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FORM 10-Q



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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



Commission File Number 0-16626



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7-Eleven, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 75-1085131                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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



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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 ̈



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



APPLICABLE ONLY TO
CORPORATE ISSUERS:



112,250,031 shares of common stock,
$.0001 par value (the issuers only class of common stock), were outstanding as of June 30, 2004.



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##### Table of Contents

7-ELEVEN, INC. / INDEX



|                                                                                                           |  |                                                                                                          |  |         
|---------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                           |  |                                                                                                          |  | Page No.
|Part I.                                                                                                    |  | FINANCIAL INFORMATION                                                                                    |  |         
|                                                                                                           |  |                                                                                                         
|Item 1.                                                                                                    |  | Financial Statements:                                                                                    |  |         
|                                                                                                           |  |                                                                                                         
|                                                                                                           |  | Condensed Consolidated Balance Sheets - December 31, 2003 and June 30, 2004                              |  | 1       
|                                                                                                           |  |                                                                                                         
|                                                                                                           |  | Condensed Consolidated Statements of Earnings - Three Months and Six Months Ended June 30, 2003 and 2004 |  | 2       
|                                                                                                           |  |                                                                                                         
|                                                                                                           |  | Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003 and 2004                |  | 3       
|                                                                                                           |  |                                                                                                         
|                                                                                                           |  | Notes to Condensed Consolidated Financial Statements                                                     |  | 4       
|                                                                                                           |  |                                                                                                         
|                                                                                                           |  | Report of Independent Registered Public Accounting Firm                                                  |  | 13      
|                                                                                                           |  |                                                                                                         
|Item 2.                                                                                                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 14      
|                                                                                                           |  |                                                                                                         
|Item 3.                                                                                                    |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 26      
|                                                                                                           |  |                                                                                                         
|Item 4.                                                                                                    |  | Controls and Procedures                                                                                  |  | 26      
|                                                                                                           | 
|Part II.
OTHER INFORMATION                                                                                 |  |                                                                                                         
|                                                                                                           |  |                                                                                                         
|Item 1.                                                                                                    |  | Legal Proceedings                                                                                        |  | 27      
|                                                                                                           |  |                                                                                                         
|Item 4.                                                                                                    |  | Submission of Matters to a Vote of Security Holders                                                      |  | 28      
|                                                                                                           |  |                                                                                                         
|Item 6.                                                                                                    |  | Exhibits and Reports on Form 8-K                                                                         |  | 29      
|                                                                                                           | 
|SIGNATURES                                                                                                 |  | 30                                                                                                      
|                                                                                                           | 
|Exhibit 15  Letter re Unaudited Interim Financial Information                                             |  | Tab 1                                                                                                   
|                                                                                                           | 
|Exhibit 31(1)  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |  | Tab 2                                                                                                   
|                                                                                                           | 
|Exhibit 31(2)  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |  | Tab 3                                                                                                   
|                                                                                                           | 
|Exhibit 32(1)  Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350                      |  | Tab 4                                                                                                   
|                                                                                                           | 
|Exhibit 32(2)  Certification of Chief Financial Officer Pursuant to 18 U.S.C. § 1350                      |  | Tab 5                                                                                                   



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##### Table of Contents

7-ELEVEN, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per-share data)



|                                             |  |                  |           |   |               |   |           |  
|-------------------------------------------- |  | ---------------- | --------- | - | ------------- | - | --------- | -
|                                             |  | December 31,2003 |           |   | June 30, 2004 |  
|                                             |  |                  |           |   | (Unaudited)   |  
|ASSETS                                       |  |                  |           |   |               |   |           |  
|Current assets                               |  |                  |           |   |               |   |           |  
|Cash and cash equivalents                    |  | $                | 190,513   |   |               | $ | 104,069   |  
|Accounts receivable                          |  |                  | 151,171   |   |               |   | 162,168   |  
|Inventories                                  |  |                  | 279,130   |   |               |   | 285,319   |  
|Other current assets                         |  |                  | 162,847   |   |               |   | 172,674   |  
|                                             |  |                  |           |   |               |   |           |  
|Total current assets                         |  |                  | 783,661   |   |               |   | 724,230   |  
|Property and equipment                       |  |                  | 2,409,466 |   |               |   | 2,232,390 |  
|Goodwill and other intangible assets         |  |                  | 140,412   |   |               |   | 140,374   |  
|Other assets                                 |  |                  | 120,649   |   |               |   | 100,118   |  
|                                             |  |                  |           |   |               |   |           |  
|Total assets                                 |  | $                | 3,454,188 |   |               | $ | 3,197,112 |  
|                                             |  |                  |           |   |               |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY         |  |                  |           |   |               |   |           |  
|Current liabilities                          |  |                  |           |   |               |   |           |  
|Trade accounts payable                       |  | $                | 270,747   |   |               | $ | 324,925   |  
|Accrued expenses and other liabilities       |  |                  | 567,888   |   |               |   | 518,500   |  
|Long-term debt due within one year           |  |                  | 39,828    |   |               |   | 120,147   |  
|                                             |  |                  |           |   |               |   |           |  
|Total current liabilities                    |  |                  | 878,463   |   |               |   | 963,572   |  
|Deferred credits and other liabilities       |  |                  | 418,185   |   |               |   | 429,601   |  
|Senior Subordinated Notes due to SEJ         |  |                  | 400,000   |   |               |   | 400,000   |  
|Other long-term debt                         |  |                  | 1,035,490 |   |               |   | 617,098   |  
|Minority interest                            |  |                  | 82,028    |   |               |   | 93,836    |  
|Convertible quarterly income debt securities |  |                  | 300,000   |   |               |   | 300,000   |  
|Commitments and contingencies                |  |                  |           |   |               |   |           |  
|Shareholders equity                         |  |                  |           |   |               |   |           |  
|Preferred stock, $.01 par value              |  |                  |          |   |               |   |          |  
|Common stock, $.0001 par value               |  |                  | 11        |   |               |   | 11        |  
|Additional capital                           |  |                  | 1,251,428 |   |               |   | 1,256,456 |  
|Accumulated deficit                          |  |                  | (926,013  | ) |               |   | (873,519  | )
|Unearned compensation                        |  |                  | (796      | ) |               |   | (631      | )
|Accumulated other comprehensive earnings     |  |                  | 15,392    |   |               |   | 10,688    |  
|                                             |  |                  |           |   |               |   |           |  
|Total shareholders equity                   |  |                  | 340,022   |   |               |   | 393,005   |  
|                                             |  |                  |           |   |               |   |           |  
|Total liabilities and shareholders equity   |  | $                | 3,454,188 |   |               | $ | 3,197,112 |  
|                                             |  |                  |           |   |               |   |           |  



See notes to condensed
consolidated financial statements.



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##### Table of Contents

7-ELEVEN, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars in thousands, except per-share data)

(UNAUDITED)

|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------ |  | -------------------------- | --------- | - | ------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                 |  | Three Months Ended June 30 |           |   | Six Months Ended June 30 |  
|                                                                                                 |  | 2003                       |           |   | 2004                     |   |           | 2003 |  |   | 2004      |  
|REVENUES                                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Merchandise sales                                                                                |  | $                          | 1,878,730 |   |                          | $ | 2,034,715 |      |  | $ | 3,525,084 |   |  | $ | 3,825,726 |  
|Gasoline sales                                                                                   |  |                            | 825,218   |   |                          |   | 1,091,452 |      |  |   | 1,641,036 |   |  |   | 2,018,351 |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net sales                                                                                        |  |                            | 2,703,948 |   |                          |   | 3,126,167 |      |  |   | 5,166,120 |   |  |   | 5,844,077 |  
|                                                                                                 |  |                            |           |  
|Other income                                                                                     |  |                            | 24,205    |   |                          |   | 32,827    |      |  |   | 44,954    |   |  |   | 64,069    |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total revenues                                                                                   |  |                            | 2,728,153 |   |                          |   | 3,158,994 |      |  |   | 5,211,074 |   |  |   | 5,908,146 |  
|                                                                                                 |  |                            |           |  
|COSTS AND EXPENSES                                                                               |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Merchandise cost of goods sold                                                                   |  |                            | 1,209,954 |   |                          |   | 1,310,209 |      |  |   | 2,287,497 |   |  |   | 2,469,679 |  
|Gasoline cost of goods sold                                                                      |  |                            | 733,431   |   |                          |   | 999,911   |      |  |   | 1,481,586 |   |  |   | 1,855,257 |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total cost of goods sold                                                                         |  |                            | 1,943,385 |   |                          |   | 2,310,120 |      |  |   | 3,769,083 |   |  |   | 4,324,936 |  
|Operating, selling, general and administrative expenses                                          |  |                            | 701,973   |   |                          |   | 755,878   |      |  |   | 1,330,033 |   |  |   | 1,452,289 |  
|Interest expense, net                                                                            |  |                            | 17,836    |   |                          |   | 15,760    |      |  |   | 35,825    |   |  |   | 35,944    |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total costs and expenses                                                                         |  |                            | 2,663,194 |   |                          |   | 3,081,758 |      |  |   | 5,134,941 |   |  |   | 5,813,169 |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE |  |                            | 64,959    |   |                          |   | 77,236    |      |  |   | 76,133    |   |  |   | 94,977    |  
|                                                                                                 |  |                            |           |  
|INCOME TAX EXPENSE                                                                               |  |                            | 24,573    |   |                          |   | 29,172    |      |  |   | 28,931    |   |  |   | 36,091    |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                |  |                            | 40,386    |   |                          |   | 48,064    |      |  |   | 47,202    |   |  |   | 58,886    |  
|                                                                                                 |  |                            |           |  
|LOSS ON DISCONTINUED OPERATIONS (net of tax benefit of $626, $189, $1,815 and $769)              |  |                            | (1,101    | ) |                          |   | (348      | )    |  |   | (2,961    | ) |  |   | (1,255    | )
|                                                                                                 |  |                            |           |  
|CUMULATIVE EFFECT OF ACCOUNTING CHANGE (net of tax benefit of $3,284)                            |  |                            |          |   |                          |   |          |      |  |   |          |   |  |   | (5,137    | )
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|NET EARNINGS                                                                                     |  | $                          | 39,285    |   |                          | $ | 47,716    |      |  | $ | 44,241    |   |  | $ | 52,494    |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|NET EARNINGS PER COMMON SHARE                                                                    |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|BASIC                                                                                            |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Earnings from continuing operations before cumulative effect of accounting change                |  | $                          | .38       |   |                          | $ | .43       |      |  | $ | .45       |   |  | $ | .53       |  
|Loss on discontinued operations                                                                  |  |                            | (.01      | ) |                          |   | (.00      | )    |  |   | (.03      | ) |  |   | (.01      | )
|Cumulative effect of accounting change                                                           |  |                            |          |   |                          |   |          |      |  |   |          |   |  |   | (.05      | )
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net earnings                                                                                     |  | $                          | .37       |   |                          | $ | .43       |      |  | $ | .42       |   |  | $ | .47       |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|DILUTED                                                                                          |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Earnings from continuing operations before cumulative effect of accounting change                |  | $                          | .34       |   |                          | $ | .39       |      |  | $ | .41       |   |  | $ | .49       |  
|Loss on discontinued operations                                                                  |  |                            | (.01      | ) |                          |   | (.00      | )    |  |   | (.02      | ) |  |   | (.01      | )
|Cumulative effect of accounting change                                                           |  |                            |          |   |                          |   |          |      |  |   |          |   |  |   | (.04      | )
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net earnings                                                                                     |  | $                          | .33       |   |                          | $ | .39       |      |  | $ | .39       |   |  | $ | .44       |  
|                                                                                                 |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  



