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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Commission file number 1-10948

OFFICE DEPOT, INC.

(561) 438-4800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]      No [   ]

The registrant had 309,199,044 shares of common stock outstanding as of June 29, 2002.

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Item 1. FINANCIAL STATEMENTS

OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)
(Unaudited)

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

(Tabular amounts in thousands)

Note A – Basis of Presentation

Office Depot, Inc., including consolidated subsidiaries (the “Company”), is the world’s largest seller of office products and services. Fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. The condensed consolidated balance sheet at December 29, 2001 has been derived from audited financial statements at that date. The condensed interim financial statements as of June 29, 2002 and for the 13- and 26-week periods ending June 29, 2002 (also referred to as “the second quarter of 2002” and “the first half of 2002,” respectively) and June 30, 2001 (also referred to as “the second quarter of 2001” and “the first half of 2001”) are unaudited. However, in our opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of the Company and its financial statements, we recommend reading these condensed interim financial statements in conjunction with the Company’s audited financial statements for the year ended December 29, 2001, which are included in our 2001 Annual Report on Form 10-K, filed on March 19, 2002.

Note B – Comprehensive Income

Comprehensive income represents all non-owner changes in stockholders’ equity and consists of the following:

Note C – Stock Repurchase

In 2001, the board of directors approved common stock repurchases of up to $50 million per year, subject to annual approval. During the second quarter of 2002, the Company repurchased 615,300 shares at a total cost of $11.7 million plus commissions. Purchases for the first half of 2002 totaled 1,295,228 shares at a cost of $23.8 million plus commissions.

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Note D – Long-Term Debt

On April 24, 2002, the Company replaced its 364-day credit agreement, domestic credit facility, and its yen facilities with a single credit facility through a syndicate of banks, financial institutions and other lenders. This new revolving credit facility (the “New Credit Facility”) provides for borrowings in the aggregate amount of $600 million, including up to $150 million for issuance of standby and trade letters of credit. The New Credit Facility is a 3-year, unsecured revolving credit facility maturing on April 24, 2005. The New Credit Facility has the availability for U.S. dollar borrowings up to the full amount of the facility, and for yen borrowings up to an equivalent of $100 million U.S. dollars. Borrowings will bear interest at a benchmark variable rate plus a spread determined at the time of usage. For U.S. dollar borrowings, interest will be based on the then-current London Interbank Offering Rate (LIBOR). For international borrowings, interest will be based on the then-current Eurocurrency rate. The benchmark rates can be specified by the Company for periods of one, two, three or six months. Based on the Company’s current credit ratings, all borrowings would include a spread of 0.925%. The covenants contained in the New Credit Facility are similar to those in the credit facilities existing as of March 30, 2002.

As of June 29, 2002, the New Credit Facility had outstanding yen borrowings equivalent to $81.7 million, which had an average effective interest rate of 1.05%, and outstanding letters of credit totaling $41.3 million.

Note E – Earnings Per Share (“EPS”)

The information required to compute basic and diluted EPS is as follows:

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Options to purchase approximately seven million shares of common stock were not included in our computation of diluted earnings per share for the second quarter of 2002 because their weighted average effect would have been anti-dilutive.

Note F – Segment Information

The following is a summary of our significant accounts and balances by segment, reconciled to consolidated totals.

A reconciliation of earnings before income taxes from our reportable segments to earnings before income taxes in our condensed consolidated financial statements is as follows:

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Note G — Goodwill

Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangibles, was effective for Office Depot at the beginning of fiscal year 2002. The components of goodwill by segments are listed below:

The change in net book value of goodwill is primarily related to a tax election the Company made during the second quarter of 2002. Following the acquisition of 4Sure.com in the second half of 2001, the Company recorded a deferred tax asset for the anticipated future tax benefit of 4Sure.com’s net operating loss (NOL) carryforwards. The election in 2002 resulted in the utilization of those NOLs and will result in the related goodwill being deductible over 15 years for tax purposes. Accordingly, goodwill was increased and deferred tax assets were reduced by a like amount. The election has no impact on the results of operations. The remaining change in the net book value of goodwill, for both the North American Retail and International segments, is directly attributable to fluctuations in foreign currency exchange rates.

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The net book value of intangible assets totaled $10.4 million at June 29, 2002 and $10.9 million at December 29, 2001. Beginning with fiscal 2002, approximately $2 million of intangible assets are no longer subject to amortization. Amortization of intangible assets totaled $0.3 million for the second quarter, and $0.7 million for the first half of 2002. Amortization of goodwill and intangible assets totaled $1.8 million for the second quarter, and $3.6 million for the first half of 2001. Without this amortization, pro forma earnings per share would have increased by $0.01 for the second quarter and $0.01 for the first half of 2001. It is anticipated that amortization of intangible assets will continue at approximately $1.4 million per year for each of the next two years and approximately $0.4 million per year for the following three years.

Note H – New Accounting Standards

In July 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. This Statement requires capitalizing any retirement costs as part of the total cost of the related long-lived asset and subsequently allocating the total expense to future periods using a systematic and rational method. Adoption of this Statement is required for Office Depot with the beginning of fiscal year 2003. We have not yet completed our evaluation of the impact of adopting this Statement.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction. This Statement eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarifies meanings, or describes their applicability under changed conditions. The provisions of this Statement are effective for the Company with the beginning of fiscal year 2003; however, early application of the Statement is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of this Statement would be reclassified in most cases following adoption. The Company does not anticipate a significant impact on its results of operations from adopting this Statement.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required with the beginning of fiscal year 2003. We have not yet completed our evaluation of the impact of adopting this Statement.

