

Secretary of State

Division of Corporations

Delivered 09:00 AM 08/03/2007

FILED 08:17 AM 08/03/2007

SRV 070886704 — 2581085 FILE

AMENDMENT NO. 1 TO THE

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

TOYS “R” US HOLDINGS, INC.

     Toys “R” Us Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies as follows:

1.	The name of the Corporation is Toys “R” Us Holdings, Inc. The Corporation filed its original Certificate of Incorporation with the Secretary of State of the State of Delaware on January 11, 1996, under the name of TRU Netherlands Holdings 1, Inc. The Corporation filed its Amended and Restated Certificate of Incorporation (the “Amended Certificate”) with the Secretary of State of the State of Delaware on July 21, 2005.
2.	Article FOURTH of the Amended and Restated Certificate of Incorporation of Toys “R” Us Holdings, Inc. is hereby amended and restated in its entirety as follows:
	“FOURTH. Authorized Shares.
	(i) Authorized Shares. The total number of shares of capital stock which the Corporation has authority to issue is 55,000,000 shares of common stock, par value $0.01 per share (the “Common Stock”).
	(ii) Voting Rights. The holders of Common Stock shall be entitled to one vote per share on all matters to be voted on by the Corporation’s stockholders.
	(iii) Registration of Transfer. The Corporation shall keep at its principal office (or such other place as the Corporation reasonably designates) a register for the registration of the Common Stock. Upon the surrender of any certificate representing shares of Common Stock at such place, the Corporation shall, at the request of the registered holder of such certificate, execute and deliver a new certificate or certificates in exchange therefore representing in the aggregate the number of shares represented by the surrendered certificate and the Corporation forthwith shall cancel such surrendered certificate. Each such new certificate will be registered in such name and will represent such number of shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. The issuance of new certificates shall be made without charge to the holders of the surrendered certificates for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such issuance.
	(iv) Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (it being understood that an affidavit of the registered holder will be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Common Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the

	Corporation, or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate.”
3.	Pursuant to Sections 228 and 242 of the Delaware General Corporation Law, Amendment No. 1 to the Amended and Restated Certificate of Incorporation (the “Amendment”) has been duly adopted and amends the Amended Certificate as set forth herein.
4.	Immediately upon the filing of the Amendment with the Secretary of State of the State of Delaware, each outstanding share of the Corporation’s Class A Common Stock, par value $0.01 per share, and Class L Common Stock, par value $0.01 per share, shall be converted into a number of shares of common stock, par value $0.01 per share, as determined by the Plan of Reorganization adopted by the Corporation on August 3, 2007.

     IN WITNESS WHEREOF, the undersigned has executed this Amendment No. 1 to the Amended and Restated Certificate of Incorporation of Toys “R” Us Holdings, Inc. to be effective as of the date of the signature hereto, as indicated below.

TOYS “R” US HOLDINGS, INC.
By:	/s/ David J. Schwartz
Name:	David J. Schwartz
Title:		Assistant Secretary
Date signed: August 3, 2007

EX-10.1

Exhibit 10.1

AMENDED AND RESTATED
TOYS “R” US HOLDINGS, INC.
2005 MANAGEMENT EQUITY PLAN

ARTICLE I
ESTABLISHMENT AND PURPOSE; ADMINISTRATION

     1.1 Establishment; Prior Plan. On July 21, 2005, the board of directors (the “Board”) of Toys “R” Us Holdings, Inc., a Delaware corporation (the “Company”) adopted and established a stock incentive plan known as the “Toys “R” Us Holdings, Inc. 2005 Management Equity Plan” (the “Initial Plan”). On February 6, 2006, the Board adopted Amendment No. 1 to the Initial Plan (the “First Amendment”) and on June 28, 2006 the Board adopted Amendment No. 2 to the Initial Plan (the “Second Amendment” and together with the Initial Plan and the First Amendment, the “Original Plan”). Effective as of August 3, 2007, and in connection with the adoption and approval of Amendment No. 1 to the Company’s Amended and Restated Certificate of Incorporation (the “COI Amendment”), the Board has adopted this “Amended and Restated Toys “R” Us Holdings, Inc. 2005 Management Equity Plan” (the “Plan”), which such Plan amends and restates in its entirety the provisions of the Original Plan.

     1.2 Purpose. The Plan is intended to promote the long-term growth and profitability of the Company and its Subsidiaries by providing those persons who are or will be involved in the Company’s and its Subsidiaries’ growth with an opportunity to acquire an ownership interest in the Company, thereby encouraging such persons to contribute to and participate in the success of the Company and its Subsidiaries. Under the Plan, the Company may make Awards (as defined in Section 3.1 below) to such present and future officers, directors, employees, consultants, and advisors of the Company or its Subsidiaries as may be selected in the sole discretion of the Board (collectively, “Participants”).

     1.3 Administration. The Board shall have the power and authority to prescribe, amend and rescind rules and procedures governing the administration of this Plan, including, but not limited to the full power and authority (a) to interpret the terms of this Plan, the terms of any Awards made under this Plan, and the rules and procedures established by the Board governing any such Awards, (b) to determine the rights of any person under this Plan, or the meaning of requirements imposed by the terms of this Plan or any rule or procedure established by the Board, (c) to select Participants for Awards under the Plan, (d) to set the purchase price for sales, if any, of Restricted Stock, (e) to set the exercise price of any Options or Rollover Options granted under the Plan, (f) to establish performance and vesting standards, (g) to impose such limitations, restrictions and conditions upon such Awards as it shall deem appropriate, (h) to adopt, amend, and rescind administrative guidelines and other rules and regulations relating to the Plan, (i) to correct any defect or omission or reconcile any inconsistency in the Plan, and (j) to make all other determinations and take all other actions necessary or advisable for the implementation and administration of the Plan, subject to such limitations as may be imposed by the Code or other applicable law. Each action of the Board shall be binding on all persons. The Board may, to the extent permissible by law, delegate any of its authority hereunder to any duly authorized committee of the Board or any other persons as it deems appropriate.

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ARTICLE II
DEFINITIONS

     As used in this Plan, the following terms shall have the meanings set forth below:

     “Affiliate” of a Person means any other person, entity, or investment fund controlling, controlled by, or under common control with such Person and, in the case of a Person which is a partnership, any partner of such Person.

     “Aggregate Spread” of any option (including any Option or Rollover Option) as of any particular date means the Fair Market Value of the securities for which such option is exercisable, minus the aggregate exercise price payable by the holder of such option in order to acquire such securities.

     “Award Agreement” means a written agreement between the Company and a Participant setting forth the terms, conditions, and limitations applicable to an Award. All Award Agreements shall be deemed to include all of the terms and conditions of the Plan, except to the extent otherwise set forth in an Award Agreement and approved by the Board.

     “Award Stock” with respect to a Participant, means any Common Stock issued to such Participant upon exercise of any Options or Rollover Options granted hereunder and any Common Stock issued to such Participant as Restricted Stock. For all purposes of this Plan, Award Stock will continue to be Award Stock in the hands of any holder (including any Permitted Transferee) other than a Participant (except for the Company and purchasers pursuant to a Public Sale), and each such other holder of Award Stock will succeed to all rights and obligations attributable to such Participant as a holder of Award Stock hereunder. Award Stock will also include shares of the Company’s capital stock issued with respect to shares of Award Stock by way of a stock split, stock dividend or other recapitalization.

     “Cause” means, for any Participant, the meaning given to such term in an employment or other similar agreement entered into by such Participant on or after the Effective Date and approved by the Board, or in the absence of such an agreement it shall mean with respect to such Participant any of the following, as determined by the Board, (i) the willful failure of such Participant to perform any portion of his or her duties, (ii) willful misconduct by such Participant which is or is likely to be injurious to the Company or any of its Subsidiaries, monetarily or otherwise, (iii) such Participant’s conviction of a felony (including a plea of nolo contendere), (iv) such Participant’s negligent performance of his or her duties, (v) any material breach by such Participant of the terms of this Plan, an Award Agreement, or any other agreement with the Company or any of its Subsidiaries to which such Participant is a party, or (vi) a violation of the Toys “R” Us Code of Ethical Standards and Business Practices and Conduct Agreement or any other serious violation of any written policy of the Company or any of its Subsidiaries.

