UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

OR

For the transition period from to

Commission File Number: 1-9595

BEST BUY CO., INC.

(Exact Namename of Registrant as Specifiedspecified in its Charter)charter)

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

Securities registered pursuant to Section 12(g) of the Act: None

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 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 ý  No o

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý  No o

The aggregate market value of voting stockand non-voting common equity held by non-affiliates of the Registrant on May 3,August 30, 2002, was approximately $12.700$5.615 billion, based on the closing price on such date of $48.07$21.20 per share of the Registrant’s Common Stock, (adjusted for a three-for-two stock split on May 10, 2002) as reported on the New York Stock Exchange-Composite Index. (Voting stock held by(For purposes of this calculation all of the Registrant’s directors and executive officers is excluded)are deemed affiliates of the Registrant). On that date, there were 320,568,397

As of May 2, 2003, the Registrant had 322,243,258 shares of its Common Stock as adjusted for the stock split, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders for the year ended March 2, 20021, 2003 (“Annual Report”), are incorporated by reference into Parts I and II. The Annual Report is Exhibit 13.1 to this report.

Portions of the Registrant’s Definitive Proxy Statement dated June 5, 2002,May 20, 2003, for the regular meeting of shareholders to be held on June 25, 200224, 2003 (“Proxy Statement”), are incorporated by reference into PartParts II and III.

Section 27A of the Securities Act of 1933, as amended, and sectionSection 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provide a “safe harbor” for forward–looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this annual report are forward–looking statements and may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential.” Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our actual results to differ materially from the anticipated results expressed in such forward–looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, weather, foreign currency fluctuation, availability of suitable real estate locations, and the impact of labor markets and new product introductions on our overall profitability. Readers should review our Current Report on Form 8-K filed May 16, 2001, whichwith the Securities and Exchange Commission (“SEC”) on January 10, 2003, that describes additional important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements made in this annual reportAnnual Report on Form 10-K.

2

TABLE OF CONTENTS

3

PART I

ITEM 1. BUSINESSItem 1. Business.

Overview

History

We are North America’s No. 1a specialty retailer of consumer electronics, personal computers,home-office equipment, entertainment software and appliances with revenuesrevenue from continuing operations of $20.9 billion for our fiscal year ended March 2, 2002, of $19.6 billion.1, 2003. We operate retail stores and commercial Web sites as part of continuing operations under the brand names Best Buy (BestBuy.com), Media Play (MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com), Suncoast (Suncoast.com),Future Shop (FutureShop.ca) and Magnolia Hi-Fi (MagnoliaHiFi.com) and Future Shop (FutureShop.ca).

We began in 1966 as an audio components retailer, and in the early 1980s, with the introduction of the videocassette recorder in the early 1980’s, expanded into video products. In 1983, we revised our marketing strategy and began using mass-merchandising techniques, which included offering a wider variety of products and operating stores under a “superstore” concept. In 1989, we dramatically changed our method of retailing by introducing a self-service, noncommissioned, discount–style store concept designed to give the customer more control over the purchasing process. In fiscal 2000, we introduced a small–market Best Buy store concept that offers merchandise in the same product categories as larger stores, with a product assortment tailored to each respective community.  The Best Buy store concept now employed in 481 stores across the United States, has continued to evolveevolved to include more interactive displays and, for certain products, a higher level of customer service, with the latest version including a more effectivedesigned to increase labor modelefficiency and improvedto improve merchandising. In fiscal 2004, we plan to enhance our store formats and customize product offerings to meet the needs of customers in different markets.  This plan is consistent with customer centricity, one of the four key strategic priorities we formalized in fiscal 2003.

In fiscal 2000, we introduced a small–marketestablished Best Buy store concept that serves communities of generally less than 200,000 people and offers merchandise in the same product categories as larger stores, with a product assortment tailored to each respective community. In fiscal 2001, we re-launched Best Buy storesstores’ online shopping site, BestBuy.com. Our clicks-and-mortar strategy is designed to empower consumers to research and purchase products seamlessly across the Best Buy retail environment —either online or in retail stores. The online site offers products in all of Best Buy stores’ principal product categories except appliances.categories.  In fiscal 2004, we expect to unveil a Web site with enhanced features including the ability to offer online consumers an even broader product assortment than we carry in Best Buy stores.

Acquisitions

In the fourth quarter of fiscal 2001, we acquired the common stock of Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi) for $88 million in cash, including transaction costs, and the common stock of Musicland Stores Corporation for $425 million, including transaction costs, plus long-term debt valued at $271 million.costs. Magnolia Hi-Fi is a Seattle-based, high-end retailer of audio and video products that operates 13operated 19 stores in Washington, Oregon and California.California as of March 1, 2003. We believeacquired Magnolia Hi-Fi has expansion potential of up to 150 stores nationwide. However, prior to pursuing an aggressive growth strategy, we believe we must refine the store concept and broaden the scope of products and services currently offered at Magnolia Hi-Fi. Musicland is one of the largest national retailers of movies, prerecorded music, video games and other entertainment–related products with 1,321 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. Our intention is to enhance the Musicland business by improving the customer experience and diversifying the revenue mix, thereby boosting sales productivity and profitability. We also view Musicland’s small-market stores as an attractive growth opportunity. access new customers.

In the third quarter of fiscal 2002, we acquired all of the common stock of Future Shop Ltd. (Future Shop) for $368 million, net of cash acquired, including transaction costs. Future Shop, which currently operates 95operated 104 stores as of March 1, 2003, is Canada’s largest consumer electronics retailer and offers product categories similar to that atof Best Buy stores. We acquired Future Shop to further our expansion plans, leverage our expertise in consumer electronics retailing and increase shareholder value. The acquisition marked our initial expansion into international operations.

In the third quarter of fiscal 2003, we acquired all of the common stock of Geek Squad, Inc. (Geek Squad) for approximately $3 million, net of cash acquired, including transaction costs. Geek Squad provides residential consumer computer support. We acquired Geek Squad to further our plans of providing technology support services to customers.

Additional information regarding our acquisitions is included in note 23 of the Notes to Consolidated Financial Statements on page 4154 of our Annual Report, contained in exhibitExhibit 13.1 to this report, and is incorporated herein by reference.

In fiscal 2003, we put on hold any major acquisitions or expansion beyond North America to focus on our core business.

Discontinued Operations

In addition to the acquisitions described above, in the fourth quarter of fiscal 2001, we acquired the common stock of Musicland Stores Corporation (Musicland) for $425 million, including transaction costs, plus long-term debt valued at $271 million. Musicland is primarily a mall-based national retailer of movies, prerecorded music and other entertainment-related products. At the end of fiscal 2003, Musicland operated 1,195 retail stores in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico, and commercial Web sites under the brand names Media Play (MediaPlay.com), Sam Goody (SamGoody.com) and Suncoast (Suncoast.com).