See notes to condensed
consolidated financial statements.



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##### Table of Contents

7-ELEVEN, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



(UNAUDITED)



|                                                                                    |  |                          |            |   |      |   |            |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                    |  | Six Months Ended June 30 |           
|                                                                                    |  | 2003                     |            |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                |  |                          |            |   |      |   |            |  
|Net earnings                                                                        |  | $                        | 44,241     |   |      | $ | 52,494     |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                          |            |   |      |   |            |  
|Cumulative effect of accounting change                                              |  |                          |           |   |      |   | 5,137      |  
|Depreciation and amortization of property and equipment                             |  |                          | 146,783    |   |      |   | 162,565    |  
|Deferred income taxes (benefit)                                                     |  |                          | 9,808      |   |      |   | (11,494    | )
|Noncash interest expense                                                            |  |                          | 325        |   |      |   | 571        |  
|Foreign currency net conversion gain                                                |  |                          | (3,773     | ) |      |   | (1,118     | )
|Other noncash expense                                                               |  |                          | 2,944      |   |      |   | 802        |  
|Net loss (gain) on property and equipment                                           |  |                          | 2,026      |   |      |   | (772       | )
|Increase in accounts receivable                                                     |  |                          | (6,012     | ) |      |   | (10,012    | )
|Decrease (increase) in inventories                                                  |  |                          | 22,745     |   |      |   | (6,189     | )
|Decrease in other assets                                                            |  |                          | (20,475    | ) |      |   | (3,539     | )
|(Decrease) increase in trade accounts payable and other liabilities                 |  |                          | (5,669     | ) |      |   | 25,358     |  
|                                                                                    |  |                          |            |   |      |   |            |  
|Net cash provided by operating activities                                           |  |                          | 192,943    |   |      |   | 213,803    |  
|                                                                                    |  |                          |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                |  |                          |            |   |      |   |            |  
|Payments for purchases of property and equipment                                    |  |                          | (117,916   | ) |      |   | (84,091    | )
|Proceeds from sales of property and equipment                                       |  |                          | 4,273      |   |      |   | 125,016    |  
|Proceeds from sales of domestic securities                                          |  |                          | 990        |   |      |   | 1,500      |  
|Restricted cash                                                                     |  |                          | (7,486     | ) |      |   | 6,357      |  
|Other                                                                               |  |                          | 74         |   |      |   | 17         |  
|                                                                                    |  |                          |            |   |      |   |            |  
|Net cash (used in) provided by investing activities                                 |  |                          | (120,065   | ) |      |   | 48,799     |  
|                                                                                    |  |                          |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                |  |                          |            |   |      |   |            |  
|Proceeds from commercial paper and revolving credit facilities                      |  |                          | 2,877,527  |   |      |   | 3,427,996  |  
|Payments under commercial paper and revolving credit facilities                     |  |                          | (2,972,177 | ) |      |   | (3,541,590 | )
|Proceeds from issuance of long-term debt                                            |  |                          | 100,000    |   |      |   |           |  
|Principal payments under long-term debt agreements                                  |  |                          | (18,120    | ) |      |   | (218,896   | )
|Increase (decrease) in outstanding checks in excess of cash in bank                 |  |                          | 2,640      |   |      |   | (21,315    | )
|Net proceeds from issuance of common stock                                          |  |                          |           |   |      |   | 4,759      |  
|Other                                                                               |  |                          | (42        | ) |      |   |           |  
|                                                                                    |  |                          |            |   |      |   |            |  
|Net cash used in financing activities                                               |  |                          | (10,172    | ) |      |   | (349,046   | )
|                                                                                    |  |                          |            |   |      |   |            |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                |  |                          | 62,706     |   |      |   | (86,444    | )
|                                                                                    |  |                         
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                      |  |                          | 126,624    |   |      |   | 190,513    |  
|                                                                                    |  |                          |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                          |  | $                        | 189,330    |   |      | $ | 104,069    |  
|                                                                                    |  |                          |            |   |      |   |            |  
|RELATED DISCLOSURES FOR CASH FLOW REPORTING                                         |  |                          |            |   |      |   |            |  
|Interest paid, excluding SFAS No. 15 Interest                                       |  | $                        | (33,819    | ) |      | $ | (37,607    | )
|                                                                                    |  |                          |            |   |      |   |            |  
|Net income taxes paid                                                               |  | $                        | (8,234     | ) |      | $ | (8,371     | )
|                                                                                    |  |                          |            |   |      |   |            |  
|Assets obtained by entering into capital leases                                     |  | $                        | 43,637     |   |      | $ | 4,391      |  
|                                                                                    |  |                          |            |   |      |   |            |  
|1998 Yen loan principal and interest payments from restricted cash                  |  | $                        | (7,359     | ) |      | $ | (8,825     | )
|                                                                                    |  |                          |            |   |      |   |            |  



See notes to condensed
consolidated financial statements.



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##### Table of Contents

7-ELEVEN, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2004



(UNAUDITED)

1. BASIS OF PRESENTATION



The condensed consolidated balance sheet as of June 30, 2004, and the condensed consolidated statements of earnings for the three- and six-month periods
ended June 30, 2003 and 2004, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2003 and 2004, have been prepared by 7-Eleven, Inc. (the Company) without audit. In the opinion of management,
all adjustments necessary to present fairly the financial position at June 30, 2004, and the results of operations and cash flows for all periods presented have been made. Certain prior-period amounts have been reclassified to conform to
current-period presentation. The results of operations for the interim periods are not necessarily indicative of the operating results for the full year.



The reported results of operations include the operations of approximately 5,800 convenience stores that are operated or franchised in the United States
and Canada by the Company along with royalty income from worldwide 7-Eleven area licensees. Historically, sales and cost of goods sold of stores operated by franchisees have been included with the operations of Company-operated stores in the
condensed consolidated statements of earnings. Gross profit from franchise stores is split between the Company and its franchisees pursuant to the terms of franchise agreements.



Effective January 1, 2004, the Company adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 46, Consolidation of Variable Interest Entities  an Interpretation of ARB No. 51, (FIN 46) and the subsequent revision to FIN 46 (FIN 46R). The Companys franchisees are independent
contractors in whom the Company is deemed to have a controlling financial interest, as defined by FIN 46R. Accordingly, the assets, liabilities, equity and results of operations of these stores are consolidated into the Companys condensed
consolidated financial statements. The prior-year presentation of financial position, results of operations and cash flows has been reclassified to conform to the current-year consolidation presentation (see Note 2). Prior to the issuance of FIN 46,
the criteria for consolidation were prescribed by Accounting Research Bulletin No. 51, Consolidated Financial Statements, and were principally based on control through ownership of voting interests.



The condensed consolidated balance sheet as of December 31, 2003, is derived
from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. The notes accompanying the consolidated financial statements in the Companys Annual Report on Form 10-K for the
year ended December 31, 2003, include accounting policies and additional information pertinent to an understanding of both the December 31, 2003, balance sheet and the interim financial statements. The information has not changed except as a result
of normal transactions in the six months ended June 30, 2004, and as discussed in the notes herein.