     “Change in Control” means (i) prior to an Initial Public Offering, any transaction or series of related transactions which result in the Sponsors ceasing collectively to own shares of Common Stock which represent at least 50% of the total voting power or economic interest in

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the Company, (ii) at any time, any transaction or series of related transactions which result in an Independent Third Party acquiring shares of Common Stock which represent more than 50% of the total voting power or economic interest in the Company, and (iii) at any time, a sale or disposition of all or substantially all of the assets of the Company and its Subsidiaries on a consolidated basis; provided that, in the case of clauses (i) and (ii) above, such transactions shall only constitute a Change in Control if they result in the Sponsors ceasing to have the power (whether by ownership of voting securities, contractual right, or otherwise) collectively to elect a majority of the Board.

     “Code” means the Internal Revenue Code of 1986, as it may be amended from time to time.

     “Common Stock” means the Company’s Common Stock, par value $.01 per share, or, in the event that the outstanding shares of Common Stock are hereafter recapitalized, converted into or exchanged for different stock or securities of the Company, such other stock or securities.

     “Competing Business” means, with respect to any Participant at any time, any Person engaged wholly or in part (directly or through one or more Subsidiaries) in the retail sale or retail distribution (via stores, 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 such Participant’s Termination Date, as of such Termination Date) are generated by engaging in such sale or distribution of Competing Products. Without limiting the foregoing, Competing 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.

     “Competing Products” means, with respect to any Participant at any time, (i) toys and games, (ii) video games, computer software for children, and electronic toys or games, (iii) juvenile or baby: products, apparel, equipment, furniture, or consumables, (iv) wheeled goods for children, and (v) any other product or group of related products that represents more than twenty (20) percent of the gross sales of the Company and its Subsidiaries for the twelve (12) month period preceding such time (or with respect to the period after such Participant’s Termination Date, as of such Termination Date).

     “Disability” means, for any Participant, the meaning given to such term in an employment or other similar agreement entered into by such Participant on or after the Effective Date and approved by the Board, or in the absence of such an agreement it shall mean such Participant’s eligibility to receive disability benefits under the Company’s or its Subsidiaries’ long-term disability plan or the inability of such Participant, as determined by the Board, to perform the essential functions of his or her regular duties and responsibilities, with or without reasonable accommodation, due to a medically determinable physical or mental illness which has lasted (or can reasonably be expected to last) for a period of six consecutive months.

     “Effective Date” means July 21, 2005.

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     “Fair Market Value” of a share of Award Stock (or any other security) means the fair market value of a share of Award Stock (or such other security, as applicable) as determined in good faith by the Board, and such determination shall be binding and conclusive on the Company, the Participants, and all other Persons interested in this Plan.

     “Independent Third Party” means any Person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) who, immediately prior to the contemplated transaction or series of related transactions, does not own in excess of 5% of the Company’s Common Stock on a fully-diluted basis, who is not an Affiliate of any such 5% owner of the Company’s Common Stock and who is not the spouse or descendent (by birth or adoption) of any such 5% owner of the Company’s Common Stock.

     “Initial Public Offering” means an initial public offering, after the Effective Date, of the Company’s Common Stock pursuant to an offering registered under the Securities Act, other than any such offerings which are registered on Forms S-4 or S-8 under the Securities Act.

     “Non-Competition Period” for a Participant means (i) in the case of termination by the Company with Cause, the period of such Participant’s employment plus one (1) year after such Participant’s Termination Date, (ii) in the case of resignation for any reason other than Retirement, the period of such Participant’s employment, (iii) in the case of resignation for Retirement, the period of such Participant’s employment plus one (1) year after such Participant’s Termination Date, and (iv) otherwise, the period of such Participant’s employment plus the length of time, if any, for which the Participant receives (or is eligible to receive, where Participant declines or otherwise takes action to reject) in connection with such Participant’s termination severance benefits or other similar payments from the Company or its Subsidiaries pursuant to an agreement with such Participant, the severance policies of the Company and its Subsidiaries then in effect, at the Company’s or any of its Subsidiaries’ election, or otherwise (or the length of time in terms of compensation used to determine the amount of such Participant’s severance benefits in the event such severance benefits are payable in a lump sum or on a schedule different than such length of time). In no event shall any amount received by a Participant pursuant to Articles IX or X of the Plan constitute severance or other similar payments for purposes of this definition.

     “Original Value” (a) for each share of Award Stock which is originally issued as Restricted Stock will be equal to the purchase price paid, if any, by the Participant for such share of Award Stock, (b) for each share of Award Stock which is originally issued upon exercise of any Options will be equal to the exercise price paid by the Participant for such share of Award Stock, and (c) for each share of Award Stock which is originally issued upon exercise of any Rollover Options will be equal to the Fair Market Value of such share of Award Stock on the date on which such Rollover Option is originally issued, and in each case as proportionally adjusted for all stock splits, stock dividends, and other recapitalizations affecting the Award Stock subsequent to the Effective Date.

     “Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a government or any branch, department, agency, political subdivision or official thereof.

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     “Permitted Transferee” with respect to any Participant means such Participant’s spouse and descendants (whether or not adopted) and any trust, family limited partnership or limited liability company that is and remains at all times solely for the benefit of such Participant and/or such Participant’s spouse and/or descendants, in each case which transferee has executed and delivered to the Company the documents required under Section 6.6(b) or 7.3(b), as applicable.

     “Public Sale” means any sale pursuant to a registered public offering under the Securities Act or any sale to the public through a broker, dealer or market maker pursuant to Rule 144 promulgated under the Securities Act.

     “Retirement” means, for any Participant, the meaning given to such term in an employment or other similar agreement entered into by such Participant on or after the Effective Date and approved by the Board, or in the absence of such an agreement it shall mean voluntary resignation by such Participant at or after the age of sixty-two (62) following continuous employment by the Company and its Subsidiaries for a period of at least ten (10) years.

     “Securities Act” means the Securities Act of 1933, as amended from time to time.

     “Sponsor Inflows” means, without duplication, as of any measurement date, all cash payments (excluding management fees and expense reimbursements) received by the Sponsors with respect to or in exchange for equity securities (including securities which are convertible into equity securities) of the Company (whether such payments are received from the Company or any third party) from the Effective Date through such measurement date. If such measurement date is the date of consummation of a Change in Control, any equity securities (including securities which are convertible into equity securities) held by the Sponsors and not transferred in such Change in Control will be deemed to have been sold on such measurement date for the price per share for such equity securities implied by the Change in Control. After consummation of an Initial Public Offering, if the measurement date is not the date of a consummation of a Change in Control, any equity securities (including securities which are convertible into equity securities) held by the Sponsors will be deemed to have been sold for a price per share equal to the weighted average (by dollar volume) of the closing trading price for each of the 90 consecutive trading days ending on such measurement date, and for purposes of calculating the Sponsor IRR such sale will be deemed to occur on the first day of such 90 trading day period.

     “Sponsor IRR” as of any measurement date, means the annual interest rate (compounded annually) which, when used to calculate the net present value of all Sponsor Inflows and all Sponsor Outflows, causes such net present value amount to equal zero. The Sponsor IRR shall be determined in good faith by the Board.

     “Sponsor Outflows” means, without duplication, as of any measurement date, all cash payments made by the Sponsors (on a cumulative basis) with respect to or in exchange for equity securities (including securities which are convertible into equity securities) of the Company (whether such payments are made to the Company or any third party) from the Effective Date until such measurement date.

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     “Sponsors” means, collectively, Bain Capital Partners LLC, Toybox Holdings, LLC, and Vornado Truck, LLC, in each case together with their respective Affiliates.

     “Stockholders Agreement” means the Management Stockholders Addendum, which is attached hereto as Exhibit A.

     “Subsidiary” means any corporation, partnership, limited liability company, or other entity in which the Company owns, directly or indirectly, stock or other equity securities or interests possessing 50% or more of the total combined voting power of such entity.

     “Termination Date” means the earliest date on which a Participant is no longer employed by the Company or any of its Subsidiaries for any reason. For the avoidance of doubt, a Participant’s Termination Date shall be considered to be the last date of his actual and active employment with the Company or one of its Subsidiaries, whether such day is selected by agreement with the Participant or unilaterally by the Company or such Subsidiary and whether advance notice is or is not given to the Participant; no period of notice that is or ought to have been given under applicable law in respect of the termination of employment will be taken into account in determining entitlement under the Plan. Furthermore, a Participant who goes on a leave of absence approved by the Company or one of its Subsidiaries shall not be deemed to have ceased their employment with the Company or its Subsidiaries during the period of such approved leave; provided that, the time vesting of such Participant’s Options under Section 4.2 shall be suspended during the period of such leave, except to the extent required by applicable law.