The original strategy behind the Musicland acquisition was to bring Best Buy’s core competencies in retailing consumer electronics to new consumer segments, including segments typically underserved by our Best Buy stores. However, the Musicland business did not meet our financial objectives. After carefully considering several alternatives, we determined that the interests of our shareholders, employees, vendors and landlords would be best served by a sale of the business. Accordingly, during the fourth quarter of fiscal 2003, we committed to a plan to sell our interest in Musicland. We have retained a national investment banking firm to assist with the sale process, as well as additional professionals to assist in other areas of the plan. Musicland’s financial results have been classified separately as discontinued operations in our consolidated financial statements for all periods presented. The sale of our interest in Musicland will allow us to focus on our consumer electronics stores, which are the core profit drivers for our business.

Additional information regarding Discontinued Operations is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 20 of our Annual Report and note 2 of the Notes to Consolidated Financial Statements beginning on page 52 of our Annual Report, incorporated herein by reference.

Unless otherwise noted, the following discussion relates to continuing operations only.

Business Strategy

Our vision is to make life fun and easy. Our business strategy is to bring technology and consumers together in a retail environment that focuses on educating consumers on the features and benefits of technology and entertainment products, while maximizing overall profitability. We believe our stores offer consumers meaningful advantages in store environment, product value, selection and service, all of which furtheradvance our objectiveobjectives of achieving a significantenhancing our business model, gaining market share in the markets we serve.and improving profitability. The acquisitions of Musicland,Future Shop and Magnolia Hi-Fi and Future Shop giveacquisitions provide us with access to new distribution channels more customer visits and the ability to leverage Best Buy stores’ core competencies with their operations. We also expect additional benefits from the cross merchandising of products and information sharing across our distribution channels.

Operating Segments

We currently operate three segments: Best Buy, Musicland and International. Best Buy is primarily a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products. The Musicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and other entertainment-related products. The International segment consists of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada.

The following table reconciles stores open at the end of fiscal 2001 to the number of stores open at the end of the fiscal 2002:new customers.

3

* The International segment consists of Future Shop stores. Future Shop was acquired inDuring fiscal 2003, we formalized four strategic priorities that we believe will further enhance our business model over the third quarter of fiscal 2002.

next several years.  Additional information regardingon our operating segments is presented in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 20 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference. In addition, selected operating segment financial data is included in note 8 of the Notes to Consolidated Financial Statements beginning on page 52 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

Best Buy Segment

Additional information regarding our Best Buy operating segmentstrategic priorities is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 20 of our Annual Report, containedincorporated herein by reference.

Store Development

The addition of new stores has played, and we believe it will continue to play, a significant role in exhibit 13.1our continued growth and success.  Our store development program focuses on entering new markets, adding stores within existing markets and relocating, remodeling and/or expanding existing stores.  During fiscal 2003, we opened 90 new stores and 17 stores were remodeled, relocated or expanded.  While many of the new stores opened in fiscal 2003 were in existing markets, others were in new markets including the opening of our first Best Buy store in Manhattan, as well as the opening of the first Best Buy stores in Canada.  During fiscal 2004, we expect to open

4

approximately 80 new stores, most of which will be located in existing markets.  We believe that continuing to grow our store base and locating our stores in desirable geographic markets are essential to our future success.

Additional information regarding our Outlook for Fiscal 2004 is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition on page 37 of our Annual Report, incorporated herein by reference.

Customers

We do not have a significant concentration of sales with any individual customer and, therefore, the loss of any one customer would not have a material impact on our business. No single customer accounts for 10% or more of our total revenue.

Suppliers

Our strategy depends, in part, upon our ability to offer customers a broad selection of name-brand products and, therefore, our success is dependent upon satisfactory and stable supplier relationships. In fiscal 2003, our 20 largest suppliers accounted for over half of the merchandise we purchased, with five suppliers – Sony, Hewlett-Packard, Toshiba, Panasonic and Samsung – representing approximately one-third of total merchandise purchased. The loss of or disruption in supply from any one of these major suppliers could have a material adverse effect on our revenue and profits. We generally do not have long-term written contracts with our major suppliers. We have no indication that any of our suppliers will discontinue selling us merchandise. We have not experienced significant difficulty in maintaining satisfactory sources of supply, and we generally expect that adequate sources of supply will continue to exist for the types of merchandise sold in our stores.

Working Capital

We fund the growth of our business through a combination of existing cash and cash equivalents and cash flows generated from continuing operations. In addition, our revolving credit facilities are available for additional working capital needs or investment opportunities.

Additional information on our Liquidity and Capital Resources is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 31 of our Annual Report, incorporated herein by reference.

Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations.  The Exchange Act requires us to file reports, proxy statements and other information with the SEC. Copies of these reports, proxy statements and other information can be inspected and copied at:

SEC Public Reference Room

450 Fifth Street, N.W.

Washington, D.C. 20549

You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

You may also obtain these materials electronically by accessing the SEC’s home page on the Internet at:

http://www.sec.gov

In addition, we make available, free of charge on our Internet Web site, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file this report,material with, or furnish it to, the SEC. You may review these documents, under the heading “Investor Relations,” by accessing our Web site:

http://www.BestBuy.com

Also, reports and other information concerning us are available for inspection and copying at:

New York Stock Exchange

20 Broad Street

New York, NY 10005

Reportable Operating Segments

During fiscal 2003, we had two reportable operating segments: Domestic and International. At the end of fiscal 2003, the Domestic segment included U.S. Best Buy and Magnolia Hi-Fi stores. U.S. Best Buy stores offer a wide variety of consumer electronics, home-office equipment, entertainment software and appliances, and operated 548 stores in 48 states at the end of fiscal 2003. Magnolia Hi-Fi is a high-end retailer of audio and video products and had 19 stores in Washington, Oregon and California at March 1, 2003. The International segment was established in connection with our acquisition of Future Shop in November of fiscal 2002. At the end of fiscal 2003, the International segment consisted of 104 Future Shop stores operating in all Canadian provinces and eight Canadian Best Buy stores operating in Ontario. Future Shop and Canadian Best Buy stores offer products similar to those offered by U.S. Best Buy stores.

During fiscal 2002, we had three reportable operating segments: Best Buy, Musicland and International.  The primary reasons for the combining of our domestic operations into one reportable operating segment were the significant similarities of their respective products and markets, the leveraging of our buying and distribution functions and the merging of many of our operational functions into a shared services model in the first quarter of fiscal 2003. Based on our commitment to a plan to sell our interest in Musicland, Musicland’s financial results are no longer included in the Domestic segment, but rather are reported separately as discontinued operations.

