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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission File No. 0-16626

7-Eleven, Inc.

(Exact name of registrant as specified in its charter)

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

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

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 whether the registrant is an accelerated filer (as defined in Rules 12b-2 of the Act). Yes  x  No  ¨

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of the common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $225,162,895

104,986,071 shares of common stock, $.0001 par value (our only class of common stock) were outstanding as of March 15, 2003.

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 23, 2003, Annual Meeting of Shareholders: Part III, items 10, 11, 12 and 13.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this report, 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

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PART I

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. Because these forward-looking statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We do not intend to assume any duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For additional information about forward-looking statements, see page 20.

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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, we are the largest convenience store chain in the world. We operate, franchise or license more than 24,000 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 6 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 company-operated stores in Canada.

Our principal executive offices are located at 2711 North Haskell Avenue, Dallas, Texas 75204. Our telephone number is 214/828-7011. 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.

Our Internet address is www.7-Eleven.com. We make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

For financial reporting purposes, during 2002 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 2002, refer to our financial statements on pages 44 to 82.

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:

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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 strive to obtain 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 approximately 50% 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:

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:

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. During 2002, we introduced new formalized employee training, mandated certification programs and linkage of performance measurements to our fundamental business concepts.

Differentiated franchise model. More than half of our stores in the United States are operated by independent franchisees. Our franchise model is different from most others because we own or lease the stores and equipment used by our franchisees. In addition, the ongoing royalties that 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.

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GROWTH STRATEGY

Increasing same-store merchandise sales. Our U.S. same-store merchandise sales growth was 3.3% for 2002 and 5.1% for 2001. To increase same-store merchandise sales, our merchandising team focuses on developing and introducing new products. In addition, by using the retail information system, our merchandising team, franchisees and store managers are better able to increase sales by optimizing the product assortment 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 efficiently. We believe that the potential exists for significant expansion in our core urban and suburban markets, and we plan to open approximately 100 new stores during 2003 and between 100 and 150 new stores during 2004. 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 check-cashing, 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 online. 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.

During the fourth quarter of 2002, after successfully completing a 98-store Vcom pilot program, we began our further expansion of Vcom. By year-end 2002, we had installed more than 340 Vcom units. We plan to complete our expansion of Vcom to a total of 1,000 stores by the end of the second quarter of 2003. Our longer range plans anticipate further expanding Vcom to a total of 3,500 stores. 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 our 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. During 2002, we presented our preliminary plans for these arrangements to a special committee of our Board of Directors. In addition, during 2002 the special committee conditionally approved two of our current international licensees and two Chinese entities as partners in the joint venture that will be a party to these additional licensing arrangements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Issues—Related Party Transactions—Expansion In China.”

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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:

In addition, gasoline sales accounted for 29.0% in 2000, 28.2% in 2001 and 28.0% in 2002 of our total net sales in the U.S. and Canada.

Our merchandise assortment includes a number of items specifically identified with us, including Slurpee^® semi-frozen carbonated beverages, Café Select^® coffee, Big Gulp^® fountain beverages and Big Bite^® hot dogs. During 2002, we introduced nine new Slurpee flavors, including the first sugar-free flavor (Crystal Light Raspberry Ice) and Mountain Dew Blue Shock. We continue to work with third-party vendors to develop products specifically for our stores, such as our popular Go-Go Taquitos^™, crispy grilled tortillas with spicy Mexican filling.

Also during 2002, we introduced our high-quality, award-winning Big Eats Deli^™ sandwiches to 7-Eleven stores served by our network of daily distribution providers.

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 2,475 stores. We anticipate that approximately 50% 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 2,150 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.

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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 by-item sales information 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.

The system features:

We have installed hardware and software for the retail information system in the United States and Canada. 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 2002, including debit card processing, additional credit card functionality, lottery management, integration of money orders and check authorization into the point-of-sale registers, and changes to support the rollout of the system to our Canadian stores. We implemented, as part of our enterprise portal, an intranet home page to facilitate communication to our stores and other store functions. Also during 2002, we installed the retail information system and a secondary server to support in-store training and other functions in each of our Canadian stores.