Note I – Subsequent Events

On July 17, 2002, the Company announced its plan to redeem its 1992 Liquid Yield Option Notes (LYONS®) due December 2007 for cash. These notes are currently included in current maturities of long-term debt on the Company’s balance sheet, and will be redeemed at 100 percent of the principal amount, plus interest accrued through August 19, 2002. During the third quarter of 2002, the Company may also issue call notices to redeem the remaining $2 million portion of 1993 LYONS®. The redemption of both LYONS® issues will reduce the Company’s indebtedness by approximately $243 million.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

GENERAL

Office Depot, Inc., together with our subsidiaries, is the largest seller of office products and services in the world. We sell to consumers and businesses of all sizes through our three business segments: North American Retail Division, Business Services Group (“BSG”) and International Division.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We recommend that you read this MD&A in conjunction with our condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q, as well as our 2001 Annual Report on Form 10-K.

This MD&A contains significant amounts of forward-looking information. Without limitation, when we use the words “believe,” “estimate,” “plan,” “expect,” “intend,” “anticipate,” “continue,” “project,” “probably,” “should” and similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking statements. Our Cautionary Statements, which you will find immediately following this MD&A and following the MD&A in our 2001 Annual Report on Form 10-K, apply to these forward-looking statements.

RESULTS OF OPERATIONS

Net earnings increased 36% to $56.9 million for the second quarter, and increased 62% to $159.7 million for the first half of 2002, compared to the corresponding periods of 2001. Diluted earnings per share increased to $0.18 for the second quarter and $0.50 for the first half of 2002. Our improved earnings reflect higher total sales for each of the three operating segments, a continued shift in sales mix away from technology products and operational efficiencies, partially offset by expansion costs, primarily in certain European countries. Operating results for 2002 also include a $12 million accrual for the anticipated settlement of class action litigation in the state of California (discussed further below). Included in second quarter and first half results for 2001 were charges related to the write-down of investments in certain Office Depot Internet partners totaling $8.5 million. Additionally, in accordance with accounting rules that became effective at the beginning of fiscal year 2002, goodwill is no longer being amortized. During 2001, goodwill amortization was $1.8 million for the second quarter and $3.6 million for the first half.

Overall
($ in millions)

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Overall sales for the second quarter and first half of 2002 increased 4% and 2%, respectively. Comparable worldwide sales in the 847 stores and 39 delivery centers that have been open for more than one year were flat for the second quarter and declined 1% for the first half of 2002. Sales of technology hardware and furniture declined in both periods.

Sales through our e-commerce channels continued their increasing trend. Worldwide e-commerce sales grew 38% to $498 million during the quarter, and grew 37% to $987 million for the first half of 2002. These e-commerce sales are comprised of all worldwide online sales, including those from our domestic and international public Web sites, as well as Office Depot’s contract business-to-business sites. These sales are reported in the generating business segment, primarily BSG.

The increase in gross profit as a percent of sales reflects a continuing sales mix shift away from technology products in North American Retail, partially offset by vendor program impacts in BSG and increased lower margin contract sales in our International Division.

Store and warehouse operating and selling expenses as a percent of sales decreased for both the quarter and first half of 2002, reflecting the benefits of improved cost control, partially offset by the cost of expansion activities in Europe. Furthermore, our 2001 results included costs associated with the domestic re-merchandising effort.

North American Retail Division
($ in millions)

Sales in the North American Retail Division increased 1% for both the second quarter and first half of 2002. Comparable store sales in the 815 stores in the U.S. and Canada that have been open for more than one year decreased 1% for the second quarter and 2% for the first half of 2002. While comparable sales declined for the second quarter, customer traffic increased by 3%, but at a lower average ticket value. Sales of technology hardware products declined 12% in the second quarter and 13% year-to-date. Sales of basic office supplies, paper and filing, and machine supplies increased in both periods.

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Gross profit as a percent of sales increased as our product mix shifted away from lower margin technology products. Additionally, results in 2002 continue to benefit from the chain-wide re-merchandising program initiated in 2001, along with improvements in product assortment and clearance management.

Store and warehouse operating and selling expenses include a $12 million accrual for the anticipated settlement of class action litigation in the state of California. The litigation alleges that the Company incorrectly classified store managers and assistant store managers in the state of California as exempt from payment of overtime for hours worked in that state. The Company denies any liability in this case, and any settlement will expressly disclaim any admission of liability on the part of the Company. The California state wage and hour statutes differ from those in other states, as well as from the Federal standard. Numerous other retailers have settled similar cases in California. The asserted claims have not been settled, and negotiations are ongoing.

In addition to store and warehouse operating profit reported above, segment earnings reported in Note F include pre-opening expenses and an adjustment to accrued facility closure costs. Total segment earnings, before general and administrative costs or interest allocation, totaled $92.8 million for the second quarter and $215.8 million for the first six months of 2002. The comparable amounts for 2001 were $69.5 million for the quarter and $144.6 million for the first half.

During the second quarter of 2002, six new retail stores were opened, 10 stores closed, and two relocated. Eight of the closures were previously announced as under-performing stores and two were closed at the expiration of their lease terms. Also during the quarter, we converted 12 of our existing Office Place stores in Canada to the Office Depot brand. At the end of the quarter, Office Depot operated a total of 853 retail stores throughout the United States and Canada.

Business Services Group
($ in millions)