5

The following table reconciles stores open at the end of fiscal 2002 to the number of stores open at the end of fiscal 2003:

Additional information regarding our Segment Performance is presented in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 26 of our Annual Report, incorporated herein by reference. In addition, selected Best Buyoperating segment financial data is included in note 810 of the Notes to Consolidated Financial Statements beginning on page 5262 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

Domestic Segment

U.S. Best Buy Stores

Overview

At the end of fiscal 2002,2003, we operated 481548 U.S. Best Buy stores in 4448 states. The stores average 44,900approximately 44,200 retail square feet and produce average annual salesrevenue of approximately $38$37.1 million. U.S. Best Buy stores collectively represent 21.6approximately 24.2 million retail square feet, or 67%about 90% of our total retail square footage. During fiscal 2002, weU.S. Best Buy stores launched ourits latest store concept, which featureswas designed to provide a more flexible architecture, improved merchandising, faster checkout, better product adjacencies and a more efficient labor model. Most new U.S. Best Buy stores opened in fiscal 2003 are expected to incorporateincorporated the features of this latest store format.

The following table reconciles U.S. Best Buy stores open at the beginning and end of each of the last five fiscal years:

Fiscal Year		Stores Opened		Stores Closed		Total Stores at End of Fiscal Year
Balance Forward		n.a.		n.a.		284
1999		28		1		311
2000		47		1		357
2001		62		—		419
2002		62		—		481
2003		67		—		548

Merchandise

U.S. Best Buy stores generally offer merchandise in five product categories: consumer electronics, home office, entertainment software, appliances and “other” products. Consumer electronics, Best Buy’sthe largest product category based on revenues,revenue, consists of video and audio equipment. Video products include television sets, DVD players, cameras, camcorders, VCRs and digital broadcast satellite systems. Audio products include car stereos, portable audio equipment, home theater audio systems, audio components, shelf systems and speakers. The home office category includes desktop and notebook computers and related peripheral equipment, telephones, wireless communication devices and personal digital assistants. Entertainment software products include compact discs, video game hardware and software, DVD and VHS movies, and computer software. The appliance category includes major appliances such as washers, dryers, ranges, refrigerators, freezers and dishwashers, as well as vacuums, microwaves and housewares. The “other” product category includes extended service contracts, blank recording media, furniture and other miscellaneous products such as batteries, business cases and storage products.

The following table presents U.S. Best Buy stores’ sales,revenue, by product category, as a percentage of total U.S. Best Buy stores’ sales:revenue:

4

Operations

U.S. Best Buy stores follow a standardized and detailed operating proceduresprocedure called Standard Operating Platform (SOP). The SOP includes procedures for inventory management, transaction processing, customer relations, store administration, product sales and merchandise display.

U.S. Best Buy store operations are organized into three divisions. Each division is divided into regions and is under the supervision of a senior vice president who oversees store performance through regional vice presidents. Regional vice presidents have responsibility for a number of districts within their respective region. District managers monitor store operations closely and meet regularly with store managers to discuss merchandising, new product introductions, sales promotions, customer loyalty programs, employee satisfaction surveys and store operating performance. Similar meetings are conducted at the corporate level with divisional and regional management. A senior vice president of retail operations has overall responsibility for retail store processing and operations, including labor management. Each district also has a loss prevention manager, with product security personnel employed at each store to control physical inventory shrinkage.losses. Advertising, merchandise buying and pricing, and inventory policies for U.S. Best Buy stores are centrally controlled.

6

U.S. Best Buy stores are generally open 73 hours a week, seven days a week for approximately 73 hours a week. A store is typically staffed by one manager and four to five assistant managers. The average staff in each store ranges from 65 to 150 people, depending on store size and sales volume.

Distribution

Generally, merchandise is shipped to U.S. Best Buy stores from one of six distribution centers located in California, Georgia, Minnesota, Ohio, Oklahoma and Virginia. U.S. Best Buy stores also currently operate atwo dedicated distribution centercenters for entertainment software in Minnesota.Minnesota and Indiana. In addition, during the first quarter of fiscal 2004, we expect to openopened an additional general distribution center in upstate New York. The majority of U.S. Best Buy stores’ merchandise, except for major appliances and large-screen televisions, is shipped directly from manufacturers to a distribution center. Major appliances and large-screen televisions are shipped to satellite warehouses in each major market. U.S. Best Buy stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. We believe distribution centers can most effectively service Best Buy stores within a 600 to 700-mile radius and that our current distribution centers and the planned additionrelocation of the New YorkArdmore, Oklahoma, distribution center to a larger facility in fiscal 2004,2005, will accommodate expansion plans for the next several years. On average, U.S. Best Buy stores receive product shipments two or three times a week depending on sales volume. Generally, e-commerce merchandise sales are either picked up at U.S. Best Buy retail stores or fulfilled through the distribution centers.

Seasonality

Similar to many retailers, U.S. Best Buy stores’ business is seasonal. RevenuesRevenue and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season.

Competition

U.S. Best Buy stores’ industry is highly competitive. U.S. Best Buy stores compete nationally against other consumer electronics retailers, specialty home office retailers, mass merchants, home improvement superstores entertainment software superstores, electronics boutiques and a growing number of direct-to-consumer alternatives. U.S. Best Buy stores also compete against independent dealers, regional chain discount stores, wholesale clubs, mail-order and Internet retailers, video rental stores and other specialty retail stores. Mass merchandisers continue to increase their assortment of consumer electronics products—products — primarily those that are less complex to sell, install and operate. Similarly, large home improvement retailers are expanding their assortment of appliances. In addition, consumers are increasingly downloading entertainment and computer software directly via the Internet.

We believe our U.S. Best Buy stores’ formats and brand marketing strategies distinguish themare differentiated from most competitorscompetitors' by positioning our U.S. Best Buy retail stores as the destination for new technology and entertainment products in a fun, informative and no-pressurenoncommissioned shopping environment. U.S. Best Buy stores compete by aggressively advertising and emphasizing a broad product assortment, value pricing and financing alternatives. In addition, we believe ourBest Buy’s e-commerce operations, coupled with the knowledgeable sales associates and service capabilities of U.S. Best Buy retail stores, have effectively positioned us to compete successfully, despite an increasingly competitive environment.

Magnolia Hi-Fi

Overview

In the fourth quarter of fiscal 2001, we acquired Seattle-based Magnolia Hi-Fi, a retailer of high-end consumer electronics, founded in Seattle in

5

1954. At the end of fiscal 2002,2003, Magnolia Hi-Fi operated 1319 stores in Washington, Oregon and California that average 10,200approximately 10,000 retail square feet and generate average annual salesrevenue per store of $7.6$6.9 million. Collectively, Magnolia Hi-Fi stores represent approximately 133,000189,000 retail square feet, less than 1% of our total retail square footage.

