7 ELEVEN INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------ to ------

Commission File Numbers 0-676 and 0-16626
----------------------
7-ELEVEN, INC.
(Exact name of registrant as specified in its charter)

TEXAS 75-1085131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2711 North Haskell Ave., Dallas, Texas 75204-2906
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code,
214-828-7011

-----------------------

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- --------------------
NONE N/A

Securities Registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.0001 PAR VALUE

Indicate by check mark whether we (1) have 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 we
were required to file these reports), and (2) have been subject to these filing
requirements for the past 90 days.
Yes [X] No [ ]

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $295,995,975 at March 15, 2002, based upon
27,950,517 shares held by persons other than executive officers, directors and
5% owners and a price of $10.59 per share.

104,829,197 shares of common stock, $.0001 par value (our only class of
common stock), were outstanding as of March 15, 2002.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
listed Parts and Items of Form 10-K: Definitive Proxy Statement for April 24,
2002, Annual Meeting of Shareholders: Part III, Items 10, 11, 12 and 13.
===============================================================================

PART I

ITEM 1. BUSINESS.

GENERAL

We introduced the convenience store concept in 1927,
when, as an ice company, our retail outlets began selling
milk, bread and eggs. Today, as we prepare to celebrate our
75th anniversary, we are the largest convenience store chain
in the world. We operate, franchise or license more than
22,000 stores worldwide, primarily under the name "7-Eleven."

The name "7-Eleven" originated in 1946 when our stores
were open from 7 a.m. until 11 p.m. Today, the majority of
our stores in the United States and Canada provide more than
7 million daily customers with 24-hour convenience, seven
days a week. Our stores generally range in size from 2,400
to 3,000 square feet and carry about 2,300 to 2,800 items.
Please note that throughout this report, when we refer to
"our stores," we mean our company-operated and franchised
stores in the United States and our stores in Canada, all of
which are company-operated.

We are using our scale, well-known brand and best
practices developed by our affiliate and licensee, Seven-
Eleven Japan Co., Ltd. to execute our strategic initiatives.

Our U.S. same-store merchandise sales growth was 5.1%
for 2001 and 5.3% for 2000 after adjusting for the additional
day due to leap year in 2000.

Our principal executive offices are located at 2711
North Haskell Avenue, Dallas, Texas 75204. Our telephone
number is 214/828-7011. Our Web site address is www.7-
Eleven.com. We were incorporated in Texas in 1961 as the
successor to an ice business organized in 1927. On April 30,
1999, we changed our name from The Southland Corporation to
7-Eleven, Inc.

For financial reporting purposes, during 2001 we
conducted our business in one operating segment -- the
operating, franchising and licensing of convenience food
stores. For specific information about our financial results
for 2001, refer to our financial statements at pages 45 to
79.

BUSINESS MODEL

Because of our market position, brand recognition and
ability to share best practices with Seven-Eleven Japan, we
have developed a business model that we believe is difficult
to replicate. The key elements of this model are:

* a differentiated merchandising strategy;

* utilization of our retail information system;

* managed distribution, including daily delivery of
fresh foods and other time-sensitive products to more than
3,900 of our stores;

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* providing a convenient shopping environment; and

* a differentiated franchise model.

DIFFERENTIATED MERCHANDISING STRATEGY. We offer a broad
array of products, including many not traditionally available
in convenience stores, to meet the changing needs of our
customer base. These products include high-quality fresh
foods that are delivered daily to our stores. In addition, we
sell a number of products that are developed specifically for
our stores. Working with our vendors to develop and produce
proprietary items is an integral part of our merchandising
strategy. Proprietary items typically provide higher profit
margins than other products we sell.

We implement our merchandising strategy through a
variety of means. We employ item-by-item inventory
management to keep certain basic items in-stock. In
addition, we promote new high-potential items. We expect our
franchisees and store managers to monitor customer buying
patterns to maximize their sales by staying stocked on
popular items, managing product assortment and merchandising
effectively.

Our goal is to maintain consistent, competitive prices
on our merchandise. We use our significant buying power to
seek the lowest possible cost on the items we sell. This
enables us to execute an everyday fair pricing strategy and
manage our gross profit margin.

Our gasoline strategy is to be competitively priced to
maximize gross profit. Because we believe that gasoline
sales contribute to increased store traffic, we intend to
sell gasoline wherever practical. We expect that the
majority of our new stores opening in the United States and
Canada over the next few years will sell gasoline.

UTILIZATION OF OUR RETAIL INFORMATION SYSTEM. We were
the first major convenience store chain in the United States
to use an integrated set of retail information technology
tools. In designing our retail information system, we
adapted the best practices of our largest area licensee,
Seven-Eleven Japan. Through the use of this system, our
franchisees and store managers are able to:

* analyze sales on individual items, sales trends,
customer preferences and the factors that affect each of
these; and

* more effectively maintain optimal inventory levels
and eliminate slow-moving items from inventory.

The system automates various tasks that previously
would have required significant resources and time, so our
franchisees and store managers can focus on inventory
management and customer service.

All of our U.S. stores are able to use the retail
information system to place orders. We aggregate these
orders at our headquarters and transmit them to our vendors
and distributors.

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MANAGED DISTRIBUTION. We are working with our vendors
and distributors to provide daily delivery of fresh food and
other items to our stores, to lower the cost of delivery, and
to shift some deliveries to off-peak hours. The combined
distribution centers, which consolidate orders from multiple
suppliers for daily distribution to individual stores, offer
a number of advantages over other distribution systems,
including:

* more frequent deliveries of time-sensitive and
perishable products such as milk, bread and fresh foods;

* off-peak, consolidated deliveries that allow store
personnel to focus on store operations during peak sales time
and reduce congestion in our typically small parking lots;

* more customized deliveries and improved in-stock
levels; and

* access to products that traditionally have not
been available to individual convenience stores.

We are working to increase both the number of stores
that use the combined distribution centers and the number of
items available for delivery from the centers.

PROVIDING A CONVENIENT SHOPPING ENVIRONMENT. We seek
to provide our customers with a convenient, safe and clean
store environment. Over the last several years we have
improved lighting inside and outside our stores, modernized
store signage and installed canopies over our gasoline pumps.
Additionally, we have implemented a program that aims to
remodel stores or upgrade equipment at each of our locations
at least once every three years.

We are focused on developing our employees to improve
customer service and store operations. This year, we are
introducing new formalized employee training, mandated
certification programs and linkage of performance
measurements to our fundamental business concepts. We plan
to develop similar programs to offer our franchisees.

DIFFERENTIATED FRANCHISE MODEL. More than half of our
stores in the United States are operated by independent
franchisees. Our franchise model is different from others
because we own or lease the stores and equipment used by our
franchisees. In addition, the ongoing royalties we receive
from our franchisees are based upon a percentage of store
gross profit. We believe this model better aligns our
interests with those of our franchisees and allows us to
provide consistency in the store environment and shopping
experience for our customers. We also provide more support
to our franchisees than most franchisors, including service
support, training and access to our infrastructure.

GROWTH STRATEGY

INCREASING SAME-STORE MERCHANDISE SALES. Our
merchandising team focuses on developing and introducing new
products in order to increase overall merchandise sales. In
addition, by using the retail information system, our
merchandising team, franchisees and store managers are better
able to increase sales by enhancing the product mix in each
store.

EXPANDING IN EXISTING MARKETS. Our store development
efforts are focused on our existing markets to take advantage
of population density and traffic. Typically, new stores are
concentrated around the combined distribution centers,
commissaries and bakeries that allow us to operate more

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efficiently. We believe that the potential exists for
significant expansion in our core urban and suburban markets,
and we plan to open about 125 to 150 new stores per year in
these areas during 2002 and 2003. We evaluate sites for new
stores by focusing on population density, demographics,
traffic volume, visibility, ease of access and economic
activity in the area.

PROVIDING GREATER CONVENIENCE TO CUSTOMERS. We intend
to continue to improve customer convenience through
innovative merchandising programs, such as Vcom, our
proprietary self-service kiosk that offers checkcashing,
money order, money transfer and traditional ATM services.

In future years, we anticipate that the Vcom kiosks will
allow customers to pay bills electronically and purchase
event tickets on-line. In addition to the revenue streams
associated with Vcom, we believe we also will benefit from
attracting new customers to our stores. We continue to
pursue our Vcom strategy of working with third parties in a
manner that minimizes our capital outlays.

We are currently operating a 98-store Vcom pilot program
in Texas and Florida. Upon successful completion of the
pilot program, we anticipate beginning deployment of
additional Vcom kiosks to our stores beginning in the second
half of 2002, with up to 3,500 kiosks deployed by the end of
2003. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources - Vcom."

INCREASING THE VALUE OF OUR LICENSES AND EXPANDING
INTERNATIONALLY. By continuing to develop our
infrastructure, we can offer a more attractive financial
opportunity to prospective licensees. This will continue to
strengthen the value of the brand. Our long-range plans
include expanding into a number of countries where we
currently do not have a presence. In September 2001, we
announced our plans to explore additional licensing
arrangements in China. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Other Issues- Related Party Transactions - Expansion in
China."

PRODUCTS AND SERVICES

Our stores carry a broad array of products which our
merchandising team selects based on customer demands, sales
potential and profitability. At the same time, franchisees
and store managers supplement this product assortment with
items intended to appeal to local preferences.

Based upon total store purchases, we estimate that the
breakdown of our merchandise sales in the United States and
Canada by principal product category for the last three years
is as follows:

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In addition, gasoline sales accounted for 24.7% in
1999, 29.0% in 2000 and 28.2% in 2001 of our total net sales
in the U.S. and Canada.

Our merchandise assortment includes a number of items
widely identified with us, including Slurpee semi-frozen
carbonated beverages, Cafe Select coffee, Big Gulp fountain
beverages and Big Bite hot dogs. During 2001, we introduced
two popular new Slurpee flavors, Mountain Dew and Mountain
Dew Code Red. We also introduced our proprietary Premium
Dark Mountain Roast coffee, which has a robust flavor
designed to compete with the offerings at coffeehouses. We
continue to work with third-party vendors to develop products
specifically for our stores, such as Myntz! Instastripz, one
of the fast-growing varieties of "film" mints.

In addition to a variety of products, our stores offer
a number of services to our customers. We have the largest
ATM network of any retailer, with more than 5,200 ATMs in our
U.S. stores and an additional 500 in Canada. We continue to
be one of the leading retailers of money orders in the United
States. Our stores provide other services that draw customer
traffic, such as the sale of lottery tickets.

We sell gasoline at more than 2,450 stores. We
anticipate that most of our new stores will sell gasoline.
New stores tend to have higher gasoline sales because they
have more pumps with convenient configurations and offer the
"pay-at-the-pump" option. More than 2,250 of our stores are
equipped to accept credit cards at the pump. We are
continuing to install "pay-at-the-pump" technology in
locations where we believe it is cost-effective.

We manage gasoline sales through a centralized
monitoring process to minimize the effects of gasoline margin
volatility and maximize gross profit per gallon. Almost all
of our stores that sell gasoline offer CITGO-branded
gasoline.

RETAIL INFORMATION SYSTEM

Our retail information system is a proprietary system
that provides our franchisees, store managers and management
team with timely access to sales information by item captured
by a point-of-sale scanning system at the register. As a
part of the system, stores can be linked to vendors, our
primary third-party distributor and our combined distribution
centers for ordering and item-level information sharing.
Effective utilization of the system is the foundation of our
business model, allowing franchisees and store managers the
ability to manage both their products and time more
effectively.

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The system features:

* a point-of-sale, touch-screen system with
scanning and integrated credit card authorization, supported
by a centralized price book;

* daily ordering for all items, supported by 5-
day forward looking weather forecasts, merchandise messages
and historical sales information;

* category management and item level sales
analysis;

* integrated gasoline and "pay-at-the-pump"
functionality;

* automated back-office functions, such as sales
and cash reporting, payroll, gasoline pricing and inventory
control, which are connected directly to our accounting
system; and

* the ability to make delivery adjustments and
perform write-offs on a hand-held unit.

We have installed hardware and software for the retail
information system in the United States. We worked with a
number of vendors to design and develop the system, including
ACS Retail Solutions, EDS, NCR and NEC. We developed the
system to support our business model in substantially the
same manner that Seven-Eleven Japan's retail technology
supports its business model.

We completed a number of enhancements to the system
during 2001, including debit card processing, additional
credit card functionality, lottery management, integration of
money orders and check authorization into the point-of-sale
registers, additional support for age verification on
restricted items and further support for promotions and
improved item sales reporting. During 2002, we plan
additional enhancements to the system. These will include
enhancements to ordering and product assortment and
additional automation of accounting functions, such as retail
inventory adjustments. We also will be working on additional
functions to support merchandising and ordering, targeted to
be rolled out in 2003. We are implementing an intranet home
page to facilitate communication to the stores and support
other functions, such as labor scheduling. We plan to
install an additional server in each store to support in-
store training and other functions.

We own all of the necessary licenses for exclusive use
of the retail information system. All of our U.S. stores
have the scanning capability of the system today. Following
additional development work, we plan to install the system in
Canada beginning in 2002.

COMMISSARIES AND BAKERIES

We have contracted with third-parties who own and
operate 11 bakeries and 12 commissaries that currently
provide daily deliveries of fresh foods such as sandwiches,
salads and baked goods to about two-thirds of our stores.
These commissaries and bakeries average about 20,000 square

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feet in size. Each commissary ships approximately 13,000
units daily to our stores. Each bakery ships about 28,000
units. All store deliveries from our commissaries and
bakeries are made from one of our combined distribution
centers so that fresh products are in the stores by 5 a.m.
for our morning customers. In addition to whatever
governmental inspections may be required, we inspect these
third-party commissaries and bakeries periodically to ensure
that our products are produced in a safe and sanitary
environment.

Bakeries and commissaries currently serve more than
3,900 of our stores. We expect to provide daily fresh food
deliveries to about 1,200 additional stores by the end of
2002.

DISTRIBUTION

We rely primarily on traditional distribution services
for the delivery of non-perishable goods to our stores.
McLane Company, Inc., a wholly owned subsidiary of Wal-Mart
Stores, Inc. is our primary third-party distributor. They
deliver traditional grocery products to all of our company-
operated stores and a majority of our franchised stores
pursuant to a ten-year contract we entered into in 1992. The
contract expires in November 2002. We are obtaining and
evaluating proposals from McLane and other companies to
provide these distribution services after the current
contract expires. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity
and Capital Resources-Contractual Obligations and Commercial
Commitments-Financial Obligations-Distribution Services."

Our stores also purchase a variety of merchandise,
including certain beverages and snack foods, directly from a
number of vendors and their wholesalers. We have been
working with these vendors and distributors to improve the
accuracy and scheduling of deliveries.

Currently, we use a system of 21 combined distribution
centers in the United States and Canada to service more than
3,900 of our stores, and we expect to add about 1,200 stores
to the system during 2002, which will bring the total daily
distribution to almost 90%.

Combined distribution centers typically serve stores
within a 90-minute drive. The 21 combined distribution
centers are operated by third parties experienced in
logistics. The average center is approximately 20,000 square
feet in size and ships about 60,000 units to our stores
daily. Each center has cross-docking facilities so that
every incoming shipment is matched with an outgoing order.
Each center serves an average of 150 to 200 stores using
dedicated trucks on route systems that are exclusive to us.
The centers receive deliveries of products such as milk,
bread, produce, fresh and packaged bakery products, fresh
sandwiches and other perishables from a variety of suppliers,
including the commissaries and bakeries. Merchandise is then
sorted to fill orders placed by area stores. All store
deliveries are made by 5 a.m. the following day so that fresh
products are ready for morning customers. For perishable
products with a longer shelf life such as juices, deli meats
and cheeses, the combined distribution centers may hold three
to seven days of supplier-owned inventory when demonstrated
to be more efficient and cost-effective.

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FRANCHISEES

As of December 31, 2001, independent franchisees
operated 3,174 7-Eleven stores in the United States.
Merchandise sales by franchised stores are included in our
net sales and totaled approximately $3.9 billion for the year
ended December 31, 2001. Gasoline sales at franchised stores
are also included in our net sales. In addition, we own all
gasoline inventories at all but one of our franchised stores.

In our franchise program, we select qualified
applicants and train the operators who will participate in
store management. The franchisee pays us an initial fee that
varies by store and is generally calculated based upon the
gross profit of the store if it has been operating for more
than 12 months, or average gross profit of the 7-Eleven
stores in the designated market area if the store has been
operating for less than 12 months. Under the standard
franchise agreement, we lease to the franchisee a ready-to-
operate 7-Eleven store and bear the costs of acquiring the
land, building and equipment as well as most utility costs
and property taxes. The standard agreement has an initial
term of ten years, or the term of our lease on the store if
shorter than ten years. The franchisee pays for all business
licenses, permits and in-store selling expenses. We finance
a portion of these costs, as well as the ongoing operating
expenses and inventory purchases.

Under our standard franchise agreement, we generally
receive approximately 52% of the merchandise gross profits.
In addition, we pay the franchisee a commission in connection
with gasoline sales which is the greater of one cent per
gallon sold or 25% of the gasoline gross profit. The
franchisee may terminate the franchise at any time. We may
terminate the franchise only for cause following the notice
specified in the franchise agreement.

Approximately 40% of our franchise agreements
expire on December 31, 2003. We are working with our
franchisees to develop a new franchise agreement to replace
agreements that are scheduled to expire on or after that
date. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Issues -
Franchise Agreement Renewal."

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LICENSEES

As of December 31, 2001, area license agreements
covered the operation of 16,819 7-Eleven stores in the
following countries and U.S. territories:

COUNTRY TOTAL STORES
-------------- ------------
Japan 8,924
Taiwan 2,908
Thailand 1,722
South Korea 1,001
China 516
United States 441
Mexico 328
Australia 267
Malaysia 189
Philippines 161
Singapore 156
Norway 63
Sweden 60
Denmark 37
Spain 15
Puerto Rico 13
Turkey 10
Guam 8
----------
TOTAL 16,819
==========

We receive royalty payments from our area licensees
based on a percentage of their gross sales. We have an
equity interest in the Puerto Rico and Mexico area licensees.

COMPETITION

Our stores compete with a number of national,
regional, local and independent retailers, including grocery
and supermarket chains, grocery wholesalers and buying clubs,
other convenience store chains, oil company gasoline/mini-
convenience stores, food stores and fast food chains as well
as variety, drug and candy stores. In sales of gasoline, our
stores compete with other food stores, service stations and,
increasingly, supermarket chains and discount retailers. We
generate only a very small percentage of the gasoline sales
in the United States. Each store's ability to compete
depends on its location, accessibility and customer service.
The rapid growth in the numbers of convenience-type stores
opened by oil companies over the past several years has
intensified competition.