     “Transfer” means any direct or indirect sale, transfer, assignment, pledge, encumbrance or other disposition (whether with or without consideration and whether voluntary or involuntary or by operation of law, including to the Company or any of its Subsidiaries) of any interest.

ARTICLE III
AWARDS AND ELIGIBILITY

     3.1 Awards. Awards under the Plan may be granted in any one or all of the following three forms: (i) non-qualified stock options (“Options”), as described in Article IV of the Plan, (ii) non-qualified stock options issued in exchange for options of Subsidiaries of the Company which a Participant may have been granted prior to the Effective Date (“Rollover Options”), as described in Article V of the Plan, and (iii) shares of Common Stock which are subject to certain restrictions (“Restricted Stock” and together with Options and Rollover Options, “Awards”), as described in Article VII of the Plan. For the avoidance of doubt, no Option or Rollover Option shall be an incentive stock option within the meaning of Section 422(a) of the Code or any successor provision. Each grant of Options, Rollover Options, or Restricted Stock shall be evidenced by a written Award Agreement containing such restrictions, terms, and conditions, if any, as the Board may require; provided that, except as otherwise expressly provided in an Award Agreement, if there is any conflict between any provision of the Plan and an Award Agreement, the provisions of the Plan shall govern.

     3.2 Maximum Shares Available. The Board may authorize Awards consisting of Rollover Options or Restricted Stock in such numbers of shares as it may determine from time to

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time. An aggregate of no more than 3,889,000 shares of Common Stock shall be reserved for issuance with respect to Options. All Awards shall be subject to adjustment by the Board as follows. In the event of any reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation or other change in the Common Stock, the Board shall make such changes in the number and type of shares of Common Stock covered by outstanding Awards and the terms thereof as the Board determines in its sole discretion are necessary to prevent dilution or enlargement of rights of Participants under the Plan. Without limiting the generality of the foregoing, in the event of any such transaction, the Board shall have the power to make such changes as it deems appropriate in the number and type of shares covered by outstanding Awards, the prices specified therein, and the securities or other property to be received upon exercise (which may include providing for cash payment (or no consideration) in exchange for cancellation of outstanding Options or Rollover Options). If any Options or Rollover Options expire unexercised or unpaid or are canceled, terminated or forfeited in any manner without the issuance of Common Stock or payment thereunder, the shares with respect to which such Options or Rollover Options were granted shall again be available under this Plan, subject to the foregoing maximum amounts. Similarly, if any shares of Common Stock issued hereunder, either as Restricted Stock or upon exercise of Options or Rollover Options, are repurchased hereunder, such shares shall again be available under this Plan for reissuance, subject to the foregoing maximum amounts. Shares of Common Stock to be issued upon exercise of Options or Rollover Options or shares of Common Stock to be issued as Restricted Stock hereunder may be either authorized and unissued shares, treasury shares, or a combination thereof, as the Board shall determine.

     3.3 Eligibility. The Board may, from time to time, select the Participants who shall be eligible to participate in the Plan and the Awards to be made to each such Participant. The Board may consider any factors it deems relevant in selecting Participants and in making Awards to such Participants. The Board’s determinations under the Plan (including without limitation determinations of which persons are to receive Awards and in what amount) need not be uniform and may be made by it selectively among persons who are eligible to receive Awards under the Plan.

     3.4 No Right to Continued Employment. Nothing in this Plan or (in the absence of an express provision to the contrary) in any Award Agreement, as applicable, shall confer on any Participant any right to continue in the employment of the Company or its Subsidiaries or interfere in any way with the right of the Company or its Subsidiaries to terminate such Participant’s employment at any time for any reason or to continue such Participant’s present (or any other) rate of compensation.

     3.5 Return of Prior Awards. The Board shall have the right, at its discretion, to require Participants to return to the Company Awards previously granted to them under the Plan in exchange for new Awards; provided that, no Participant shall be required, without such Participant’s prior written consent, to return any Award if the new Award is to be made on terms less favorable to such Participant than the Award to be returned. Subject to the provisions of the Plan, such new Awards shall be upon such terms and conditions as are specified by the Board at the time the new Awards are made.

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     3.6 Securities Laws. The Plan has been instituted by the Company to provide certain compensatory incentives to Participants and is intended to qualify for an exemption from the registration requirements (i) under the Securities Act, as amended, pursuant to Rule 701 of the Securities Act, and (ii) under applicable state securities laws.

ARTICLE IV
OPTIONS

     4.1 Options. The Board shall have the right and power to grant to any Participant, at any time prior to the termination of this Plan, Options in such quantity, at such price, on such terms and subject to such conditions that are consistent with this Plan and established by the Board. Options granted under this Plan shall be in the form described in this Article IV, or in such other form or forms as the Board may determine, and shall be subject to such additional terms and conditions and evidenced by Award Agreements, as shall be determined from time to time by the Board. Except as otherwise set forth in an Award Agreement, Options shall be subject to all of the terms and conditions contained in this Plan.

     4.2 Vesting of Options. Unless otherwise set forth in an Award Agreement, all Options shall be subject to vesting in accordance the provisions of this Section 4.2. Options shall be exercisable only to the extent that they are vested. In addition to the other requirements set forth in this Section 4.2, Options shall vest only so long as a Participant remains employed by the Company or one of its Subsidiaries. Unless otherwise set forth in an Award Agreement, all Awards of Options shall be divided into three equal portions, with each such portion exercisable for one-third of the number of shares of Common Stock for which such Options are exercisable, and such portions shall be referred to hereunder as “Tranche I Options”, “Tranche II Options”, and “Tranche III Options”.

          (a) Tranche I Vesting. The Tranche I Options will be subject to time vesting and will time vest on each date set forth below with respect to the cumulative percentage of shares of Common Stock issuable upon each of the Tranche I Options set forth opposite such date if the respective Participant is, and has been, continuously employed by the Company or any of its Subsidiaries from the date of award through such date:

	Cumulative Percentage
Date	of Shares Vested
2nd anniversary of date of grant		40	%
3rd anniversary of date of grant		60	%
4th anniversary of date of grant		80	%
5th anniversary of date of grant		100	%

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Notwithstanding the foregoing, all Tranche I Options shall be considered 100% vested upon consummation of a Change in Control.

          (b) Tranche II Vesting. The Tranche II Options shall be subject to time and performance vesting, and will only be deemed fully vested when they have both time vested and performance vested in accordance with the terms hereof. The Tranche II Options will time vest in the same manner as the Tranche I Options. The Tranche II Options will performance 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 (2) 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 date is equal to or greater than 15%, and (B) the Sponsor Inflows through such date are at least two (2) times the Sponsor Outflows through such measurement date.

          (c) Tranche III Vesting. The Tranche III Options shall be subject to time and performance vesting, and will only be deemed fully vested when they have both time vested and performance vested in accordance with the terms hereof. The Tranche III Options will time vest in the same manner as the Tranche I Options. The Tranche III Options will performance 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 (3) 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 date is equal to or greater than 20%, and (B) the Sponsor Inflows through such date are at least three (3) times the Sponsor Outflows through such measurement date.

          (d) Eight Year Limit. Notwithstanding the provisions of clauses (b) and (c) above, all Tranche II Options and Tranche III Options shall vest in full on the date which is eight (8) years after the date on which such options were first granted, so long as a Participant remains employed by the Company or any of its Subsidiaries from the date of award through such date.

ARTICLE V
ROLLOVER OPTIONS

     5.1 Rollover Options. The Board shall have the right and power to grant to any Participant, at any time prior to the termination of this Plan, Rollover Options in such quantity, at such price, on such terms and subject to such conditions that are consistent with this Plan and established by the Board. Rollover Options granted under this Plan shall be in the form described in this Article V, or in such other form or forms as the Board may determine, and shall be subject to such additional terms and conditions and evidenced by Award Agreements, as shall be determined from time to time by the Board. Except as otherwise set forth in an Award Agreement, Rollover Options shall be subject to all of the terms and conditions contained in this Plan.

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     5.2 Issuance for Cancellation of Other Awards. Rollover Options shall only be issued as consideration for the agreement of Participants to cancel or forgo options issued by Subsidiaries of the Company to Participants prior to the Effective Date. All Rollover Options shall have an Aggregate Spread equal, on the day of grant, to the Aggregate Spread of the options cancelled or foregone in exchange for such Rollover Options.