The following table reconciles Magnolia Hi-Fi stores open at the beginning and end of each fiscal year since the date of acquisition:

*As of the date of acquisition, December 15, 2000.2000

Merchandise

Magnolia Hi-Fi stores offer merchandise in three product categories: consumer electronics, home office and “other” products.  Consumer electronics, the largest product category based on revenue, consists of video and audio equipment. Video products include television sets, DVD players, digital cameras, digital camcorders, mobile video, VCRs, digital broadcast satellite systems and video accessories.  Audio products include home receivers and amplifiers, home speakers, shelf systems, for homes, automobilesportable audio equipment, audio accessories, car stereos and businesses, as well as certain consumer electronicscar security systems.  The home office category includes telephones and wireless communication devices.  Magnolia Hi-Fi also operates a state-of-the-art design center, as well as in-house repairThe “other” product category includes extended service contracts, customer equipment repairs, and in-home and automobile installation departments. In addition, Magnolia Hi-Fi provides custom homelabor and car installation services.

parts.

The following table presents Magnolia Hi-Fi sales,revenue, by product category, as a percentage of total Magnolia Hi-Fi sales:revenue:

Operations

Magnolia Hi-Fi stores are typically managed by a store manager, an audio/video sales manager and a mobile electronics sales manager. Most Magnolia Hi–Fi stores are generally open 72 hours a week, seven days a week for 65 to 75 hours a week. Depending on an individual store’s volume, store staffing includes 10eight to 2825 commissioned sales personnel, two to six commissioned mobile electronicelectronics installers, and twoone to 11six digital productproducts sales personnel, cashiers and warehouse personnel. Advertising, merchandise buying and pricing, and inventory policies for Magnolia Hi-Fi stores are centrally controlled.

7

---

Distribution

Magnolia Hi-Fi’s merchandise inventory is received and warehoused at its distribution center in Washington as well as aor at its regional warehouse in California. All inventory is bar coded and scanned to ensure accurate inventory tracking. In addition, a computerized inventory replenishment program is used to maintain optimal inventory levels at each retail store location.store. Merchandise is delivered to retail stores an average of fourthree times each week via Magnolia Hi-Fi’s in-house distribution system.

Seasonality

Similar to many retailers, Magnolia Hi-Fi’s business is seasonal. RevenuesRevenue and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season.

Competition

Magnolia Hi-Fi competes with a variety of national, regional and local retailers, including large consumer electronics superstores, mass merchants and small specialty stores.

Magnolia Hi-Fi has positioned itself between large mass merchants and high-end specialty boutiques. We believe Magnolia Hi-Fi’s superior-qualityquality product offerings, its extensively trained sales staff and its focus on exceptional customer service both before and after the sale, in combination with the leveraging of U.S. Best Buy stores’ core competencies, effectively position Magnolia Hi-Fi to meet current and future competitive challenges.

MusiclandInternational Segment

Overview

Musicland, whichThe International segment was acquiredestablished in the fourth quarterconnection with our acquisition of Future Shop in November of fiscal 2001, is one of the largest national retailers of movies, prerecorded music, video games and other entertainment–related products. Its mall-based stores include the Sam Goody and Suncoast brands. In addition, Musicland operates small-market On Cue stores and metropolitan, large–format Media Play stores.2002. At the end of fiscal 2002, Musicland operated 1,3212003, the International segment consisted of 104 Future Shop stores in 49 states, the Districtall Canadian provinces and eight Canadian Best Buy stores in Ontario.  Collectively, International stores generate average annual revenue of Columbia, the Commonwealth of Puerto Ricoapproximately $16.0 million per store and the Virgin Islands, with 8.8represent approximately 2.4 million total retail square feet, or approximately 27%9% of our total retail square footage.

The Future Shop acquisition accelerated our international expansion plans and provided us with an opportunity to increase revenue, gain market share and leverage our operational expertise. We continue to build on Future Shop’s position as the leading consumer electronics retailer in Canada.  During fiscal 2003, we opened nine new Future Shop stores.  These new stores strengthen our presence in Ontario, British Columbia and Quebec. In addition to investments in new store openings, we also enhanced the Future Shop Web site.  The Web site provides an increasingly important avenue for reaching consumers and enhancing the Future Shop brand in Canada.

The primary objective of our International segment in fiscal 2003 was launching our dual-branding strategy in Canada.  We introduced the Best Buy brand in Canada by opening eight Best Buy stores in the Toronto, Ontario market. The Canadian Best Buy stores are similar to the U.S. Best Buy stores and appeal to technology and entertainment enthusiasts who enjoy the interactive shopping experience and grab-and-go convenience for which Best Buy is known. As we increase the presence of Best Buy stores in Canada, we expect to gain operating efficiencies through the leveraging of our capital investments, supply chain management, advertising, merchandising and administrative functions.

The dual-branding strategy was designed to retain Future Shop’s brand equity and attract more customers by offering a choice of store experiences. Our goal is to reach differentiated customers with each brand by giving them the unique shopping experiences they desire. The primary differences between the two brands are:

In-store experience – The customer’s interaction with store employees is different at each of the two brands. Future Shop has commissioned sales associates who take a more proactive role in assisting customers. Through their expertise and attentiveness, the sales associate drives the transaction.  In contrast, Canadian Best Buy store employees are noncommissioned, and the stores offer more interactive displays and grab-and-go merchandising.  This design allows the customer to drive the transaction as they experience the products themselves, with store employees available to provide product information and explain product features.

Store size – The average Future Shop store is approximately 21,000 retail square feet, compared with an average of approximately 28,000 retail square feet for Canadian Best Buy stores.  Canadian Best Buy stores generally have wider aisles, with more square footage devoted to entertainment software.

Additional information regarding our

6

Musicland operating International segment is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 2428 of our Annual Report, containedincorporated herein by reference. In addition, selected International segment financial data is included in exhibit 13.1note 10 of the Notes to Consolidated Financial Statements on page 62 of our Annual Report, incorporated herein by reference.

Reference is also made to Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk,” of this report for a discussion regarding the risks associated with foreign operations.

The following table reconciles Future Shop stores open at the beginning and end of each fiscal year since the date of acquisition:

*As of the date of acquisition, November 4, 2001

The following table reconciles Canadian Best Buy stores open at the beginning and end of each fiscal year since inception of the International segment:

Merchandise

International stores generally offer merchandise in five product categories: consumer electronics, home office, entertainment software, appliances and “other” products. Home office, the largest product category based on revenue, includes desktop and notebook computers and related peripheral equipment, telephones, wireless communication devices and personal digital assistants. The consumer electronics category consists of video and audio equipment. Video products include television sets, DVD players, cameras, camcorders, VCRs and digital broadcast satellite systems. Audio products include car stereos, portable audio equipment, home theater

8

audio systems, audio components, shelf systems and speakers. Entertainment software products include compact discs, video game hardware and software, DVD and VHS movies, and computer software. The appliance category includes washers, dryers, ranges, refrigerators, freezers and dishwashers, as well as vacuums, microwaves and housewares. The “other” product category includes extended service contracts, blank recording media, furniture and other miscellaneous products such as batteries, business cases and storage products.

Although the two store brands carry similar product categories, there are differences in product brands and depth of selection within product categories.  On average, less than 55 percent of the product assortment overlaps (excluding entertainment software) between the two store brands.