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TRADEMARKS

Our 7-Eleven trademark, registered in 1961, is well-
known throughout the United States and in many other parts
of the world. Our other trademarks and service marks
include Slurpee, Big Gulp, Big Bite, Deli Central, Cafe
Select, World Ovens and Quality Classic Selection, as well
as many other trade names, marks and slogans relating to
other foods, beverages and items such as 7-Eleven Cafe
Cooler, 7-Eleven Frut Cooler, and Vcom.

EMPLOYEES

At December 31, 2001, we had 33,313 employees.

OUR MAJORITY SHAREHOLDER

Our majority shareholder, IYG Holding Co., is owned
51% by Ito-Yokado and 49% by Seven-Eleven Japan. IYG
Holding is a Delaware corporation formed in 1991 to acquire
and hold our common stock.

On March 16, 2000, IYG Holding purchased 22,736,842
shares of common stock for $540.0 million in a private
transaction. As a result of that purchase, IYG Holding
owned 76,124,428 shares, or 72.6%, of our common stock at
December 31, 2001. In addition, IYG Holding's shareholders
own quarterly income debt securities convertible into a
maximum of 20,924,069 shares of our common stock. If these
debt securities were converted into the maximum number of
shares issuable upon conversion, IYG Holding's shareholders
would beneficially own approximately 77.2% of our common
stock.

ITO-YOKADO. Ito-Yokado is among the largest
retailers in Japan. Its principal business consists of
operating approximately 150 superstores that sell a broad
range of food, clothing and household goods. In addition,
its activities include operating a chain of supermarkets and
two restaurant chains doing business under the names
"Denny's" and "Famil." All of Ito-Yokado's operations are
located in Japan except for two stores in China and some
limited overseas purchasing activities.

SEVEN-ELEVEN JAPAN. Seven-Eleven Japan is a 50.3%-
owned subsidiary of Ito-Yokado and is our largest area
licensee, operating approximately 9,000 stores in Japan. It
owns Seven-Eleven (Hawaii), Inc., which, as of December 31,
2001, operated an additional 56 7-Eleven stores in Hawaii
under a separate area license agreement covering that state.

ENVIRONMENTAL MATTERS

We are subject to various federal, state and local
environmental laws and regulations, including the Resource
Conservation and Recovery Act of 1976, the Comprehensive
Environmental Response Compensation and Liability Act of
1980, the Superfund Amendments and Reauthorization Act of
1986 and the Clean Air Act. The enforcement of these laws
by the U.S. Environmental Protection Agency and the states
will continue to affect our operations by imposing increased
operating and maintenance costs and capital expenditures
required for compliance. In addition, certain procedures
required by these laws can result in increased lead times
and costs for new facilities. Violation of environmental
statutes, regulations or orders could result in civil or
criminal enforcement actions.

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For a description of current environmental projects
and proceedings, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Other
Issues-Environmental."

RECAPITALIZATION

On March 16, 2000, IYG Holding purchased 22,736,842
newly issued shares of our common stock for $540 million, or
$23.75 per share. This purchase price represented a premium
of $10.75, or 83%, over the stock's closing price on
February 29, 2000, the trading day immediately before we
publicly announced the sale. We used these funds primarily
to reduce debt. As a result of this purchase, IYG Holding
currently owns 76,124,428 shares, or 72.6%, of our common
stock. The balance of our common stock is thinly traded,
with average daily trading volume during 2001 of
approximately 70,000 shares.

In addition, at our April 26, 2000, Annual Meeting of
Shareholders, our shareholders approved an amendment to our
Articles of Incorporation to effect a one-for-five reverse
stock split of our common stock. The reverse stock split
became effective on May 1, 2000.

RISK FACTORS

RISKS PARTICULAR TO OUR BUSINESS

FUTURE TOBACCO LEGISLATION, CAMPAIGNS TO DISCOURAGE
SMOKING, INCREASED TAXES ON TOBACCO PRODUCTS AND AN INCREASE
IN WHOLESALE PRICES OF TOBACCO PRODUCTS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR REVENUES AND GROSS PROFIT.

Sales of tobacco products have averaged approximately
26% of our merchandise sales over the past three fiscal
years. Future tobacco legislation, national and local
campaigns to discourage smoking and increases in taxes on
cigarettes and other tobacco products could cause sales or
unit declines which could have a material adverse effect on
sales of and margins for the tobacco products we sell.

In addition, major cigarette manufacturers continue
to increase the wholesale prices of their products. If we
are unable to pass future price increases on to our
customers, gross profit margin on tobacco products would
decline.

INCREASES IN THE WHOLESALE COST OF GASOLINE COULD
ADVERSELY AFFECT OUR REVENUE AND GROSS PROFIT.

Over the past three years, gasoline sales have
averaged approximately 27% of our total net sales and 9.6%
of our gross profit. Increases in the wholesale cost of

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gasoline could adversely affect our revenues if our retail
gasoline gallons declined, and would adversely affect our
gross profit if we are not able to fully pass on these
increases to our customers.

CHANGES IN TRAFFIC PATTERNS AND INCREASED COMPETITION
COULD AFFECT OUR REVENUES.

We compete with numerous other convenience stores,
supermarket chains, drug stores, fast food operations and
other retail outlets. In addition, our stores that offer
self-service gasoline compete with gasoline service stations
and, more recently, supermarkets and discount retailers that
offer gasoline. Our stores compete in large part based on
their ability to offer convenience to customers. As a
result, changes in traffic patterns and the type, number and
location of competing stores could result in the loss of
customers and a corresponding decrease in revenues for
affected stores.

UNFAVORABLE WEATHER CONDITIONS IN THE SPRING AND
SUMMER MONTHS COULD ADVERSELY AFFECT OUR BUSINESS.

Weather conditions can have a significant effect on
our sales, as buying patterns have shown that our customers
increase their transactions and also purchase higher profit
margin products when weather conditions are favorable.
Consequently, our results are seasonal, and we typically
earn more during the warmer second and third quarters.
Unusually inclement weather conditions during those quarters
may adversely affect our sales and profits.

AS A RESULT OF OUR GASOLINE BUSINESS, WE ARE SUBJECT
TO EXTENSIVE AND CHANGING ENVIRONMENTAL REGULATION, AND THE
COSTS OF COMPLIANCE COULD REQUIRE SUBSTANTIAL ADDITIONAL
CAPITAL EXPENDITURES.

We are subject to extensive environmental laws and
regulations, particularly those regulating underground
storage tanks and vapor recovery systems. Compliance with
these regulations requires significant capital expenditures.
These laws and regulations are subject to change. Any
increased regulation could require substantially greater
capital expenditures.

WE MAY INCUR SUBSTANTIAL LIABILITIES FOR REMEDIATION
OF ENVIRONMENTAL CONTAMINATION AT OUR STORES.

Under various federal, state and local laws,
ordinances and regulations, we may be liable for the costs
of removing or remediating contamination. We may incur
these liabilities at sites we currently own, or at sites we
used to own, regardless of whether we knew about or were
responsible for any contamination. The presence of
contamination may subject us to liability to third parties
and may adversely affect our ability to sell or rent such
property.

Additionally, persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be
liable for removing or remediating contamination at sites
where these substances are located, whether or not the sites
are owned or operated by those persons. We may be deemed to
have arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may be liable for removal
or remediation costs, as well as other related costs,
including governmental fines, and injuries to persons,
property and natural resources.

12

OUR BUSINESS IS SUBJECT TO NUMEROUS OTHER REGULATIONS
THAT MAY AFFECT OUR REVENUES AND RESULTS OF OPERATIONS.

In certain areas where our stores are located, state
or local laws limit the stores' hours of operation or their
sale of alcoholic beverages, tobacco products, possible
inhalants and lottery tickets. Failure to comply with these
laws could adversely affect our revenues because these state
and local regulatory agencies have the power to revoke,
suspend or deny applications for and renewals of permits and
licenses relating to the sale of these products or to seek
other remedies. Regulations related to wages also affect
our business, and any appreciable increase in the statutory
minimum wage would result in an increase in our labor costs.
All of these regulations are subject to legislative and
administrative change from time to time.

OUR OPERATIONS IN CALIFORNIA HAVE BEEN, AND WILL
LIKELY CONTINUE TO BE, ADVERSELY AFFECTED BY INCREASES IN
THE PRICE OF ELECTRICITY.

Electricity prices in California rose significantly
during 2001. The unstable utility market in California has
become even more uncertain after Enron Corporation filed for
bankruptcy in December 2001. On October 30, 1998, we entered
into a contract with PG&E Energy Services Corp., effective
through June 30, 2004, to provide electricity to about 75
percent of our nearly 1,200 stores in California. The
prices we agreed to pay under this contract are lower than
those available in the market today. In June 2000, PG&E
Energy Services assigned the contract to Enron Corporation.
The California Public Utility Commission is considering
several issues related to utility contracts generally, but
has not yet ruled on these issues. It is possible that the
Commission may issue a ruling that effectively invalidates
all contracts of the type we have with Enron. In that
case, we would be forced to purchase our electricity through
"bundled service" at then-current market rates. If that
happens, we expect that our utility costs may increase by as
much as $5 million over the internal projections we used in
preparing our guidance for investors about our expected
results for 2002.

Even if the Commission's ruling permits our contract
to remain in effect, it is possible that the bankruptcy
court will permit Enron to force us to amend the contract to
increase our cost or to reject the contract, effectively
terminating it. If the contract is amended, our electricity
costs in California may increase significantly. If the
contract is terminated, the impact will be similar to the
impact of an unfavorable ruling from the California Public
Utility Commission, as described in the paragraph above.

WE PURCHASE SUBSTANTIALLY ALL OF OUR GASOLINE FROM
ONE SUPPLIER, AND ANY SUDDEN DISRUPTION IN SUPPLY COULD
ADVERSELY AFFECT OUR REVENUES.

Gasoline sales comprise a substantial portion of our
total sales. We purchase mosty all of our gasoline from
CITGO Petroleum Corporation under a product purchase and
supply agreement that expires in 2006. We may not be able
to obtain alternative sources of gasoline quickly if our
supplies from CITGO were suddenly disrupted. Any disruption
in the supply of gasoline from CITGO may leave

13

us, at least for a period of time, unable to meet the demand
of our customers, which would adversely affect our sales and
profitability. Although we believe we would be able to
purchase gasoline from other suppliers if our supply from
CITGO were disrupted, we may be required to pay a higher
price, which would adversely affect our gasoline profits.

RISKS PARTICULAR TO OUR CAPITAL STRUCTURE

OUR FINANCIAL LEVERAGE MAY IMPAIR OUR FLEXIBILITY IN
OBTAINING ADDITIONAL FINANCING AND IN PURSUING BUSINESS
OPPORTUNITIES.

Our financial leverage has important consequences to
the holders of our common stock, including the following:

* It may be more difficult for us to obtain
additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or
other purposes;

* It may be more difficult for us to implement our
business strategy, adjust to changing market conditions,
compete effectively and weather a downturn in general
economic conditions; and

* We may have to pay higher interest rates on our
borrowings.

If our cash flow and capital resources are
insufficient to fund our debt service obligations, we may be
forced to reduce or delay planned expansion and capital
expenditures, sell assets, obtain additional equity capital
or restructure our debt.

OUR DEBT FACILITIES CONTAIN RESTRICTIVE COVENANTS,
WHICH MAY LIMIT OUR ABILITY TO ENGAGE IN VARIOUS ACTIVITIES.

Our bank credit facilities and the indentures related
to our indebtedness contain a number of significant
covenants that, among other things, restrict our ability and
that of our subsidiaries to dispose of assets, incur
additional indebtedness and pay dividends. In addition, we
are required to satisfy financial tests. Failure to comply
with these covenants could cause a default under our debt
obligations and result in our debt becoming immediately due
and payable which would materially adversely affect our
business, financial condition and results of operations.

14

AS A RESULT OF ITS POSITION AS OUR MAJORITY
SHAREHOLDER, IYG HOLDING CAN CONTROL THE OUTCOME OF ANY
EVENT REQUIRING A VOTE OF OUR SHAREHOLDERS.

At December 31, 2001, IYG Holding owned 72.6% of our
outstanding common stock. In addition, IYG Holding's
shareholders own quarterly income debt securities
convertible into a maximum of 20,924,069 shares of our
common stock. If these debt securities were converted into
the maximum number of shares issuable upon conversion, IYG
Holding's shareholders would beneficially own approximately
77.2% of our common stock. As our majority owner, IYG
Holding is able to determine the outcome of all corporate
actions requiring shareholder approval. For example, IYG
Holding can control decisions with respect to:

* our direction and policies, including the election
and removal of members of our board of directors;

* mergers or other business combinations involving us;

* our acquisition or disposition of assets;

* future issuances of our common stock or other
securities;

* our incurrence of debt;

* the payment of any dividends on our common stock; and

* amendments to our certificate of incorporation and
bylaws.

Ito-Yokado, as 51% owner of IYG Holding, can
similarly control our business decisions.

15

ITEM 2. PROPERTIES

STORES. The following table shows the location and
number of our company-operated and franchised 7-Eleven stores
in operation on December 31, 2001. These figures include
seven stores that we operate under names other than 7-Eleven.
We plan to convert these stores to the 7-Eleven name over the
next few years or close them.

16

ADDITIONAL INFORMATION ABOUT PROPERTIES AND LEASES. At
December 31, 2001, 37 7-Eleven stores were under
construction. We owned or were under contract to purchase
22 undeveloped sites, and had leases on another 152
undeveloped sites. In addition, at year-end 2001 we owned 64
store properties available for sale, including 29 unimproved
parcels of land, 21 closed store locations, and 14 parcels of
excess property adjoining store locations. At December 31,
2001, 15 of these properties were under contract for sale.

At December 31, 2001, we held leases on 159 closed
stores or other non-operating facilities, 15 of which were
leased from the 7-Eleven, Inc. Employees' Savings and Profit
Sharing Plan. Of these 159 leases, 117 were subleased to
third parties at year-end 2001.

Generally, we lease our stores for primary terms of 14
to 20 years, with options to renew for additional periods.
Many leases grant us a right of first refusal if the lessor
decides to sell the property. In addition to our minimum
annual rental payments, many leases require us to pay
percentage rental payments if sales exceed a certain amount,
and to pay taxes, insurance and maintenance.

HEADQUARTERS. Our headquarters are located in Dallas,
Texas, in a building known as Cityplace Tower. One of our
subsidiaries owns Cityplace Tower, subject to certain
outstanding debt, and leases it to us. Our lease covers the
entire Cityplace Tower, but permits us to sublease. For the
past five years, our subleases to other tenants have resulted
in Cityplace Tower being virtually completely leased or
reserved for expansion under current leases.

ITEM 3. LEGAL PROCEEDINGS

At December 31, 2001, we were not a party to, nor was
any of our property the subject of, any pending material
legal proceeding.

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

No matters were submitted to a vote of security holders
during the fourth quarter of 2001.

17

PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Our common stock, $.0001 par value per share, is our
only class of common equity and is our only security with
voting rights. As of March 1, 2002, 104,829,197 shares of
our common stock were issued and outstanding, held by 1,973
record holders. During 2001, our common stock was traded on
the New York Stock Exchange under the symbol "SE." The
table below shows the price range for our common stock
during each quarter of 2000 and 2001 and the closing price
of our common stock on the last trading day of each quarter.
We have adjusted all figures to reflect the one-for-five
reverse split of our common stock that became effective on
May 1, 2000.

QUARTERS PRICE RANGE
HIGH LOW CLOSE
2000
FIRST $ 21.25 $ 8.13 $ 18.75
SECOND 21.25 11.88 13.75
THIRD 15.63 12.00 12.75
FOURTH 13.00 8.00 8.75

2001
FIRST $ 11.52 $ 8.50 $ 9.90
SECOND 13.16 8.61 11.25
THIRD 14.00 8.25 9.65
FOURTH 12.30 9.15 11.71

The prices quoted in this table reflect inter-dealer
prices without retail mark-up, mark-down or commission.
Therefore, these prices may not necessarily represent the
prices paid in actual transactions.

The indentures governing our outstanding debt
securities permit the payment of cash dividends only under
limited circumstances. Our credit agreement also restricts
our ability to pay cash dividends on our common stock.

Under Texas law, we are permitted to pay cash dividends only
(a) out of our surplus, which is defined as the excess of
the total value of our assets over the sum of our debt, the
par value of our stock and the consideration fixed by the
our board of directors for stock without par value, and (b)
if, after paying cash dividends, we would not be insolvent,
which is defined as unable to pay our debts as they become
due in the usual course. Our board of directors may
determine that a surplus exists, among other ways, by
examining our financial statements, by conducting a fair
valuation, or by analyzing information derived from any
other reasonable method.

In addition, see "Recapitalization," above.

18

19

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS REPORT INCLUDES CERTAIN STATEMENTS THAT ARE "FORWARD-
LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. ANY STATEMENT IN
THIS REPORT THAT IS NOT A STATEMENT OF HISTORICAL FACT MAY BE
DEEMED TO BE A FORWARD-LOOKING STATEMENT. WE OFTEN USE THESE
TYPES OF STATEMENTS WHEN DISCUSSING OUR PLANS AND STRATEGIES,
OUR ANTICIPATION OF REVENUES FROM DESIGNATED MARKETS AND
STATEMENTS REGARDING THE DEVELOPMENT OF OUR BUSINESSES, THE
MARKETS FOR OUR SERVICES AND PRODUCTS, OUR ANTICIPATED CAPITAL
EXPENDITURES, OPERATIONS, SUPPORT SYSTEMS, CHANGES IN
REGULATORY REQUIREMENTS AND OTHER STATEMENTS CONTAINED IN THIS
REPORT REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS. WHEN
USED IN THIS REPORT, THE WORDS "EXPECT," "ANTICIPATE,"
"INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE" AND OTHER
SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-
LOOKING STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-
LOOKING STATEMENTS. THERE CAN BE NO ASSURANCE THAT: (I) WE
HAVE CORRECTLY MEASURED OR IDENTIFIED ALL OF THE FACTORS
AFFECTING US OR THE EXTENT OF THEIR LIKELY IMPACT; (II) THE
PUBLICLY AVAILABLE INFORMATION WITH RESPECT TO THESE FACTORS ON
WHICH OUR ANALYSIS IS BASED IS COMPLETE OR ACCURATE; (III) OUR
ANALYSIS IS CORRECT; OR (IV) OUR STRATEGY, WHICH IS BASED IN
PART ON THIS ANALYSIS, WILL BE SUCCESSFUL. WE DO NOT ASSUME
ANY OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.

We are the world's largest operator, franchisor and
licensor of convenience stores and the largest convenience
store chain in North America. Our revenue principally
consists of merchandise and gasoline sales and, to a lesser
extent, royalty income from licensees. Our primary expenses
consist of cost of goods sold; operating, selling, general
and administrative expense; occupancy; interest expense and
taxes.