During 2003, we plan additional enhancements to the system to support merchandising and ordering. In addition, we plan to add enhancements to streamline gasoline pricing and

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support credit and alternative payment initiatives. We also plan to add certain additional features and support for the stores using the portal and secondary server.

COMMISSARIES AND BAKERIES

We have contracted with third-parties who own and operate 12 bakeries and 13 commissaries that currently provide daily deliveries of fresh foods such as sandwiches, salads and baked goods to more than 4,750 of our stores. These commissaries and bakeries average about 20,000 square feet in size. Each commissary ships approximately 13,000 units daily to our stores. Each bakery ships about 34,500 units daily. 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.

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. Our original, ten-year contract with McLane was scheduled to expire in November 2002. In July 2002, we signed a new 40-month agreement with McLane, which became effective in September 2002. We believe the terms of our new agreement with McLane are more favorable to us than those included in the previous agreement. 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 22 combined distribution centers in the United States and Canada to service more than 4,750 of our stores.

Combined distribution centers typically serve stores within a 90-minute drive. The 22 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 approximately 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, 2002, independent franchisees operated 3,276 7-Eleven stores in the United States, which collectively comprise more than 60% of our U.S. store base. Merchandise sales by franchised stores are included in our net sales and totaled approximately $4.2 billion for the year ended December 31, 2002. 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 dollars of the store if it has been operating for more than 12 months, or average gross profit dollars 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. With regard to gasoline sales, our franchise agreements in most instances require us to pay the franchisee one cent per gallon sold. By practice, in recent years we have paid our franchisees 25% of the gasoline gross profit if that sum is higher than one cent per gallon sold, but we are not required to continue doing so. 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 37% of our franchise agreements will expire on December 31, 2003. In addition, during the three-year period beginning on January 1, 2004, approximately 10% of our franchise agreements will expire. We are working with our franchisees to develop a new franchise agreement to replace agreements that are scheduled to expire on or after December 31, 2003. The economics of the new agreement will be evaluated according to a procedure set forth in a court-approved settlement agreement. This procedure provides for extension of the existing franchise agreements until such time as all steps in the procedure have been completed. 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, 2002, area license agreements covered the operation of 18,611 7-Eleven stores in the following countries and U.S. territories:

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^®, Café 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 Vcom^®, Big Eats Deli^™, Big Eats Bakery^™, 7-Eleven Convenience Card^™, 7-Eleven Go-Go Taquitos^™ and Big Eats Bakery Dreammm Donuts^™.

EMPLOYEES

At December 31, 2002, we had approximately 31,500 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 72.5%, of our common stock at December 31, 2002. In addition, IYG Holding’s shareholders own quarterly income debt securities, or QUIDS, convertible into a maximum of 20,924,069 shares of our common stock. If these QUIDS were converted into the maximum number of shares issuable upon conversion, IYG Holding’s shareholders would beneficially own approximately 77.1% of our common stock.

Ito-Yokado. Ito-Yokado is among the largest retailers in Japan. Its principal business consists of operating approximately 180 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 three 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 9,450 stores in Japan. It owns Seven-Eleven (Hawaii), Inc., which, as of December 31, 2002, operated an additional 53 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

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times and costs for new facilities. Violation of environmental statutes, regulations or orders could result in civil or criminal enforcement actions.

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 72.5%, of our common stock. The balance of our common stock is thinly traded, with average daily trading volume during 2002 of approximately 80,000 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 27% of our merchandise sales (based on wholesale purchases by our stores) 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 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 28% of our total net sales and 9.5% of our gross profit. Increases in the wholesale cost of 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.

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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.

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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.

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 most 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 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. In addition, a significant international conflict, including but not limited to a war with Iraq, could disrupt or reduce our available supply of gasoline, at least in the short term, and could otherwise adversely affect our gasoline sales and profits.

RISKS PARTICULAR TO OUR CAPITAL STRUCTURE

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 obligated to satisfy certain financial ratio requirements. 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.

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, 2002, IYG Holding owned 72.5% 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 77.1% of our common stock. As our majority owner,

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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:

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

Our financial leverage may impair our flexibility in obtaining additional financing and in pursuing business opportunities.