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##### Table of Contents

2. STORES OPERATED BY FRANCHISEES



More than 3,300 of the Companys convenience stores are operated by franchisees as of June 30, 2004. The gross profit
of franchise stores is split between the Company and its franchisees. The Companys share of the gross profit of franchise stores is its ongoing royalty, generally approximating 50% to 52% of the merchandise gross profit of the store. This 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 ongoing services provided by the Company. These services include financing,
bookkeeping, advertising, contractual indemnification, business counseling and other services. The Company also provides financing of a franchisees merchandise inventory and other operating items, which is collateralized by the store inventory
and the franchisees receipts from store operations. The receipts are deposited in a bank account belonging to the Company. The franchisees share of the gross profit generally approximates 48% to 50% of the merchandise gross profit of the
store, which is used by the franchisee to pay operating expenses of the franchisees store. The Company includes the franchisees share of gross profit in operating, selling, general and administrative (OSG&A) expenses in
the accompanying condensed consolidated statements of earnings. Some franchisees pay an advertising fee of .5% to 1.5% of gross profit, depending on the total gross profit of the store.



With regard to gasoline sales, the franchise agreements in most instances require the Company to pay the franchisee one cent
per gallon sold as compensation for measuring and reporting deliveries of gasoline, conducting pricing surveys of competitors, changing the price displays and cleaning the service areas. The Company has implemented a non-contractual policy under
which it pays its franchisees the greater of (a) 1.5 cents per gallon or (b) up to 24% of the gasoline gross profit, depending on the term of the franchise agreement when the store was franchised. The Company can revise this policy at any time but
has committed to franchisees who have signed the Companys new franchise agreement to keep the existing policy in place for 2004. These amounts are also included in OSG&A in the accompanying condensed consolidated statements of earnings.



As a result of adopting the provisions of FIN 46 and FIN 46R,
the Company changed the presentation of its franchise stores in its condensed consolidated financial statements as of January 1, 2004 (see Note 1). Consolidation of these stores resulted in an after-tax, one-time cumulative effect charge of $5.1
million (net of deferred tax benefit of $3.3 million). This resulted from a change in how the Company is required to recognize franchise fee income for franchise fees financed by the Company. Instead of recognizing these fees in income when the
franchisees 90-day termination and refund period has passed, the Company recognizes the fees as payments are received from the franchisee (after the 90-day period). Franchise fees that the Company does not finance will continue to be fully
recognized in income after the 90-day termination and refund period has expired.



The presentation of the condensed consolidated statements of earnings changed slightly as a result of the adoption of FIN 46R. The historically reported franchisee gross profit expense was eliminated and is now
included in OSG&A expense. The primary components of OSG&A expense for franchised stores are payroll-related items, insurance and business taxes. The net earnings or loss of franchised stores is included in OSG&A because it represents
owner compensation.



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The components of OSG&A expense in the accompanying condensed consolidated statements of earnings are
as follows (in thousands):



|                         |  |                            |         |                          |   |         |  |      |           |  |   |          
|------------------------ |  | -------------------------- | ------- | ------------------------ | - | ------- |  | ---- | --------- |  | - | ---------
|                         |  | Three Months Ended June 30 |         | Six Months Ended June 30
|                         |  | 2003                       |         | 2004                     |   | 2003    |  | 2004
|Company OSG&A expense    |  | $                          | 506,740 |                          | $ | 538,749 |  | $    | 969,264   |  | $ | 1,048,378
|Franchisee OSG&A expense |  |                            | 195,233 |                          |   | 217,129 |  |      | 360,769   |  |   | 403,911  
|                         |  |                            |         |                          |   |         |  |      |           |  |   |          
|                         |  | $                          | 701,973 |                          | $ | 755,878 |  | $    | 1,330,033 |  | $ | 1,452,289
|                         |  |                            |         |                          |   |         |  |      |           |  |   |          



FIN 46 and FIN 46R
require the Companys condensed consolidated balance sheets as of December 31, 2003 and June 30, 2004, to include, among other things, franchisees merchandise inventory and minority interest, which represents the franchisees equity
in the franchise stores. Merchandise inventory costs are determined by the FIFO method for franchisee-operated stores and for Company-operated stores in Canada and by the LIFO method for Company-operated stores in the United States. The prior-year
presentation of franchisees merchandise inventory, minority interest, and other assets and liabilities has been reclassified to conform to the current-year presentation.



3. EQUITY-BASED COMPENSATION



The fair value of each option grant under the Companys 1995 Stock Incentive Plan (Stock Incentive Plan) is estimated on the date of
grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for the options granted: expected life of five years, no dividend yield, risk-free interest rate of 2.65% and expected volatility of 64.98% for
the options granted in 2003; expected life of three years, no dividend yield, risk-free interest rate of 2.28% and expected volatility of 46.30% for the options granted in 2004.



In 2003, the Companys shareholders approved an amendment to its Stock Compensation Plan for Non-Employee Directors
(the Non-Employee Directors Plan), which provides for the issuance of stock options to the Companys independent directors. Under the amended Non-Employee Directors Plan, the Company granted stock options in May 2003 and May 2004 at
exercise prices that were equal to the fair market values on the grant dates.



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The Company has recognized no compensation expense for its stock options as it is accounting for both the
Stock Incentive Plan and the Non-Employee Directors Plan under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If compensation expense had been determined based on the fair value at
the grant date for awards under this plan consistent with the method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Companys net earnings and net
earnings per common share for the three- and six-month periods ended June 30, 2003 and 2004, would have been reduced to the pro forma amounts indicated in the following table (in thousands, except per-share data):



|                                                                                                                                 |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                 |  | Three Months Ended June 30 |        |   | Six Months Ended June 30 |  
|                                                                                                                                 |  | 2003                       |        |   | 2004                     |   |        | 2003 |  |   | 2004   |  
|Net earnings as reported                                                                                                         |  | $                          | 39,285 |   |                          | $ | 47,716 |      |  | $ | 44,241 |   |  | $ | 52,494 |  
|Add: Stock-based compensation expense included in reported net earnings, net of tax                                              |  |                            | 468    |   |                          |   | 1,006  |      |  |   | 838    |   |  |   | 1,400  |  
|Less: Total stock-based compensation expense determined under the fair-value-based method for all stock-based awards, net of
tax |  |                            | (1,667 | ) |                          |   | (2,422 | )    |  |   | (3,037 | ) |  |   | (4,223 | )
|                                                                                                                                 |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net earnings                                                                                                           |  | $                          | 38,086 |   |                          | $ | 46,300 |      |  | $ | 42,042 |   |  | $ | 49,671 |  
|                                                                                                                                 |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net earnings per common share as reported                                                                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                                                            |  | $                          | .37    |   |                          | $ | .43    |      |  | $ | .42    |   |  | $ | .47    |  
|Diluted                                                                                                                          |  |                            | .33    |   |                          |   | .39    |      |  |   | .39    |   |  |   | .44    |  
|Pro forma net earnings per common share                                                                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                                                            |  | $                          | .36    |   |                          | $ | .41    |      |  | $ | .40    |   |  | $ | .44    |  
|Diluted                                                                                                                          |  |                            | .32    |   |                          |   | .37    |      |  |   | .38    |   |  |   | .42    |  



4. COMPREHENSIVE EARNINGS



The components of comprehensive earnings of the Company
for the periods presented are as follows (in thousands):



|                                                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                  |  | Three Months Ended June 30 |        |   | Six Months Ended June 30 |  
|                                                                                                                  |  | 2003                       |        |   | 2004                     |   |        | 2003 |  |   | 2004   |  
|Net earnings                                                                                                      |  | $                          | 39,285 |   |                          | $ | 47,716 |      |  | $ | 44,241 |   |  | $ | 52,494 |  
|Other comprehensive earnings:                                                                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Unrealized gains (losses) on equity securities (net of $70, $0, ($283) and ($73) deferred taxes)                  |  |                            | 109    |   |                          |   |       |      |  |   | (360   | ) |  |   | (114   | )
|Reclassification adjustments for gains included in net earnings (net of $192, $293, $407 and $587 deferred taxes) |  |                            | (301   | ) |                          |   | (460   | )    |  |   | (586   | ) |  |   | (919   | )
|Unrealized gain related to interest rate swap (net of $1,123, $2,209 and $348 deferred taxes)                     |  |                            | 1,557  |   |                          |   |       |      |  |   | 2,773  |   |  |   | 386    |  
|Foreign currency translation adjustments                                                                          |  |                            | 10,446 |   |                          |   | (2,688 | )    |  |   | 17,831 |   |  |   | (4,057 | )
|                                                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Other comprehensive earnings (loss)                                                                               |  |                            | 11,811 |   |                          |   | (3,148 | )    |  |   | 19,658 |   |  |   | (4,704 | )
|                                                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total comprehensive earnings                                                                                      |  | $                          | 51,096 |   |                          | $ | 44,568 |      |  | $ | 63,899 |   |  | $ | 47,790 |  
|                                                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



5. BENEFIT PLANS



Postretirement Benefits- The Company adopted the provisions of SFAS
No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits (revised December 2003), (SFAS No. 132R) as of December 31, 2003. SFAS No. 132R revises employers disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits and SFAS No. 106, Employers



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Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 132R retains the disclosure requirements
contained in the original SFAS No. 132, which it replaces, and also requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement
plans as well as certain interim disclosures.