MANAGEMENT STRATEGY OVERVIEW

Over the last several years, we have refined our
business strategy to take advantage of our widely recognized
brand and to leverage our size, technology and people. In
2002, we will accelerate investment in our traditional
convenience store business and our key growth initiatives in
order to improve our competitive position and financial
results in 2003 and beyond. Our primary focus in 2002 will
be in the following areas:

* Introducing new or improved products and
services at our stores;
* Growing and improving our existing store base;
* Enhancing our retail information system;
* Developing our people; and
* Improving administrative efficiencies.

INTRODUCING NEW OR IMPROVED PRODUCTS AND SERVICES AT OUR
STORES

The financial services business continues to be one of
our priorities. Recognizing our customers' needs for
convenient and continuously available financial services, we
developed Vcom, our proprietary self-service kiosk that
offers check-cashing, money order, money transfer and
traditional ATM services. We are currently operating a 98-
store Vcom pilot program in Texas and Florida. Upon
successful completion of the pilot program, we anticipate
beginning deployment of additional Vcom kiosks to our stores
in the second half of 2002 with up to 3,500 kiosks deployed
by the end of 2003.

20

Our fresh food business is a key component of our long-
term growth strategy. We are improving the quality of our
fresh food offering, introducing new menu items and new
packaging and leveraging the brand equity in our Big Gulp,
Big Bite and Big Brew brands. In February 2002, we began a
pilot program of new, higher quality products under the brand
name Big Eats, and we expect to introduce additional pilot
markets in the second quarter. If pilot results are
successful, we would expect to begin a rollout of the Big
Eats brand to all of our stores that are serviced by a
combined distribution center. Additionally, we will promote
our fresh foods through radio and television advertising and
updated point-of-purchase displays.

GROWING AND IMPROVING OUR EXISTING STORE BASE

We plan on opening between 125 and 150 new stores
during 2002. We intend to focus this expansion on our
existing markets to leverage our infrastructure and maximize
the efficiencies of our network of 21 combined distribution
centers. In addition, during 2002 we plan on improving our
existing store base by spending an estimated $135 million for
capital expenditures related to the maintenance and
replacement of store equipment.

ENHANCING OUR RETAIL INFORMATION SYSTEM

In 2002, we plan to accelerate our capital spending on
information technology to approximately $120 million. We
will apply most of this spending to enhance our proprietary
retail information system in order to reduce administrative
work for our store operators and improve their future
productivity. These enhancements will automate the
verification of product delivery from vendors and process
vendor invoices electronically. We plan to add labor
scheduling and job assignment tools that will save time,
create more accountability and permit store operators to plan
a consistent and organized work flow.

Enhanced automation will also improve our system of
store cash reporting and the processes for reconciling
lottery reports and completing shift changes. These actions
will save store managers time and improve the accuracy of
store cash reports. We expect these initiatives to
contribute to reduced shortages in both cash and inventory in
the future.

DEVELOPING OUR PEOPLE

We recognize that employees and franchisees are
critical to our success. As such, we have designed and
developed new training programs that we plan to implement in
2002. Our new staffing model will clearly define a store
employee's career path and require mandatory certification of
certain skills in order to be promoted. After completing
computerized training at our stores, employees will be tested
and certified. In addition, our field consultants, a
position that supports a group of about eight 7-Eleven
stores, will undergo a rigorous training program to ensure
they are fully able to manage as well as train key aspects
of store operations.

We have also strengthened our hiring process by
utilizing additional screening tools and new pay scales to
improve employee and franchisee recruitment and selection.
We recently launched a new jobs line to increase applicant
flow. We plan to introduce an incentive program that grades
and rewards successful execution of the five fundamentals
of our business: product assortment, quality, service,
cleanliness and value.

21

Through these initiatives, we believe we can improve
the knowledge and skills of our store operators, increase
sales and lower turnover, all of which will improve the
operating performance of our stores.

IMPROVING ADMINISTRATIVE EFFICIENCIES

We also believe we can improve efficiency through
process improvements. In 2001, we hired seasoned executives
with expertise in logistics and procurement to assist us in
reducing our costs in these two areas. We have a new
centralized procurement department with a focus on
standardizing procurement procedures company-wide, provide a
more disciplined approach to the competitive bidding process
and aggressively negotiate terms with our vendors. In
addition, we are studying other administrative areas of the
company with the objective of lowering our level of
administrative costs.

OTHER 2002 BUSINESS ISSUES

COST REDUCTIONS. We are constantly evaluating our
operating performance to improve our financial results. As
part of a continuing effort to lower operating expenses, we
undertook a comprehensive review in 2001 of our corporate,
field and distribution infrastructure as well as our store
base. As a result of this review, we are closing
underperforming stores, consolidating one division and
reducing corporate staff. In the first quarter of 2002, we
committed to and carried out a plan that eliminated
approximately 100 positions. As a result, our first quarter
2002 results will include a $4.7 million pretax charge to
Operating, Selling, General and Administrative ("OSG&A")
expenses for severance costs.

We plan to optimize our store base by closing
underperforming stores and opening new stores in strategic
locations. In the first quarter of 2002, we committed to a
plan to close between 115 and 120 underperforming stores in
2002. We recorded an asset impairment charge of $5.3 million
in the fourth quarter of 2001 related to these stores. In
the first quarter of 2002, we will record a pretax charge of
$5.8 million to OSG&A primarily for anticipated future rent
for these stores and other expenses in excess of the income
we expect to derive from subleasing them. During 2002, we
also plan to open 125 to 150 new stores. See "-Management
Strategy Overview - Growing and improving our existing store
base."

We expect to realize an annual pretax operating earnings
benefit of $17 million due to our cost reduction efforts. We
will not realize the full amount of this annual benefit,
however, until 2003. We intend to initiate and continue
other cost reductions to improve operating earnings such as
standardized procurement procedures and negotiating a new
distribution services agreement with favorable terms.

ROYALTY PAYMENT REDUCTION. We have a license agreement
with Seven-Eleven Japan under which Seven-Eleven Japan pays
us a royalty fee based upon a percentage of its total
revenues. In 1988, we monetized this yen royalty stream and
amended our license agreement with Seven-Eleven Japan. The
monetization enabled us to repay $300 million of debt. The
amendment to the license agreement will reduce Seven-Eleven
Japan's royalty payments to us by approximately 70% beginning
in August 2002. This reduction will decrease our Seven-
Eleven Japan royalty receipts by approximately $18 million in
2002 compared to 2001. Our Seven-Eleven Japan royalty
receipts will decrease in 2003 by approximately $24 million
compared to 2002. We do not anticipate any further
reductions in the amount of the license fee percentage. See
"-Other Issues-Related Party Transactions - License
Royalties."

22

DISTRIBUTION SERVICES. Our ten-year distribution
services agreement with McLane Company, Inc. expires in
November 2002. We are currently discussing with numerous
wholesale companies, including McLane, the possibility of
providing distribution services to our U.S. stores after our
McLane agreement expires. See "-Liquidity and Capital
Resources-Contractual Obligations and Commercial Commitments-
Distribution Services."

NEW ACCOUNTING STANDARDS. We are adopting two new
required accounting standards in 2002 that will have a
significant impact on our reported results of operations.
Effective January 1, 2002, we will adopt Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." Adopting SFAS No. 142 means we
will no longer amortize goodwill and certain intangible
assets. This will result in an annual reduction in
amortization expense of approximately $19 million beginning
in 2002. Effective January 1, 2002, we will adopt the
provisions of SFAS No. 143, "Accounting for Asset Retirement
Obligations," which for our purposes relates to the
accounting for costs associated with future removal of
underground gasoline tanks. This adoption will result in a
one-time, cumulative effect after-tax charge of approximately
$29 million and reduce our 2002 earnings before cumulative
effect charge by approximately $2 million. We intend to
record the cumulative charge in the first quarter of 2002.
See "-Other Issues-Recently Issued Accounting Standards" and
Note 18 to the Consolidated Financial Statements.

LEASE RENEWALS. We lease approximately two-thirds of
our 5,829 U.S. and Canadian store locations. Over the next
five years, about half of these leases expire or will require
renegotiation of the rental rates. Beginning in 2002, we
will devote considerable energies to extending and/or
renegotiating these leases. See "-Liquidity and Capital
Resources-Contractual Obligations and Commercial Commitments-
Financial Obligations-Store Leases."

The combination of the above factors is expected to
cause pressure on our 2002 earnings.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

ESTIMATES

Our discussion and analysis of our financial condition
and results of operations are based upon our consolidated
statements, which have been prepared in accordance with
accounting principles generally accepted in the United
States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience
and on various other assumptions that we believe to be
reasonable under the circumstances. The results of these
estimates form the basis for our judgments about the carrying
values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
See Note 1 to the Consolidated Financial Statements.

23

FRANCHISEES

We consolidate all merchandise sales and cost of goods
sold from stores operated by franchisees with the results of
company-operated stores. We split the merchandise gross
profit of franchise stores between our franchisees, who
generally receive 48% of the gross profit, and ourselves.
Our share of the merchandise gross profit of franchise stores
represents the ongoing franchise fee. In addition, for
gasoline sales, our franchisees receive the greater of one
cent per gallon sold or 25% of gasoline gross profit as
compensation for services they perform related to gasoline.
The franchisees' share of the merchandise and gasoline gross
profit is presented as franchisee gross profit expense in the
accompanying Consolidated Statements of Earnings. If we did
not consolidate the franchisee merchandise revenues and cost
of goods sold into our consolidated financial results, our
net earnings would not change; our Consolidated Statement of
Earnings, however, would not reflect any franchise gross
profit expense and would reflect significantly lower
merchandise revenues and cost of goods sold. Instead, our
share of the earnings from franchised stores would be
reflected as Other Income in our Consolidated Statement of
Earnings.

We include the franchise stores' merchandise sales and
cost of sales in our financial statements because we believe
that we retain a more significant financial and merchandising
advisory role in the franchise business than is present in
most other franchisor/franchisee relationships. For example,
unlike most franchise models, we own or lease the stores and
equipment used by the franchisees as well as provide
accounting and merchandising services, among others. Due to
this significant level of involvement and our retention of
certain business risks associated with the ownership or
leasing of franchised locations and the equipment used by
franchisees, we believe that our financial statement
presentation appropriately reflects the substance of this
combined economic relationship. See Note 1 to the
Consolidated Financial Statements.

ENVIRONMENTAL

We accrue for the estimated future costs related to
remediation activities at existing and previously operated
gasoline storage sites and other operating and non-operating
properties where releases of regulated substances have been
detected. Our estimates of the anticipated future costs for
remediation activities at such sites are based upon our prior
experience with remediation sites and consideration of
factors such as the condition of the site contamination,
location of tank sites and our experience with contractors
who perform environmental assessment and remediation work.
We determine the reserve on a site-by-site basis and record a
liability for remediation activities when it is probable that
corrective action will be taken and the cost of the
remediation activities can be reasonably estimated.

A portion of the environmental expenditures we incur for
remediation activities is eligible for reimbursement under
state trust funds and reimbursement programs. A receivable
is recorded for estimated probable refunds when the related
liability is recorded. The amount of the receivable is based
upon our historical collection experience with the specific
state fund (or other state funds), the financial status of
the state fund and our priority ranking for reimbursement
from the state fund. We discount the receivable if the
amount relates to remediation activities that have already
been completed.

24

The estimated future remediation expenditures and
related state reimbursement amounts could change as
governmental requirements and state reimbursement programs
continue to be implemented or revised. Such revisions could
have a material impact on our operations and financial
position. See "-Other Issues-Environmental" and Note 13 to
the Consolidated Financial Statements.

STORE CLOSINGS AND ASSET IMPAIRMENT

We write down property and equipment of stores we are
closing to estimated net realizable value at the time we
commit to a plan to close such stores. If we lease the
store, we will also accrue for related future estimated rent
and other expenses if we believe the expenses will exceed
estimated sublease rental income. We base the estimated net
realizable value of property and equipment on our experience
in utilizing and/or disposing of similar assets and on
estimates provided by our own and/or third-party real estate
experts. We also use our experience in subleasing similar
property to estimate future sublease income. If there is a
significant change in the real estate market, our net
realizable value estimates and/or our estimated future
sublease income could change materially. See Note 1 to the
Consolidated Financial Statements.

YEN LOANS

We use the Seven-Eleven Japan license royalty receipts
to service the monthly principal and interest payments on our
outstanding yen loans. This provides us with an economic
hedge against fluctuations in the Japanese yen to U.S. dollar
exchange rate. Effective January 1, 2001, SFAS No. 133 ,
"Accounting for Derivative Instruments and Hedging Activities,"
nullified the hedge accounting treatment we were previously
applying to the Seven-Eleven Japan royalty and yen loans. In
the first quarter of 2001, we recorded a one-time charge of
$9.8 million, net of taxes, related to the cumulative effect
of the adoption of SFAS No. 133. Accordingly, since January
1, 2001, we have adjusted the balance of the yen loans at
each reporting date to reflect the current Japanese yen to
U.S. dollar exchange rate, and the resultant foreign currency
exchange gain or loss is recognized in earnings. In
addition, we record the Seven-Eleven Japan royalty and
interest expense on the yen loans at the average Japanese yen
to U.S. dollar exchange rate for the respective periods. Our
2001 reported results include pretax non-cash transaction
gains of $15.9 million associated with the adjustment of our
yen loan balance to reflect the current Japanese yen to U.S.
dollar exchange rate. Future changes in the Japanese yen to
U.S. dollar exchange rate will continue to result in non-cash
transaction gains or losses. See "-Quantitative and
Qualitative Disclosures About Market Risks-Foreign-Exchange
Risk Management" and Note 8 to the Consolidated Financial
Statements.

INVENTORIES

Inventories are stated at the lower of cost or market.
Cost is generally determined by the last-in, first-out
("LIFO") method for company-operated stores in the United
States and by the first-in, first-out ("FIFO") method for
stores in Canada. Although the LIFO method generally matches
the most recent product cost with related revenues, decreases
in inventory quantities can result in a liquidation of LIFO
inventory layers recorded at costs that are lower than the
current costs, which would lower cost of goods sold and
increase our margin. See Notes 1 and 3 to the Consolidated
Financial Statements.

25

WORKERS' COMPENSATION AND GENERAL LIABILITY RESERVES

We have third-party insurance for workers' compensation
and general liability losses, with predetermined deductibles.
We record our share of workers' compensation and general
liability losses based upon independent actuarial estimates
of the aggregate liabilities for claims incurred. A
significant change in claims experience or in the criteria
which the actuary utilizes could result in a material revision
to our liability.

OFF-BALANCE SHEET LEASE-FINANCING

We utilize an off-balance sheet lease-financing program
to diversify our funding sources for new store growth. In
1999 and 2001, we entered into lease-financing programs for
constructing new stores and acquiring operating convenience
stores from third parties not affiliated with us. Under
these programs, we do not include the costs incurred in
constructing or acquiring the stores or any related financing
obligations in our Consolidated Balance Sheets. If we were
to account for the stores covered under these programs as
owned assets or capital leases, our balance sheet would
include the costs incurred in constructing the stores or
acquiring the operating convenience stores and any related
financing obligations. See "-Liquidity and Capital
Resources-Contractual Obligations and Commercial Commitments-
Financial Obligations-Operating Lease Obligations-Off-Balance
Sheet Lease-Financing Program" and Note 11 to the
Consolidated Financial Statements.

COMPARISON OF 2001 TO 2000 RESULTS

Merchandise sales for 2001 increased $387.3 million, or
5.8%, over 2000. Key contributors to the merchandise sales
growth in 2001 were increases in the sales of cigarettes,
prepaid cards, beer and non-carbonated beverages. Primary
contributors to this growth include improving merchandise
assortment, offering new items such as energy drinks and
operating an average of 61 additional stores in 2001 as
compared to 2000. Partially offsetting these increases were
decreases in 7-Eleven Cafe Cooler frozen beverages and apparel
products.

In addition, U.S. same-store merchandise sales growth was
4.8% (or 5.1% after adjusting for the additional day due to
leap year in 2000). Increases in the retail price of
cigarettes due to wholesale cost increases accounted for less
than 1% of growth in 2001 and less than 2% of such growth in
2000.

Gasoline sales for 2001 increased $48.6 million, or 1.8%,
over 2000. We attribute this increase to a 3.7% increase (or
4.0% after adjusting for the additional day due to leap year in
2000) in per-store gallons sold and the operation of an average
of 83 additional gasoline stores in 2001, which were partially
offset by an 8-cent decrease in the average retail price of

26

gasoline in 2001. The increase in per-store gallons sold is
primarily due to the addition of new higher-volume gasoline
stores which typically have more gasoline pumps than existing
stores.

We calculate gross profit by subtracting our total cost
of goods sold from our total net sales. Merchandise gross
profit for 2001 increased $95.1 million, or 4.1%, over 2000
as a result of higher sales, partially offset by a decline in
gross profit margin to 34.19% from the prior year's 34.75%.
Our overall gross profit margin and gross profit growth per
store decline was due to a combination of wholesale cost
increases, changes in product mix and the impact of cigarette
cost increases. Some of our faster growing product
categories were cigarettes, prepaid cards, beer and fresh
foods, all of which are traditionally lower margin products.
Our strategy of maintaining competitive everyday fair prices
in the face of increasing wholesale costs has resulted in
lower margins in some cases. Aggressive pricing by
competitors for items such as bread, milk, cigarettes and
soft drinks has also decreased our margin. These factors
will continue to put pressure on our merchandise gross profit
margin; however, we anticipate that our merchandise gross
profit margin will improve in 2002 through aggressive
monitoring of our retail pricing and continued efforts to
reduce our cost of goods sold.

Gasoline gross profit for 2001 increased $23.6 million,
or 9.9%, over 2000 primarily due to increased sales volume.
Gasoline gross profit margin improved to 13.81 cents per
gallon for 2001 compared to 13.50 cents per gallon in 2000.
Our gasoline gross profit per store increased 6.1% from 2000
in part because of wholesale costs declining more quickly
than retail prices during the second half of 2001 and our
management of retail gasoline prices.

We manage retail gasoline prices through a centralized
monitoring process to minimize the effect of gasoline margin
volatility and maximize our gross profit per gallon.
Increases or decreases in the wholesale cost of gasoline will
generally cause similar increases or decreases in the retail
price of gasoline. An increase in the wholesale cost of
gasoline generally results in higher retail prices within
five to ten days after the cost increase. Conversely, a
decrease in the wholesale cost of gasoline generally results
in lower retail prices within 15 to 20 days after the cost
decrease. Competitive conditions in the retail marketplace
can cause these time periods to vary considerably on a
market-by-market basis, which can have a significant impact
on gasoline gross profit margin. Over the last nine years,
however, our gasoline gross profit margins have ranged from
13.07 to 14.50 cents per gallon on an annual basis.