In January 2003, we announced that we had entered into a note purchase agreement with our affiliate, Seven-Eleven Japan, pursuant to which we have the ability to borrow up to $400 million from Seven-Eleven Japan in multiple tranches during 2003. The interest rate on the notes is set by a formula tied to U.S. Treasury and Japanese government bond rates. We plan to use the proceeds of this financing for general corporate purposes and to retire all of our outstanding subordinated debentures.

Notwithstanding our agreement with Seven-Eleven Japan, our financial leverage may have important consequences to the holders of our common stock, including the following:

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.

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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, 2002. 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.

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Additional Information About Properties and Leases. At December 31, 2002, 28 7-Eleven stores were under construction. We owned or were under contract to purchase 19 undeveloped sites, and had leases on another 72 undeveloped sites. In addition, at year-end 2002 we owned 91 store properties available for sale, including 24 unimproved parcels of land, 56 closed store locations, and 11 parcels of excess property adjoining store locations. At December 31, 2002, 24 of these properties were under contract for sale.

At December 31, 2002, we held leases on 175 closed stores or other non-operating facilities, 12 of which were leased from the 7-Eleven, Inc. Employees’ Savings and Profit Sharing Plan. Of these 175 leases, 102 were subleased to third parties at year-end 2002.

Generally, we lease our stores for primary terms of 10 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.

Over the next five years, leases covering more than half of our total leased stores will expire, including more than 1,200 leases that lack rent renewal options or contain negotiable rent options and more than 1,300 leases that have fixed rent options. We have devoted, and will continue to devote, considerable efforts to extending and/or renegotiating these leases.

Headquarters. Our headquarters are located in Dallas, Texas, in a building known as Cityplace Center East (“Cityplace”). One of our subsidiaries owns Cityplace, subject to certain outstanding debt, and leases it to us. Our lease covers the entire building but permits us to sublease. For the past five years, our subleases to other tenants have resulted in Cityplace being virtually completely leased or reserved for expansion under current leases. During 2003, as certain current subleases terminate, we plan to negotiate extensions of the subleases or seek new tenants for any space that becomes available.

Item 3. LEGAL PROCEEDINGS

At December 31, 2002, 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 2002.

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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 February 28, 2003, there were 104,986,071 shares of our common stock issued and outstanding, held by 1,875 record holders. During 2002, 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 2001 and 2002 and the closing price of our common stock on the last trading day of each quarter.

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 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.

The following table summarizes, as of December 31, 2002, our equity compensation plans:

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Equity Compensation Plan Information

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Item 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

7-ELEVEN, INC. AND SUBSIDIARIES

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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.

General

We are the world’s largest operator, franchisor and licensor of convenience stores and the world’s largest convenience store chain. Our revenues principally consist of retail sales of merchandise and gasoline. To a lesser extent, we generate royalty revenues, mainly from international licensed stores. Our primary expenses consist of cost of goods sold; operating, selling, general and administrative expense; interest expense and taxes.

We seek to meet the changing needs of convenience customers and maintain a leadership position in the convenience store industry by leveraging our scale, technology, people and widely recognized brand. In 2003, we will continue to focus on our traditional convenience store business as well as our growth strategy to further our competitive advantage and improve our financial results.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated 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 materially from these estimates under different assumptions or conditions. See Note 1 to the Consolidated Financial Statements.

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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 royalty. With regard to gasoline sales, our franchise agreements in most instances require us to pay the franchisee one cent per gallon sold as compensation for the services our franchisees perform related to gasoline. By practice, in recent years we have paid our franchisees 25% of the gasoline gross profit if that sum is higher than one cent per gallon sold, but we are not required to continue doing so. 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 Statements 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 Statements 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, merchandising and other services. 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 on our prior experience with remediation sites. In addition, we consider 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. We record a receivable for estimated probable refunds at the same time that we record the liability. The amount of the receivable is based on 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.

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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 our operations and financial position. See “—Other Issues—Environmental” and Note 14 to the Consolidated Financial Statements.