     5.3 Vesting of Rollover Options. All Rollover Options shall be exercisable in full on the date on which they are granted to a Participant.

ARTICLE VI
GENERAL OPTION PROVISIONS

     6.1 Normal Expiration. All Options granted under this Plan shall expire at the close of business on the tenth anniversary of the date of grant to the Participant holding such Options, subject to earlier expiration as provided in this Article VI. All Rollover Options granted under this Plan shall expire at the date that is specified in the Award Agreement applicable to such Rollover Options.

     6.2 Exercise on Termination. If a Participant ceases to be employed by the Company and its Subsidiaries for any reason, then the portion of such Participant’s Options that have not fully vested as of the Termination Date shall expire at such time. In addition, upon consummation of a Change in Control, all unvested Tranche II Options and Tranche III Options shall expire at the time of such consummation if they do not otherwise vest in connection with such Change in Control in accordance with the provisions of Section 4.2. Unless otherwise set forth in an Award Agreement, the portion of a Participant’s Options that have fully vested as of such Participant’s Termination Date shall expire (i) 30 days after the Termination Date if a Participant is terminated without Cause or if a Participant resigns for any reason (including Retirement), (ii) 90 days after the Termination Date if a Participant is terminated due to Disability, (iii) 180 days after the Termination Date if a Participant is terminated due to death, and (iv) immediately upon termination if a Participant is terminated with Cause. All of a Participant’s Rollover Options shall expire at the end of their stated term, notwithstanding any termination of a Participant’s employment.

     6.3 Procedure for Exercise. At any time after all or any portion of a Participant’s Options or Rollover Options have become vested and prior to their expiration, a Participant may exercise all or any specified portion of such vested Options or Rollover Options by delivering written notice of exercise specifically identifying the particular Options or Rollover Options (including whether Options are Tranche I, II, or III Options or are Rollover Options) to the Company (an “Exercise Notice”), together with a written acknowledgment that such Participant has read and has been afforded an opportunity to ask questions of management of the Company regarding all financial and other information provided to such Participant regarding the Company. Payment by Participants in connection with any exercise (a) shall be made by delivery of a cashier’s, certified check or wire transfer in the amount equal to the product of the exercise price multiplied by the number of Award Shares to be acquired, plus the amount of any

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additional federal and state income taxes or any income taxes or employee’s social security contributions arising in any jurisdiction outside the United States required to be withheld (or accounted for to appropriate revenue authorities by the Participant’s employer) by reason of the exercise of the Options or Rollover Options (which such amount shall be calculated by the Company and provided to Participants promptly following delivery of an Exercise Notice, and which shall be subject to later adjustment by the Company (with a corresponding payment by or refund to Participant) in the event that any such adjustment is required), and (b) shall be due in full from the Participant either (i) at the same time as delivery of the Exercise Notice (with the portion representing taxes or contributions due within two (2) days of the date on which the Company informs the Participant of the amount of such items pursuant to the provisions of this section) or (ii) in the event the Participant is at the time of exercise not employed by the Company or any of its Subsidiaries, then upon the first to occur of (A) the date of closing of any repurchase of Award Stock issuable in connection with such exercise in accordance with the provisions of Section 9.8, (B) the Company’s delivery of notice that neither it nor the Sponsors will exercise their Repurchase Option with respect to the Award Stock issuable in connection with such exercise, and (C) the expiration of the Repurchase Option (in accordance with the provisions of Section 9.6) applicable to the Award Stock issuable in connection with such exercise. For United States federal income tax purposes, the Company intends to treat Options and Rollover Options as exercised at the time the Company issues the applicable Award Stock to the Participant. At the discretion of the Board, which discretion shall be exercised (among other considerations) in a manner intended (as determined in good faith by the Board) to cause a Participant’s options not to be treated as deferred compensation within the meaning of Code Section 409A, a Participant may be permitted to acquire Award Stock upon the exercise of Options or Rollover Options without payment in cash therefor pursuant to a cashless exercise of such Options or Rollover Options. Such cashless exercise shall be effectuated by the Company delivering shares of Common Stock to the Participant with a Fair Market Value equal to (a) the Fair Market Value of all shares issuable upon exercise of such Options or Rollover Options, minus (b) the aggregate exercise price of all shares issuable upon exercise of such Options or Rollover Options (together with the amount of any income taxes or employee’s social security contributions arising in respect of such cashless exercise).

     6.4 Representations on Exercise. In connection with any exercise of Options or Rollover Options and the issuance of Award Stock thereunder (other than pursuant to an effective registration statement under the 1933 Act), Participant shall by the act of delivering the Exercise Notice (and without any further action on the part of the Participant) represent and warrant to the Company that as of the time of such exercise:

          (a) The Award Stock to be acquired by Participant upon exercise shall be acquired for Participant’s own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act or any applicable state securities laws, and the Award Stock shall not be disposed of in contravention of the Securities Act or any applicable state securities laws.

          (b) Participant is or was an employee of the Company or one of its Subsidiaries, is sophisticated in financial matters, and is able to evaluate the risks and benefits of the investment in the Award Stock.

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          (c) Participant is able to bear the economic risks of his investment in the Award Stock for an indefinite period of time and is aware that transfer of the Award Stock may not be possible because (A) such transfer is subject to contractual restrictions on transfer set forth herein and in the Stockholders Agreement and (B) the Award Stock has not been registered under the Securities Act or any applicable state securities laws and, therefore, cannot be sold unless subsequently registered under the Securities Act and such applicable state securities laws or an exemption from such registration is available.

          (d) Participant has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of the Award Stock issued upon exercise and has had full access to such other information concerning the Company as Participant has requested.

In connection with any exercise of Options or Rollover Options, Participant shall make such additional customary investment representations as the Company may require and Participant shall execute such documents necessary for the Company to perfect exemptions from registration under federal and state securities laws as the Company may reasonably request. In addition, in connection with any exercise of Options or Rollover Options, Participant shall make an election under Section 83(b) of the Code, in the form prescribed by the Board.

     6.5 [Reserved].

     6.6 Non-Transferability.

          (a) All Options and Rollover Options are personal to a Participant and are not Transferable by such Participant, other than by will or pursuant to applicable laws of descent and distribution. Only a Participant, his estate or personal representatives or heirs, or any Permitted Transferee are entitled to exercise Options or Rollover Options. All Award Stock issued pursuant to the exercise of any Option or Rollover Option shall not be Transferable (other than pursuant to Article IX or X below, or as otherwise permitted pursuant to the terms of the Stockholders Agreement) by the Participant or Permitted Transferee who exercised such option and purchased such Award Stock (or any subsequent transferee) until the occurrence of a Change in Control. Any attempted Transfer of Options, Rollover Options, or Award Stock issued upon exercise thereof which is not specifically permitted under the Plan shall be null and void.

          (b) Notwithstanding the provisions of Section 6.6(a) above, Options, Rollover Options, and Award Stock issued pursuant to the exercise of any Option or Rollover Option shall be Transferable by a Participant to any of such Participant’s Permitted Transferees; provided that, in no event shall any Participant be allowed, without the prior consent of the Board, to Transfer Options or Rollover Options pursuant to this Section 6.6(b) more than once, nor to more than one (1) of such Participant’s Permitted Transferees, and in such case such Permitted Transferee shall thereafter not be allowed, without the prior consent of the Board, to Transfer any of the Options or Rollover Options Transferred to such Permitted Transferee pursuant to this Section 6.6(b). As part of any such Transfer, the Permitted Transferee shall execute such documents as the Company may reasonably require, which documents shall provide that the Permitted Transferee (i) remains bound by the Plan and the applicable Award Agreement in the same manner as the Participant, and (ii) is bound by all of the terms and conditions of the Stockholders Agreement.

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          (c) No Participant shall make any Transfer prohibited by this Section 6.6 either directly or indirectly. Without limiting the generality of the foregoing, no Participant shall make one or more transfers to one or more Permitted Transferees and then dispose of all or any portion of such Participant’s interest in any such Permitted Transferee. Any Transfer or attempted Transfer in violation of this clause (c) shall be null and void.

          (d) Any Award Stock issued upon exercise of any Options or Rollover Options will be subject to the provisions of Sections 7.4 and 7.5 in the same manner as Restricted Stock is subject to such provisions.