27

OTHER INCOME

Other income consists primarily of area license
royalties and initial franchise fees. Other income for 2001
was $112.3 million, an increase of $7.2 million, or 6.9%,
from $105.1 million in 2000. We attribute this primarily to
an increase in royalty income from our area licensees to
$84.8 million in 2001 from $80.9 million in 2000, which
resulted primarily from higher sales at stores operated by
licensees, an increase in the number of such stores and a
benefit of $1.8 million on our Seven-Eleven Japan royalty
receipts due to changes in the yen to U.S. dollar exchange
rate. See "-Management Strategy Overview-Other 2002 Business
Issues-Royalty Payment Reduction."

FRANCHISEE GROSS PROFIT EXPENSE

Franchisee gross profit expense for 2001 was $706.6
million, an increase of $39.3 million, or 5.9%, from $667.3
million in 2000, due to higher per store gross profits at
franchised stores and an increase in the number of stores
operated by franchisees. See "-Critical Accounting Policies
and Estimates" and Note 1 to the Consolidated Financial
Statements.

OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

The primary components of OSG&A are store labor, occupancy
(including depreciation) and corporate expenses. OSG&A for
2001 was $1,851.8 million, an increase of $103.5 million, or
5.9%, from $1,748.3 million in 2000. We attribute this
increase primarily to costs associated with operating an
average of 61 new stores in 2001, combined with increased labor
expense. Other increases included significantly higher utility
costs, mostly due to increased rates in California, Texas and
Florida, and increases in our costs associated with
environmental contamination, credit card processing due to
increased revenues and credit card volume and enhancements to
our retail information system. In addition, OSG&A for 2001
includes a $5.3 million write-down in connection with our
closing of underperforming stores. (See "-Management
Strategy Overview-Other 2002 Business Issues-Cost
Reductions.") These expense increases were partially offset by
a non-cash benefit of $15.9 million we recorded in connection
with conversion of our yen-based debt to the year-end exchange
rate.

The ratio of OSG&A to net sales increased to 18.9% for
2001 from 18.7% for 2000. Excluding a 5% decline in the retail
price of gasoline, the impairment charge and the conversion
gain, the ratio of OSG&A to net sales in 2001 was 18.7%. In
2002, our investment in new stores and technology, projected
increases in utility costs and the effects of store lease
renewals will adversely affect the ratio of OSG&A to net sales.
Pressure on this ratio will also result from anticipated
increases in repair and maintenance expenses as a result of
our continued efforts to enhance our store image and grow our
store base. To mitigate this impact, we are accelerating our
expense reduction efforts.

INTEREST EXPENSE, NET

Net interest expense for 2001 was $62.7 million, a
decrease of $16.6 million, or 20.9%, from $79.3 million in
2000. In March 2000, we received $540.0 million by selling
22,736,842 newly issued shares of our common stock to IYG
Holding Company, and we used the proceeds from this sale to
reduce our outstanding indebtedness. This reduction of
indebtedness accounts for a significant portion of our
reduction in net interest expense in 2001. During 2001 we also
benefited from a lower interest rate environment. See "-
Quantitative and Qualitative Disclosures About Market Risks-
Interest Rate Risk Management."

28

In accordance with SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring," our debentures are
recorded at an amount equal to the undiscounted cash payments
of both principal and interest, and we do not recognize
interest expense on our debentures in our Consolidated
Statement of Earnings. Accordingly, we charge the cash
interest payments against the recorded amount of the
debentures. If we did not account for our debentures in
accordance with SFAS No. 15, our reported interest expense
would have increased by $17.7 million in 1999, 2000 and 2001.
See Note 8 to the Consolidated Financial Statements.

INCOME TAX EXPENSE

Income tax expense for 2001 was $59.8 million, an increase
of $12.6 million, or 26.7%, from $47.2 million in 2000. This
increase is due to a non-recurring benefit of $12.5 million
recorded in 2000 which resulted from a favorable settlement
with the Internal Revenue Service related to audits of our
federal income taxes for the tax years 1992 through 1995.
Excluding the effect of this non-recurring benefit, our
effective tax rate was 39.0% for 2001, compared to 38.8% in
2000.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

On January 1, 2001, we adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which
resulted in a one-time charge of $9.8 million, net of taxes,
related to the cumulative effect of the accounting change on
our yen-denominated debt. See Note 8 to the Consolidated
Financial Statements.

EXTRAORDINARY ITEMS

In 2001, we had no extraordinary items. In 2000, we
purchased $36.1 million of the outstanding principal of debt
related to Cityplace, our corporate headquarters, for $33.2
million, resulting in a $1.8 million after-tax gain. See
Note 8 to the Consolidated Financial Statements.

NET EARNINGS

Net earnings for 2001 were $83.7 million ($0.75 per
diluted share), a decrease of $24.6 million, or 22.7%, from
$108.3 million ($0.98 per diluted share) in 2000. Earnings
before the extraordinary gain and the cumulative effect of the
accounting change discussed above were $93.6 million ($0.83 per
diluted share) for 2001, a decrease of $12.9 million, or 12.2%,
from $106.5 million ($0.97 per diluted share) in 2000.

SEASONALITY

Weather conditions can have a significant impact on our
sales, as buying patterns have shown that our customers
increase their transactions and also purchase higher profit
margin products when weather conditions are favorable.
Consequently, our results are seasonal, and we typically earn
more during the warmer second and third quarters.

29

COMPARISON OF 2000 TO 1999 RESULTS

Merchandise sales for 2000 increased $416.1 million, or
6.7%, over 1999. The largest contributors to the merchandise
sales growth in 2000 were cigarettes, prepaid cards, beer,
non-carbonated beverages, coffee and snacks, which were
offset, in part, by decreases in the sales of frozen
beverages, newspapers and other publications. Primary
contributors to this growth include improving merchandise
assortment, offering new items and operating an average of 60
additional stores in 2000 as compared to 1999.

In addition, U.S. same-store merchandise sales growth
was 5.6% (or 5.3% after adjusting for the additional day due
to leap year in 2000). Increases in the retail price of
cigarettes due to wholesale cost increases accounted for less
than 2% of such growth in 2000 and 5% of such growth in 1999.

Gasoline sales for 2000 increased $678.2 million, or
33.3%, over 1999, primarily due to a higher retail price of
gasoline and operating an average of 95 additional gasoline
stores. The average retail price of gasoline was $1.53 per
gallon in 2000, a 32-cent increase over 1999. We believe that
the high price of gasoline adversely affected the demand for
gasoline. Gallons sold per store increased 0.6% (or 0.3% after
adjusting for the additional day due to leap year in 2000) over
1999, primarily due to the addition of new stores that sell
more gasoline, on average, than our existing stores.

Merchandise gross profit for 2000 increased $162.2
million, or 7.6%, over 1999 as a result of higher sales
combined with gross profit margin improvement to 34.75% from
the prior year's 34.46%. Gross profit margin improved due to
a combination of a change in product mix and reduced
shortages, which we attribute to initiatives put in place to
improve store-level accountability.

30

Gasoline gross profit for 2000 increased $15.5 million,
or 6.9%, over 1999 as a result of new gasoline outlets opened
in 1999 and 2000. In addition, gasoline gross profit margin
improved to 13.50 cents per gallon for 2000 compared to 13.25
cents per gallon in 1999. As a result of aggressively
managing our retail gasoline prices, gasoline gross profit
per store increased 2.5% for the year compared to 1999.

OTHER INCOME

Other income for 2000 was $105.1 million, an increase of
$7.2 million, or 7.4%, from $97.9 million in 1999. We
attribute this to an increase in royalty income from our area
licensees to $80.9 in 2000 from $76.6 million in 1999, which
resulted primarily from higher sales at stores operated by
licensees and an increase in the number of such stores.

FRANCHISEE GROSS PROFIT EXPENSE

Franchisee gross profit expense for 2000 was $667.3
million, an increase of $55.1 million, or 9.0%, from $612.2
million in 1999, due to a higher per store gross profit at
franchised stores and an increase in the number of stores
operated by franchisees. See "-Critical Accounting Policies
and Estimates" and Note 1 to the Consolidated Financial
Statements.

OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

OSG&A for 2000 was $1,748.3 million, an increase of $126.4
million, or 7.8%, from $1,621.9 million in 1999. The increase
in OSG&A was partly due to the cost of operating an average of
60 new stores, approximately $32 million of incremental costs
related to the implementation of our retail information system
and increased credit card processing costs due in part to the
significantly higher gasoline prices.

The ratio of OSG&A to net sales decreased to 18.7% for
2000 from 19.7% for 1999. In 1999, OSG&A included a credit
of $14.0 million related to environmental legislation changes
in California, which was partially offset by $4.7 million in
severance expenses. After adjusting for these items and the
increase in the average retail price of gasoline in 2000, the
ratio of OSG&A to net sales would have increased slightly to
19.9% in 2000, from 19.8% in 1999.

INTEREST EXPENSE, NET

Net interest expense for 2000 was $79.3 million, a
decrease of $22.9 million, or 22.4%, from $102.2 million in
1999. This decrease is primarily attributable to our repayment
of borrowings with proceeds from the sale of common stock to
IYG Holding Company in March 2000. See "-Comparison of 2001
to 2000 Results-Interest Expense, Net."

INCOME TAX EXPENSE

Income tax expense on earnings before extraordinary gains
for 2000 was $47.2 million, a decrease of $1.3 million, or
2.7%, from $48.5 million in 1999. The 2000 expense is net of a
non-recurring benefit of $12.5 million, which resulted from a
favorable settlement with the Internal Revenue Service related
to audits of our federal income taxes for the tax years 1992
through 1995. Excluding the non-recurring benefit, our
effective tax rate was 38.8% for 2000, compared to 38.1% in
1999.

31

EXTRAORDINARY ITEMS

In December 2000, we purchased $36.1 million of the
outstanding principal of debt related to Cityplace, our
corporate headquarters, for $33.2 million, resulting in a
$1.8 million after-tax gain. (See Note 8 to the Consolidated
Financial Statements.) In 1999, we redeemed $19.4 million of
our debentures resulting in a $4.3 million after-tax gain.
This gain resulted from the retirement of future undiscounted
interest payments as recorded under SFAS No. 15, combined
with repurchasing a portion of the debentures below their
face value. See Note 8 to Consolidated Financial Statements.

NET EARNINGS

Net earnings for 2000 were $108.3 million ($0.98 per
diluted share), an increase of $25.2 million, or 30.3%, from
$83.1 million ($0.91 per diluted share) in 1999. Net earnings
before extraordinary gains were $106.5 million ($0.97 per
diluted share) for 2000, an increase of $27.7 million, or
35.2%, from $78.8 million ($0.87 per diluted share) in 1999.
The per diluted share data reflects a one-for-five reverse
split of our common stock that occurred in May 2000.

LIQUIDITY AND CAPITAL RESOURCES

We obtain the majority of our working capital from three
sources:

* Cash flows generated from our operating activities;
* A $650 million commercial paper facility, guaranteed
by Ito-Yokado Co., Ltd.; and
* Borrowings of up to $200 million under our revolving
credit facility.

We believe that operating activities, available working
capital sources and additional borrowings will provide
sufficient liquidity in 2002 to fund our operating costs,
capital expenditures and debt service. In addition, we intend
to continue accessing the leasing market to finance our new
stores and certain equipment, including potentially Vcom
kiosks.

We expect capital expenditures for 2002, excluding lease
commitments, will be between $450 million and $500 million.
This is an increase of $100 million to $150 million over
capital expenditures in 2001 and is caused primarily by our
accelerating some capital expenditures from 2003 to 2002 to
facilitate enhancing our retail information system and
upgrading our existing store base. Capital expenditures for
key areas include $135 million of store improvements and in-
store equipment, $120 million of information technology
enhancements primarily related to our proprietary retail
information system, $100 million of capital associated with
opening or acquiring between 125 and 150 new stores and $30
million for gasoline equipment upgrades.

Based upon current expectations, including accelerated
capital spending on our growth initiatives, our consolidated
total indebtedness to EBITDA ratio will exceed the maximum
level allowed by the financial covenant in our revolving credit
agreement. Therefore, we are currently discussing with our
banks the possibility of modifying our financial covenants. We
believe the banks will grant us this covenant relief we are
seeking, but we cannot make any assurances to that effect.

32

On February 15, 2002, Moody's Investor Service announced
it was placing our long-term debt credit rating on review for
possible downgrade. Our credit rating affects the terms of
some of our existing debt instruments. Under these
instruments, an upgrade in our credit rating will generally
decrease the percentage of fees and interest we would
otherwise be required to pay to our lenders. Conversely, a
downgrade in our credit rating would generally increase the
percentage of fees and interest we would otherwise be
required to pay to our lenders. Additionally, under the
indentures governing our public subordinated debentures, a
downgrade in the credit rating of the debentures below
investment grade would prohibit us from making certain
payments, including dividends and stock repurchases. We do
not believe, however, that a ratings downgrade would prohibit
us from continuing to issue commercial paper at our current
rates because our commercial paper is currently guaranteed by
Ito-Yokado through 2003. Nor do we believe that a ratings
downgrade would affect our ability to draw down funds from
our revolver, although in such an event the cost of obtaining
such funds will increase.

If we receive a significant downgrade to our credit
rating, it would be more difficult and expensive for us to
access financing, and we could be forced to slow our growth
initiatives. In addition, a small number of our contractual
vendor obligations would be affected, which may obligate us
to issue letters of credit for the benefit of the vendors.

VCOM

Vcom is our proprietary kiosk solution to meet consumer
demands for convenient and continuously available financial
and e-commerce services. We believe that the deployment of
these Web-enabled, integrated services kiosks represents a
significant market opportunity to offer financial and e-
commerce services to a large segment of our current and
future customers who have little or no access to banks or the
Internet. We find that we are particularly well-positioned
to capitalize on this opportunity because of the demographics
of our existing customer base and the large number of our
conveniently located stores.

We are currently operating a 98-store Vcom pilot program
in Texas and Florida. Through exclusive agreements with
third-party service providers, we currently offer or plan to
offer ATM services (American Express Co.), money order and
money transfer services (Western Union Financial Services,
Inc.), check-cashing services (Certegy Inc.) and
telecommunications services (Verizon Select Services, Inc.).
We estimate that our capital investment for Vcom will total
between $20 million and $25 million by mid-2002. Upon
successful completion of the Vcom pilot program, we will move
forward with our plans for a national rollout. A commitment
to a national rollout will require us to make a significant
investment. We currently estimate that we will need up to
$200 million to finance and install 3,500 Vcom kiosks
beginning in the second half of 2002 and continuing through
2003. In addition, we estimate that we will need
approximately $430 million to fund the amount of cash in the
kiosks necessary for check-cashing and ATM transactions. We
have had substantive discussions with financial institutions
about providing funding for Vcom, and we reasonably expect
such funds to be available to us.

We anticipate that Vcom will be cash-flow positive
beginning in 2003 primarily as a result of placement fees
from our strategic partners. These funds will be recognized
as revenue when earned by the incurring of specified
expenses, installation of equipment, sale of products or the

33

passage of time, all as specified by the substance of the
applicable agreement. We estimate that we will incur
cumulative pretax losses during the 2002 and 2003 roll out
period of up to $10 million. We expect Vcom to be profitable
in 2004 and beyond.

In exchange for our granting strategic partners
exclusive rights to offer their services or products on our
Vcom kiosks, they will pay us placement fees, a percentage of
the transaction fees and, in certain circumstances, expense
reimbursement. As of December 31, 2001, we have received
approximately $220 million of placement fee commitments from
our strategic partners, although most of such commitments are
funded as Vcom kiosks are deployed. In 2001, we received
$21.1 million in such fees, of which we recognized $7.0
million as an offset to the costs associated with the Vcom
pilot program in OSG&A expense and $927,000 in other income.
As of December 31, 2001, the remaining $13.2 million of fees
received has not been recognized in earnings and is included
in deferred credits and other liabilities in our Consolidated
Balance Sheet. With the exception of fees associated with
pilot program funding, which are amortized over the term of
the pilot program, we will amortize substantially all
placement fee income over the term of the applicable
agreement.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

FINANCIAL OBLIGATIONS.

A summary of our material contractual cash obligations
under our long-term debt, leases and convertible quarterly
income debt securities ("QUIDS") is as follows (in millions):

LONG-TERM DEBT. We have $650 million available under
our commercial paper facility and $471.6 outstanding as of
December 31, 2001. We have classified $400 million, net of
discount, of this outstanding amount as non-current debt
because we intend to maintain at least $400 million
outstanding during the next year. Such debt is unsecured and
is fully and unconditionally guaranteed by Ito-Yokado through
2003 under an agreement we entered into with Ito-Yokado. (See
"-Other Issues-Related Party Transactions-Commercial Paper"
and Note 8 to the Consolidated Financial Statements.) If we
fail to repay the commercial paper as it matures, Ito-Yokado
will become obligated to make such payments under its
guarantee of our commercial paper facility. We would, in
turn, be obligated to reimburse Ito-Yokado, subject to some
restrictions in our credit agreement, for the costs associated
with such a payment. Our credit agreement restrictions
principally specify that we cannot make reimbursements until
one year after we repay, in full, all amounts outstanding
under the credit agreement.

34

In December 2001, we entered into a financing agreement
for 10.0 billion yen, which was $75.9 million based upon the
yen to U.S. dollar exchange rate at December 31, 2001. The
financing, which has a fixed interest rate of 1.8%, is
nonrecourse and secured by a pledge, secondary to our 1998
yen-denominated loan, of the future royalty payments from our
Seven-Eleven Japan license agreement that also fund repayment
of the loan. Semi-annual principal repayments begin in 2007,
and we project that we will make the final payment in 2011.
See "-Management Strategy Overview-Other 2002 Business
Issues-Royalty Payment Reduction," "- Other Issues-Related
Party Transactions-License Royalties" and Notes 1 and 8 to
the Consolidated Financial Statements.

Our other long-term debt primarily consists of
subordinated debentures of $407.5 million, a term loan of
$220.1 million and a 1998 yen-denominated loan of $93.0
million. See Note 8 to the Consolidated Financial
Statements.

CAPITAL LEASE OBLIGATIONS. We utilize capital leases as
a means of funding our property and equipment. Generally,
real estate leases are for primary terms from 14 to 20 years
with options to renew for additional periods, and equipment
leases are for terms of one to ten years. These obligations
and related assets are included in our Consolidated Balance
Sheet.

OPERATING LEASE OBLIGATIONS. We also lease a
substantial portion of our property and equipment using
traditional operating leases. Generally, real estate leases
are for primary terms up to 19 years with options to renew
for additional periods and equipment leases are for terms
from one to ten years. These obligations and related assets
are not included in our Consolidated Balance Sheet.