Store Closings and Asset Impairment

The results of operations of certain owned and leased stores are presented as discontinued operations in accordance with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Since 2002 the results of operations of owned stores have been presented as discontinued operations beginning in the quarter in which management commits to a plan to close the related store and actively markets the store. The results of operations of a leased store are presented as discontinued operations beginning in the quarter in which the related store ceases operations. The results of operations of these owned and leased stores include related write-downs of stores to estimated net realizable value and accruals for future estimated rent and other expenses in excess of estimated sublease rental income.

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 and begin to actively market the store. If we lease the store, we also accrue for related future estimated rent and other expenses if we believe the expenses will exceed estimated sublease rental income. We adopted the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and as a result, effective January 1, 2003, if we lease the store, we will accrue for related future estimated rent and other expenses if we believe the expenses will exceed estimated sublease rental income at the time the store ceases operations. 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 “—Other Issues—Recently Issued Accounting Standards” and Notes 1 and 5 to the Consolidated Financial Statements.

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We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), we also conduct an annual impairment test of our goodwill and intangible assets with indefinite lives. The impairment test for goodwill is comprised of two steps. Step one compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, then goodwill is impaired and step two is required to measure the amount of impairment loss. Step two compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount is greater than the implied fair value of the goodwill, an impairment loss is recognized for the excess. See Note 6 to the Consolidated Financial Statements.

The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount is greater than fair value, an impairment loss is recognized for the excess. See Note 6 to the Consolidated Financial Statements.

Underground Gasoline Storage Tanks

Since 2002 we have recognized the estimated future cost to remove an underground storage tank over the estimated useful life of the storage tank in accordance with the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). We record a discounted liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset at the time an underground storage tank is installed. We amortize the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of tank. We base our estimates of the anticipated future costs for removal of an underground storage tank on our prior experience with removal. We also consider factors such as the type of tank, location of tank sites and our experience with contractors who perform removal work. See Note 8 to the Consolidated Financial Statements.

Yen Loans

We use our license royalty receipts from Seven-Eleven Japan Co., Ltd. (“Seven-Eleven Japan”) 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. Since our adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), on January 1, 2001, we have adjusted the balance of the yen loans at each reporting date to reflect the then-current Japanese yen to U.S. dollar exchange rate, and we recognize the resulting noncash foreign currency exchange gain or loss 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. See “—Quantitative and Qualitative Disclosures About Market Risks—Foreign-Exchange Risk Management” and Notes 9 and 11 to the Consolidated Financial Statements.

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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.

Workers’ Compensation, General Liability and Medical 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 on 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.

Effective January 1, 2003, we changed our medical coverage from a fully insured plan to a self-insured plan. In lieu of paying fully insured premiums, which cover incurred claims plus administrative expenses, we will pay claims and administrative expenses as they become due and establish reserves for incurred but unpaid claims as determined by an independent actuary. This decision to change to self-insurance is designed to mitigate the impact of rising healthcare costs.

Off-balance Sheet Lease-financing

We have utilized off-balance sheet lease-financing programs to diversify our funding sources for new store growth. We have in place lease-financing programs that we used to construct new stores and acquire operating convenience stores from third parties not affiliated with us. Under these programs, we have not included 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—Off-balance Sheet Items” and Notes 12 and 20 to the Consolidated Financial Statements.

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COMPARISON OF 2002 TO 2001 RESULTS

We have reclassified certain prior-year amounts to conform to the current-year presentation, such as the results of operations of certain owned and leased stores which are presented as discontinued operations in accordance with the provisions of SFAS No. 144 for all years discussed.

Net Sales

Merchandise sales for 2002 increased $370.0 million, or 5.4%, over 2001. U.S. same-store merchandise sales increased 3.3% for 2002, on top of 5.1% for 2001. Continued improvement in same-store sales is a result of our focus on product assortment, introducing new items and improving the quality of existing items. Key contributors to the merchandise sales growth in 2002 were increases in cigarettes, beer, prepaid cards, noncarbonated beverages, fresh food items and candy. Partially offsetting these increases was a decrease in our sales of Café Cooler frozen beverages. Increases in the retail price of cigarettes due to wholesale cost increases accounted for less than 1% of the increase in same-store sales in 2002 and 2001.

Gasoline sales for 2002 increased $117.4 million, or 4.3%, over 2001. We attribute this increase to a 4.3% increase in per-store gallons sold, partially offset by a 6-cent decline in the average retail price of gasoline in 2002. 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.