     6.7 Rights as a Stockholder. A Participant holding Options or Rollover Options shall have no rights as a stockholder with respect to any shares of Award Stock issuable upon exercise thereof until the date on which a stock certificate is issued to such Participant representing such Award Stock. The Company shall issue Award Stock to Participants no later than twenty (20) days following receipt by the Company of all exercise payments required to be made by a Participant in connection therewith; provided that, such time period shall be reduced to two (2) days during the thirty (30) days following any notice given by the Company pursuant to Section 6.8 of the Plan. Except as otherwise expressly provided in the Plan or in any Award Agreement, no adjustment shall be made for cash dividends or other rights for which the record date is prior to the date such stock certificate is issued.

     6.8 Notice of Dividends. The Board shall provide notice to all Participants who hold vested Options or Rollover Options in the event that it intends to declare any dividend or distribution in respect of shares of Common Stock. Such notice shall be provided not less than ten (10) days prior to the record date of such dividend or distribution, and shall describe in reasonable detail the approximate amounts anticipated to be distributed in respect of the Common Stock.

ARTICLE VII
RESTRICTED STOCK

     7.1 Restricted Stock. The Board shall have the right and power, at any time prior to the termination of this Plan, to sell to any Participant for purchase prices equal to Fair Market Value, or to grant to any Participant without consideration as an incentive for future services, Restricted Stock in such quantity, on such terms, and subject to such conditions that are consistent with this Plan and established by the Board. Restricted Stock sold or granted under this Plan shall be in the form described in this Article VII, or in such other form or forms as the Board may determine, and shall be subject to such additional terms and conditions and evidenced by Award Agreements, as shall be determined from time to time by the Board. Except as otherwise set forth in an Award Agreement, Restricted Stock shall be subject to all of the terms and conditions contained in this Plan. The consideration for any such sale shall be cash, unless otherwise determined by the Board. In the case of a sale of Restricted Stock under the Plan, a Participant may elect to purchase any or all of the Restricted Stock awarded to him or her by the Board through one or more entities (but not natural persons) that would constitute a Permitted

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Transferee as such term is defined in the Plan, which entity shall be bound by all of the terms of this Plan, any Award Agreement, and the Stockholders Agreement in the same manner as any other Permitted Transferee hereunder. In the case of a grant of Restricted Stock under the Plan without consideration, the grant shall be made solely to the Participant.

     7.2 Representations on Acquisition. In connection with any acquisition of Restricted Stock (other than pursuant to an effective registration statement under the 1933 Act), Participant shall, by his or her acceptance of such Restricted Stock (and without any further action on the part of the Participant), represent and warrant to the Company that as of the time of such acquisition:

          (a) The Restricted Stock to be acquired by Participant shall be acquired for Participant’s own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act or any applicable state securities laws, and the Restricted Stock shall not be disposed of in contravention of the Securities Act or any applicable state securities laws.

          (b) Participant is an employee of the Company or one of its Subsidiaries, is sophisticated in financial matters, and is able to evaluate the risks and benefits of the investment in the Restricted Stock.

          (c) Participant is able to bear the economic risks of his investment in the Restricted Stock for an indefinite period of time and is aware that transfer of the Restricted Stock may not be possible because (A) such transfer is subject to contractual restrictions on transfer set forth herein and in the Stockholders Agreement and (B) the Restricted Stock has not been registered under the Securities Act or any applicable state securities laws and, therefore, cannot be sold unless subsequently registered under the Securities Act and such applicable state securities laws or an exemption from such registration is available.

          (d) Participant has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of the Restricted Stock and has had full access to such other information concerning the Company as Participant has requested.

In connection with any acquisition of Restricted Stock, Participant shall make such additional customary investment representations as the Company may require and Participant shall execute such documents necessary for the Company to perfect exemptions from registration under federal and state securities laws as the Company may reasonably request. In addition, in connection with any acquisition of Restricted Stock that is purchased from the Company, Participant shall make an election under Section 83(b) of the Code, in the form prescribed by the Board. A Participant may, but is not required to, make such an election in the case of Restricted Stock granted for no consideration.

     7.3 Restrictions on Transfer.

          (a) All Restricted Stock shall not be Transferable (other than pursuant to Article IX or X below, or as otherwise permitted pursuant to the terms of the Stockholders Agreement) by the Participant holding such Restricted Stock until the occurrence of a Change in Control or such later time as may set forth in the applicable Award Agreement. Any attempted Transfer of Restricted Stock which is not specifically permitted under the Plan shall be null and void.

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          (b) Notwithstanding the provisions of Section 7.3(a) above, Restricted Stock for which an election under Section 83(b) of the Code has been timely filed shall be Transferable by a Participant to any of the Participant’s Permitted Transferees. As part of any such Transfer, the Permitted Transferee shall execute such documents as the Company may reasonably require, which such documents shall provide that the Permitted Transferee (i) remains bound by the Plan and the applicable Award Agreement in the same manner as the Participant, and (ii) is bound by all of the terms and conditions of the Stockholders Agreement.

          (c) No Participant shall make any Transfer prohibited by this Section 7.3 either directly or indirectly. Without limiting the generality of the foregoing, no Participant shall make one or more transfers to one or more Permitted Transferees and then dispose of all or any portion of such Participant’s interest in any such Permitted Transferee. In addition, in the event that a Participant acquires Restricted Stock through one or more entities that would otherwise constitute Permitted Transferees, then such Participant shall not dispose of all or any portion of such Participant’s interest in any such Permitted Transferee. Any Transfer or attempted Transfer in violation of this clause (c) shall be null and void.

     7.4 Restricted Stock Certificates. The Company shall issue, in the name of each Participant to whom Restricted Stock has been granted or sold, stock certificates representing the total number of shares of Award Stock granted or sold to such Participant, as soon as reasonably practicable after such grant or sale. The Company shall hold such certificates for the Participant’s benefit until such Restricted Stock becomes freely Transferable, at which time the Company shall deliver such certificates (free of all such Transferability restrictions) to the Participant.

     7.5 Rights of a Participant. Unless the Board determines otherwise, any Participant who holds Restricted Stock shall have the right to receive dividends and distributions, if any are declared, with respect to such Restricted Stock. Any shares of Company Stock received by a Participant as a result of any such dividends or distributions shall be considered Restricted Stock and shall be subject to all of the restrictions contained in the Plan.

ARTICLE VIII
JOINDERS

     8.1 Stockholders Agreement. Exercise of any Options or Rollover Options, or purchase of or acceptance of any Restricted Stock, shall constitute agreement by the Participant making such exercise or purchasing or receiving such Restricted Stock, to be bound by all of the terms and conditions of the Stockholders Agreement with respect to the Award Stock, or any other Company capital stock, issuable to or held by such Participant. All of the terms of the Stockholders Agreement are incorporated herein by reference.

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ARTICLE IX
REPURCHASE OF SHARES

     9.1 Repurchase Option. In order to provide a market for Award Stock, in the event that a Participant is no longer employed by the Company or any of its Subsidiaries for any reason, all Award Stock issued or issuable to such Participant (whether as Restricted Stock or upon the exercise of Options or Rollover Options), whether held by such Participant or one or more transferees of such Participant, will be subject to repurchase by the Company and the Sponsors (solely at their option), by delivery of one or more Repurchase Notices (as defined below) within the time periods set forth below, pursuant to the terms and conditions set forth in this Article IX (the “Repurchase Option”), unless otherwise set forth in the Award Agreement between the Company and the Participant. The Repurchase Option shall terminate on the first to occur of a Change in Control or an Initial Public Offering.

     9.2 Termination Other than for Cause or Resignation. 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 any reason other than such Participant’s (a) termination for Cause or (b) resignation for any reason other than Retirement, then on or after the Termination Date (subject to the provisions of Section 10.2) 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). Notwithstanding the foregoing, in the event a Participant resigns due to Retirement and subsequently takes any action described in the first sentence of Section 12.3 at any time within one (1) year after such Participant’s Termination Date, then the purchase price per share shall be the lower of Fair Market Value and Original Value; provided that, in the event a Participant exercises his or her put rights set forth in Section 10.3, the purchase price shall be calculated so that such Participant does not receive, with respect to all shares of Award Stock held by such Participant, an aggregate amount greater than (a) the lower of the Fair Market Value or Original Value of all such shares of Award Stock, minus (b) any amounts paid to the Participant pursuant to Section 10.3.

     9.3 Termination for Cause. 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 termination for Cause, 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 lower of the Fair Market Value and Original 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).