OFF-BALANCE SHEET LEASE-FINANCING PROGRAM. In 1999, we
entered into a lease facility that provided us with $96.6
million in off-balance sheet financing that we used for
constructing new stores and acquiring operating convenience
stores from third parties not affiliated with us. Under the
agreement, a trust funded by a group of senior lenders either
acquired land and undertook construction projects for which
we were the construction agent or acquired operating
convenience stores from third parties. As the construction
agent, we handled all of the day-to-day issues involved in
constructing any new store built by the trust under this
facility. After a store was constructed or acquired, the
trust leased the store to us for an amount equal to the
interest expense on the applicable store's construction costs
or, in the case of operating convenience stores, the
acquisition price of the land, building, motor fuels
equipment and other fixtures, at London Interbank Offer Rate
("LIBOR") plus 2.1%. The base lease term under this facility
expires in February 2005, and as of December 31, 2001, the
trust had funded $96.6 million from this facility.

In January 2001, we entered into an additional lease
facility that provides up to $100 million of off-balance
sheet financing with substantially the same terms as the 1999
facility. The rent expense on stores constructed or
purchased with money from this facility equals the interest
expense on the applicable store's construction costs or, in
the case of operating convenience stores acquired from third
parties, the acquisition price of the land, building, motor
fuels equipment and other fixtures, at LIBOR plus 1.1%. The
base lease term under this facility expires in July 2006. As
of December 31, 2001, the trust had funded $72.0 million of
the $100 million facility.

35

After the initial lease term has expired under each
lease facility agreement, we have the option of:

* Negotiating an extension of the lease;
* Purchasing all properties for an amount
approximating the trust's interest in such properties,
which is equal to the total amount of funds advanced by
the trust; or
* Vacating the properties, arranging for the sale
to a third party and paying the trust the net proceeds
from the sale. If the sale proceeds are less than the
trust's interest in the properties, we are required to
reimburse the trust for the deficiency, although our
reimbursement obligation is limited to 84% of the trust's
interest in the properties. If the sale proceeds exceed
the trust's interest in the properties, we are entitled to
all of such excess amounts.

The leases, which we account for as operating leases,
contain financial and operating covenants similar to those
under our revolving credit facility. (See Note 11 to the
Consolidated Financial Statements.) The trusts are
substantive entities in which a major financial institution
is the primary equity holder. We have no management control
or equity interest in the trusts, and we have no contingent
obligation other than guaranteeing 84% of the trust's
interest in the properties in the event that we vacate and
sell at a loss to third parties. We do not intend to use
this type of financing program in the future and will instead
rely on other sources to fund future expansion.

STORE LEASES. As of December 31, 2001, we operated a
total of 5,829 stores in the United States and Canada. We
own fewer than one-third of these stores, and we lease the
rest. Over the next five years, leases covering more than
half of our total leased stores will expire, including more
than 1,100 leases that lack rent renewal options or contain
negotiable rent options and more than 1,200 leases that have
fixed rent options.

We originally signed many of the expiring leases, or
leases with negotiable options, in the 1970s and 1980s. Some
of these leases contained favorable rents for 10- to 20-year
primary terms, with as many as three options to renew for
additional five-year terms. For those sites where we need to
negotiate (a) a new lease to replace an expiring lease or (b)
new rent for those leases that have negotiable rent renewal
options, we expect that we will pay prevailing market rates
when the new lease term or option term commences, which will
likely increase our operating costs. If we are unable to
agree on an appropriate rent, we may decide to forego renewal
of the lease and close the store.

If we have a fixed rent option, in most cases the rent
will increase either to a specific predetermined dollar amount
or as calculated based upon a predetermined formula, such as
an increase in the consumer price index. These rent increases
will increase our operating costs.

QUIDS. Ito-Yokado and Seven-Eleven Japan hold $380
million of QUIDS from two separate transactions in 1995 ($300
million) and 1998 ($80 million). These securities can be
converted into our common stock at predetermined prices. The
securities bear interest at 4.5% annually and are subordinate
to all existing debt. See "-Other Issues - Related Party
Transactions-QUIDS" and Note 9 to the Consolidated Financial
Statements.

36

REVOLVING CREDIT FACILITY. There was no funded debt
outstanding under the revolver at December 31, 2001. Letters of
credit outstanding under the revolver totaled $67.0 million at
December 31, 2001, and reduced available funds under the
revolver to $133.0 million. Interest on borrowings are based
upon a variable rate equal to the administrative agent bank's
base rate or, at our option, a rate equal to a reserve-adjusted
Eurodollar rate plus a margin determined by our credit rating
for senior long-term indebtedness.

Our revolving credit facility contains various financial
and operating covenants that require us, among other things,
to maintain certain financial ratios, including interest and
rent coverage and consolidated total indebtedness to earnings
before interest, income taxes, depreciation and amortization.
The facility also contains covenants which, among other
things, limit (a) our ability to incur or guarantee
indebtedness or other liabilities other than under the
facility; (b) our ability to engage in asset sales and
sale/leaseback transactions; (c) the types of investments we
can make; and (d) our ability to pay cash dividends or redeem
or prepay principal and interest on any subordinated debt.
The bank's funding obligations are contingent upon our
financial operations. If we suffer a material adverse change,
the bank would not have to fund the facility. We do not
anticipate drawing down any funds under our revolver in the
near future. See Note 8 to the Consolidated Financial
Statements.

PURCHASE COMMITMENTS. We have various material
contracts with service and product vendors, some of which were
executed in the first quarter of 2002, that contain
commitments to purchase minimum levels of products or
services. We have estimated our material minimum purchase
commitments as of December 31, 2001, and material commitments
executed in the first quarter of 2002. These estimated
commitments are summarized as follows (in millions):

DISTRIBUTION SERVICES. In 1992, we entered into a ten-
year distribution services agreement with McLane Company,
Inc., a wholly owned subsidiary of Wal-Mart Stores, Inc.,
pursuant to which McLane is the primary distributor of
traditional grocery products to our U.S. stores. In 2001, we
purchased in excess of $2.0 billion in traditional grocery
products from McLane, which represents over 40% of all
merchandise purchased for our stores last year. These
purchases satisfied our minimum purchase requirement under the
agreement for 2001, and we expect to continue satisfying this
requirement until the contract's expiration in November 2002.
We are currently discussing with numerous wholesale
distribution companies, including McLane, the possibility of
providing distribution services to our U.S. stores upon the
expiration of our current contract. We believe that our
future distribution services agreement, whether with McLane or
another third party or parties, will be on terms more
favorable than the those set forth in our existing agreement
with McLane because of the increased competition in the
marketplace with potential suppliers, the size of our current
store base and the attractiveness of our growth strategy to a
potential supplier.

37

GASOLINE SUPPLY. We are currently in the 16th year of a
20-year product purchase agreement with Citgo Petroleum
Corporation. This agreement, which expires in September 2006,
permits us to purchase gasoline from parties other than Citgo,
but obligates us to purchase specified quantities of gasoline
at market prices from Citgo. The minimum required annual
purchases under this agreement are generally the lesser of 750
million gallons or 35% of all of the gasoline we purchased for
retail sale. We have exceeded the minimum required annual
purchases in each year of the contract and expect to continue
doing so in the future. See Note 13 to the Consolidated
Financial Statements.

IT COMMITMENTS. We have various information technology
commitments that require us to purchase minimum amounts of
products and services annually. We have exceeded such minimum
purchase requirements in the past and expect to continue doing
so for the foreseeable future. Our failure to satisfy the
minimum purchase requirements could cause us to make payments
to the applicable provider(s) equal to the commitment(s) or a
predetermined percentage of the commitment(s).

PRODUCT COMMITMENTS. We have various product purchase
contracts that require us to purchase a minimum amount of
products annually. We have exceeded such minimum purchase
requirements in the past and expect to continue doing so for
the foreseeable future. Our failure to satisfy the minimum
purchase requirements could result in termination of the
contracts, changes in pricing of the products and payments to
the applicable provider(s) of a predetermined percentage of
the commitment(s) which would not exceed $7 million.

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities for 2001 was
$278.2 million, a decrease of $174.3 million, or 38.5%, from
$452.5 million in 2000. We attribute this decrease to changes
in balance sheet items, primarily as a result of timing of the
funding for money orders, the timing of payment of merchandise
payables, an increase in receivables for vendor promotional
allowances and payment of a prior year legal settlement.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash used in investing activities in 2001 was $357.4
million, an increase of $128.0 million, or 55.8%, from $229.4
million in 2000. A portion of this increase is due to
increased capital expenditures to $356.9 million in 2001 from
$300.4 million in 2000, primarily as a result of an increase
in the number of new stores opened in 2001 compared to 2000.
The net cash used in 2000 was offset by $71.9 million of net
proceeds from a sale-leaseback transaction during 2000.

Capital expenditures for each of 2001 and 2000 were used
for maintaining, remodeling and upgrading stores, developing
new stores, enhancing our retail information system,
purchasing new equipment to support merchandising initiatives
and complying with environmental regulations.

38

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash provided by financing activities was $71.6
million in 2001, compared to net cash used in financing
activities of $166.7 million in 2000. Net proceeds under
commercial paper and revolving credit facilities in 2001
totaled $77.3 million, compared to net repayments of $483.6
million in 2000. We received proceeds of $76.6 million from
our borrowing of 10 billion yen in 2001. Scheduled debt
payments of $76.8 million and $94.6 million were made in 2001
and 2000. In 2000, we retired $145.7 million of debt early.
Cash from financing activities for 2000 includes net proceeds
of $539.7 million from issuance of common stock that was used
to pay down debt. See Notes 8 and 14 to the Consolidated
Financial Statements.

OTHER ISSUES

RELATED PARTY TRANSACTIONS

As of December 31, 2001, our majority shareholder, IYG
Holding Co., held 72.6% of our common stock. IYG Holding Co.
is owned 51% by Ito-Yokado and 49% by Seven-Eleven Japan,
which is a majority owned subsidiary of Ito-Yokado. IYG
Holding Co. is a Delaware corporation that was formed in 1991
to acquire and hold our common stock.

COMMERCIAL PAPER. We entered into an agreement with
Ito-Yokado pursuant to which Ito-Yokado agreed to fully and
unconditionally guarantee our commercial paper facility. As a
result of this guarantee, we achieve lower interest rates and
better credit ratings than would otherwise be achieved. Both
the interest rates we pay on our commercial paper and our
credit rating are affected by Ito-Yokado's credit rating, and
a significant downgrade of Ito-Yokado's credit rating could
adversely affect us. Due to Ito-Yokado's significant indirect
ownership interest in our company, we expect our relationship
with Ito-Yokado to continue in the future. See "-Liquidity
and Capital Resources-Contractual Obligation and Commercial
Commitments-Financial Obligations- Long-Term Debt" and Notes 1
and 8 to the Consolidated Financial Statements.

QUIDS. Ito-Yokado and Seven-Eleven Japan hold $380
million of QUIDS from two separate transactions in 1995 ($300
million) and 1998 ($80 million). These securities can be
converted into our common stock at predetermined prices. The
securities bear interest at 4.5% annually and are subordinate
to all existing debt. The terms and conditions of both QUIDS
transactions were approved in advance by a special committee
comprised of three independent members of our board of
directors. In deciding whether to approve the transactions,
the special committee relied, in part, on fairness opinions
delivered to the committee by financial institutions who
conducted extensive due diligence prior to issuing their
opinions. See Note 9 to the Consolidated Financial
Statements.

LICENSE ROYALTIES. In 2001, we received over $60 million
of royalties from our area license agreement with Seven-Eleven
Japan. See "-Management Strategy Overview-Other 2002 Business
Issues-Royalty Payment Reduction" and Note 1 to the
Consolidated Financial Statements.

EXPANSION IN CHINA. During the third quarter of 2001, we
announced plans to expand the development and operation of 7-
Eleven stores in the People's Republic of China through
licensing arrangements. There are currently approximately 450
7-Eleven stores in Hong Kong and 75 7-Eleven stores in the
south China province of Guangdong. Those stores are operated
by subsidiaries of Dairy Farm International Ltd. pursuant to a
licensing arrangement.

39

Subject to obtaining the approvals referenced below, we
are evaluating the possibility of entering into a licensing
arrangement for at least one additional market area in China
with Seven-Eleven Japan, President Chain Store Corporation and
a local Chinese participant. President Chain Store
Corporation is our current licensee in Taiwan where it
operates approximately 2,925 7-Eleven stores, and Seven-Eleven
Japan is our current licensee in Japan where it operates
approximately 9,000 7-Eleven stores. We have focused on the
possibility of negotiating a licensing arrangement with Seven-
Eleven Japan and President Chain Store Corporation because of
their financial strength, business experience in China and
proven ability to develop and operate 7-Eleven stores.

We have not negotiated the final terms and conditions of
the proposed licensing agreement. We anticipate that the
final license agreement will include the payment of a one-time
licensing fee, a store development schedule and obligation and
a royalty on sales at the licensed stores. Based on the
development experience of Dairy Farm in Guangdong and our own
preliminary projections for the development of additional
stores in China, we do not expect that the licensing of
additional market areas in China will have any material impact
on our royalty revenue for several years.

Because we anticipate entering into a licensing
arrangement with Seven-Eleven Japan, which together with Ito-
Yokado owns 72.6% of our common stock, our board of directors
has appointed a special committee comprised of three
independent directors to review and consider the proposed
licensing arrangement for approval. Our board has authorized
the special committee to retain whatever external resources
are necessary to obtain objective advice regarding the
proposed licensing arrangement.

ENVIRONMENTAL

At December 31, 2001, our estimated undiscounted liability
for our environmental costs related to remedial action at
existing and previously-operated gasoline storage sites and
other operating and non-operating properties where releases of
regulated substances have been detected was $31.4 million. We
anticipate that substantially all of the future remediation
costs for detected releases of regulated substances at
remediation sites of which we are aware, as of December 31,
2001, will be incurred within the next five to six years. The
estimated liability could change for several reasons,
including revisions to or the creation of governmental
requirements, existing remediation projects become fully
defined and cost-to-closure estimates become available, and
unplanned future failures of underground gasoline storage tank
systems.

Under state reimbursement programs, we are eligible to be
reimbursed for a portion of remediation costs previously
incurred. At December 31, 2001, we had recorded a net
receivable of $54.0 million for the estimated state
reimbursements of which $33.3 million relates to remediation
costs incurred in California. In assessing the probability of
state reimbursements, we take into consideration each state's
fund balance, revenue sources, existing claim backlog,
historical payments and claim ranking systems. As a result of
these assessments, the recorded receivable amounts, at
December 31, 2001, are net of allowances of $10.8 million.
The estimated future state reimbursement amounts could change
as governmental requirements and state reimbursement programs
continue to be revised or extended. Our estimated
reimbursement amounts could change materially as remediation
costs are spent and as receipts of state trust funds are
recorded.

40

While we cannot be certain of the timing of our receipt
of state reimbursement funds, based upon our experience we
expect to receive the majority of state reimbursement funds
within one to three years after our payment of eligible
remediation expenses. This time period assumes that the state
administrative procedures for processing such reimbursements
have been fully developed. One exception to our assumption is
California, where we estimate that we will receive
reimbursement funds within one to ten years after our payment
of eligible remediation expenses. As a result of the timing
for reimbursements, we have present-valued the portion of the
recorded receivable amount that relates to remediation
activities that have already been completed at a discount rate
of approximately 5.0%. Thus, in addition to the allowance set
forth in the preceding paragraph, the recorded receivable
amount is also net of a discount of $11.1 million.

The estimated future remediation expenditures and related
state reimbursement amounts could change as governmental
requirements and state reimbursement programs continue to be
implemented or revised. Such revisions could have a material
impact on our operations and financial position. See Notes 1
and 13 to the Consolidated Financial Statements.

In December 1988, we closed our chemical manufacturing
facility in New Jersey. We are required to conduct
environmental remediation at the facility, including
groundwater monitoring and treatment, which commenced in 1998.
We have recorded undiscounted liabilities, representing our
best estimates of the cleanup costs, of $4.7 million at
December 31, 2001. The estimated reserve could change as
governmental requirements change. In 1991, we entered into a
settlement agreement with the former owner of the facility
pursuant to which the former owner agreed to pay a substantial
portion of the cleanup costs. Based upon the terms of the
settlement agreement and the financial resources of the former
owner, we have a receivable recorded of $3.1 million at
December 31, 2001. See Notes 1 and 13 to the Consolidated
Financial Statements.

FRANCHISE AGREEMENT RENEWAL

As of December 31, 2001, we had approximately 3,174
franchised stores in the United States. About 40% of those
franchised stores are subject to franchise agreements that are
scheduled to expire on December 31, 2003. We are in the
process of developing a new franchise agreement that we plan
to offer to franchisees whose franchise agreements expire at
that time. We do not anticipate that the terms of the new
agreement will have a material impact on our franchisees or
the company.

RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS No. 141, "Business Combinations," issued in July
2001, addresses financial accounting and reporting for
business combinations. This statement requires that all
business combinations initiated after June 30, 2001, be
accounted for using the purchase method of accounting. The
provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001, and to all business
combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001, or later. We adopted
the provisions of this statement effective July 1, 2001, and
we did not experience any financial accounting impact
associated with our adoption of this statement.

41

SFAS No. 142, "Goodwill and Other Intangible Assets,"
also issued in July 2001, addresses financial accounting and
reporting for acquired goodwill and other intangible assets.
The statement eliminates amortization of goodwill and
intangible assets with indefinite lives and requires a
transitional impairment test of these assets within six months
of the date of adoption. In certain circumstances, an ongoing
annual impairment test is required. We estimate the annual
impact of our not amortizing goodwill and indefinite-life
license royalty intangibles will be a $19 million decrease in
our amortization expense. No material changes to the carrying
amounts of our goodwill and other intangible assets are
anticipated as a result of adopting SFAS No. 142. We will
adopt the provisions of SFAS No. 142 effective January 1,
2002.

SFAS No. 143, "Accounting for Asset Retirement
Obligations," issued in August 2001, establishes financial
accounting and reporting standards for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 generally
applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 will impact our accounting for
underground storage tank removal costs. We will adopt the
provisions of SFAS No. 143 effective January 1, 2002, which
will result in a one-time, cumulative effect after-tax charge
of approximately $29 million and reduce our 2002 earnings
before cumulative effect charge by approximately $2 million.
We intend to record the cumulative charge in the first quarter
of 2002.

SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," issued in October 2001, provides new
guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of, and this
statement also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued
operation are to be measured and presented. We anticipate
that the provisions of this statement, which we will adopt
effective January 1, 2002, will not have a material effect on
our financial statements.

42

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK

The following discussion summarizes the financial and
derivative instruments we held as of December 31, 2001. These
instruments are sensitive to changes in interest rates,
foreign exchange rates and equity prices. We use interest-rate
swaps to manage the primary market exposures associated with
underlying liabilities and anticipated transactions. We use
these instruments to reduce risk by essentially creating
offsetting market exposures. In addition, our two yen-
denominated loans effectively serve as an economic hedge of
our exposure to yen-dollar currency fluctuations resulting
from our significant yen-based royalty from Seven-Eleven
Japan. We do not leverage the instruments we hold, and we
hold the instruments for purposes other than trading. In the
normal course of business, we also face risks that are either
non-financial or non-quantifiable, such as country risk,
credit risk and legal risk, and we have not addressed these
risks in this discussion.

