MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Three Months Ended August 31, 2002 vs. Three Months Ended September 1, 2001

Net sales for the second quarter ended August 31, 2002 were $903.0 million, an increase of $189.4 million or approximately 26.5% over net sales of $713.6 million for the corresponding quarter last year. Approximately 69% of the increase was attributable to new store sales. The increase in comparable store sales in the second quarter of 2002 was 8.0%. The increase in comparable store sales is due to a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings, a strong focus on customer service and the continued success of the Company’s advertising program. Approximately 56% and 44% of sales for the second quarter were attributable to sales of domestics merchandise and home furnishings, respectively.

Gross profit for the second quarter of 2002 was $370.3 million or 41.0% of net sales, compared with $291.3 million or 40.8% of net sales during the second quarter of 2001. The increase in gross profit as a percentage of net sales was primarily attributable to an improved markup on the mix of product purchased partially offset by a relative increase in markdowns recorded during the second quarter of 2002 compared to the second quarter of 2001.

Selling, general and administrative expenses (“SG&A”) were $250.6 million in the second quarter of 2002 compared with $206.7 million in the same quarter last year and as a percentage of net sales were 27.8% and 29.0%, respectively. The decrease in SG&A as a percentage of net sales was primarily attributed to a relative decrease in occupancy costs and costs associated with new store openings, partially offset by a relative increase in payroll and payroll related items.

As a result of the foregoing, operating profit increased to $119.7 million, compared with the $84.7 million during the second quarter of 2001.

Interest income decreased to $3.0 million for the second quarter of 2002 compared to $3.1 million for the second quarter of 2001 due to a decrease in the average investment interest rate partially offset by an increase in invested cash.

The effective tax rate was 38.5% for both the second quarter of 2002 and 2001 due to the weighted average effective tax rate remaining consistent in the states in which the Company currently conducts its business.

As a result of the factors described above, net earnings increased to $75.5 million, compared with $54.0 million in the second quarter of 2001.

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Six Months Ended August 31, 2002 vs. Six Months Ended September 1, 2001

Net sales for the six months ended August 31, 2002 were $1.7 billion, an increase of $390.4 million or approximately 30.3% over net sales of $1.3 billion for the corresponding period last year. Approximately 64% of the increase was attributable to new store sales. The increase in comparable store sales for the first six months of 2002 was 10.4%. The increase in comparable store sales is due to a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings, a strong focus on customer service and the continued success of the Company’s advertising program.

Gross profit for the first six months of 2002 was $688.7 million or 41.0% of net sales, compared with $526.3 million or 40.8% of net sales during the same period last year. The increase in gross profit as a percentage of net sales was primarily attributable to an improved markup on the mix of product purchased partially offset by a relative increase in markdowns recorded during the first six months of 2002 compared to the first six months of 2001.

SG&A was $496.3 million for the first six months of 2002 compared with $396.0 million for the same period last year and as a percentage of net sales were 29.5% and 30.7%, respectively. The decrease in SG&A as a percentage of net sales was primarily attributed to a relative decrease in occupancy costs and costs associated with new store openings, partially offset by an increase in payroll and payroll related items.

As a result of the foregoing, operating profit increased to $192.4 million, compared with the $130.3 million for the first six months of 2001.

Interest income decreased to $5.6 million for the first six months of 2002 compared to $6.2 million for the same period last year due to a decrease in the average investment interest rate partially offset by an increase in invested cash.

The effective tax rate was 38.5% for the first six months of both 2002 and 2001 due to the weighted average effective tax rate remaining consistent in the states in which the Company currently conducts its business.

As a result of the factors described above, net earnings increased to $121.8 million, compared with $84.0 million for the first six months of 2001.

Expansion Program

The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets and the expansion or relocation of existing stores with larger stores. As a result of this program, the total number of Bed Bath & Beyond stores has increased to 433 stores at the end of the second quarter of 2002 compared with 344 Bed Bath & Beyond stores at the end of the corresponding quarter last year. Additionally, the Company operates 28 Harmon stores as a result of a recent acquisition. Total square footage of Bed Bath & Beyond stores grew to 15.8 million square feet at the end of the second quarter of 2002 from 13.2 million square feet at the end of the second quarter of last year.

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During the first six months of fiscal 2002, the Company opened 37 Bed Bath & Beyond stores resulting in an aggregate addition of 1.0 million square feet to total store space. The Company anticipates opening approximately 51 additional Bed Bath & Beyond stores by the end of the fiscal year, aggregating approximately 1.5 million square feet of additional store space.

Financial Condition

Total assets at August 31, 2002 were approximately $1.9 billion compared with approximately $1.6 billion at March 2, 2002, an increase of $232.1 million. Of the total increase, $120.8 million represented an increase in current assets and $111.3 million represented an increase in non-current assets.