     9.4 Resignation. 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). Notwithstanding the foregoing, in the event a Participant takes any action described in the first sentence of Section 12.3 at any time within one (1) year after such Participant’s Termination Date (as if such period was part of such Participant’s Non-Competition Period), then the purchase price per share shall be the lower of (a) the Fair Market Value, and (b) Original Value, 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).

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     9.5 Option Repurchases. In the event the Company and/or the Sponsors, as applicable, exercise the Repurchase Option with respect to any shares of Award Stock issuable upon exercise of any Options or Rollover Options held by a Participant, then such Participant shall be required, promptly following receipt of a Repurchase Notice (as defined below), to exercise such Options and/or Rollover Options and purchase from the Company (in accordance with the provisions of Section 6.3) all shares of Award Stock for which the Company and/or the Sponsors, as applicable, shall have delivered a Repurchase Notice.

     9.6 Repurchase Procedures. Pursuant to the Repurchase Option, the Company may elect to exercise the right to purchase all or any portion of the shares of Award Stock issued to a Participant by delivering written notice or notices (each, a “Repurchase Notice”) to the holder or holders of the such Award Stock at any time and from time to time no later than 120 days after the Termination Date (or 180 days, in the case of the Participant’s Disability, or 270 days, in the case of the Participant’s death, or one year and 10 days, in the case of the Participant’s resignation); provided that such periods may be tolled in accordance with Section 9.9 below; provided further, in the event that Section 10.2 applies to a Participant’s termination, then the period of exercise for the Repurchase Option applicable in such circumstances shall be the later of (a) 120 days after the Participant’s Termination Date, and (b) seven (7) months after the Effective Date. Each Repurchase Notice will specifically identify the shares of Award Stock to be acquired from such holder(s) (including whether such shares are issuable upon exercise of Tranche I, II, or III Options or Rollover Options), the repurchase price of such shares, the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction (each, a “Repurchase Closing”). In the event that the Company elects to purchase a portion of such Award Stock pursuant to the terms of this Section 9.6, if any shares of such Award Stock are held by transferees of such Participant, the Company shall purchase the shares elected to be purchased first from such Participant to the extent of the shares of such Award Stock then held by such Participant and second purchase any remaining shares elected to be purchased from such other holder(s) of Award Stock pro rata according to the number of shares of Award Stock held by such other holder(s) at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share) and the number of shares of each class of Award Stock to be purchased will be allocated among such other holders pro rata according to the total number of shares of Award Stock to be purchased from such persons.

     9.7 Sponsor Rights.

          (a) If for any reason the Company does not elect to purchase all of the Award Stock (issued or issuable to a particular Participant) pursuant to the Repurchase Option pursuant to one or more Repurchase Notices, the Sponsors will be entitled to exercise the Repurchase Option, in the manner set forth in this Section 9.7, for the Award Stock the Company has not elected to purchase (the “Available Shares”). As soon as practicable after the Company has determined that there will be Available Shares, but in any event within 90 days after the Termination Date (or 150 days, in the case of the Participant’s Disability, or 240 days, in the case of the Participant’s death), the Company shall give written notice (each, an “Option Notice”) to the Sponsors setting forth the number of Available Shares and the price for each Available Share as determined pursuant to the provisions of this Article IX.

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          (b) The Sponsors may elect to purchase any number of Available Shares by delivering written notice (an “Election Notice”) to the Company within 20 days after receipt of the Option Notice from the Company. If the Sponsors elect to purchase an aggregate number of shares greater than the number of Available Shares, each class of Available Shares shall be allocated among the Sponsors based upon the number of shares of Common Stock owned by each Sponsor on a fully-diluted basis.

          (c) As soon as practicable, and in any event within ten days after the expiration of the 20-day period set forth above, the Company shall notify the holder(s) of Award Stock as to the number of shares being purchased from such holder(s) by the Sponsors (each, a “Supplemental Repurchase Notice”). At the time the Company delivers a Supplemental Repurchase Notice to the holder(s) of Award Stock, the Company shall also deliver written notice to each electing Sponsor setting forth the number of shares that the Company and each Sponsor will acquire, the aggregate purchase price and the time and place of the closing of the transaction.

     9.8 Closing of Repurchase. The closing of the transactions contemplated by this Article IX will take place on the date designated by the Company in the applicable Repurchase Notice or Supplemental Repurchase Notice, as the case may be, which date will not be more than 60 days after the delivery of such notice. The Company and/or the Sponsors, as the case may be, will pay for the Award Stock to be purchased pursuant to the Repurchase Option by delivery of a check payable to the holder(s) of Award Stock or a wire transfer of immediately available funds. In addition, the Company may pay the repurchase price for such Award Stock by offsetting such amounts against any bona fide debts owed by Participant to the Company or any of its Subsidiaries. The Company and/or the Sponsors as the case may be, will receive customary representations and warranties from each seller regarding the sale of Award Stock including, but not limited to, the representation that such seller has good and marketable title to the Award Stock to be Transferred free and clear of all liens, claims and other encumbrances, and will be entitled to require all sellers’ signatures be guaranteed by a national bank or reputable securities broker. In the event that a repurchase is to take place at a price equal to Fair Market Value, and the Fair Market Value of the Award Stock has increased or decreased from the date on which it is determined to the date of closing pursuant to this Section 9.8, then the repurchase shall be consummated at such higher or lower price.

     9.9 Restrictions on Repurchase. Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Award Stock by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company’s and its Subsidiaries’ debt and equity financing agreements. If any such restrictions prohibit the repurchase of Award Stock for cash and the Sponsors have not elected to acquire all Award Stock which the Company and the Sponsors have a right to repurchase pursuant to this Article IX, the Company shall have the right to deliver, as payment of the repurchase price, a subordinated note or notes payable in up to three equal annual installments beginning on the first anniversary of the closing of such repurchase and bearing interest (accruing quarterly) at a rate per annum equal to 7%. Any such notes issued by the Company shall be subject to any

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restrictive covenants which the Company is subject to at the time of repurchase. If any such restrictions prohibit the repurchase of Award Stock for such subordinated notes and the Sponsors have not elected to acquire all Award Stock which the Company and the Sponsors have a right to repurchase pursuant to this Article IX, the time periods provided in this Article IX shall be suspended for a period of up to twelve months, and the Company may make such repurchases as soon as it is permitted to do so under such restrictions but in no event later than twelve months after the initial time periods hereunder.

ARTICLE X
PUT RIGHTS

     10.1 Put Rights on Death or Disability. In order to provide a market for Award Stock, each Participant shall have the right (solely at their option) to require the Company to repurchase all (but not less than all) of such Participant’s shares of Award Stock (whether actually issued or issuable upon exercise of Rollover Options) in the event such Participant’s employment is terminated because of death or Disability. Such put right must be exercised no more than (a) 240 days in event of death, or (b) 150 days in the event of Disability, following such Participant’s Termination Date by giving written notice to the Company. The purchase price payable by the Company in connection with such put shall be Fair Market Value. The closing of the transactions contemplated by this Section 10.1 will take place no later than 60 days after delivery of notice of exercise of the put right by the Participant and otherwise in accordance with the provisions of Sections 9.8 and 9.9, to the extent applicable. Notwithstanding the foregoing put right, the Company and/or the Sponsors, as applicable, shall still have the repurchase rights set forth in Article IX with respect to any termination otherwise subject to this Section 10.1.

     10.2 Put Rights on Termination Without Cause. In order to provide Participants with protection against losses in respect of Award Stock in certain circumstances, each Participant shall have the right (solely at their option) to require the Company to repurchase all (but not less than all) of such Participant’s shares of Award Stock (whether actually issued or issuable upon exercise of Rollover Options) in the event such Participant’s employment is terminated without Cause within one (1) year of the Effective Date. Such put right shall be exercised by giving written notice to the Company. Such put right may not be exercised prior to the date that is six (6) months and one (1) day after the Effective Date and shall expire on the later of (a) the date that is 30 days following such Participant’s Termination Date or (b) the date that is six (6) months and ten (10) business days after the Effective Date. The purchase price payable by the Company in connection with such put shall be Original Value. The closing of the transactions contemplated by this Section 10.2 will take place no later than 60 days after delivery of notice of exercise of the put right by the Participant and otherwise in accordance with the provisions of Sections 9.8 and 9.9, to the extent applicable. Notwithstanding the foregoing put right, in the event the Participant has not exercised such put right by the deadlines specified above, then thereafter the Company and/or the Sponsors, as applicable, shall still have the repurchase rights set forth in Article IX with respect to any termination otherwise subject to this Section 10.2.