INTEREST-RATE RISK MANAGEMENT

The table below presents descriptions of the floating-
rate financial instruments and interest-rate-derivative
instruments we held at December 31, 2001. We entered into
interest-rate swaps to achieve the levels of variable and
fixed-rate debt approved by senior management. Under the
interest-rate swaps, we agreed with other parties to exchange
the difference between fixed-rate and floating-rate interest
amounts on a quarterly basis.

The table below presents the principal cash flows by
maturity date for our floating-rate debt and the related
estimated average interest rate. For the interest-rate swaps,
the table presents the notional amounts outstanding and
expected interest rates that exist by contractual dates. We
used the notional amount to calculate the contractual payments
to be exchanged under the contract, and we estimated the
variable rates based upon implied forward rates in the yield
curve as of December 31, 2001.

The negative $14 million fair value of the interest-rate
swap represents an estimate of the amount we would pay if we
had chosen to terminate the swap as of December 31, 2001.
(See Note 10 to the Consolidated Financial Statements.) As
of December 31, 2001, approximately 33% of our debt contained
floating rates that will be impacted by changes in interest
rates. We have effectively eliminated 52% of our exposure to
variable rates in a rising-rate environment through the
interest-rate swap agreement. The weighted-average interest
rate for such debt, including the impact of the interest-rate
swap agreement, was 5.2% for the year ended December 31,
2001, as compared to 6.2% for the year ended December 31,
2000.

43

FOREIGN-EXCHANGE RISK MANAGEMENT

Approximately $81 million of our royalty income in 2001
was impacted by fluctuating exchange rates, including
approximately $61 million from Seven-Eleven Japan. Although
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," nullified the hedge accounting treatment we were
applying to the Seven-Eleven Japan royalty and our yen-
denominated loans, we continue to have an economic hedge by
using the Seven-Eleven Japan royalty receipts to make
principal and interest payments on our yen-denominated loans.
Since January 1, 2001, we have adjusted the balance of the
yen loans at each reporting date to reflect the current
Japanese yen to U.S. dollar exchange rate, and the resulting
foreign currency exchange gain or loss is recognized in
earnings. Based upon our yen-denominated debt balance as of
December 31, 2001, a one-point increase or decrease in the
Japanese yen to U.S. dollar exchange rate would result in an
increase or decrease in pretax earnings of approximately $1
million. See "-Critical Accounting Policies and Estimates-
Yen Loans" and Notes 1 and 8 to the Consolidated Financial
Statements.

In addition, we are exposed to fluctuating exchange
rates on the portion of our royalties earned in foreign
currencies that are not attributable to our license agreement
with Seven-Eleven Japan, but we do not believe future risk is
material based upon current estimates. We also have several
wholly- or partially-owned foreign subsidiaries and are
susceptible to exchange-rate risk on earnings from these
subsidiaries; based upon current estimates, however, we do
not consider future foreign-exchange risk to be material.

EQUITY-PRICE RISK MANAGEMENT

We hold equity securities of other companies. We
classify these securities as available for sale and carry
them on our consolidated balance sheet at fair value. At
December 31, 2001, we held 80,800 shares of Affiliated
Computer Services, Inc. common stock (the "ACS shares"),
which had no cost basis but had a fair value of $8.6 million.
We obtained the ACS shares in 1988 as part of our mainframe
data processing contract with ACS. At that time, ACS was a
privately held start-up company. Accordingly, the stock was
valued with no cost.

Changes in fair value are recognized as other
comprehensive earnings, net of tax, as a separate component
of shareholders' equity.

44

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

7-ELEVEN, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

45

See Notes to Consolidated Financial Statements.

46

7-ELEVEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 2000 and 2001

1. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - 7-Eleven, Inc. and
its subsidiaries ("the Company") is owned 72.6% by
IYG Holding Company (see Note 14), which is
jointly owned by Ito-Yokado Co., Ltd. ("IY") and
Seven-Eleven Japan Co., Ltd. ("SEJ"). SEJ is a
majority-owned subsidiary of IY. The Company
operates more than 5,800 7-Eleven and other
convenience stores in the United States and
Canada. Area licensees, or their franchisees, and
affiliates operate approximately 16,800 additional
7-Eleven convenience stores in certain areas of
the United States, in 15 foreign countries and in
the U. S. territories of Guam and Puerto Rico.

The consolidated financial statements include
the accounts of 7-Eleven, Inc. and its
subsidiaries. Intercompany transactions and
account balances are eliminated. Certain prior-
year amounts have been reclassified to conform to
the current-year presentation.

The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets
and liabilities at the date of the financial
statements and revenues and expenses during the
reporting period. Such estimates are based on
historical experience and on various other
assumptions that the Company believes to be
reasonable under the circumstances. The results
of these estimates form the basis of the Company's
judgments about the carrying values of assets and
liabilities that are not readily apparent from
other sources. Actual results may differ from
these estimates under different assumptions or
conditions.

Merchandise sales and cost of goods sold of
stores operated by franchisees are consolidated
with the results of Company-operated stores.
Merchandise sales of stores operated by
franchisees are $3.39 billion, $3.68 billion and
$3.94 billion from 3,008, 3,118 and 3,174 stores
for the years ended December 31, 1999, 2000 and
2001, respectively.

The gross profit of franchise stores is split
between the Company and its franchisees. The
franchisees' share of the gross profit of
franchise stores generally approximates 48% of
the merchandise gross profit of the store and is
presented as franchisee gross profit expense in
the accompanying Consolidated Statements of
Earnings. The Company's share of the gross
profit of franchise stores is its continuing
franchise fee, generally approximating 52% of the
merchandise gross profit of the store, which is
charged to the franchisee for the license to use
the 7-Eleven operating system and trademarks, for
the lease and use of the store premises and
equipment, and for continuing services provided
by the Company. These services include
merchandising, advertising, recordkeeping, store
audits, contractual indemnification, business
counseling services and preparation of financial
summaries. The Company also provides financing
of the franchisee store inventory and other
operating items (see Notes 2 and 6), which are
collateralized by the store inventory.

In addition, franchisees receive the greater
of one cent per gallon sold or 25% of gasoline
gross profit as compensation for measuring and
reporting deliveries of gasoline, conducting
pricing surveys of competitors, changing the
price displays and cleaning the service areas.

50

Sales by stores operated under domestic and
foreign area license agreements are not included
in consolidated revenues. All fees or royalties
arising from such agreements are included in other
income. Initial fees, which have been immaterial,
are recognized when the services required under
the agreements are performed.

OPERATING SEGMENT - The Company operates in a
single operating segment - the operating,
franchising and licensing of convenience food
stores, primarily under the 7-Eleven name.

The Company does not rely on any major
customers as a source of revenue. Excluding area
license royalties, which are included in other
income as stated above, the Company's operations
are concentrated in the United States and Canada.
Approximately 8% of the Company's net sales for
the years ended December 31, 1999, 2000 and 2001
are from Canadian operations, and approximately
5% of the Company's long-lived assets for the
years ended December 31, 2000 and 2001 are
located in Canada.

REVENUES - Revenues from the Company's two major
product categories, merchandise and gasoline, are
recognized at the point of sale. Based on the total
dollar volume of store purchases, management
estimates that the percentages of its convenience
store merchandise sales by principal product category
for the last three years were as follows:

Services include lottery, ATM and money order
service fees/commissions for which there are
little, if any, costs included in merchandise cost
of goods sold.

Proceeds received in advance of satisfying
revenue recognition criteria are deferred. These
funds are recognized as revenue when earned by
sales of related products, installation of
equipment or the passage of time, all as
specified by the substance of the applicable
agreement.

51

In 2001, the Company received $21.1 million
in placement fees from strategic partners in
connection with its new proprietary self-service
financial and e-commerce kiosks, Vcom. In 2001,
the Company recognized $7.0 million of such fees
as an offset to the cost associated with the Vcom
pilot in Operating, Selling, General and
Administrative ("OSG&A") expense and $927,000 in
other income. As of December 31, 2001, the
remaining $13.2 million of fees received has not
been recognized in earnings and is included in
deferred credits and other liabilities in the
accompanying Consolidated Balance Sheet. With
the exception of fees associated with pilot phase
funding, which are amortized over the term of the
pilot period, the Company will amortize
substantially all placement fee income over the
term of the applicable agreement.

OTHER INCOME - Other income is primarily area
license royalties and franchise fee income. The
area license royalties include amounts from area
license agreements with SEJ of approximately $56
million, $58 million and $61 million for the years
ended December 31, 1999, 2000 and 2001,
respectively. Beginning in August 2002, royalty
payments from SEJ will be reduced by approximately
70% in accordance with the terms of the license
agreement.

The present franchise agreements typically have
a ten-year term, and initial franchise fees are
generally calculated based on gross profit
experience for the store or market area. These
fees cover certain costs including training, an
allowance for lodging for the trainees and other
costs relating to the franchising of the store.
The Company defers the recognition of these fees
until its obligations under the agreement are
completed and a 90-day franchisee termination
period has passed. Franchisee fees recognized in
earnings were $14.0 million, $16.4 million and
$18.3 million for the years ended December 31,
1999, 2000 and 2001, respectively.

The Company has a program in place to finance
the franchise fee for a qualifying franchisee. As
of December 31, 2000 and 2001, the Company had
$14.5 million and $15.1 million of outstanding
notes receivable from franchisees, of which $3.5
million and $4.0 million were classified as
current for the respective years (see Notes 2 and
6).

OPERATING, SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES - Store labor, occupancy expense and
corporate expenses are the primary components of
OSG&A. Advertising costs, also included in OSG&A,
generally are charged to expense as incurred and
were $39.4 million, $34.4 million and $32.9
million for the years ended December 31, 1999,
2000 and 2001, respectively.

INTEREST EXPENSE - Interest expense is net of
interest income and capitalized interest. Interest
income was $11.2 million, $13.3 million and $13.4
million, and capitalized interest was $5.0
million, $2.6 million and $4.2 million for the
years ended December 31, 1999, 2000 and 2001,
respectively.

INCOME TAXES - Income taxes are determined
using the liability method, where deferred tax
assets and liabilities are recognized for
temporary differences between the tax basis of
assets and liabilities and their reported amounts
in the financial statements. Deferred tax assets
include tax carryforwards and are reduced by a
valuation allowance if, based on available
evidence, it is more likely than not that some
portion or all of the deferred tax assets will not
be realized.

52

CASH AND CASH EQUIVALENTS - The Company
considers all highly liquid investment instruments
purchased with maturities of three months or less
to be cash equivalents. Cash and cash equivalents
include temporary cash investments of $37.7
million and $33.3 million at December 31, 2000 and
2001, respectively, stated at cost, which
approximates market.

The Company utilizes a cash management system
under which a book cash overdraft exists for the
Company's primary disbursement accounts. These
overdrafts represent uncleared checks in excess of
cash balances in bank accounts at the end of the
reporting period. The Company transfers cash on an
as-needed basis to fund clearing checks (see
Note 7).

INVENTORIES - Inventories are stated at the
lower of cost or market. Cost is generally
determined by the LIFO method for company-operated
stores in the United States and by the FIFO method
for stores in Canada.

DEPRECIATION AND AMORTIZATION - Depreciation of
property and equipment is based on the estimated
useful lives of these assets using the straight-line
method. Acquisition and development costs for
significant business systems and related software for
internal use are capitalized and are depreciated or
amortized on a straight-line basis. Amortization of
capital lease assets, leasehold improvements and
favorable leaseholds is based on the remaining terms
of the leases or the estimated useful lives,
whichever is shorter.

The following table summarizes the years over
which significant assets are generally depreciated or
amortized:

YEARS
-----------
Buildings 25
Leasehold improvements 3 to 20
Equipment 3 to 10
Software and other intangibles 3 to 7
License royalties and goodwill 20 to 40

Foreign and domestic area license royalty
intangibles were recorded in 1987 at the fair
value of future royalty payments and are being
amortized over 20 years using the straight-line
method. The 20-year life is less than the
estimated lives of the various royalty agreements,
all of which are perpetual (see Note 18).

STORE CLOSINGS AND ASSET IMPAIRMENT - The
Company writes down property and equipment of
stores it is closing to estimated net realizable
value at the time that management commits to a
plan to close such stores. If the stores are
leased, the Company will also accrue for related
future estimated rent and other expenses if the
expenses are expected to exceed estimated sublease
rental income. The Company bases the estimated
net realizable value of property and equipment on
its experience in utilizing and/or disposing of
similar assets and on estimates provided by its
own and/or third-party real estate experts. The
Company also uses its experience in subleasing
similar property to estimate future sublease
income.

The Company's long-lived assets, including
goodwill, are reviewed for impairment and written
down to fair value whenever events or changes in
circumstances indicate that the carrying value may
not be recoverable (see Note 18).

53

In 2001, the Company recorded an asset
impairment charge of $5.3 million related to the
planned closing in 2002 of 115 to 120 under-
performing stores (see Note 19).

INSURANCE - The Company has third-party
insurance with predetermined deductibles that
cover certain insurable risks. The Company's
share of losses for its workers' compensation and
general liability losses are recorded based on
independent actuarial estimates of the aggregate
liabilities for claims incurred.

ENVIRONMENTAL - The Company accrues for the
estimated future costs related to remediation
activities at existing and previously operated
gasoline storage sites and other operating and
nonoperating properties where releases of
regulated substances have been detected.
Estimates of the anticipated future costs for
remediation activities at such sites are based
upon the Company's prior experience with
remediation sites and consideration of factors
such as the condition of the site contamination,
location of tank sites and experience with
contractors that perform environmental assessment
and remediation work. The reserve is determined
on a site-by-site basis, and a liability is
recorded for remediation activities when it is
probable that corrective action will be taken and
the cost of the remediation activities can be
reasonably estimated.

A portion of the environmental expenditures
incurred for remediation activities is eligible
for reimbursement under state trust funds and
reimbursement programs. A receivable is recorded
for estimated probable refunds when the related
liability is recorded. The amount of the
receivable is based upon the Company's historical
collection experience with the specific state
fund (or other state funds), the financial status
of the state fund and the Company's priority
ranking for reimbursement from the state fund.
The receivable is discounted if the amount
relates to remediation activities that have
already been completed (see Note 13).

2. ACCOUNTS RECEIVABLE

54

3. INVENTORIES

Inventories stated on the LIFO basis that are
included in inventories in the accompanying
Consolidated Balance Sheets were $52.5 million and
$50.4 million for merchandise and $21.7 million
and $31.0 million for gasoline at December 31,
2000 and 2001, respectively. These amounts are
less than replacement cost by $37.8 million and
$38.4 million for merchandise and $11.1 million
and $3.0 million for gasoline at December 31, 2000
and 2001, respectively.

For the years ended December 31, 1999, 2000
and 2001, certain inventory quantities were
reduced resulting in a liquidation of LIFO
inventory layers recorded at costs that were
lower than the costs of current purchases. The
effect of this reduction was a decrease in cost
of goods sold of $628,000, $5.8 million and $2.6
million, respectively.

4. OTHER CURRENT ASSETS

55

5. PROPERTY AND EQUIPMENT

6. OTHER ASSETS

56

7. ACCRUED EXPENSES AND OTHER LIABILITIES

8. DEBT

REVOLVING CREDIT FACILITY - As of January 25,
2001, the Company is obligated to a group of
lenders under a $200 million unsecured revolving
credit agreement ("Credit Agreement"). The Credit
Agreement includes a sublimit of $150 million for
letters of credit. The revolving credit facility
expires in January 2006. At December 31, 2001,
outstanding letters of credit under the facility
totaled $67.0 million, which reduced available
funds under the revolver to $133.0 million.

57

Interest on the borrowings under the revolving
credit facility is generally payable quarterly and
is based on a variable rate equal to the
administrative agent bank's base rate (4.75% at
December 31, 2001) or, at the Company's option, at
a rate equal to a reserve-adjusted Eurodollar rate
plus a margin determined by the Company's credit
ratings for senior long-term indebtedness. At
December 31, 2001, the one-month Eurodollar rate
was 1.85% and the applicable margin was 0.475%.

A facility fee of 0.15% per year is charged on
the aggregate amount of the revolving credit
facility. In addition, if the average outstanding
balance of the facility is greater than or equal
to two-thirds of the available borrowings under
the facility, a utilization fee is charged on the
average outstanding principal amount of loans and
the undrawn face amount of the letters of credit.
The utilization fee is also tied to the Company's
senior long-term indebtedness as described above
and was 0.375% as of December 31, 2001. All fees
are paid quarterly.

The Credit Agreement contains various
financial and operating covenants which require,
among other things, the maintenance of certain
financial ratios including interest and rent
coverage and consolidated total indebtedness to
earnings before interest, income taxes,
depreciation and amortization. The Credit
Agreement also contains various covenants which,
among other things (a) limit the Company's ability
to incur or guarantee indebtedness or other
liabilities other than under the Credit Agreement;
(b) limit the Company's ability to engage in asset
sales and sale/leaseback transactions; (c) limit
the types of investments the Company can make; and
(d) limit the Company's ability to pay cash
dividends or redeem or prepay principal and
interest on any subordinated debt.

COMMERCIAL PAPER - The availability of
borrowings under the Company's commercial paper
facility is $650 million. At December 31, 2000
and 2001, $395.6 million and $400.0 million of the
respective $395.6 million and $471.6 million
outstanding principal amounts, net of discount,
was classified as long-term debt since the Company
intends to maintain at least these amounts
outstanding during the next year. Such debt is
unsecured and is fully and unconditionally
guaranteed by IY. IY has agreed to continue its
guarantee of all commercial paper issued through
2003. While it is not anticipated that IY would
be required to perform under its commercial paper
guarantee, in the event IY makes any payments
under the guarantee, the Company and IY have
entered into an agreement by which the Company is
required to reimburse IY subject to certain
restrictions in the Credit Agreement. The
restrictions principally specify that no
reimbursements can be made until one year after
repayment in full of amounts outstanding under the
Credit Agreement. The weighted-average interest
rate was 6.6% and 2.0% on commercial paper
borrowings outstanding at December 31, 2000 and
2001, respectively.

DEBENTURES - The Debentures are accounted for
in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 15, "Accounting
by Debtors and Creditors for Troubled Debt
Restructuring," and were recorded at an amount
equal to the future undiscounted cash payments,
both principal and interest ("SFAS No. 15
Interest"). Accordingly, no interest expense will
be recognized over the life of these securities,
and cash interest payments will be charged against
the recorded amount of such securities. Interest
on all of the Debentures is payable in cash
semiannually on June 15 and December 15 of each
year.