The following table presents International revenue, by product category, as a percentage of total International revenue:

* Subsequent to the date of acquisition, November 4, 2001

Operations

International stores use a standardized operating system. The operating system includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and performance appraisal as well as merchandise display. Advertising, merchandise buying and pricing, and inventory policies are centrally controlled.

International store operations are organized into divisions, each headed by a vice president. Each vice president has regional management who closely monitor store operations and meet regularly with store managers to review management and staff training programs, customer feedback and requests, store operating performance and other matters. Meetings involving store management, product managers, advertising, financial and administrative staff, as well as senior regional and global headquarters personnel, are held quarterly to review operating results and to establish future objectives.

International stores are generally open 60 to 75 hours a week, seven days a week. A typical store is staffed by a general manager, several department sales managers, a customer service manager and on average 39 full-time staff associates, as well as part-time associates. The number of full-time staff associates is dependent upon store size, sales volume and store brand.

Distribution

The majority of International stores’ merchandise, except for appliances, is shipped directly from suppliers to distribution centers in British Columbia and Ontario. Contract carriers ship merchandise from the distribution centers to retail stores. The majority of appliance sales are delivered by third-party distributors. International stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. International stores typically receive product shipments twice a week, with accelerated shipments during periods of high sales volume.

Seasonality

Similar to many retailers, the International segment’s business is seasonal. Revenue and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season.

Competition

The Canadian marketplace is highly competitive and highly fragmented. International stores compete against other consumer electronics retailers, specialty home office retailers, mass merchants, home improvement superstores and a growing number of direct-to-consumer alternatives. International stores also compete against independent dealers, regional chain discount stores, wholesale clubs, mail-order and Internet retailers, video rental stores and other specialty retail stores. Mass merchandisers continue to increase their assortment of consumer electronics products — primarily those that are less complex to sell, install and operate. Similarly, large home improvement retailers are expanding their assortment of appliances. In addition, consumers are increasingly downloading entertainment and computer software directly via the Internet.

We believe our International segment’s price leadership, large product assortment, focus on customer service and complementary e-commerce operations effectively positions us to meet current and future competitive conditions.

Discontinued Operations

Overview

Musicland, which was acquired in the fourth quarter of fiscal 2001, is a national retailer of movies, prerecorded music, video gaming merchandise and other entertainment–related products. Its mall-based stores include the Sam Goody and Suncoast brands. Musicland also operates large–format Media Play stores in urban and suburban areas, and Sam Goody Rural (formerly known as On Cue) stores in small or rural cities. At the end of fiscal 2003, Musicland operated 1,195 stores in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico, with 8.3 million retail square feet.

Additional information regarding Discontinued Operations is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 29 of our Annual Report, incorporated herein by reference. In addition, selected Musicland segment financial data is included in note 82 of the Notes to Consolidated Financial Statements beginning on page 52 of our Annual Report, contained in exhibit 13.1 to this report and, is incorporated herein by reference.

The following is a general overview of Musicland’s four retail store concepts:

Sam Goody Mall - – Sam Goody Mall stores are predominantly located in malls and average approximately 4,8005,100 retail square feet, although they range in size from 1,000 to 30,000 square feet. At the end of fiscal 2002, we operated 6152003, there were 505 Sam Goody Mall stores in 4846 states, the District of Columbia, the Commonwealth ofU.S. Virgin Islands and Puerto Rico and the Virgin Islands.Rico. The total retail square footage of Sam Goody Mall stores was approximately 3.02.6 million square feet, or 9% of our total retail square footage.feet. Sam Goody Mall stores average approximately $1.2$1.1 million in annual revenuesrevenue per location.  During fiscal 2003, Musicland opened 13 and closed 123 Sam Goody Mall stores.

9

Suncoast - –Suncoast stores are mall-based and average approximately 2,400 retail square feet. At the end of fiscal 2002,2003, there were 398383 Suncoast stores in 47 states the District of Columbia and the Commonwealth of Puerto Rico. The total retail square footage of Suncoast stores was approximately 1.0 million900,000 square feet, or 3% of our total retail square footage.feet. Suncoast stores average approximately $1.1 million in annual revenuesrevenue per location. During fiscal 2003, Musicland opened 10 and closed 25 Suncoast stores.

On CueSam Goody Rural - On Cue stores are located in small or rural cities, generally with populations of 10,000 to 30,000, and average approximately 6,100 retail square feet. At the end of fiscal 2002, we operated 232 On Cue stores in 32 states with total retail square footage of approximately 1.4 million square feet, or 4% of our total retail square footage. On Cue stores average approximately $700,000 in annual revenues per location. – In fiscal 2003, we announced plans to beginMusicland began changing the name of On Cue stores to the Sam Goody name as the result of brand recognition research we conducted during fiscal 2002.  Sam Goody Rural stores are located in small or rural cities, generally with populations of 10,000 to 30,000 people, and average approximately 5,900 retail square feet. At the end of fiscal 2003, there were 231 Sam Goody Rural stores in 33 states with total retail square footage of approximately 1.4 million square feet. Sam Goody Rural stores average approximately $700,000 in annual revenue per location.  During fiscal 2003, Musicland opened 19 and closed 20 Sam Goody Rural stores.

Media Play -– Media Play is a superstore format retailer located in metropolitan markets. Media Play stores are operatedoperate primarily in freestanding and strip mall locations in urban and suburban areas and average approximately 45,00045,300 retail square feet. At the end of fiscal 2002, we operated2003, there were 76 Media Play stores in 19 states with total retail square footage of approximately 3.4 million or 11% of our total retail square footage.feet. Media Play stores average approximately $7.3$6.4 million in annual revenuesrevenue per location.  During fiscal 2003, Musicland did not open or close any Media Play stores.

The following table reconciles Musicland stores open at the beginning and end of each fiscal year since the date of acquisition:

*As of the date of acquisition, January 31, 2001.2001

Merchandise

The following is an overview of the merchandise offered at each of Musicland’s four retail store concepts:

Sam Goody - Mall - Sam Goody Mall stores generally offer musica wide assortment of entertainment products such asincluding compact discs, DVD’s, audiocassettes,disks, music, DVDs, books, computer software, electronics, video games and movie videos, sheet music, music-inspired apparel, posters and other music-related accessories. In fiscal 2002, we launched a new mix of products in Sam Goody stores. We doubled the assortment of DVD movies and introduced video gaming, categories that carry lower profit margins but are expected to generate higher sales growth. We also expanded our assortment of hardware products that play music and movies, a natural extension of Sam Goody’s principal product offerings.apparel.

Suncoast - Suncoast stores feature newly released and classic movies, special interest videos and video recordings of popular TV shows. Complementary products include apparel, posters and other products inspired by new releases, as well as blank videotapes, storage cases and other video-related accessories.