Gross Profit

We calculate gross profit by subtracting our total cost of goods sold from our total net sales. Merchandise gross profit for 2002 was $2,529.1 million, an increase of $163.8 million, or 6.9%, over 2001. Gross profit margin in 2002 increased 51 basis points to 34.74% from 34.23% in 2001. Our overall gross profit margin increase and gross profit growth per store

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were due to a combination of continued emphasis on reducing our costs of goods sold, changes in product mix and a reduction in write-offs and shortages. Some of our faster growing products were beer, prepaid cards, noncarbonated beverages, fresh food items and candy. During the third quarter of 2002, we signed a new primary wholesale agreement with McLane Company, which supports our cost containment efforts and has increased service levels to our stores.

Gasoline gross profit for 2002 was $259.3 million, basically flat with 2001. Our gasoline gross profit per gallon decreased to 12.73 cents for 2002 compared to 13.88 cents for 2001. This translated into a 4.4% decrease in our gasoline gross profit per store for 2002. These declines were primarily due to difficult market conditions in the first quarter of 2002 when retail prices fell faster than wholesale costs, causing lower retail margins.

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 10 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 10 years, however, our annual gasoline gross profit margins have remained comparatively stable and range from 12.73 to 14.50 cents per gallon.

Other Income

Other income consists primarily of area license royalties and initial franchise fees. Other income for 2002 was $103.0 million, a decrease of $9.0 million, or 8.0%, from $112.0 million in 2001. Royalty income from our area licensees was $71.6 million in 2002, a decrease of $13.2 million from $84.8 million in 2001. The decrease is primarily due to a $17.7 million decrease in the royalties received from our licensing agreement with Seven-Eleven Japan under which Seven-Eleven Japan pays us a royalty fee based on a percentage of its total revenues. Under the terms of a 1988 amendment to that agreement, Seven-Eleven Japan reduced its royalty payments to us by approximately 70% beginning in August 2002. In addition, we experienced an unfavorable impact from changes in the Japanese yen to U.S. dollar exchange rate during 2002. The royalty rate reduction and the impact of the exchange rate changes were partially offset by increases in franchise fees, other area license royalties and Vcom placement fees.

We expect that 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.

Franchisee Gross Profit Expense

Franchisee gross profit expense for 2002 was $747.1 million, an increase of $43.7 million, or 6.2%, from $703.4 million in 2001, 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.

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Operating, Selling, General and Administrative Expense (“OSG&A”)

The primary components of OSG&A are store labor, occupancy (including depreciation) and corporate expenses. OSG&A for 2002 was $1,992.1 million, an increase of $186.8 million, or 10.3%, from $1,805.3 million in 2001. We attribute this increase primarily to costs associated with higher occupancy expenses from store openings, higher employee-related costs and increased technology-related expenses. In 2003 we expect that our investment in new stores, technology and the effects of store lease renewals will continue to increase OSG&A. We also expect OSG&A to grow at a rate less than that of merchandise gross profit.

OSG&A includes noncash foreign currency conversion gains and losses which primarily relate to our yen-denominated loans. OSG&A for 2002 also includes a charge primarily for the write-down of stores to net realizable value and anticipated future rent and other expenses in excess of related estimated sublease income in connection with our anticipated closing of 53 underperforming stores in 2003. It also includes severance, infrastructure consolidation and other expenses. OSG&A for 2001 includes goodwill and intangible asset amortization expense, which was eliminated in 2002 upon the adoption of SFAS No. 142 (see Note 6 to the Consolidated Financial Statements).

Interest Expense, Net

Net interest expense for 2002 was $64.7 million, an increase of $2.0 million, or 3.2%, from $62.7 million in 2001. The increase is primarily due to a decrease in interest income due to lower interest rates. See “—Quantitative and Qualitative Disclosures About Market Risks—Interest Rate Risk Management.”

In accordance with SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructuring” (“SFAS No. 15”), we record our debentures 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 for each year by $17.7 million in 2000, 2001 and 2002. See Note 9 to the Consolidated Financial Statements.