     10.3 Put Rights on Retirement. In order to provide a market for Award Stock, each Participant shall have the right (solely at their option) to require the Company to repurchase a portion (as determined below) of such Participant’s shares of Award Stock (whether actually issued or issuable upon exercise of Rollover Options) in the event such Participant’s employment

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is terminated because of resignation due to Retirement. Such put right must be exercised no more than 30 days following such Participant’s Termination Date by giving written notice to the Company. The purchase price per share payable by the Company in connection with such put shall be Fair Market Value. Each Participant shall have the right to require the Company to repurchase no more than those number of shares of Award Stock (whether actually issued or issuable upon exercise of Rollover Options) that would produce total pre-tax proceeds to such Participant equal to the aggregate Original Value of all Rollover Options and Restricted Stock held by such Participant. The closing of the transactions contemplated by this Section 10.3 will take place no later than 60 days after delivery of notice of exercise of the put right by the Participant (or, if later, delivery of a Repurchase Notice or Supplemental Repurchase Notice) and otherwise in accordance with the provisions of Sections 9.8 and 9.9, to the extent applicable. Notwithstanding the foregoing put right, the Company and/or the Sponsors, as applicable, shall still have the repurchase rights set forth in Article IX with respect to any termination otherwise subject to this Section 10.3.

     10.4 Option Puts. In the event a Participant exercises a put right with respect to any shares of Award Stock issuable upon exercise of any Rollover Options held by such Participant, then such Participant shall be required, in connection with the exercise of such put right, to exercise such Rollover Options and purchase from the Company (in accordance with the provisions of Section 6.3) all shares of Award Stock for which such Participant shall have exercised such put right. The closing of any such exercise shall take place concurrently with the closing of the put transactions set forth in this Article X.

     10.5 Termination of Puts. Notwithstanding any other provision in this Article X, each of the put rights contained in this Article X shall terminate on the first to occur of a Change in Control or an Initial Public Offering.

     10.6 Applicability of Puts. Except as otherwise expressly provided in an Award Agreement, none of the put rights set forth in this Article X shall apply to any Awards made on or after the date that is one hundred and twenty (120) days after the Effective Date.

ARTICLE XI
PUBLIC OFFERINGS

     11.1 Cooperation in an IPO. In the event that the Company approves an Initial Public Offering, the holders of Options, Rollover Options, or Award Stock will take all necessary or desirable actions in connection with the consummation of such offering. In the event that such Initial Public Offering is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the Common Stock structure will adversely affect the marketability of the offering, each holder of Options, Rollover Options, or Award Stock will consent to and vote for a recapitalization, reorganization and/or exchange of the Common Stock into securities that the managing underwriters and the Board find acceptable and will take all necessary or desirable actions in connection with the consummation of the recapitalization, reorganization and/or exchange.

     11.2 Holdback. No Participant shall effect any public sale or distribution (including sales pursuant to Rule 144) of any Award Stock during the 7 days prior to and the 90 days (or

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180 days in the event of an Initial Public Offering) after the effective date of any underwritten public offering of the Company’s Common Stock, except as part of such underwritten public offering or if otherwise permitted by the Company.

     11.3 Compliance with Laws. Each Option and Rollover Option shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the shares subject to such Option or Rollover Option upon any securities exchange or under any state or federal securities or other law or regulation or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to or in connection with the granting of such Option or Rollover Option or the issue or purchase of shares thereunder, no such Option or Rollover Option may be exercised or paid in Common Stock in whole or in part unless such listing, registration, qualification, consent or approval (a “Required Listing”) shall have been effected or obtained and the holder of the Option or Rollover Option, as applicable, will supply the Company with such certificates, representations and information as the Company shall request which are reasonably necessary or desirable in order for the Company to obtain such Required Listing, and shall otherwise cooperate with the Company in obtaining such Required Listing. In the case of officers and other persons subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, the Board may at any time impose any limitations upon the exercise of an Option or Rollover Option which, in the Board’s discretion, are necessary or desirable in order to comply with Section 16(b) and the rules and regulations thereunder. If the Company, as part of an offering of securities or otherwise, finds it desirable because of federal or state regulatory requirements to reduce the period during which any Options or Rollover Options may be exercised, the Board may, in its discretion and without the consent of the holders of any such Options or Rollover Options, so reduce such period on not less than 15 days’ written notice to the holders thereof.

     11.4 Purchaser Representative. If the Company or the holders of the Company’s securities enter into any negotiation or transaction for which Rule 506 (or any similar rule then in effect) promulgated by the Securities Exchange Commission may be available with respect to such negotiation or transaction (including a merger, consolidation or other reorganization), as a condition to participation in such sale (whether or not obligated to so participate pursuant to the provisions of the Stockholders Agreement or otherwise), the holders of Award Stock will, at the request of the Company, appoint a purchaser representative (as such term is defined in Rule 501) reasonably acceptable to the Company. If any holder of Award Stock appoints a purchaser representative designated by the Company, the Company will pay the fees of such purchaser representative; but if any holder of Award Stock declines to appoint the purchaser representative designated by the Company, such holder will appoint another purchaser representative and such holder will be responsible for the fees of the purchaser representative so appointed.

ARTICLE XII
RESTRICTIVE COVENANTS

     The Company and its Subsidiaries operate in a highly sensitive and competitive commercial environment. As part of their employment with the Company and its Subsidiaries, Participants will be exposed to highly confidential and sensitive information regarding the Company’s and its Subsidiaries’ business operations, including corporate strategy, pricing and other market information, know-how, trade secrets, and valuable customer, supplier, and

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employee relationships. It is critical that the Company take all necessary steps to safeguard its legitimate protectible interests in such information and to prevent any of its competitors or any other persons from obtaining any such information. Therefore, as consideration for the Company’s agreement to grant or sell Options, Rollover Options, and/or Restricted Stock to a Participant, each Participant shall agree to be bound by the following restrictive covenants:

     12.1 Confidentiality. Each Participant acknowledges that the information, observations and data obtained by him or her while employed by the Company and its Subsidiaries concerning the business or affairs of the Company or any of its Subsidiaries (“Confidential Information”) are the property of the Company or such Subsidiary. Therefore, each Participant agrees that he or she shall not disclose to any unauthorized Person or use for his or her own purposes any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of such Participant’s acts or omissions. Each Participant shall deliver to the Company or one of its Subsidiaries, at the termination of such Participant’s employment, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) or the business of the Company or any of its Subsidiaries which he or she may then possess or have under his or her control.

     12.2 Assignment of Inventions. Each Participant acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, formulas, recipes, customer lists, and all similar or related information (whether or not patentable) which relate to the Company’s or any of its Subsidiaries’ actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by such Participant while employed by the Company and its Subsidiaries (“Work Product”) belong to the Company or such Subsidiary. Each Participant shall promptly disclose such Work Product to the Board and perform all actions reasonably requested by the Board (whether during or after the period of Participant’s employment) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments).

     12.3 Non-Competition; Non-Solicitation. At any time during a Participant’s Non-Competition Period, such Participant shall not, for himself or herself or on behalf of any other Person, participate in, directly or indirectly, any Competing Business in any country in which the Company or any of its Subsidiaries or licensees operates or conducts business as of such time (or with respect to the period after such Participant’s Termination Date, as of such Termination Date); provided that, nothing in this sentence shall restrict a Participant from passive ownership of three (3) percent or less of the publicly traded securities of any Person. During a Participant’s employment with the Company and/or its Subsidiaries and for 1 year thereafter, a Participant shall not (i) induce or attempt to induce any employee of the Company or its Subsidiaries to leave the employ of the Company or its Subsidiaries, or in any way interfere with the relationship between the Company or its Subsidiaries and any employee thereof, (ii) hire directly or through another entity any person who was an employee (other than clerical or administrative support personnel) of the Company or its Subsidiaries at any time during the Non-Competition Period or (iii) induce or attempt to induce any customer, supplier, licensee or other business

22

relation of the Company or its Subsidiaries to cease doing business with the Company or its Subsidiaries, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or its Subsidiaries (including, without limitation, making any negative statements or communications concerning the Company or its Subsidiaries); provided that, clauses (i) and (ii) above shall not apply with respect to any person solicited or employed after the date that is twelve (12) months after the date on which such person’s employment with the Company and its Subsidiaries is terminated.