Information on
the Companys group insurance plan, which provides postretirement medical and dental benefits for all retirees that meet certain criteria, is provided below in accordance with the requirements of SFAS No. 132R (in thousands):



|                                        |  |                           |      |   |                          |   |     |      |  |   |        |   |  |   |       |  
|--------------------------------------- |  | ------------------------- | ---- | - | ------------------------ | - | --- | ---- |  | - | ------ | - |  | - | ----- | -
|                                        |  | Three MonthsEnded June 30 |      |   | Six Months Ended June 30 |  
|                                        |  | 2003                      |      |   | 2004                     |   |     | 2003 |  |   | 2004   |  
|Components of net periodic benefit cost |  |                           |      |   |                          |   |     |      |  |   |        |   |  |   |       |  
|Service cost                            |  | $                         | 221  |   |                          | $ | 196 |      |  | $ | 442    |   |  | $ | 393   |  
|Interest cost                           |  |                           | 385  |   |                          |   | 331 |      |  |   | 770    |   |  |   | 661   |  
|Amortization of prior service cost      |  |                           | 96   |   |                          |   | 96  |      |  |   | 193    |   |  |   | 193   |  
|Amortization of actuarial gain          |  |                           | (707 | ) |                          |   | (37 | )    |  |   | (1,415 | ) |  |   | (75   | )
|                                        |  |                           |      |   |                          |   |     |      |  |   |        |   |  |   |       |  
|Net periodic benefit cost (gain)        |  | $                         | (5   | ) |                          | $ | 586 |      |  | $ | (10    | ) |  | $ | 1,172 |  
|                                        |  |                           |      |   |                          |   |     |      |  |   |        |   |  |   |       |  



The total amount of
the Companys contributions paid, and expected to be paid, under its group insurance plan in 2004 has not changed materially from amounts previously reported.



Executive Protection Plan- The Company maintains the Executive Protection Plan (EPP), which is a
supplementary benefit plan, for certain key employees of the Company. In addition to the disability and life insurance coverage available to all full-time employees of the Company, the EPP participants are eligible for supplemental disability
benefits and life insurance coverage before they retire. After they retire, they are eligible for the postretirement income benefits of the EPP. No EPP assets have been accumulated as the Company funds its costs on a cash basis.



The following information on the Companys EPP is provided:



|                                        |  |                           |     |                          |   |      |  |      |       |  |   |      
|--------------------------------------- |  | ------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                                        |  | Three Months EndedJune 30 |     | Six Months Ended June 30
|                                        |  | 2003                      |     | 2004                     |   | 2003 |  | 2004
|Components of net periodic benefit cost |  |                           |     |                          |   |      |  |      |       |  |   |      
|Service cost                            |  | $                         | 199 |                          | $ | 211  |  | $    | 399   |  | $ | 423  
|Interest cost                           |  |                           | 313 |                          |   | 322  |  |      | 626   |  |   | 644  
|Amortization of prior service cost      |  |                           | 117 |                          |   | 117  |  |      | 233   |  |   | 233  
|Amortization of actuarial loss          |  |                           | 14  |                          |   | 23   |  |      | 29    |  |   | 46   
|                                        |  |                           |     |                          |   |      |  |      |       |  |   |      
|Net periodic benefit cost               |  | $                         | 643 |                          | $ | 673  |  | $    | 1,287 |  | $ | 1,346
|                                        |  |                           |     |                          |   |      |  |      |       |  |   |      



6. STORE CLOSINGS, ASSET IMPAIRMENT
AND ASSET RETIREMENT OBLIGATIONS



The results of
operations of certain owned and leased stores are presented as discontinued operations in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The results of operations of owned
stores are 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 include related writedowns of stores



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to estimated net realizable value and accruals for future estimated rent and other expenses in excess of estimated
sublease rental income. The Company does not allocate interest expense to discontinued operations. Amounts related to discontinued operations of prior periods have been reclassified to conform to discontinued operations of the current period in the
accompanying condensed consolidated statements of earnings.



The stores presented as discontinued operations had total revenues and pretax losses as follows for the periods presented (in thousands):



|              |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   |        |  
|------------- |  | -------------------------- | ------ | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|              |  | Three Months Ended June 30 |        |   | Six Months Ended June 30 |  
|              |  | 2003                       |        |   | 2004                     |   |       | 2003 |  |   | 2004   |  
|Total revenue |  | $                          | 26,664 |   |                          | $ | 1,005 |      |  | $ | 65,828 |   |  | $ | 4,230  |  
|Pretax loss   |  |                            | (1,726 | ) |                          |   | (537  | )    |  |   | (4,776 | ) |  |   | (2,024 | )



Losses on disposal,
which are included in the loss on discontinued operations, were immaterial for the three- and six-month periods ended June 30, 2003 and 2004. Assets held for sale, which are included in other current assets in the accompanying condensed consolidated
balance sheets, were $15.3 million and $11.2 million as of June 30, 2003 and 2004, respectively.



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7. EARNINGS PER SHARE



Computations for basic and diluted earnings per common share are presented below (in thousands, except per-share data):



|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                           |  | Three Months Ended June 30 |         |   | Six Months Ended June 30 |  
|                                                                                                           |  | 2003                       |         |   | 2004                     |   |         | 2003 |  |   | 2004    |  
|BASIC                                                                                                      |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings from continuing operations before cumulative effect of accounting change                          |  | $                          | 40,386  |   |                          | $ | 48,064  |      |  | $ | 47,202  |   |  | $ | 58,886  |  
|Loss on discontinued operations                                                                            |  |                            | (1,101  | ) |                          |   | (348    | )    |  |   | (2,961  | ) |  |   | (1,255  | )
|Cumulative effect of accounting change                                                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   | (5,137  | )
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net earnings                                                                                               |  | $                          | 39,285  |   |                          | $ | 47,716  |      |  | $ | 44,241  |   |  | $ | 52,494  |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Weighted-average common shares outstanding                                                                 |  |                            | 104,902 |   |                          |   | 112,028 |      |  |   | 104,878 |   |  |   | 111,932 |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share from continuing operations before cumulative effect of accounting change         |  | $                          | .38     |   |                          | $ | .43     |      |  | $ | .45     |   |  | $ | .53     |  
|Loss per common share on discontinued operations                                                           |  |                            | (.01    | ) |                          |   | (.00    | )    |  |   | (.03    | ) |  |   | (.01    | )
|Loss per common share on cumulative effect of accounting change                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   | (.05    | )
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net earnings per common share                                                                              |  | $                          | .37     |   |                          | $ | .43     |      |  | $ | .42     |   |  | $ | .47     |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|DILUTED                                                                                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings from continuing operations before cumulative effect of accounting change                          |  | $                          | 40,386  |   |                          | $ | 48,064  |      |  | $ | 47,202  |   |  | $ | 58,886  |  
|Add interest on convertible quarterly income debt securities, net of tax                                   |  |                            | 2,702   |   |                          |   | 2,137   |      |  |   | 5,389   |   |  |   | 4,257   |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings from continuing operations before cumulative effect of accounting change plus assumed conversions |  | $                          | 43,088  |   |                          | $ | 50,201  |      |  | $ | 52,591  |   |  | $ | 63,143  |  
|Loss on discontinued operations                                                                            |  |                            | (1,101  | ) |                          |   | (348    | )    |  |   | (2,961  | ) |  |   | (1,255  | )
|Cumulative effect of accounting change                                                                     |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   | (5,137  | )
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net earnings plus assumed conversions                                                                      |  | $                          | 41,987  |   |                          | $ | 49,853  |      |  | $ | 49,630  |   |  | $ | 56,751  |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Weighted-average common shares outstanding (Basic)                                                         |  |                            | 104,902 |   |                          |   | 112,028 |      |  |   | 104,878 |   |  |   | 111,932 |  
|Add effects of assumed conversions:                                                                        |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Stock options and restricted stock(1)                                                                      |  |                            | 822     |   |                          |   | 2,870   |      |  |   | 632     |   |  |   | 2,770   |  
|Convertible quarterly income debt securities                                                               |  |                            | 20,924  |   |                          |   | 14,422  |      |  |   | 20,924  |   |  |   | 14,422  |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Weighted-average common shares outstanding plus shares from assumed conversions (Diluted)                  |  |                            | 126,648 |   |                          |   | 129,320 |      |  |   | 126,434 |   |  |   | 129,124 |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share from continuing operations before cumulative effect of accounting change         |  | $                          | .34     |   |                          | $ | .39     |      |  | $ | .41     |   |  | $ | .49     |  
|Loss per common share on discontinued operations                                                           |  |                            | (.01    | ) |                          |   | (.00    | )    |  |   | (.02    | ) |  |   | (.01    | )
|Loss per common share on cumulative effect of accounting change                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   | (.04    | )
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net earnings per common share                                                                              |  | $                          | .33     |   |                          | $ | .39     |      |  | $ | .39     |   |  | $ | .44     |  
|                                                                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

---

|(1) | Stock options for 5.0 million, 1.6 million, 6.3 million and 1.6 million shares of common stock for the three- and six-month periods ended June 30, 2003 and 2004, respectively, have
exercise prices that are greater than the average market price of the common shares for each respective period. Therefore, these shares have not been included in diluted earnings-per-share calculations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|



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8. SALE OF CITYPLACE



On April 22, 2004, the Company sold its headquarters tower, parking garages and related facilities (Cityplace) to an outside party for $124.0
million. The Company subsequently leased back the portion of the tower and parking garages that it currently occupies for a term of three years with an option to extend for an additional seven years. Concurrent with the Cityplace sale closing, the
Company retired the loan associated with the construction of Cityplace (Cityplace Term Loan) using a combination of sale proceeds and available corporate funds. The total retirement of the Cityplace Term Loan was $214.1 million, which
was comprised of the outstanding loan balance, accrued interest and fees associated with prepayment of the loan of $7.5 million. The carrying amount of the property and equipment (and associated net rental amounts) that was sold was $104.7 million
at the time of closing. The Company recorded a pretax gain from the sale of $17.5 million, which is being amortized to income over the three-year life of the lease.