58

The 5% First Priority Senior Subordinated
Debentures, due December 15, 2003 ("5%
Debentures"), had an outstanding principal balance
of $239.3 million at December 31, 2001, and are
redeemable at any time at the Company's option at
100% of the principal amount.

The Second Priority Senior Subordinated
Debentures are redeemable at any time at the
Company's option at 100% of the principal amount
and are described as follows:

- 4 1/2% Series A Debentures, due June 15, 2004
("4 1/2% Debentures"), had an outstanding
principal balance of $111.4 million at
December 31, 2001.

- 4% Series B Debentures, due June 15, 2004 ("4%
Debentures"), had an outstanding principal
balance of $18.5 million at December 31, 2001.

In 1999, the Company purchased $15 million
principal amount of its 5% Debentures and $4.4
million principal amount of its 4 1/2% Debentures
with a portion of the proceeds of the Convertible
Quarterly Income Debt Securities due 2013 ("1998
QUIDS") (see Note 9). These partial purchases
resulted in an extraordinary gain of $4.3 million
(net of current tax effect of $2.7 million) as a
result of the discounted purchase price and the
inclusion of SFAS No. 15 Interest in the carrying
amount of the debt.

The Debentures contain certain covenants
that, among other things (a) limit the payment of
dividends and certain other restricted payments by
both the Company and its subsidiaries; (b) require
the purchase by the Company of the Debentures at
the option of the holder upon a change of control;
(c) limit additional indebtedness; (d) limit future
exchange offers; (e) limit the repayment of
subordinated indebtedness; (f) require board
approval of certain asset sales; (g) limit
transactions with certain stockholders and
affiliates; and (h) limit consolidations, mergers
and the conveyance of all or substantially all of
the Company's assets.

The First and Second Priority Senior
Subordinated Debentures are subordinate to the
borrowings outstanding under the Credit Agreement
and to outstanding mortgages and notes that are
either backed by specific collateral or are
general unsecured, unsubordinated obligations.
The Second Priority Debentures are subordinate to
the First Priority Debentures.

YEN LOANS - The Company has monetized its
future royalty payments from SEJ, its area
licensee in Japan, through fixed-rate yen-
denominated loans that are nonrecourse to the
Company as to principal and interest. These
loans, which are referred to as the "1988 Yen
Loan," the "1998 Yen Loan" and the "2001 Yen
Loan," are collateralized by the Japanese
trademarks and a pledge of the future area
license royalty payments from SEJ. The 1988 Yen
Loan was repaid in August 2001.

As of December 31, 2001, the principal
balance on the 1998 Yen Loan was 12.3 billion yen
or $93.0 million at the exchange rate in effect
on that date (131.67). The 1998 Yen Loan has an
interest rate of 2.3% and, beginning October
2001, principal and interest are paid
semiannually from the SEJ area license royalty
income. Based on current royalty income
projections, the final payment will be made in
2006.

Proceeds from the 2001 Yen Loan, which was
funded on December 27, 2001, were 10 billion yen
or $76.6 million. The principal balance on the
2001 Yen Loan at December 31, 2001, was $75.9
million at the exchange rate in effect on that
date (131.67). The 2001 Yen Loan has an interest
rate of 1.8%, and principal and interest are
payable from the SEJ area license royalty income.
Semiannual principal payments commence April
2007.

59

Commencing in October 2002, interest is paid
semiannually in accordance with the loan
agreement. Interest expense exceeds interest
paid until commencement of principal payments in
2007, at which time interest paid will exceed
interest expense. Based on current royalty
income projections, the final payment will be
made in 2011.

The 1998 Yen Loan and the 2001 Yen Loan were
funded by entities formed by the lenders. The
Company has no management control or equity
interest in these entities. The Company's
obligation to the entities is known (i.e.,
principal and interest payments as defined in the
loan agreements), and the Company has no
contingent obligations. The entities enable
lenders to convert a portion of the Company's
fixed-rate debt to variable-rate debt and to
receive interest payments on a current basis.

The SEJ area license royalty is remitted
monthly into a yen-denominated account for the
benefit of the Company. Principal and interest
payments are made from this account semiannually
in accordance with the loan agreements. After
the semiannual principal and interest payments
are made from this account, any excess amount, as
defined by the loan agreements, is released to
the Company for general-purpose use. The account
held 1.09 billion yen or $8.3 million at December
31, 2001 (see Note 4).

By using its SEJ royalty receipts to
service the monthly principal and interest
payments on the yen loans, the Company has an
economic hedge against fluctuations in the
Japanese yen to U.S. dollar exchange rate. As a
result of this hedge, the 1988 and 1998 yen
loans and related interest expense and payable
have been recorded in the Company's consolidated
financial statements as of December 31, 2000,
utilizing the Japanese yen to U.S. dollar
exchange rates in effect at the date of the
borrowings (125.35 for the 1988 Yen Loan and
129.53 for the 1998 Yen Loan). Additionally, the
SEJ royalty for the years ended December 31,
1999 and 2000, has been recorded at the 125.35
exchange rate as it has been utilized to service
the 1988 Yen Loan.

Although SFAS No. 133 nullified the hedge
accounting treatment the Company was applying to
the SEJ royalty and yen loans, the Company's
economic hedge against changes in the Japanese
yen to U.S. dollar exchange rate remains in
place. Upon adoption of SFAS No. 133 on January
1, 2001, the Company adjusted the outstanding
yen loans, related interest payable and the SEJ
royalty receivable to reflect the Japanese yen
to U.S. dollar exchange rate quoted for January
1, 2001 (114.35). As a result, the Company
increased the yen loans, related interest
payable and SEJ royalty receivable by $16.1
million, with an offsetting charge of $9.8
million (net of deferred taxes of $6.3 million)
to Cumulative Effect of Accounting Change in the
Consolidated Statements of Earnings.

The Company adjusts the balance of the yen
loans at each reporting date to reflect the
current Japanese yen to U.S. dollar exchange
rate, and the resultant foreign currency
exchange gain or loss is recognized in earnings.
In addition, the Company records the SEJ royalty
and interest expense on the yen loans at the
average Japanese yen to U.S. dollar exchange
rate for the respective periods. The Company
recorded $15.9 million of net conversion gain in
OSG&A from the adjustment of the yen loans to
the Japanese yen to U.S. dollar exchange rate
for the year ended December 31, 2001.

60

CITYPLACE TERM LOAN - Cityplace Center East
Corporation ("CCEC"), a subsidiary of the Company,
constructed the headquarters tower, parking
garages and related facilities of the Cityplace
Center development and is currently obligated to
The Sanwa Bank, Limited, New York Branch
("Sanwa"), which has a lien on the property
financed. The debt with Sanwa has monthly
payments of principal and interest based on a 25-
year amortization at 7.5%, with the remaining
principal of $199.3 million due on March 1, 2005
(the "Cityplace Term Loan"). In December 2000,
the Company purchased and retired approximately
$36.1 million of the outstanding principal for
$33.2 million, resulting in an extraordinary gain
of $1.8 million (net of current tax effect of $1.1
million).

The Company leases the building from CCEC,
occupying part of the building as its corporate
headquarters and subleasing the balance to third
parties. CCEC pays to Sanwa an amount that is
equal to the Company's rental payments. Upon sale
or refinancing of the building, CCEC will pay to
Sanwa 60% of the proceeds less $275 million and
permitted costs.

MATURITIES - Long-term debt maturities assume
the continuance of the commercial paper program
and the IY guarantee. The maturities, which
include capital lease obligations as well as SFAS
No. 15 Interest accounted for in the recorded
amount of the Debentures, are as follows (dollars
in thousands):

2002 $ 150,708
2003 286,183
2004 163,664
2005 226,405
2006 26,203
Thereafter 581,452
-----------
$ 1,434,615
===========

9. CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES

In November 1995, the Company issued $300
million principal amount of Convertible Quarterly
Income Debt Securities due 2010 ("1995 QUIDS") to
IY and SEJ. The 1995 QUIDS have no amortization,
an interest rate of 4.5% and interest is payable
semiannually. The Company has the right to defer
interest payments at any time for up to 20
consecutive quarters. The holder of the 1995
QUIDS can convert the debt anytime at a rate of
$20.80 per share of the Company's common stock.
The conversion rate represents a premium to the
market value of the Company's common stock at the
time of issuance of the 1995 QUIDS.

In February 1998, the Company issued $80
million principal amount of 1998 QUIDS, which have
a 15-year life, no amortization, an interest rate
of 4.5% and interest is payable semiannually. The
instrument gives the Company the right to defer
interest payments thereon for up to 20 consecutive
quarters. The debt mandatorily converts into
6,501,686 shares of the Company's common stock if
(a) the Company's stock trades above $12.30 for 20
of 30 consecutive trading days after the fifth
anniversary of issuance; (b) the Company's stock
trades above $14.77 for 20 of 30 consecutive
trading days after the third anniversary of
issuance and before the fifth anniversary; or (c)
the Company's stock closes at or above $12.30 on
the last trading day prior to maturity. A portion
of the proceeds from the 1998 QUIDS was used to
fund the partial purchases of its 5% Debentures
and its 4 1/2% Debentures (see Note 8). The 1998
QUIDS, together with the 1995 QUIDS (collectively,
"Convertible Debt"), are subordinate to all
existing debt.

61

The financial statements include interest
payable of $723,000 and $760,000 as of December
31, 2000 and 2001, respectively, as well as
interest expense of $17.4 million for the years
ended December 31, 1999, 2000 and 2001, related to
the Convertible Debt. As of December 31, 2001, no
shares had been issued as a result of debt
conversion, and the Company had not deferred any
interest payments in connection with the
Convertible Debt.

10. FINANCIAL INSTRUMENTS

FAIR VALUE - The disclosure of the estimated
fair value of financial instruments has been
determined by the Company using available market
information and appropriate valuation
methodologies as indicated below.

The carrying amounts of cash and cash
equivalents, trade accounts receivable, trade
accounts payable and accrued expenses and other
liabilities are reasonable estimates of their fair
values. Letters of credit are included in the
estimated fair value of accrued expenses and other
liabilities.

The carrying amounts and estimated fair
values of other financial instruments as of
December 31, 2001, are listed in the following
table:

The methods and assumptions used in
estimating the fair value for each of the classes
of financial instruments presented in the table
above are as follows:

- Commercial paper borrowings are sold at
market interest rates and have an average
remaining maturity of less than 33 days.
Therefore, the carrying amount of commercial
paper is a reasonable estimate of its fair
value. The guarantee of the commercial paper
by IY is an integral part of the estimated fair
value of the commercial paper borrowings.

- The fair value of the Debentures is
estimated based on December 31, 2001, bid
prices obtained from investment banking firms
where traders regularly make a market for these
financial instruments. The carrying amount of
the Debentures includes $38.3 million of SFAS
No. 15 Interest.

- - The fair value of the Yen Loans is
estimated by calculating the present value of
the future yen cash flows at current interest
and exchange rates.

62

- The fair value of the Cityplace Term
Loan is estimated by calculating the present
value of the future cash flows at a current
interest rate for a similar financial
instrument.

- It is not practicable, without
incurring excessive costs, to estimate the fair
value of the Convertible Debt (see Note 9) at
December 31, 2001. The fair value would be the
sum of the fair values assigned to both an
interest rate and an equity component of the
debt by a valuation firm.

- The fair value of the Interest Rate
Swap is estimated based on discounted cash
flows for the term of the swap using forward
three-month LIBOR rates as of December 31,
2001, and represents the estimated amount the
Company would pay if the Company chose to
terminate the swap as of December 31, 2001.

DERIVATIVES - The Company adopted the
provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities,"
as of January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards for
derivative instruments, including certain
derivative instruments embedded in other
contracts, and for hedging activities.

The Company uses derivative financial
instruments to reduce its exposure to market
risk resulting from fluctuations in foreign
exchange rates and interest rates. The Company
is party to a $250 million notional principal
amount interest rate swap agreement. The
Company currently pays a fixed interest rate of
6.096% on the $250 million notional amount until
February 2004. A major financial institution,
as counterparty to the agreement, pays the
Company interest at a floating rate based on
three-month LIBOR on the notional amount during
the term of the agreement. Interest payments
are made quarterly on a net settlement basis.
The interest rate swap has been accounted for as
a hedge and, accordingly, any difference between
amounts paid and received is recorded as
interest expense. The impact on net interest
expense as a result of this agreement was
nominally favorable for the years ended December
31, 1999 and 2000, and was an increase of $4.3
million for the year ended December 31, 2001.
The Company is at risk of loss from this swap
agreement in the event of nonperformance by the
counterparty when the floating interest rate
exceeds the Company's fixed interest rate.

Under SFAS No. 133, the $250 million
interest rate swap is treated as a cash flow
hedge of the Company's interest rate exposure in
connection with its commercial paper program.
Upon adoption of SFAS No. 133 on January 1,
2001, the Company recorded a liability of $2.0
million representing the fair value of the
interest rate swap as of January 1, 2001, with
the offset of $1.2 million (net of deferred
taxes of $784,000) to Accumulated Other
Comprehensive Earnings. The Company adjusts the
carrying value of the interest rate swap to fair
value at each reporting date with a
corresponding offset to Accumulated Other
Comprehensive Earnings. Additionally, the
Company reviews the effectiveness of the
interest rate swap at each reporting date and
recognizes the ineffective portion of the
interest rate swap in earnings for the period
reported. The Company recognized a charge of
$310,000 to interest expense in connection with
ineffectiveness for the year ended December 31,
2001.

In addition, upon adoption of SFAS No. 133,
the Company transferred January 1, 2001, asset
and liability balances of $2.4 million and ($4.3
million), respectively, related to previous
interest rate swap activity, to Accumulated
Other Comprehensive Earnings. These balances
will continue to be amortized into earnings as
an adjustment to interest expense through
February 2004.

63

11. LEASES

LEASES - Certain property and equipment used
in the Company's business is leased. Generally,
real estate leases are for primary terms from 14
to 20 years with options to renew for additional
periods, and equipment leases are for terms from
one to ten years.

In 1999, the Company entered into a lease
facility that provided $96.6 million in off-
balance sheet financing, which was used for
constructing new stores and acquiring operating
convenience stores from third parties not
affiliated with the Company. Under the
agreement, a trust funded by a group of senior
lenders either acquired land and undertook
construction projects with the Company acting as
the construction agent or acquired operating
convenience stores. After a store was
constructed or acquired, the trust leased the
store to the Company for an amount equal to the
interest expense on the applicable store's
construction costs or, in the case of operating
convenience stores, the acquisition price of the
land, building, motor fuels equipment and other
fixtures, at LIBOR plus 2.1%. The base lease
term under this facility expires in February
2005.

In January 2001, the Company entered into an
additional lease facility that provides up to
$100 million of off-balance sheet financing with
essentially the same terms as the 1999 facility.
Rent expense on stores constructed or purchased
with money from this facility is equal to the
interest expense on the applicable store's
construction costs or, in the case of operating
convenience stores acquired, the acquisition
price of the land, building, motor fuels
equipment, and other fixtures, at LIBOR plus
1.1%. The base lease term under this facility
expires in July 2006 and, as of December 31,
2001, the trust had funded $72.0 million from
this facility.

Under both agreements, after the initial
lease term has expired, the Company has the
option of (a) extending the lease for an
additional period subject to the approval of the
trust; (b) purchasing the property for an amount
approximating the trust's interest in such
property, which is equal to the total amount of
funds advanced by the trust; or (c) vacating the
property, arranging for the sale to a third party
and paying the trust the net proceeds from the
sale. If the sale proceeds are less than the
trust's interest in the property, the Company is
required to reimburse the trust for the
deficiency (such reimbursement not to exceed 84%
of the trust's interest in the property). If the
sale proceeds exceed the trust's interest in the
properties, the Company is entitled to all of
such excess amounts. The leases, which are
accounted for as operating leases, contain
financial and operating covenants similar to
those under the Company's Credit Agreement (see
Note 8).

The trusts are substantive entities in
which a major financial institution is the
primary equity holder. The Company has no
management control or equity interest in the
trusts. The Company's obligation to the trust is
known (i.e. the rental payments), and the Company
has no contingent obligation other than the
guaranteed residual value noted above.

In 1999 and 2000, the Company entered into
sale-leaseback agreements whereby land, buildings
and associated real and personal property
improvements were sold and leased back by the
Company. The Company received net proceeds of
$57.3 million and $71.9 million on the sale of 30
and 33 stores, respectively. The gains on the
sale of the properties of approximately $10
million and $12 million, respectively, were
deferred and are being recognized on a straight-
line basis over the initial term of the leases.

64

Under the terms of the sale-leaseback
agreements, the Company will make rental payments
over terms ranging from 16 to 18 1/2 years. At
the expiration of the initial lease term, the
Company will have the option of renewing the
lease for up to six renewal terms of up to five
years per renewal term at predetermined
increases. The leases do not contain purchase
options or guaranteed residual values; however,
the Company has the right of first refusal after
the first five years of the initial lease term
with respect to any offers to purchase the
properties which the lessor receives. The leases
are being accounted for as operating leases.

The Company is party to a $115 million master
lease facility used primarily for electronic point-
of-sale equipment and software associated with the
Company's retail information system. The leases
relating to point-of-sale equipment are accounted
for as operating leases. The leases relating to
software are accounted for as capital leases.

Individual leases under this master lease
facility have base terms that will expire at
various times during the period September 30, 2002
through September 30, 2004, at which time the
Company has an option to cancel all leases under
this facility by purchasing the equipment or
arranging its sale to a third party. The Company
has an option to renew the leases semiannually
until five years after the beginning of the
individual leases. At each semiannual renewal
date, the Company has the option to purchase the
equipment and end the lease. Individual leases
may be extended beyond five years through an
extended rental agreement.

The composition of capital leases reflected as
property and equipment in the Consolidated Balance
Sheets is as follows:

The present value of future minimum lease
payments for capital lease obligations is
reflected in the Consolidated Balance Sheets as
long-term debt. The amount representing imputed
interest necessary to reduce net minimum lease
payments to present value has been calculated
generally at the Company's incremental borrowing
rate at the inception of each lease.

65

Future minimum lease payments for years
ending December 31 are as follows:

Minimum noncancelable sublease rental income
to be received in the future, which is not
included above as an offset to future payments,
totals $8.2 million for capital leases and
$8.4 million for operating leases.

Rent expense on operating leases for the years
ended December 31, 1999, 2000 and 2001, totaled
$164.6 million, $195.8 million and $211.2 million,
respectively, including contingent rent expense of
$11.5 million, $12.4 million and $13.2 million,
which has been reduced by sublease rent income of
$4.9 million, $3.8 million and $3.6 million.
Contingent rent expense on capital leases for the
years ended December 31, 1999, 2000 and 2001, was
$1.5 million, $1.6 million and $1.5 million,
respectively. Contingent rent expense is
generally based on sales levels or changes in the
Consumer Price Index.