On CueSam Goody Rural -On CueSam Goody Rural stores providegenerally offer a wide assortment of entertainment products including movies,compact disks, music, DVDs, books, computer software, electronics, video games and related products.music-inspired apparel.

Media Play - Media Play offers a large assortment of entertainment products including movies, music, books, computer software, video games, electronics, musical instruments and toys.

The following table presents Musicland sales,revenue, by product category, as a percentage of total Musicland sales:revenue:

7

Operations

Sam Goody Mall, Suncoast and On CueSam Goody Rural stores are typically managed by a store manager and an assistant manager. Media Play stores are typically managed by a general manager, an assistant general manager and three to five department managers. Most Musicland stores are open from 65 to 80 hours per week, seven days a week, depending on mall hours. Store staffing levels fluctuate with the size of the store and anticipated sales volume. Advertising, merchandise buying and pricing, and inventory policies for Musicland stores are centrally controlled.

Distribution

The majority of Musicland’s inventory is shipped from its distribution center located in Indiana. From time to time, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors.

Seasonality

Similar to many retailers, Musicland’s business is seasonal. RevenuesRevenue and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season.

Competition

Musicland’s industry is highly competitive. Increased downloading of entertainment and computer software directly via the Internet, the progression of CD recording technology and slumping music sales all have all led to more intense competitive conditions. The industry has begun to test various copy-protection techniques as a potential means to mitigate the impact of CD recording technology advancements. Musicland retail stores also compete with specialty retail chains, mass merchants, bookstores and consumer electronics stores, as well as video rental stores, mail order clubs and various Internet-based retailers.

We believe that Musicland’s convenience-based strategy, service levels and broad product assortment, in combination with the leveraging of Best Buy stores’ core competencies and the re-merchandising strategy, position Musicland to meet current and future competitive challenges.Our Employees

International Segment

Overview

At the end of fiscal 2002, we operated 95 Future Shop stores in 10 Canadian provinces. The stores average 20,200 retail square feet and produce average annual sales of approximately $15.3 million per store. Future Shop stores collectively represent 1.9 million retail square feet, or 6% of our total retail square footage. Reference is made to Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk,” of this report for a discussion regarding risks associated with foreign operations.

The International segment was established in connection with our acquisition of Future Shop in November of fiscal 2002. At the end of fiscal 2002, Future Shop operated 95 stores and was Canada’s largest consumer electronics retailer. Additional information regarding our International operating segment is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 25 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference. In addition, selected International segment financial data is included in note 8 of the Notes to Consolidated Financial Statements on page 52 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

The following table reconciles Future Shop stores open at the beginning and end of each fiscal year since the date of acquisition:

*As of the date of acquisition, November 4, 2001.

Merchandise

Future Shop stores offer a large assortment of home office equipment, consumer electronics, entertainment software and appliances. Home office equipment includes products such as desktop and notebook computers and related peripheral equipment, telephones, wireless communication devices and personal digital assistants. Consumer electronics include products such as television sets, DVD players, cameras, camcorders, VCRs and digital broadcast satellite systems. Entertainment software includes products such as compact discs, video game hardware and software, DVD and VHS movies and computer software. Appliances include major

8

appliances such as washers, dryers, ranges, refrigerators, freezers and dishwashers, as well as vacuums, microwaves and housewares.

The following table presents Future Shop sales, by category, as a percentage of total sales:

* Since date of acquisition on November 4, 2001

Operations

Future Shop stores use a standardized operating system. The operating system includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and performance appraisal as well as merchandise display. Advertising, merchandise buying and pricing, and inventory policies for Future Shop stores are centrally controlled.

Future Shop’s store operations are organized into three divisions, each headed by a vice president. Each vice president has several regional managers who closely monitor store operations and meet regularly with store managers to review management and staff training programs, as well as customer feedback and requests, store operating performance and other matters. Meetings involving store management, product managers, advertising, financial and administrative staff, as well as senior regional and global headquarters personnel, are held quarterly to review operating results and to establish future objectives.

Future Shop stores are typically open seven days a week for approximately 60 to 75 hours a week. A typical store is staffed by a general manager, several department sales managers, a customer service manager and 35 to 45 associate staff, depending on store size and sales volume.

Distribution

The majority of Future Shop’s merchandise, exclusive of appliances, is shipped directly from suppliers to distribution centers in British Columbia and Ontario. Future Shop uses contract carriers to ship merchandise from the distribution centers to retail stores. Appliance sales are fulfilled by the distribution centers or by a contracted third-party distributor. Future Shop stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products, and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. While Future Shop stores typically receive product shipments twice a week, shipments are accelerated during high sales volume periods.

Seasonality

Similar to many retailers, Future Shop’s business is seasonal. Revenues and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season.

Competition

Future Shop’s industry is highly competitive. Future Shop competes against a variety of Canadian retailers, including major department stores, independent consumer electronics and appliance dealers, mail order distributors, discount stores, warehouse clubs and superstores. In addition, Future Shop competes with Internet-based retailers in Canada and the United States. Mass merchandisers continue to increase their assortment of consumer electronics products—primarily those that are less complex to sell, install and operate. Similarly, large home improvement retailers are expanding their assortment of appliances. In addition, Canadian consumers are increasingly downloading entertainment and computer software directly via the Internet.

We believe Future Shop’s low price leadership, large product assortment and focus on customer service in combination with the leveraging of Best Buy stores’ core competencies, effectively position Future Shop to meet current and future competitive conditions.

Our Employees

At the end of fiscal 2002,2003, we employed approximately 94,00098,000 full-time, part-time and seasonal employees across all ofin our operating segments.consolidated operations.  This included 87,000 full-time, part-time and seasonal employees in continuing operations, and approximately 11,000 full-time, part-time and seasonal employees at Musicland.  There are currently no collective bargaining agreements covering any of our employees with the exception of unions that represent hourly employees at 1310 Musicland stores. We have not experienced a strike or work stoppage and we believe that we have favorable employee relations.stoppage.

910

ITEM 2. PROPERTIESItem 2. Properties.

Stores, Distribution Centers and Corporate Facilities

Best Buy, Musicland, Future Shop and Magnolia Hi-FiThe following table summarizes the geographic store locations are included on page 60location of our Annual Report, contained in Exhibit 13.1 to this report, and are incorporated herein by reference.stores at the end of fiscal 2003:

11

Domestic Segment

Best Buy Segment

U.S. Best Buy Stores

At the end of fiscal 2002,2003, we operated 481548 U.S. Best Buy stores totaling approximately 21.624.2 million retail square feet.

U.S. Best Buy stores are serviced by the following major distribution centers:

(1)The Dinuba, California, distribution center was expanded from 644,000 square feet to 1,039,000 square feet during fiscal 2003.