9. VCOM AGREEMENTS



The Company and two of its Vcom partners mutually agreed to terminate their relationships. One of these partners has been replaced with another
check-cashing partner. As a result of these terminations, the Company recognized $4.6 million and $10.8 million as other income in the three- and six-month periods ended June 30, 2004, respectively. These funds are related to the Companys Vcom
agreements with its former partners and were being deferred and recognized as income when earned, as specified by the substance of the applicable agreement. The Company does not recognize proceeds it receives until the applicable revenue recognition
criteria have been satisfied.



10. OTHER RELATED PARTY TRANSACTIONS



In May 2002, a financial-services subsidiary of SEJ made
a personal loan of 227.5 million Japanese yen (approximately $1.75 million) to one of the Companys non-employee directors. The term of the loan, which is secured by certain shares of stock owned by the director and bears interest at 2.6%, was
extended from July 2004 to December 2004.



11. RECENTLY ISSUED ACCOUNTING
STANDARDS



In January 2004, the FASB issued FASB Staff
Position (FSP) FAS No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This was in response to a new law (the Act) regarding
prescription drug benefits under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Currently, SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, requires that changes in relevant law be considered in the current measurement of postretirement benefit costs. Certain accounting issues related to the
federal subsidy remain unclear and significant uncertainties may exist that impair a plan sponsors ability to evaluate the direct effects of the Act and the effects on plan participants behavior and healthcare costs. Due to these
uncertainties, FSP No. 106-1 provides plan sponsors with an opportunity to elect to defer recognizing the effects of the Act in accounting for its retiree health care benefit plans under SFAS No. 106 and to provide related disclosures until
authoritative guidance from the FASB on the accounting for the federal subsidy is issued and clarification of other uncertainties is resolved. The Company elected to defer recognition while evaluating the Act and the pending issuance of
authoritative guidance and their effect, if any, on the Companys financial position, results of operations and financial statement



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disclosure. Therefore, any measures of the accumulated postretirement benefit obligation or the net periodic
postretirement benefit cost do not reflect the effects of the Act, and pending authoritative guidance could require the Company to change previously reported information.



In May 2004, the FASB issued FSP FAS No. 106-2, which supersedes FAS No. 106-1. FSP FAS No. 106-2 applies only to sponsors
of defined benefit postretirement health care plans for which (a) the employer has concluded that prescription drug benefits available under the plan are actuarially equivalent to Medicare Part D and thus qualify for the subsidy under the Act and
(b) the expected subsidy will offset or reduce the employers share of the cost of postretirement prescription drug coverage provided by the plan. In general, the FSP concludes that plan sponsors should follow SFAS No. 106 (see Note 5) in
accounting for the effects of the Act. Specifically, the effect of the subsidy on benefits attributable to past service cost should be accounted for as an actuarial experience gain and the effect of the subsidy on future costs should be accounted
for as a reduction in service cost. For employers such as the Company that elected deferral under FSP FAS No. 106-1, this guidance is effective for the first interim or annual period beginning after June 15, 2004. The Company is continuing to defer
recognition of the FSP while evaluating the Act and the pending issuance of authoritative guidance and their effect, if any, on the Companys financial position, results of operations and financial statement disclosure. However, based on the
current design of its postretirement health care plan, the Company believes that it is unlikely that the prescription drug benefits available under its plan will be actuarially equivalent to Medicare Part D, and the Company will therefore not
qualify for the subsidy under the Act.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and

Shareholders of 7-Eleven, Inc.:



We have reviewed the accompanying condensed consolidated balance sheet of 7-Eleven, Inc. and
Subsidiaries as of June 30, 2004, and the related condensed consolidated statements of earnings for the three-month and six-month periods ended June 30, 2003 and 2004, and the condensed consolidated statements of cash flows for the six-month periods
ended June 30, 2003 and 2004. These interim financial statements are the responsibility of the Companys management.



We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information
consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company
Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim
financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.



We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December
31, 2003, and the related consolidated statements of earnings, shareholders equity and cash flows for the year then ended (not presented herein), and in our report dated January 29, 2004, which included an explanatory paragraph for the
adoption of newly issued accounting standards in 2001, 2002 and 2003, and an explanatory paragraph referencing Note 1 to the consolidated financial statements whereby the Company revised the accounting for prepaid phone card sales in its December
31, 2001 and 2002 consolidated financial statements, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December
31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.



PRICEWATERHOUSECOOPERS LLP



Dallas, Texas

July 22, 2004



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Item 2.



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.



OVERVIEW



We are the worlds largest operator, franchisor and licensor of convenience stores with over 26,500 stores worldwide. We derive our revenues
principally from retail sales of merchandise and gasoline from company- and franchisee-operated stores. We also receive income from monthly royalties based on sales at our licensed stores, which are predominantly international. Our primary expenses
consist of cost of goods; operating, selling, general and administrative (OSG&A) expense; interest expense and income taxes.



We seek to meet the needs of convenience customers and maintain a leadership position in the convenience store industry through leveraging our scale,
technology, people and widely recognized brand. In 2004, we are continuing to focus on the implementation of our key growth initiatives, including our model market process and fresh food sales, to improve our operating performance.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



Franchisees



Prior to our January 1, 2004, adoption of Financial Accounting Standards
Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities  an Interpretation of ARB No. 51, (FIN 46) and the subsequent revision to FIN 46 (FIN 46R), we included merchandise
sales and cost of goods sold from stores operated by franchisees with the results of stores we operate in the condensed consolidated statements of earnings. As a result of adopting the provisions of FIN 46 and FIN 46R, we have included the assets,
liabilities, equity and results of operations of stores operated by franchisees in our condensed consolidated financial



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statements. The franchisees are independent contractors in whom we are deemed to have a controlling financial interest,
as defined by FIN 46R. Adoption of FIN 46R resulted in an after-tax, one-time cumulative effect charge of $5.1 million (net of deferred tax benefit of $3.3 million). This resulted from a change in how we are required to recognize franchise fee
income when we finance the initial franchise fee. Instead of recognizing these fees in income when the franchisees 90-day termination and refund period has passed, we recognize the fees as payments are received from the franchisee (after the
90-day period). Franchise fees that we do not finance will continue to be fully recognized in income after the 90-day termination and refund period has expired.



As a result of adopting the provisions of FIN 46R, the presentation of the condensed consolidated statements of earnings has changed slightly. The
historically reported franchisee gross profit expense has been eliminated and is now included in OSG&A expense. The primary components of OSG&A expense for franchised stores are payroll-related items, insurance and business taxes. The net
earnings or loss of franchised stores is included in OSG&A because it represents owner compensation.



FIN 46 and FIN 46R require our condensed consolidated balance sheets as of December 31, 2003 and June 30, 2004, to include, among other things,
franchisees merchandise inventory and minority interest, which represents the franchisees equity in the franchise stores. Merchandise inventory costs are determined by the FIFO method for franchisee-operated stores and for
company-operated stores in Canada and by the LIFO method for company-operated stores in the United States. See Notes 1 and 2 to the condensed consolidated financial statements. The prior-year presentation of franchisees merchandise inventory,
minority interest, and other assets and liabilities has been reclassified to conform to the current-year presentation.



COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 TO THREE MONTHS ENDED JUNE 30, 2003



We have reclassified certain prior-year amounts to conform to the current-year presentation for all years discussed. See
Notes 1, 2 and 6 to the condensed consolidated financial statements.



Net Sales



|                                            |  |                            |         |   |      |   |         |  
|------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                            |  | Three Months Ended June 30 |        
|                                            |  | 2003                       |         |   | 2004 |  
|Net Sales (in millions):                    |  |                            |         |   |      |   |         |  
|Merchandise sales                           |  | $                          | 1,878.7 |   |      | $ | 2,034.7 |  
|Gasoline sales                              |  |                            | 825.2   |   |      |   | 1,091.5 |  
|                                            |  |                            |         |   |      |   |         |  
|Total net sales                             |  | $                          | 2,703.9 |   |      | $ | 3,126.2 |  
|U.S. same-store merchandise sales growth    |  |                            | 1.4     | % |      |   | 7.1     | %
|Gasoline gallons sold (in millions)         |  |                            | 527.5   |   |      |   | 559.3   |  
|Gasoline gallon sales growth per store      |  |                            | 4.1     | % |      |   | 4.9     | %
|Average retail price of gasoline per gallon |  | $                          | 1.56    |   |      | $ | 1.95    |  



Merchandise sales for
the three months ended June 30, 2004, increased $156.0 million, or 8.3%, over 2003. U.S. same-store merchandise sales increased 7.1% for the three months ended June 30, 2004, on top of a 1.4% increase for the second quarter of 2003. Key contributors
to the merchandise sales growth in 2004 were increases in hot and cold beverages, fresh foods, cigarettes and beer.