The increase in current assets was primarily attributable to a $105.9 million increase in merchandise inventories and a $100.0 million increase in short term investment securities, partially offset by a $95.9 million decrease in cash and cash equivalents. The decrease in cash and cash equivalents was primarily attributable to the investment in short term and long term government agency securities. The increase in merchandise inventories was principally the result of new store space.

The increase in non-current assets was primarily attributable to the $74.5 million increase in long term investment securities, the $20.0 million increase in net property and equipment and the $16.8 million increase in other assets, primarily attributable to goodwill related to the Harmon acquisition.

Total liabilities at August 31, 2002 were $641.9 million compared with $553.2 million at March 2, 2002, an increase of $88.8 million. The increase was primarily attributable to a $40.7 million increase in accounts payable (resulting from an increase in inventories) and a $42.1 million increase in accrued expenses and other current liabilities due to the continued expansion of the Company.

Shareholders’ equity was $1.2 billion at August 31, 2002 compared with $1.1 billion at March 2, 2002. The increase primarily reflects net earnings for the first six months of fiscal 2002 and additional paid-in capital from the exercise of stock options.

Capital expenditures for the first six months of fiscal 2002 were $57.6 million compared with $49.8 million for the corresponding period last year. The increase was primarily attributable to the timing of leasehold improvement expenditures during the first six months.

For fiscal 2002, the Company believes that its current operating cash flow, working capital, and cash and cash equivalents on hand are sufficient to meet its obligations in the ordinary course of business including capital expenditures and new store openings.

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Recent Accounting Pronouncements

In June, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. The Company is required to adopt the provisions of SFAS No. 146 for any exit or disposal activities initiated after December 31, 2002. The Company does not believe that the adoption of SFAS No. 146 will have a material impact on the Company’s consolidated financial statements.

In the first quarter of fiscal 2002, the Company adopted the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” while retaining many of the fundamental provisions covered by that statement. SFAS No. 144 differs fundamentally from SFAS No. 121 in that goodwill and other intangible assets, that are not amortized, are excluded from the scope of SFAS No. 144. SFAS No. 144 also expands the scope of discontinued operations to include more types of disposal transactions. The adoption of SFAS No. 144 did not have a material impact on the Company’s consolidated financial statements.

Additionally, in the first quarter of 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 discontinued the amortization of goodwill and other intangible assets with indefinite useful lives and requires periodic goodwill impairment testing. Consequently, the Company will not amortize any goodwill recognized as a result of the Harmon acquisition described below and will perform impairment testing annually as of the Company’s fiscal year end date. The adoption of SFAS No. 142 did not have a material impact on the Company’s consolidated financial statements.

Acquisition

On March 5, 2002, the Company consummated the all cash acquisition of Harmon Stores, Inc., a health and beauty care retailer, for $24.1 million, net of cash acquired. The Company believes the acquisition will not have a material effect on its consolidated results of operations or financial condition in fiscal 2002.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that it believes to be relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In particular, as further described below, judgment is used in areas such as the provision for sales returns, inventory valuation using the retail inventory method, impairment of assets and accruals for self insurance, litigation and store relocations

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and closings. Actual results could differ from these estimates.

Sales Returns: Sales returns, which are reserved for based on historical experience, are provided for in the period that the related sales are recorded.

Inventory Valuation: Merchandise inventories are stated at the lower of cost or market, using the retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories. At any one time, inventories include items that have been marked down to the Company’s best estimate of their fair market value.

Impairment of Assets: The Company periodically reviews long-lived assets for impairment by comparing the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during that period. The impairment loss is calculated as the difference between asset carrying values and the present value of the estimated net cash flows. The Company does not believe that any material impairment currently exists related to its long-lived assets.

Self Insurance: The Company is self insured for various insurance programs. Self insurance liabilities are based on estimates of claims incurred that are to be paid in the future.

Litigation: The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business which is based on available information and advice from outside counsel, where appropriate. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and may revise its estimates.

Store Opening, Expansion, Relocation and Closing Costs: Store opening and expansion costs are charged to earnings as incurred. Costs related to store relocations and closings are provided for in the period in which management approves the relocation or closing of a store.

Forward Looking Statements

This Form 10-Q may contain forward-looking statements. Many of these forward-looking statements can be identified by use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan, and similar words and phrases. The Company’s actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside the Company’s control. Such factors include, without limitation: general economic conditions, changes in the retailing environment and consumer spending habits, demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; unusual weather patterns; competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the ability to find suitable locations at reasonable occupancy costs to support the Company’s expansion program; and the cost of labor, merchandise and other costs and expenses. The Company does not undertake any obligation to update its forward-looking statements.

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