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Income Tax Expense

Income tax expense for 2002 was $35.0 million, a decrease of $29.3 million, or 45.5%, from $64.3 million in 2001. Our effective tax rate was 40.0% for 2002, compared to 39.0% in 2001.

Earnings from Continuing Operations

Our earnings from continuing operations for 2002 were $52.5 million ($0.48 per diluted share), compared to $100.6 million ($0.89 per diluted share) for the same period in 2001.

Discontinued Operations

Discontinued operations for 2002 resulted in a loss of $11.6 million (net of $7.7 million income tax benefit) compared to a loss of $7.0 million (net of $4.5 million income tax benefit) for the same period in 2001. We accounted for 129 stores as discontinued operations in 2002 and 2001. Substantially all the stores were closed in 2002. These stores had total revenues of $37.6 million and $159.8 million and pretax operating losses of $19.3 million and $11.5 million for 2002 and 2001, respectively. Included in the loss on discontinued operations are losses on disposal of $3.5 million (net of tax benefit of $2.3 million) and $3.2 million (net of tax benefit of $2.1 million) for the years ended December 31, 2002 and 2001, respectively. The losses on disposal represent write-downs of stores to net realizable value and anticipated future rent and other expenses in excess of related estimated sublease income in connection with the store closings.

Cumulative Effect of Accounting Change

On January 1, 2002, we adopted SFAS No. 143, which resulted in a one-time charge of $28.1 million, net of taxes, related to the cumulative effect of the accounting change. SFAS No. 143 requires us to recognize an estimated liability for the removal of our underground gasoline storage tanks. See Note 8 to the Consolidated Financial Statements.

On January 1, 2001, we adopted SFAS No. 133, 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 11 to the Consolidated Financial Statements.

Net Earnings

Net earnings for 2002 were $12.8 million ($0.13 per diluted share), a decrease of $70.9 million, or 84.7%, from $83.7 million ($0.75 per diluted share) in 2001.

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.

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COMPARISON OF 2001 TO 2000 RESULTS

Net Sales

Merchandise sales for 2001 increased $386.3 million, or 5.9%, over 2000. The largest contributors to the merchandise sales growth in 2001 were increases in sales of cigarettes, prepaid cards, beer and noncarbonated beverages. Primary contributors to this growth include improving merchandise assortment, offering new items and operating additional stores in 2001 as compared to 2000. In addition, U.S. same-store merchandise sales growth was 5.1% for 2001 compared to 5.6% in 2000. Increases in the retail price of cigarettes due to wholesale cost increases accounted for less than 1% of such growth in 2001 and 2% of such growth in 2000.

Gasoline sales for 2001 increased $57.3 million, or 2.2%, over 2000. We attribute this increase to a 4.1% increase in per-store gallons sold and the operation of an average of 83 additional gasoline stores in 2001. These increases were partially offset by an 8-cent decrease in the average retail price of 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.

Gross Profit

Merchandise gross profit for 2001 increased $96.1 million, or 4.2%, over 2000 as a result of higher sales, partially offset by a decline in gross profit margin to 34.23% in 2001 from 34.79% in 2000. Our overall gross profit margin and gross profit growth per store declines were due to a combination of wholesale cost increases, changes in product mix and the impact of cigarette cost increases. Some of our faster growing products 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 resulted

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in lower margins in some cases. Aggressive pricing by competitors for items such as bread, milk, cigarettes and soft drinks also decreased our margin.

Gasoline gross profit for 2001 increased $24.5 million, or 10.4%, over 2000 as a result of increased sales volume. Gasoline gross profit margin improved to 13.88 cents per gallon for 2001 compared to 13.55 cents per gallon in 2000. Our gasoline gross profit per store increased 6.7% 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.

Other Income

Other income for 2001 was $112.0 million, an increase of $7.3 million, or 6.9%, from $104.7 million in 2000. We attribute this 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 and an increase in the number of such stores. We also recorded a $1.8 million benefit from foreign currency translation on our Seven-Eleven Japan royalty receipts due to changes in the yen to U.S. dollar exchange rate.

Franchisee Gross Profit Expense

Franchisee gross profit expense for 2001 was $703.4 million, an increase of $40.4 million, or 6.1%, from $663.0 million in 2000, 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