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Gasoline sales for the three months ended June 30, 2004, increased $266.3 million, or 32.3%, over 2003.
The increase in sales was due to a 39-cent increase in the average retail price of gasoline as well as a 4.9% increase in per-store gallons sold in the second quarter of 2004.



Gross Profit



|                                              |  |                           |       |   |      |   |       |   
|--------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | --
|                                              |  | Three MonthsEnded June 30 |      
|                                              |  | 2003                      |       |   | 2004 |  
|Gross Profit (in millions):                   |  |                           |       |   |      |   |       |   
|Merchandise gross profit                      |  | $                         | 668.8 |   |      | $ | 724.5 |   
|Gasoline gross profit                         |  |                           | 91.8  |   |      |   | 91.5  |   
|                                              |  |                           |       |   |      |   |       |   
|Total gross profit                            |  | $                         | 760.6 |   |      | $ | 816.0 |   
|Merchandise gross profit margin               |  |                           | 35.60 | % |      |   | 35.61 | % 
|Merchandise gross profit growth per store     |  |                           | 2.1   | % |      |   | 6.9   | % 
|Gasoline gross profit margin cents per gallon |  |                           | 17.4  |   |      |   | 16.4  |   
|Gasoline gross profit growth per store        |  |                           | 19.1  | % |      |   | (1.4  | )%



Merchandise gross
profit for the three months ended June 30, 2004, was $724.5 million, an increase of $55.7 million, or 8.3%, over 2003. Gross profit margin in 2004 was 35.61%, which was basically flat when compared to the prior-year quarter.



Gasoline gross profit for the three months ended June 30, 2004, was $91.5
million, compared to $91.8 million in 2003. Expressed as cents-per-gallon, our gasoline margin was 16.4 cents for 2004 compared to 17.4 cents for 2003. In an environment of rising wholesale costs for most of the quarter, our gasoline margin remained
solid while our average gasoline gross profit per store decreased only slightly at 1.4% for the three months ended June 30, 2004, when compared to exceptionally strong results in the prior-year quarter.



Other Income



Other income consists primarily of area license royalties, Vcom fees and
initial franchise fees. Other income for the three months ended June 30, 2004, was $32.8 million, an increase of $8.6 million, or 35.6%, from $24.2 million in 2003. Included in this increase was $4.6 million related to the mutually agreed-upon
termination of our Vcom e-shopping relationship with Cyphermint. We also had an increase of $3.2 million in fees and royalty income from our area licensees (which included an increase of $2.0 million for the licensing fee related to the new Beijing
license agreement). See Liquidity and Capital ResourcesVcom and Other IssuesExpansion into China.



OSG&A Expense



The components of OSG&A expense are as follows:



|                                    |  |                           |       |      |   |      
|----------------------------------- |  | ------------------------- | ----- | ---- | - | -----
|                                    |  | Three MonthsEnded June 30
|                                    |  | 2003                      |       | 2004
|Company OSG&A expense (in millions) |  | $                         | 506.8 |      | $ | 538.8
|Franchisee OSG&A expense            |  |                           | 195.2 |      |   | 217.1
|                                    |  |                           |       |      |   |      
|                                    |  | $                         | 702.0 |      | $ | 755.9
|                                    |  |                           |       |      |   |      



The ratio of OSG&A
to revenues was 23.9% for the three months ended June 30, 2004, compared to 25.7% for the second quarter of 2003.



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Company OSG&A Expense.The primary components of Company OSG&A are store labor,
occupancy (including depreciation) and corporate-related expenses. Company OSG&A for the three months ended June 30, 2004, was $538.8 million, an increase of $32.0 million, or 6.3%, from $506.8 million for the second quarter of 2003. We
attribute this increase primarily to costs associated with higher occupancy expenses and credit card processing fees. Included in Company OSG&A in the three months ended June 30, 2004 was a $5.4 million currency conversion gain. Company
OSG&A in the same period for 2003 included a $3.4 million gain related to currency conversion.



On April 22, 2004, we completed the sale of our headquarters tower, parking garages and related facilities (Cityplace) to an outside party for
$124.0 million. We subsequently leased back the portion of the tower and parking garages that we currently occupy for a term of three years with an option to extend for an additional seven years. Concurrent with the Cityplace sale closing, we
retired the loan associated with the construction of Cityplace (Cityplace Term Loan). We recorded a pretax gain from the sale of $17.5 million, which is being amortized over the three-year life of the lease. During the three months ended
June 30, 2004, we recognized $972,000 of this gain in Company OSG&A. Also included in Company OSG&A is a $7.5 million fee associated with the prepayment of the Cityplace Term Loan. See Liquidity and Capital Resources.



Franchisee OSG&A Expense.Franchisee
OSG&A expense for the three months ended June 30, 2004, was $217.1 million, an increase of $21.9 million, or 11.2%, from $195.2 million in 2003, due to compensation expense associated with higher earnings in franchised stores and an increase in
the number of stores operated by franchisees.



Interest
Expense, Net



Net interest expense for the three
months ended June 30, 2004, was $15.8 million, a decrease of $2.0 million, or 11.6%, from $17.8 million for the three months ended June 30, 2003. The decrease is primarily due to the retirement of the Cityplace Term Loan in April 2004, the
expiration of our interest-rate swaps in February 2004 and lower average borrowings under our commercial paper facility at lower average interest rates. These decreases were partially offset by additional borrowings of senior subordinated debt
(SEJ Notes) and the addition of debt related to real estate leases held by trusts that we consolidated in July 2003 as a result of the adoption of FIN 46. A portion of the borrowings from the SEJ Notes was used to retire our Senior
Subordinated Debentures in July 2003. As required by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring, during the period the Senior Subordinated Debentures were outstanding, we did not recognize interest
expense on this debt. Because interest expense is recognized on the SEJ Notes, the related interest expense increased.



Income Tax Expense



Income tax expense for the three months ended June 30, 2004, was $29.2 million, an increase of $4.6 million, or 18.7%, from $24.6 million in 2003. Our
effective tax rate for the second quarter of both 2004 and 2003 was 37.8%.



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Discontinued Operations



Discontinued operations for the three months ended June 30, 2004, resulted in a loss of $348,000 (net of $189,000 income tax
benefit) compared to a loss of $1.1 million (net of $626,000 million income tax benefit) for the same period in 2003. These stores had total revenues of $1.0 million and $26.7 million and pretax operating losses of $537,000 and $1.7 million for 2004
and 2003, respectively.



Net Earnings



Net earnings for the three months ended June 30, 2004, were $47.7 million
or $0.39 per diluted share, compared to $39.3 million, or $0.33 per diluted share in the second quarter of 2003.



COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 TO SIX MONTHS ENDED JUNE 30, 2003



We have reclassified certain prior-year amounts to conform to the current-year presentation for all years discussed. See
Notes 1, 2 and 6 to the condensed consolidated financial statements.



Net Sales



|                                            |  |                          |         |   |      |   |         |  
|------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                            |  | Six Months Ended June 30 |        
|                                            |  | 2003                     |         |   | 2004 |  
|Net Sales (in millions):                    |  |                          |         |   |      |   |         |  
|Merchandise sales                           |  | $                        | 3,525.1 |   |      | $ | 3,825.7 |  
|Gasoline sales                              |  |                          | 1,641.0 |   |      |   | 2,018.4 |  
|                                            |  |                          |         |   |      |   |         |  
|Total net sales                             |  | $                        | 5,166.1 |   |      | $ | 5,844.1 |  
|U.S. same-store merchandise sales growth    |  |                          | 2.5     | % |      |   | 6.6     | %
|Gasoline gallons sold (in millions)         |  |                          | 1,028.5 |   |      |   | 1,105.6 |  
|Gasoline gallon sales growth per store      |  |                          | 4.6     | % |      |   | 5.7     | %
|Average retail price of gasoline per gallon |  | $                        | 1.60    |   |      | $ | 1.83    |  



Merchandise sales for
the six months ended June 30, 2004, increased $300.6 million, or 8.5%, over 2003. U.S. same-store merchandise sales increased 6.6% for the six months ended June 30, 2004, on top of a 2.5% increase for the six months ended June 30, 2003. Key
contributors to the merchandise sales growth in 2004 were increases in hot and cold beverages, fresh foods, cigarettes and beer.



Gasoline sales for the six months ended June 30, 2004, increased $377.4 million, or 23.0%, over 2003. The increased sales were due to a 23-cent increase
in the average retail price of gasoline as well as a 5.7% increase in per-store gallons sold in 2004.



Total sales of merchandise and gasoline for the six months ended June 30, 2004, benefited just over one-half of one percent from the extra day due to leap
year. Both the same-store merchandise comparison and the average-gallons-sold-per-store comparison are calculated on an average-per-store-day basis and are unaffected by the extra day.