LEASES WITH THE SAVINGS AND PROFIT SHARING
PLAN - At December 31, 2001, the 7-Eleven, Inc.
Employees' Savings and Profit Sharing Plan
("Savings and Profit Sharing Plan") owned one
store leased to the Company under a capital lease
and 475 stores leased to the Company under
operating leases at rentals which, in the opinion
of management, approximated market rates at the
inception date of each lease. In addition, in
1999, 2000 and 2001, there were 28, 24 and 71
leases, respectively, that either expired or, as a
result of properties that were sold by the Savings
and Profit Sharing Plan to third parties, were
canceled or assigned to the new owner. Also, the
Company exercised its right of first refusal and
purchased four, 19 and two properties from the
Savings and Profit Sharing Plan in 1999, 2000 and
2001, respectively, for an aggregate purchase
price of $1.2 million, $9.2 million and $748,000
in the respective years.

66

Included in the consolidated financial
statements are the following amounts related to
leases with the Savings and Profit Sharing Plan:

12. BENEFIT PLANS

PROFIT SHARING PLANS - The Company maintains
the Savings and Profit Sharing Plan for its U.S.
employees and the 7-Eleven Canada, Inc. Pension
Plan for its Canadian employees. These plans
provide retirement benefits to eligible employees.

Contributions to the Savings and Profit
Sharing Plan, a 401(k) defined contribution plan,
are made by both the participants and 7-Eleven. 7-
Eleven contributes the greater of approximately
10% of its net earnings, as defined, or an amount
determined by the Company. The contribution by the
Company is generally allocated to the participants
on the basis of their individual contribution and
years of participation in the Savings and Profit
Sharing Plan. The provisions of the 7-Eleven
Canada, Inc. Pension Plan are similar to those of
the Savings and Profit Sharing Plan. Total
contributions to these plans for the years ended
December 31, 1999, 2000 and 2001, were $13.6
million, $16.0 million and $15.0 million,
respectively, and are included in OSG&A.

POSTRETIREMENT BENEFITS - The Company's
group insurance plan (the "Insurance Plan")
provides postretirement medical and dental
benefits for all retirees that meet certain
criteria. Such criteria include continuous
participation in the Insurance Plan ranging from
10 to 15 years depending on hire date, and the
sum of age plus years of continuous service equal
to at least 70. The Company contributes toward
the cost of the Insurance Plan a fixed dollar
amount per retiree based on age and number of
dependents covered, as adjusted for actual claims
experience. All other future costs and cost
increases will be paid by the retirees. The
Company continues to fund its cost on a cash
basis; therefore, no plan assets have been
accumulated.

67

In 2000, the Company changed its method of
amortization such that, if cumulative unrecognized
gains or losses at the beginning of a period
exceed 40% of the accumulated postretirement
benefit obligation, the entire unrecognized gain
or loss will be amortized over a three-year period
beginning in the subsequent year. The Company
believes this new method of amortization results
in a more accurate reflection of its
postretirement benefit obligation by providing for
more immediate recognition of gains and losses.
Because the 40% threshold was first exceeded at
the beginning of 2000, the accelerated
amortization method was first applied in 2001.
This change in accounting principle had no impact
on the Company's 1999 and 2000 results of
operations and increased the amortization of the
actuarial gain in 2001 by approximately $2
million.

The following information on the Company's
Insurance Plan is provided:

There is no effect of a one-percentage-point
increase or decrease in assumed health care cost
trend rates on either the total service and
interest cost components or the postretirement
benefit obligation for the years ended December
31, 1999, 2000 and 2001, as the Company
contributes a fixed dollar amount.

STOCK INCENTIVE PLAN - The 1995 Stock
Incentive Plan (the "Stock Incentive Plan")
provides for the granting of stock options, stock
appreciation rights, performance shares,
restricted stock, restricted stock units, bonus
stock and other forms of stock-based awards and
authorizes the issuance of up to 8.2 million
shares over a ten-year period to certain key
employees and officers of the Company. All
options granted in 1999, 2000 and 2001 were
granted at an exercise price that was equal to the
fair market value on the date of grant. The
options granted vest in five equal installments
beginning one year after grant date with possible
acceleration thereafter based on certain
improvements in the price of the Company's common
stock. Vested options are exercisable within ten
years of the date granted.

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average
assumptions used for the options granted: for each
year presented, expected life of five years and no
dividend yields, combined with risk-free interest
rates of 6.19%, 6.72% and 5.09% and expected
volatility of 62.95%, 67.76% and 67.23% for the years
ended December 31, 1999, 2000 and 2001, respectively.

69

A summary of the status of the Stock
Incentive Plan as of December 31, 1999, 2000 and
2001, and changes during the years ending on
those dates, is presented below:

The Company is accounting for the Stock
Incentive Plan for employees under the provisions
of APB No. 25 and, accordingly, no compensation
cost has been recognized. If compensation cost
had been determined based on the fair value at the
grant date for awards under this plan consistent
with the method prescribed by SFAS No. 123, the
Company's net earnings and earnings per share for
the years ended December 31, 1999, 2000 and 2001,
would have been reduced to the pro forma amounts
indicated in the table below:

70

13. COMMITMENTS AND CONTINGENCIES

DISTRIBUTION SERVICES - The Company has a ten-
year service agreement with McLane Company, Inc.
("McLane") under which McLane is making its
distribution services available to 7-Eleven stores
in the United States. The agreement expires in
November 2002. Upon signing the service
agreement, the Company received a $9.5 million
transitional payment that is being amortized to
cost of goods sold over the life of the agreement.
If the Company does not fulfill its obligation to
McLane during this time period, the Company must
reimburse McLane on a pro-rata basis for a portion
of the transitional payment. The Company has
exceeded the minimum annual purchases each year
and expects to exceed the minimum required
purchase levels in 2002.

GASOLINE SUPPLY - The Company has a 20-year
product purchase agreement with Citgo Petroleum
Corporation ("Citgo") to buy specified quantities
of gasoline at market prices. The agreement
expires September 2006. The market prices are
determined pursuant to a formula based on the
prices posted by gasoline wholesalers in the
various market areas where the Company purchases
gasoline from Citgo. Minimum required annual
purchases under this agreement are generally the
lesser of 750 million gallons or 35% of gasoline
purchased by the Company for retail sale. The
Company has met the minimum required annual
purchases each year and expects to meet the
minimum required annual purchase levels in 2002.

INFORMATION TECHNOLOGY - In January 2002,
the Company entered into a seven-year contract
with an information technology service provider.
The Company is required to purchase a minimum of
$25 million of services annually. The Company
has historically exceeded this annual threshold
for information technology expenditures and in
the future expects to fully utilize the required
minimum level of services.

ENVIRONMENTAL - The Company accrues for the
anticipated future costs and the related probable
state reimbursement amounts for remediation
activities at its existing and previously
operated gasoline storage sites where releases of
regulated substances have been detected. At
December 31, 2000 and 2001, the Company's
estimated undiscounted liability for these sites
was $27.3 million and $31.4 million,
respectively, of which $10.7 million and $15.0
million are included in deferred credits and
other liabilities and the remainder is included
in accrued expenses and other liabilities. The
Company anticipates that substantially all of the
future remediation costs for detected releases at
these sites as of December 31, 2001, will be
incurred within the next five or six years.

Under state reimbursement programs, the
Company is eligible to receive reimbursement for
a portion of future remediation costs, as well as
a portion of remediation costs previously paid.
Accordingly, at December 31, 2000 and 2001, the
Company has recorded net receivable amounts of
$50.3 million and $54.0 million, respectively,
for the estimated probable state reimbursements,
of which $31.4 million and $33.3 million relate
to remediation costs incurred in the state of
California. Of the total receivables, $43.0
million and $46.6 million, respectively, are
included in other assets and the remainder in
accounts receivable. In assessing the
probability of state reimbursements, the Company
takes into consideration each state's fund
balance, revenue sources, existing claim backlog,
status of cleanup activity and claim ranking
systems. As a result of these assessments, the
recorded receivable amounts in other assets are
net of allowances of $7.7 million and $10.8
million for 2000 and 2001, respectively.

71

While there is no assurance of the timing
of the receipt of state reimbursement funds,
based on the Company's experience, the Company
expects to receive the majority of state
reimbursement funds, except from California,
within one to three years after payment of
eligible remediation expenses, assuming that the
state administrative procedures for processing
such reimbursements have been fully developed.
The Company estimates that it will receive
reimbursement of most of its identified
remediation expenses in California, although it
may take one to ten years to receive those
reimbursement funds. As a result of the timing
in receiving reimbursement funds from the various
states, the portion of the recorded receivable
amounts related to remedial activities that have
already been completed has been discounted at
approximately 5.1% and 5.0% in 2000 and 2001,
respectively, to reflect present values. Thus,
the 2000 and 2001 recorded receivable amounts are
also net of present value discounts of $11.4
million and $11.1 million, respectively.

The estimated future remediation
expenditures and related state reimbursement
amounts could change within the near future as
governmental requirements and state reimbursement
programs continue to be implemented or revised.
Such revisions could have a material impact on
the Company's operations and financial position.

In December 1988, the Company closed its
chemical manufacturing facility in New Jersey.
Commencing in 1998, the Company is required to
conduct environmental remediation at the
facility, including groundwater monitoring and
treatment. The Company has recorded undiscounted
liabilities representing its best estimates of
the remaining cleanup costs of $6.3 million and
$4.7 million at December 31, 2000 and 2001,
respectively. Of these amounts, $4.0 million is
included in deferred credits and other
liabilities, and the remainder is in accrued
expenses and other liabilities for each year.

In 1991, the Company and the former owner
of the facility entered into a settlement
agreement pursuant to which the former owner
agreed to pay a substantial portion of the
cleanup costs. Based on the terms of the
settlement agreement and the financial resources
of the former owner, the Company has recorded
receivable amounts of $3.8 million and $3.1
million at December 31, 2000 and 2001,
respectively. Of this amount, $2.4 million and
$2.7 million, respectively, are included in other
assets and the remainder is included in accounts
receivable.

14. EQUITY TRANSACTIONS

On March 16, 2000, the Company issued
22,736,842 shares of common stock at $23.75 per
share to IYG Holding Company in a private
placement transaction, which increased their
ownership in the Company to 72.7% at that time.
The net proceeds of $539.4 million were used to
repay the outstanding balance on the Company's
bank term loan of $112.5 million and to reduce the
Company's revolving credit facility by
approximately $250 million and commercial paper
facility by approximately $177 million.

In addition to the private placement, the
Company's shareholders approved a reverse stock
split of one share of common for five shares of
common, which was effective May 1, 2000.
Accordingly, all references to share or per-share
data in the accompanying consolidated financial
statements and related notes reflect the reverse
stock split.

72

15. PREFERRED STOCK AND STOCK PLANS

PREFERRED STOCK - The Company has 5 million
shares of preferred stock authorized for issuance.
Any preferred stock issued will have such rights,
powers and preferences as determined by the
Company's Board of Directors.

STOCK PURCHASE PLANS - In 1999, the Company
adopted noncompensatory stock purchase plans that
allow qualified employees and franchisees to
acquire shares of the Company's common stock at
market value on the open market. The Company is
responsible for the payment of all administrative
fees for establishing and maintaining the stock
purchase plans as well as the payment of all
brokerage commissions for the purchase of shares
by the plans' independent administrator. In
2001, the Company added a matching-contribution
component to the employee plan equal to 10% of
the individual's common stock purchases for the
year with certain restrictions applying. The
Company's matching contribution was $79,000 for
the year ended December 31, 2001.

STOCK COMPENSATION PLAN FOR NON-EMPLOYEE
DIRECTORS - In 1998, the Company established the
Stock Compensation Plan for Non-Employee Directors
under which up to an aggregate of 240,000 shares
of the Company's common stock is authorized to be
issued to its non-employee directors. Eligible
directors may elect to receive all, none or a
portion of their directors' fees in shares of the
Company's common stock. During 1999, 2000 and
2001, 15,204, 12,785 and 16,606 shares,
respectively, were issued under the plan.

16. INCOME TAXES

The components of earnings before income tax
expense, extraordinary gain and cumulative effect
of accounting change are as follows:

73

The provision for income tax expense on earnings
before extraordinary gain and cumulative effect
of accounting change in the accompanying
Consolidated Statements of Earnings consists of
the following:

Included in the accompanying Consolidated
Statements of Shareholders' Equity (Deficit) at
December 31, 1999, 2000 and 2001, respectively, are
$7.1 million, $4.6 million and $3.3 million of
deferred income taxes provided on unrealized gains
on marketable securities. Also, at December 31,
2001, there is a deferred income tax benefit of
$5.5 million provided on unrealized losses on the
Company's interest rate swap (see Note 10).

Reconciliations of income tax expense on
earnings before extraordinary gain and cumulative
effect of accounting change at the federal statutory
rate to the Company's actual income tax expense
provided are as follows:

74

Significant components of the
Company's deferred tax assets and liabilities
are as follows:

At December 31, 2000 and 2001, respectively,
$95.9 million and $108.1 million of the Company's
net deferred tax liability is recorded in deferred
credits and other liabilities. The remaining
balance is included in other current assets (see
Note 4).

75

17. EARNINGS PER COMMON SHARE

Computations for basic and diluted earnings
per share are presented below:

76

18. RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS No. 141, "Business Combinations,"
which was issued in July 2001, addresses financial
accounting and reporting for business
combinations. The provisions of SFAS No. 141
apply to all business combinations initiated after
June 30, 2001, and to all business combinations
accounted for using the purchase method for which
the date of acquisition is July 1, 2001, or later.
The Company adopted the provisions of this
statement as of July 1, 2001, and there was no
financial accounting impact associated with its
adoption.

SFAS No. 142, "Goodwill and Other
Intangible Assets," which was issued in July 2001,
addresses financial accounting and reporting for
acquired goodwill and other intangible assets.
The statement eliminates amortization of goodwill
and intangible assets with indefinite lives and
requires a transitional impairment test of these
assets within six months of the date of adoption
and an annual impairment test thereafter and in
certain circumstances. The annual impact of not
amortizing the Company's goodwill and indefinite-
life license royalty intangibles is estimated to
be a $19 million decrease in amortization expense.
No material changes to the carrying amounts of
goodwill and other intangible assets are
anticipated as a result of adopting SFAS No. 142.
The Company will adopt the provisions of SFAS No.
142 effective January 1, 2002.

SFAS No. 143, "Accounting for Asset
Retirement Obligations," was issued in August 2001
and establishes financial accounting and reporting
standards for obligations associated with the
retirement of tangible long-lived assets and the
associated asset retirement costs. The provisions
of SFAS No. 143 apply to legal obligations
associated with the retirement of long-lived
assets that result from the acquisition,
construction, development and/or the normal
operation of a long-lived asset, except for
certain obligations of lessees. SFAS No. 143 will
impact the Company's accounting for underground
storage tank removal costs. The Company plans to
early-adopt the provisions of SFAS No. 143
effective January 1, 2002, and estimates that this
adoption will result in a one-time cumulative
effect after-tax charge of approximately $29
million and a reduction in 2002 earnings before
cumulative effect charge of approximately $2
million.

SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," was issued in
October 2001. SFAS No. 144 provides new guidance
on the recognition of impairment losses on long-
lived assets to be held and used or to be disposed
of and also broadens the definition of what
constitutes a discontinued operation and how the
results of a discontinued operation are to be
measured and presented. The Company anticipates
that the provisions of this statement, which it
will adopt effective January 1, 2002, will not
have a material effect on the Company's financial
statements.

19. SUBSEQUENT EVENT

In February 2002, the Company's management
approved and committed to a plan to streamline the
overall cost structure of the Company. As a
result, in the first quarter of 2002, the Company
recorded a one-time charge of $4.7 million to
OSG&A expense for severance costs. In addition,
the Company's management committed to a plan to
close between 115 and 120 underperforming stores
in 2002. In connection with the planned store
closings, the Company will record a pretax charge
of $5.8 million to OSG&A in the first quarter of
2002, primarily for anticipated future rent and
other expenses in excess of related estimated
sublease income.

The Company also recorded, in the fourth quarter
of 2001, an asset impairment charge of $5.3
million related to the planned store closings (see
Note 1).

77

20. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 2000
and 2001 is as follows:

The first quarter includes an income tax
benefit of $12.5 million, which resulted from the
settlement of certain outstanding tax issues
relating to audits of the Company's federal income
tax returns for the 1992 through 1995 tax years
(see Note 16). The fourth quarter includes an
extraordinary gain of $1.8 million resulting from
a partial redemption of the Cityplace Term Loan
(see Note 8).

78

The first quarter includes a cumulative effect of
accounting change expense of $9.8 million (net of
deferred taxes of $6.3 million) from the adoption of
SFAS No. 133 (see Note 10). Included in the first,
second, third and fourth quarters is a net
conversion gain (loss) of $7.8 million, ($2.2)
million, ($2.7) million and $5.7 million,
respectively, (net of deferred taxes of $5.0
million, ($1.4) million, ($1.8) million and $3.6
million, respectively) primarily resulting from
adjusting the balance of the yen loans to reflect
the end-of-period exchange rate of yen to U.S.
dollar (see Note 8). The fourth quarter includes an
impairment charge of $3.2 million (net of deferred
tax benefit of $2.1 million) related to planned
store closings in 2002 (see Note 1).

79

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
7-Eleven, Inc.:

We have audited the accompanying consolidated balance sheets
of 7-Eleven, Inc. and Subsidiaries as of December 31, 2000
and 2001, and the related consolidated statements of
earnings, shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of 7-Eleven, Inc. and
Subsidiaries as of December 31, 2000 and 2001, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 8 and Note 10 to the consolidated
financial statements, the Company adopted the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," in 2001.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
January 31, 2002, except as to Note 19, for which the date is
February 6, 2002

80

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We have included the information required in response to
this Item in our Definitive Proxy Statement for our April 24,
2002, Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION.

We have included the information required in response to
this Item in our Definitive Proxy Statement for our April 24,
2002, Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

We have included the information required in response to
this Item in our Definitive Proxy Statement for our April 24,
2002, Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have included the information required in response to
this Item in our Definitive Proxy Statement for our April 24,
2002, Annual Meeting of Shareholders.

81

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K

(a) The following documents are filed as a part of this
report:

1. 7-Eleven, Inc. and Subsidiaries' Financial Statements
for the three years in the period ended December 31, 2001, are
included in this report:

85

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders
of 7-Eleven, Inc.:

Our audits of the consolidated financial statements referred
to in our report dated January 31, 2002, except as to Note
19, for which the date is February 6, 2002, appearing on page
80 of this Form 10-K also included an audit of the financial
statement schedule listed in the index on page 87 of this
Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related
consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
January 31, 2002

86

87

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

7-ELEVEN, INC.
(Registrant)

March 22, 2002 /s/ James W. Keyes
-----------------------------
James W. Keyes
(President and Chief
Executive
Officer)

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.