     12.4 No Restriction on Earning a Living. By his or her acceptance and/or acquisition of an Award, each Participant thereby acknowledges that the provisions of this Article XII do not preclude such Participant from earning a livelihood, nor do they unreasonably impose limitations on Participant’s ability to earn a living. In addition, each Participant thereby acknowledges that the potential harm to the Company and/or its Subsidiaries of non-enforcement of this Article XII outweighs any harm to Participant of enforcement (by injunction or otherwise) of this Article XII against him. If any portion of the provisions of this Article XII is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, territory, definition of activities covered, or definition of information covered is considered to be unreasonable in scope, the invalid or unenforceable term shall be redefined, or a new enforceable term provided, such that the intent of the Company and Participant in agreeing to the provisions of this Article XII will not be impaired and the provision in question shall be enforceable to the fullest extent of applicable law.

ARTICLE XIII
OTHER PROVISIONS

     13.1 Indemnification. No member of the Board, nor any person to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to the Plan or Awards made thereunder, and each member of the Board shall be fully indemnified and protected by the Company with respect to any liability he or she may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company’s Certificate of Incorporation and Bylaws, as amended from time to time, or under any agreement between any such member and the Company.

     13.2 Termination and Amendment. The Board at any time may suspend or terminate this Plan and make such additions or amendments as it deems advisable under this Plan; provided that, the Board may not change any of the terms of an Award Agreement in a manner adverse to a Participant without the prior written approval of such Participant. In the event any Participant so requests in writing, the Company shall amend the terms of such Participant’s Rollover Options so that they will expire on the same terms as the options which were cancelled or foregone by such Participant in exchange for such Rollover Options.

     13.3 Taxes.

          (a) The Company shall have the right to require Participants or their beneficiaries or legal representatives to remit to the Company an amount sufficient to satisfy his or her minimum Federal, state, local, and foreign withholding tax requirements, or to deduct

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from all payments under the Plan amounts sufficient to satisfy such minimum withholding tax requirements. Whenever payments under the Plan are to be made to a Participant in cash, such payments shall be net of any amounts sufficient to satisfy all Federal, state, local, and foreign withholding tax requirements.

          (b) Except as otherwise expressly provided in an Award Agreement, the Board may, in its discretion permit a Participant to satisfy his or her tax withholding obligation either by (i) surrendering Award Stock owned by the Participant or (ii) having the Company withhold from Award Stock otherwise deliverable to such Participant. Award Stock surrendered or withheld shall be valued at Fair Market Value as of the date on which income is required to be recognized for income tax purposes.

     13.4 Withholding. In a situation where, if a Participant were to receive Award Stock (by virtue of the exercise of any Options, Rollover Options or the issue to such Participant of any Restricted Stock), the Company or any of its Affiliates (or a former Affiliate) would be obliged to (or would suffer a disadvantage if it were not to) account for any tax or social security contributions in any jurisdiction for which that person would be liable by virtue of the receipt of Award Stock or which would be recoverable from that person (together, the “Tax Liability”), the Options and Rollover Options may not be exercised and the Restricted Stock may not be issued unless that person has either (i) made a payment to the Company or any of its Affiliates (or a former Affiliate) of an amount at least equal to the Company’s estimate of the Tax Liability, or (ii) entered into arrangements acceptable to the Company or any of its Affiliates (or a former Affiliate) to secure that such a payment is made (whether by authorizing the sale of some or all of the Award Stock on his behalf and the payment to the Company or any of its Affiliates (or a former Affiliate) of the relevant amount out of the proceeds of sale or otherwise).

     13.5 Data Protection. By participating in the Plan or accepting any rights granted under it, each Participant consents to the collection and processing of personal data relating to the Participant so that the Company and its Affiliates can fulfill their obligations and exercise their rights under the Plan and generally administer and manage the Plan. This data will include, but may not be limited to, data about participation in the Plan and shares offered or received, purchased or sold under the Plan from time to time and other appropriate financial and other data (such as the date on which the Options, Rollover Options or Restricted Stock were granted) about the Participant and his participation in the Plan.

     13.6 Notices. Notices required or permitted to be made under the Plan shall be in writing and shall be deemed given, delivered and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile prior to 5:00 p.m. (New York time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile later than 5:00 p.m. (New York time) on any business day and earlier than 11:59 p.m. (New York time) on the day preceding the next business day, (iii) one (1) business day after when sent, if sent by nationally recognized overnight courier service (charges prepaid), or (iv) upon actual receipt by the person to whom such notice is required to be given. All notices shall be addressed (a) to a Participant at such Participant’s address as set forth in the books and records of the Company and its Subsidiaries, or (b) to the Company or the Board at the principal office of the Company clearly marked “Attention: Board of Directors”.

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     13.7 Severability. Whenever possible, each provision of this Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Plan is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Plan shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

     13.8 Prior Agreements. No provision of any employment, severance, incentive award, or other similar agreement entered into by a Participant, on the one hand, and any Subsidiary of the Company, on the other hand, prior to the Effective Date shall modify or have any effect in any manner on any provision of this Plan or any term or condition of any Award Agreement to which such Participant is a party. Without limiting the generality of the foregoing, any provision in any such agreement that purports to apply in any manner to options, stock, equity-based awards, or the like shall not apply to or have any effect on any Awards under the Plan.

     13.9 Governing Law and Forum; Waiver of Jury Trial. The Plan shall be construed and interpreted in accordance with the laws of the State of Delaware. Each Participant who accepts an Award thereby agrees that any suit, action or proceeding brought by or against such Participant in connection with this Plan shall be brought solely in the courts of the State of Delaware or the United States District Court for the District of Delaware, each Participant consents to the jurisdiction and venue of each such court, and each Participant agrees to accept service of process by the Company or any of its agents in connection with any such proceeding. EACH PARTICIPANT WHO ACCEPTS AN AWARD IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR OTHER PROCEEDING INSTITUTED BY OR AGAINST SUCH PARTICIPANT IN RESPECT OF HIS OR HER RIGHTS OR OBLIGATIONS HEREUNDER.

     13.10 Section 409A Compliance. It is the intention of the Company and the Board that the Plan not be subject to the provisions of Section 409A of the Code, as in effect as of the Effective Date or subsequently modified thereafter, or to the extent subject to such provisions then to comply in all material respects with such provisions. In the event that Section 409A would impose a detriment on the Participants, taken as a whole, with respect to Awards under the Plan, then the Board shall consider in good faith modifications or amendments to the Plan intended to eliminate or ameliorate such detriment; provided that, in no event shall the Board be required to modify or amend the Plan in a manner adverse to the Company or the Sponsors. In no event shall the Company, the Board, or any of their respective Affiliates be liable to any Participant or any other Person for any such detriment, or any other cost, expense, tax, or liability imposed on a Participant or any other Person as a result of such Participant’s acceptance of any Award or participation in the transactions contemplated by the Plan.

     13.11 Amendment and Restatement. This Plan supersedes, in its entirety, all of the terms and conditions of the Original Plan, and all Awards made pursuant to the terms of the Original Plan shall be governed by the terms of this Plan.

* * * * *

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Exhibit A

The attached Management Stock Holders Addendum is hereby incorporated in and made a part of the Amended and Restated Toys “R” Us Holdings, Inc. 2005 Management Equity Plan.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gerald L. Storch, certify that:

1.	I have reviewed this quarterly Report on Form 10-Q 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 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 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: December 18, 2007

/s/ Gerald L. Storch  

Gerald L. Storch 

Chairman and Chief Executive Officer
(Principal Executive Officer) 

EX-31.2

Exhibit 31.2

CERTIFICATION

I, F. Clay Creasey, Jr., certify that:

1.	I have reviewed this quarterly Report on Form 10-Q 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 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 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: December 18, 2007

/s/ F. Clay Creasey, Jr.  

F. Clay Creasey, Jr. 

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 Quarterly Report on Form 10-Q of the Company for the quarterly period ended November 3, 2007 (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.

December 18, 2007

/s/ Gerald L. Storch  

Gerald L. Storch 

Chairman and Chief Executive Officer
(Principal Executive Officer) 

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, F. Clay Creasey, Jr., 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 Quarterly Report on Form 10-Q of the Company for the quarterly period ended November 3, 2007 (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.

December 18, 2007

/s/ F. Clay Creasey, Jr.  

F. Clay Creasey, Jr. 

Executive Vice President -
Chief Financial Officer
(Principal Financial Officer)