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Gross Profit



|                                              |  |                          |         |   |      |   |         |  
|--------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                              |  | Six Months Ended June 30 |        
|                                              |  | 2003                     |         |   | 2004 |  
|Gross Profit (in millions):                   |  |                          |         |   |      |   |         |  
|Merchandise gross profit                      |  | $                        | 1,237.6 |   |      | $ | 1,356.0 |  
|Gasoline gross profit                         |  |                          | 159.4   |   |      |   | 163.1   |  
|                                              |  |                          |         |   |      |   |         |  
|Total gross profit                            |  | $                        | 1,397.0 |   |      | $ | 1,519.1 |  
|Merchandise gross profit margin               |  |                          | 35.11   | % |      |   | 35.45   | %
|Merchandise gross profit growth per store     |  |                          | 2.4     | % |      |   | 7.5     | %
|Gasoline gross profit margin cents per gallon |  |                          | 15.5    |   |      |   | 14.8    |  
|Gasoline gross profit growth per store        |  |                          | 32.0    | % |      |   | 0.6     | %



Merchandise gross
profit for the six months ended June 30, 2004, was $1,356.0 million, an increase of $118.4 million, or 9.6%, over 2003. Gross profit margin in 2004 was 35.45% compared to 35.11% in 2003. This increase of 34 basis points was primarily due to changes
in product mix and, to a lesser extent, improvements in write-offs and shortage. This increase was partially offset by inflation in certain items.



Gasoline gross profit for the six months ended June 30, 2004, was $163.1 million, compared to $159.4 million in 2003. Expressed as cents-per-gallon, our
gasoline margin was 14.8 cents for 2004 compared to 15.5 cents for 2003. Volume growth was the primary driver in the 0.6% increase in our average gasoline gross profit per store for the six months ended June 30, 2004.



Other Income



Other income consists primarily of area license royalties, Vcom fees and
initial franchise fees. Other income for the six months ended June 30, 2004, was $64.1 million, an increase of $19.1 million, or 42.5%, from $45.0 million in 2003. Included in this increase was $6.2 million related to the mutual termination of our
Vcom check-cashing relationship with Certegy, $4.6 million related to the mutually agreed-upon termination of our Vcom e-shopping relationship with Cyphermint, $2.9 million of increased Vcom fee income and $4.6 million in royalty income and fees
from our area licenses (which included the $2.0 million licensing fee from Beijing). See Liquidity and Capital ResourcesVcom.



OSG&A Expense



The components of OSG&A expense are as follows:



|                                    |  |                          |         |      |   |        
|----------------------------------- |  | ------------------------ | ------- | ---- | - | -------
|                                    |  | Six Months Ended June 30
|                                    |  | 2003                     |         | 2004
|Company OSG&A expense (in millions) |  | $                        | 969.3   |      | $ | 1,048.4
|Franchisee OSG&A expense            |  |                          | 360.7   |      |   | 403.9  
|                                    |  |                          |         |      |   |        
|                                    |  | $                        | 1,330.0 |      | $ | 1,452.3
|                                    |  |                          |         |      |   |        



The ratio of OSG&A
to revenues was 24.6% for the six months ended June 30, 2004, compared to 25.5% for the same period in 2003.



Company OSG&A Expense.The primary components of Company OSG&A are store labor, occupancy (including depreciation) and
corporate-related expenses. Company OSG&A for the six months ended June 30, 2004, was $1,048.4 million, an increase of $79.1 million, or



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8.2%, from $969.3 million for 2003. We attribute this increase primarily to costs associated with higher occupancy
expenses and selling costs. Included in 2004 Company OSG&A was a $1.1 million currency-conversion gain. Company OSG&A for 2003 included a $3.6 million gain related to life insurance proceeds and a $3.8 million gain related to currency
conversion.



On April 22, 2004, we completed the sale of our
headquarters tower, parking garages and related facilities (Cityplace) to an outside party for $124.0 million. We subsequently leased back the portion of the tower and parking garages that we currently occupy for a term of three years
with an option to extend for an additional seven years. Concurrent with the Cityplace sale closing, we retired the loan associated with the construction of Cityplace (Cityplace Term Loan). We recorded a pretax gain from the sale of $17.5
million, which is being amortized over the three-year life of the lease. During the six months ended June 30, 2004, we recognized $972,000 of this gain in Company OSG&A. Also included in Company OSG&A is a $7.5 million fee associated with
the prepayment of the Cityplace Term Loan. See Liquidity and Capital Resources.



Franchisee OSG&A Expense.Franchisee OSG&A expense for the six months ended June 30, 2004, was $403.9 million, an increase of $43.2
million, or 12.0%, from $360.7 million in 2003, due to compensation expense associated with higher earnings in franchised stores and an increase in the number of stores operated by franchisees.



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Interest Expense, Net



Net interest expense for the six months ended June 30 2004, was $35.9 million, which was basically flat when compared to
$35.8 million for the same period in 2003. Included in the change was an increase primarily resulting from additional borrowings of SEJ Notes. Also contributing to the increase was the addition of debt related to real estate leases held by the
trusts that we consolidated as a result of the adoption of FIN 46 in July 2003. These increases were largely offset by the retirement of the Cityplace Term Loan in April 2004, the expiration of our interest-rate swaps in February 2004 and lower
average borrowings under our commercial paper facility at lower average interest rates.



Income Tax Expense



Income tax expense for the six months ended June 30, 2004, was $36.1 million, an increase of $7.2 million, or 24.7%, from $28.9 million in 2003. Our effective tax rate for the six-month periods ended June 30, 2004 and 2003 was 38%.



Discontinued Operations



Discontinued operations for the six months ended June 30, 2004, resulted in
a loss of $1.3 million (net of $769,000 income tax benefit) compared to a loss of $3.0 million (net of $1.8 million income tax benefit) for the same period in 2003. These stores had total revenues of $4.2 million and $65.8 million and pretax
operating losses of $2.0 million and $4.8 million for 2004 and 2003, respectively.



Cumulative Effect of Accounting Change



Effective January 1, 2004, we adopted FIN 46R, which resulted in a one-time charge of $5.1 million, net of deferred tax benefit, related to the cumulative effect of the accounting change resulting from the
consolidation of our franchisees. See Critical Accounting Policies and EstimatesFranchisees.



Net Earnings



Net earnings for the six months ended June 30, 2004 were $52.5 million or $0.44 per diluted share, compared to $44.2 million, or $0.39 per diluted share
in 2003.



LIQUIDITY AND CAPITAL RESOURCES



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



| |  | Cash flows generated from our operating activities;
| | - | ---------------------------------------------------



| |  | A $650 million commercial paper facility, guaranteed by Ito-Yokado Co., Ltd. (IY);
| | - | ------------------------------------------------------------------------------------



| |  | Borrowings of up to $200 million under our revolving credit facility.
| | - | ---------------------------------------------------------------------



We believe that operating activities and available working capital sources will provide sufficient liquidity in 2004 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.



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We expect capital expenditures for 2004, excluding lease commitments, will be between $345 million and
$375 million. Anticipated capital expenditures for 2004 are projected to include the areas of new stores, information technology and maintenance. We expect to open approximately 80 stores during 2004.



In April 2004, we retired the Cityplace Term Loan using a combination of
proceeds from the sale of Cityplace and available corporate funds. The total retirement of the Cityplace Term Loan was $214.1 million. This was comprised of the outstanding loan balance, accrued interest and fees associated with prepayment of the
loan of $7.5 million. The carrying amount of the property and equipment (and associated net rental amounts) that was sold was $104.7 million at the time of closing.



Vcom®



Vcom is our proprietary self-service kiosk solution to meet consumer demands for convenient and continuously available financial services. We believe that
Vcom represents a significant market opportunity to offer financial and other services to a segment of our current and future customers. We believe we are 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. Through exclusive agreements with third-party service providers, we offer traditional ATM services, money orders and money transfer services, check-cashing, prepaid phone cards,
auto insurance, stored value cards and bill payment services.



As of June 30, 2004, we had approximately 1,000 Vcom kiosks in 7-Eleven stores. In exchange for our granting strategic partners exclusive rights to offer their services or products on our Vcom kiosks, the partners are required to pay us a
percentage of the transaction fees and, in certain circumstances, placement fees and/or expense reimbursement. During the six months ended June 30, 2004, we received $7.0 million in placement fees from one of our Vcom partners, which is included in
deferred income on the condensed consolidated balance sheet. We recognized in income $6.2 million that was previously classified as deferred income due to the mutual termination of the Vcom check-cashing relationship with Certegy. We entered into an
agreement with CashWorks, Inc., a subsidiary of General Electric Company, to provide check-cashing services to Vcom and transitioned that business to them in early April 2004. In addition, we recognized $4.6 million that was also previously
classified as deferred income related to the mutually agreed-upon termination of our e-shopping relationship with Cyphermint. At the end of the first quarter, we entered into an arrangement with a commercial bank that provides the cash in the Vcom
kiosks. The fee charged to us by the commercial bank for our use of its cash is reflected in our Company OSG&A expense.



Cash Flows from Operating Activities



Net cash provided by operating activities for the six months ended June 30, 2004, was $213.8 million compared to net cash provided by operating activities
of $192.9 million for the six months ended June 30, 2003. We attribute this increase of $20.9 million to an increase in earnings before cumulative effect of accounting change and to changes in working capital items. Changes in working capital items
were primarily due to the timing of merchandise and gasoline payables.



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Cash Flows from Investing Activities



Net cash provided by investing activities for the six months ended June 30,
2004, was $48.8 million, an increase of $168.9 million from net cash used in investing activities of $120.1 million for the six months ended June 30, 2003. The primary drivers of the increase were net proceeds of $122.4 million related to the sale
of Cityplace in April 2004 and a decrease of $33.8 million in capital expenditures for 2004 compared to the same period in 2003.