(2)We recently broke ground on a new distribution center in Ardmore, Oklahoma. The distribution center will be located north of the existing location in Ardmore, Oklahoma, and will be owned. The new distribution center is scheduled to open in fiscal 2005.  The existing location is being replaced in order to meet the expected increased demand for technology products and services. The new facility is expected to serve 98 U.S. Best Buy stores when it initially opens and will have the ability to serve up to 125 U.S. Best Buy stores in Arkansas, Kansas, Louisiana, Missouri, New Mexico, Oklahoma and Texas.

(3)At the end of fiscal 2003, the Edina, Minnesota, distribution center distributed entertainment software to certain U.S. Best Buy stores.  We are in the process of relocating the Edina distribution center’s services to our Franklin, Indiana, distribution center.  Following the transition expected to be completed in fiscal 2004 and coinciding with the expiration of the current lease, we will vacate the Edina facility.

In addition, U.S. Best Buy stores lease space in 2017 satellite warehouses in major metropolitan markets for home delivery of major appliances and large–screen televisions. U.S. Best Buy stores utilize approximately 2.52.4 million square feet in these warehouses. In the first quarter of fiscal 2004, we expect to openopened an additional 720,000-square-foot owned distribution center in upstate New York.

Effective March 31, 2003, Best Buy Co., Inc.’s moved its principal corporate offices areinto a new 1.5 million square-foot facility located in Richfield, Minnesota. The new corporate campus replaces existing owned and leased corporate office facilities. In addition to owning this new facility, we continue to own two owned facilities in Eden Prairie, Minnesota, aggregating 540,000 square feet, in Eden Prairie, Minnesota. In addition to owning these twowhich previously served as our principle corporate offices. These facilities are currently for sale. At the end of fiscal 2003, we leasealso leased an additional 550,000 square feet of office space in close proximity to the main corporate office facility. In fiscal 2002, construction commenced on a new corporate campus in Richfield, Minnesota. The new corporate campus, which will replace existing owned and leased corporate office facilities, is expected to be completed in fiscal 2003.facilities.

Magnolia Hi-Fi

At the end of fiscal 2002,2003, we operated 1319 Magnolia Hi-Fi stores totaling approximately 133,000189,000 retail square feet.

Magnolia Hi-Fi leases an 80,000 square-foot80,000-square-foot distribution, warehouse and office facility in Kent, Washington, of which approximately 54,000 square feet are used for distribution and warehouse operations, with the remainder dedicated to a service department and corporate administrative functions. In addition, Magnolia Hi-Fi utilizes a 13,000 square-foot13,000-square-foot leased regional warehouse in Hayward, California.

Musicland Segment

At the end of fiscal 2002, we operated 1,321 Musicland stores totaling approximately 8.8 million retail square feet.

Musicland’s stores are serviced by a 715,000 square-foot owned distribution facility in Franklin, Indiana.

Musicland’s corporate offices are located in a 94,000 square-foot owned facility in Minnetonka, Minnesota. Musicland will be headquartered in Richfield, Minnesota upon the expected completion of the new corporate campus in fiscal 2003.

International Segment

At the end of fiscal 2002,2003, we operated 95104 Future Shop stores and eight Canadian Best Buy stores totaling approximately 1.92.4 million retail square feet.

Future Shop leasesThe operations of the International segment are serviced by two leased distribution centers located in Delta, British Columbia, and Brampton, Ontario. Substantially allThe majority of Future Shop’s merchandise, other than appliances, is distributed from these two distribution centers, which total 288,000are 255,000 square feet and 418,000434,000 square feet, respectively. Appliance sales in western Canada are fulfilled by the distribution center in British Columbia; however, Future Shop contracts with a third-party distributor is used to warehouse and ship appliance inventory in other parts of Canada, primarily Ontario and Alberta.

Future Shop’s corporateThe Brampton distribution center is expected to be expanded to 978,000 square feet by the end of fiscal 2005.  In addition a 413,000-square-foot distribution center was purchased in Langley, British Columbia, during the first quarter of fiscal 2004.  The Langley distribution center will replace the leased Delta distribution center.  The transition to the Langley facility is expected to be completed during fiscal 2004.

Corporate offices for the International Segment are located in a 141,000 square-foot141,000-square-foot leased facility in Burnaby, British Columbia.

Discontinued Operations

At the end of fiscal 2003, we operated 1,195 Musicland stores totaling approximately 8.3 million retail square feet.

Musicland’s stores are serviced by our distribution facility in Franklin, Indiana.  For additional information regarding this facility, refer to the above discussion of U.S. Best Buy Stores.

Musicland’s corporate offices are located in a 94,000-square-foot owned facility in Minnetonka, Minnesota.

12

Operating Leases

Essentially all retail stores and mosta majority of distribution facilities are leased. Terms of the lease agreements generally range from threeup to 20 years. Most of the leases contain renewal options and escalation clauses.

Additional information regarding operating leases is

10

included in note 57 of the Notes to Consolidated Financial Statements beginning on page 4959 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGSItem 3. Legal Proceedings.

We are involved in various legal proceedings arising during the normal course of conducting business. The resolution of those proceedings is not expected to have a material impact on our results of operations and financial condition.

Our Executive Officers are as follows:

Bradbury H. Anderson has been a director since 1986 and is currently Best Buy’s Vice Chairman and Chief Executive Officer. Mr. Anderson assumed the responsibility of Chief Executive Officer effective June 30, 2002, having previously served as President and Chief Operating Officer since 1991. Mr. Anderson has been employed in various capacities with us since 1973.

Richard M. Schulze is a founder of Best Buy.  He has been an officer and director from our inception in 1966 and currently is Chairman of the Board and Chief Executive Officer.Board. Effective June 30, 2002, Mr. Schulze will relinquishrelinquished the duties of Chief Executive Officer while continuing to serve as Chairman of the Board.Officer. Mr. Schulze is also a trustee of the University of St. Thomas, chairman of the board of governors of the University of St. Thomas Business School and a member of the Board of Overseers at the Carlson School of Management at the University of Minnesota and a directorPresident’s Council of Twin Cities Public Television, Inc.

Bradbury H. Anderson is currently our Vice Chairman, having previously served as President and Chief Operating Officer since April 1991. Mr. Anderson has been a director since 1986. Effective June 30, 2002, Mr. Anderson will assume the responsibilities of Chief Executive Officer. Mr. Anderson has been employed in various capacities with us since 1973.Television.

Allen U. Lenzmeier was named President and Chief Operating Officer in March 2002. Mr. Lenzmeier has been a director since 2001.  Mr. Lenzmeier is currently Best Buy's President and Chief Operating Officer. Mr. Lenzmeier joined us in 19841984. Prior to his promotion to his current position, he served as Vice President of Finance— Best Buy Retail Stores from 2001 to 2002 and Operations. He was named Senior Vice President in 1986, promoted toas Chief Financial Officer and Executive Vice President infrom 1991 and then promoted to President of Best Buy Retail Stores in 2001. He is a national trustee for the Boys and Girls Clubs of the Twin Cities and serves on the Business Advisory Council at Minnesota State University.its board of directors.

Thomas C. Healy was promoted to President — Best Buy International in  2001.  Prior to that, he had served as Senior Vice President — Canadian Operations.  Mr. Healy joined us in 1990 and has held positions as regional vice president, district manager and general manager.

Michael P. Keskey was promoted to President — Best Buy Retail Stores in March 2002. Mr. Keskey served as Executive Vice President — Retail Sales from 2001 to 2002 and as Senior Vice President — Retail Sales from 1997 to 2001. Mr. Keskey joined us in 1988 and has since held various positions.

Brian J. Dunn was named Executive Vice President — Retail Sales in March 2002. Mr. Dunn joined us in 1985 and has held positions as senior vice president, regional vice president, regional manger,manager, district manager and store manager.

Marc D. Gordon was named Executive Vice President and Chief Information Officer in 2001. He is responsible for information systems, logisticstechnology and the legal department.supply chain management. Mr. Gordon joined us in 1998 and served as Senior Vice President -— Information Systems and Chief Information Officer. Prior to that, Mr. Gordon had experience in the retail information systems area, most recently for West Marine Products, a West Coast–based specialty retailer/wholesaler of marine products. Mr. Gordon also served as a senior manager with Accenture, a principal with a Boston management consulting firm and a vice president of information systems with Timberland Company.

Darren R. Jackson was named Executive Vice President — Finance and Treasury, and Chief Financial Officer in April 2002. Mr. Jackson joined us in 2000 as Senior Vice President -— Finance and Treasurer and was promoted to Chief Financial Officer in 2001. Prior to that, Mr. Jackson served as chief financial officer of the Full-lineFull-Line Store Division at Nordstrom, Inc. from 1998 to 2000 and as chief financial officer of Carson Pirie Scott & Co. Inc. from 1996 to 1998. A certified public accountant, Mr. Jackson has 1314 years of experience in the retailing industry.

11

Michael P. Keskey was promoted to President of Best Buy Stores in February 2002. Mr. Keskey was promoted to Executive Vice President — Retail Sales in 2001. Prior to that, he had served as Senior Vice President — Retail Sales since 1997. Mr. Keskey joined us in 1988 and has held positions as Vice President — Sales, regional manager, district manager and store manager.

Michael A. Linton was promoted to Executive Vice President — Consumer & Brand Marketing and Chief Marketing Officer in March 2002. Mr. Linton joined us in 1999 as Senior Vice President — Strategic Marketing. Prior to that, Mr. Linton held positions as vice president of marketing at Remington Products Corporation, maker of personal care and grooming products; vice president and general manager of a product category at James River Corporation, a manufacturer and marketer of consumer products, food and packaging; and a general manager at Progressive Insurance. Mr. Linton began his career at The Proctor & Gamble Company in brand management.Company.

Michael London was promoted to Executive Vice President and— General Merchandise Manager in 2001. Prior to that, he served as Senior Vice President - General Merchandise. Mr. London joined us in 1996Merchandise from 1998 to 2001 and as Vice President - General Merchandise.Merchandise from 1996 to 1998. Prior to joining us in 1996, Mr. London was a senior vice president offor NordicTrack, a division of the CML Group, Inc.,fitness equipment manufacturer, and executive vice president for Central Tractor Farm & Country.

George Z. Lopuch was named Executive Vice President - Strategic Planning in 2001. Mr. Lopuch joined us in 1998 as Senior Vice President - Corporate Strategic Planning. Prior to that, Mr. Lopuch wasCountry, a senior vice president of corporate strategic planning and research at SuperValu, Inc.specialty farm products retail supplier.

Philip J. Schoonover was named Executive Vice President — New Business Development in February 2002. He was promoted to Executive Vice President of Digital Technology Solutions in February 2001 after having served for five years as Senior Vice President - Merchandising. Prior to joining us in 1995, Mr. Schoonover was an executive vice president for TOPS Appliance City.City, a retailer of home appliances and consumer electronics.

13

John C. Walden was named Executive Vice President of— Human Capital and Leadership in FebruaryMarch 2002. Mr. Walden served as President of our Internet division, BestBuy.com, Inc. from 1999 to 2002. Prior to joining us in 1999, Mr. Walden served as chief operating officer of Peapod, Inc., an Internet retailer of groceries. Mr. Walden has also held executive positions with Ameritech Corporation, a telecommunications company, and Storage Technology Corporation, anda maker of data storage products.  Earlier he practiced corporate and securities law with Sidley, Austin, Brown and Wood LLP.

Susan S. Hoff was named Senior Vice President — Public Affairs and Investor Relations Officer in 2000. Since joining us in 1983, Ms. Hoff has served in various capacities including Vice President of Corporate Communications and Public Relations. She is the daughter of Founder and Chairman Richard M. Schulze.

Joseph M. Joyce was promoted to Senior Vice President — General Counsel and Assistant Secretary in 1997.  Mr. Joyce joined us in 1991 as Vice President — Human Resources and General Counsel.  Prior to joining us, Mr. Joyce was with Tonka Corporation, a toy maker, having most recently served as vice president, secretary and general counsel.

Bruce H. Besanko joined us in April 2002 as Vice President — Finance/Planning & Performance Management.  Prior to joining us, he spent approximately six years with Sears serving in positions of increasing responsibility.  Mr. Besanko also brings finance and treasury experience from Atlantic Richfield Company and more than eight years of service in the United States Air Force in various leadership roles.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSItem 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSItem 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

The information set forth under the caption “Common Stock Prices” on page 3340 of the Annual Report is incorporated herein by reference.

The information set forth under the caption “Equity Compensation Plan Information” on page 20 of the Proxy Statement, regarding securities authorized for issuance under equity compensation plans, is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATAItem 6. Selected Financial Data.

The information set forth under the caption “10-Year“11-Year Financial Highlights” on pages 18 and 19 of the Annual Report, for the fiscal years 19981999 through 20022003 is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The information given under the caption “Management’s Discussion and Analysis of Results of Operations and Financial Condition” on pages 20 through 3341 of the Annual Report is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our debt is not subject to material interest rateinterest-rate volatility risk. The rates on a substantial portion of our debt may be reset, but may not be more than one percentage point higher than the current rates. If the rates on the debt were to be reset one percentage point higher, our annual interest expense would increase by approximately $8 million. We do not currently manage the risk through the use of derivative instruments.

We have market risk arising from changes in foreign currency exchange rates as a result of our acquisition of Future Shop in Canada in November fiscal 2002.2001. At this time, we do not manage the risk through the use of derivative instruments. A 10% adverse change in the foreign currency exchange rate would not have a significant impact on our results of operations or financial position.

1214

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 8. Financial Statements and Supplementary Data.

The financial statements required by this Item, listed below, are included in the Annual Report contained in exhibit 13.1 to this report, on the pages indicated below and are expressly incorporated herein by this reference.