Cash Flows from Financing Activities



Net cash used in financing activities was $349.0 million for the six months ended June 30, 2004, an increase of $338.8 million from $10.2 million for the
same period in 2003. Net payments under commercial paper and revolving credit facilities totaled $113.6 million for the six months ended June 30, 2004, compared to net payments of $94.7 million for the same period in 2003, an increase of $18.9
million. Principal payments under long-term debt agreements were $218.9 million for the six months ended June 30, 2004, compared to $18.1 million for the same period in 2003, an increase of $200.8 million. Included in this increase was a payment of
$205.7 million for the retirement of the Cityplace Term Loan in April 2004. The $100 million of proceeds from issuance of long-term debt in the six months ended June 30, 2003, was from borrowings under the SEJ Notes.



OTHER ISSUES



Expansion into China



During the first quarter of 2004, we finalized an area license agreement for Beijing and the surrounding area in the Peoples Republic of China
with an approved joint venture group. The joint venture is comprised of Seven-Eleven Japan, Co., Ltd., Beijing ShouLian (Capital Allied) Commercial Group Co., Ltd., and China National Sugar & Alcohol Group Corporation. The first 7-Eleven store
opened in Beijing on April 15, 2004, with a total of five opened during the second quarter of 2004. As part of this agreement, we recognized $2.0 million in other income during the second quarter of 2004.



Environmental



At June 30, 2004, our estimated undiscounted liability for our environmental
costs related to remedial action at existing and previously operated gasoline storage sites and other operating and nonoperating properties where releases of regulated substances have been detected was $37.4 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 June 30, 2004, will primarily be incurred within the next five to six years. The estimated liability could change
within the near future for several reasons, including (a) revisions to or the creation of governmental requirements, (b) existing remediation projects become fully defined, resulting in revised estimates of the cost to finish the projects and (c)
unplanned future failures of underground gasoline storage tank systems.



Under state reimbursement programs, we are eligible to be reimbursed for a portion of future remediation costs, as well as a portion of remediation costs previously incurred. At June 30, 2004, we had recorded a net receivable of $48.8
million for the estimated state



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reimbursements, of which $27.6 million relates to remediation costs incurred in the State of California. In assessing the
probability of state reimbursements, we take into consideration each states fund balance, revenue sources, existing claim backlog and claim ranking. As a result of these assessments, the recorded receivable amounts at June 30, 2004, are net of
allowances of $11.7 million. The estimated future state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be revised or extended.



While we cannot be certain of the timing of our receipt of state
reimbursement funds, based on 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 not changed.



The exception to our assumption regarding the timing of when we will receive state reimbursement funds is in California. The California reimbursement program separates claims into four classes: A, B, C and D. Our claims are in class D. As a
result of the growing backlog of class D claims and its impact on our estimate of when we will receive funds from the California reimbursement program, we review and periodically adjust the portion of the receivable to reflect our best estimate of
the fair value of our California remediation receivable. We have recorded the portion of the receivable that relates to remediation activities that have already been completed at a discount rate of approximately 5.28%. Thus, in addition to the
allowance discussed above, the recorded receivable amount is also net of a discount of $21.1 million.



Any revisions to our estimated future remediation expenditures and related state reimbursement amounts could have a material impact on our operations and
financial position.



Franchise Agreement Renewal



We have more than 3,300 franchised stores. We
developed a new franchise agreement to replace agreements that expired beginning in December 2003. The new agreement includes a revision to the gross profit split between us and the franchisees and provides for an advertising fee to be paid by the
franchisees to us. In addition, the new agreement includes a requirement for a minimum purchase percentage of franchisees total purchases from our recommended vendors. The agreement is designed to better align our franchisees and execute our
business model with our business strategies involving fresh foods, combined distribution and differentiation and to provide an opportunity to increase profits for our franchisees and us.



A committee of our franchisees evaluated the economic impact of the new agreement on our franchisees according to a
procedure set forth in a 1998 court-approved settlement agreement. On February 23, 2004, this committee advised us that the new agreement satisfied the economic impact standard contained in the settlement agreement. Therefore, all franchisees are
being offered the chance to sign the new agreement during 2004. As of June 30, 2004, franchisees operating approximately 2,400 stores had signed the new franchise agreement.



We do not anticipate that the terms of the new agreement will have a material adverse impact on either our franchisees or
us.



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Recently Issued Accounting Standards



In January 2004, the FASB issued FASB Staff Position (FSP) No.
106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This was in response to a new law regarding prescription drug benefits under Medicare (Medicare
Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Currently, SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, requires that changes in relevant law be considered in current measurement of postretirement benefit costs. Certain accounting issues related to the federal subsidy remain unclear and significant
uncertainties may exist that impair a plan sponsors ability to evaluate the direct effects of the new law and the effects on plan participants behavior and healthcare costs. Due to these uncertainties, FSP No. 106-1 provides plan
sponsors with an opportunity to elect to defer recognizing the effects of the new law in accounting for its retiree health care benefit plans under SFAS No. 106 and to provide related disclosures until authoritative guidance from the FASB on the
accounting for the federal subsidy is issued and clarification of other uncertainties is resolved. We have elected to defer recognition while evaluating the new law and the pending issuance of authoritative guidance and their effect, if any, on our
financial position, results of operations and financial statement disclosure. Therefore, any measures of the accumulated postretirement benefit obligation or the net periodic postretirement benefit cost do not reflect the effects of the new law, and
pending authoritative guidance could require us to change previously reported information.



In May 2004, the FASB issued FSP FAS No. 106-2, which supersedes FAS No. 106-1. FSP FAS No. 106-2 applies only to sponsors of defined benefit postretirement health care plans for which (a) the employer has concluded
that prescription drug benefits available under the plan are actuarially equivalent to Medicare Part D and thus qualify for the subsidy under the Act and (b) the expected subsidy will offset or reduce the employers share of the cost of
postretirement prescription drug coverage provided by the plan. In general, the FSP concludes that plan sponsors should follow SFAS No. 106 (see Note 5) in accounting for the effects of the Act. Specifically, the effect of the subsidy on benefits
attributable to past service cost should be accounted for as an actuarial experience gain and the effect of the subsidy on future costs should be accounted for as a reduction in service cost. For employers such as us that elected deferral under FSP
FAS No. 106-1, this guidance is effective for the first interim or annual period beginning after June 15, 2004. We are continuing to defer recognition of the FSP while evaluating the Act and the pending issuance of authoritative guidance and their
effect, if any, on our financial position, results of operations and financial statement disclosure. However, based on the current design of our postretirement health care plan, we believe that it is unlikely that the prescription drug benefits
available under our plan will be considered to be actuarially equivalent to Medicare Part D, and we therefore do not expect to qualify for the subsidy under the Act.



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



See Managements Discussion and Analysis of Financial Condition and Results of Operations above.



Item 4. Controls and Procedures



We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use
or disposition. As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures with the assistance
and participation of other members of management. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the
information we are required to disclose in the reports we file under the Securities Exchange Act of 1934 within the time periods specified in the SECs rules and forms. There have been no significant changes in our internal controls over
financial reporting that occurred during our most recently completed fiscal quarter or in other factors that could significantly affect our internal controls over financial reporting.



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PART II.



OTHER INFORMATION



Item 1. Legal Proceedings.



As we
have previously disclosed, we were the subject of an investigation by the District Attorneys Office of San Joaquin County, California, for allegedly violating the California Health & Safety Code by failing to obtain permits to replace
certain monitoring systems for underground storage tanks at seven stores. The allegations were based primarily on the failure of our contractor to comply with these permitting requirements. Subsequently, the District Attorney for San Joaquin County
obtained the cooperation of two additional counties, and the investigation was expanded to include issues of operational store-level compliance with environmental regulations.



In May 2004, we reached an agreement to settle these claims. We are working with the California authorities to finalize the
settlement documents. In general, the settlement will require us (i) to make certain payments to the State of California and entities designated by the state and (ii) to replace certain underground storage tanks and make related improvements over
the next several years. We have fully accrued the amount of these payments. We are incorporating the costs associated with replacing the underground storage tanks and related improvements into our future capital spending plans.



In addition, in June 2004 we were served with a lawsuit filed in the Superior
Court of New Jersey for Warren County by the New Jersey Department of Environmental Protection and the Administrator of the New Jersey Spill Compensation Fund. The lawsuit relates to a former chemical manufacturing facility known as the Great
Meadows Plant. We purchased the Great Meadows Plant in 1978 and closed the Plant in 1988, but we still own the site.



The lawsuit seeks (i) compensation for damages to New Jerseys natural resources allegedly caused by conditions at the Great Meadows Plant; (ii) a
declaratory judgment for all future cleanup and removal costs and damages; and (iii) reimbursement of the plaintiffs costs and fees. Based on a previous settlement agreement that we reached with a large chemical company that formerly owned the
site, we expect that the former owner will pay the majority of the costs associated with the new lawsuit. We are cooperating with authorities and pursuing a settlement of this matter.



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Item 4. Submission of Matters to a Vote of Security Holders.



On April 21, 2004, we held our annual meeting of shareholders. Each of the 10 nominated directors was elected without contest. In addition, our shareholders ratified the approval of PricewaterhouseCoopers LLP to be
our independent auditors for 2004 and approved the Companys Annual Performance Incentive Plan.



| | (a) | The votes for and the votes withheld for each of the nominees for director were as follows:
| | --- | -------------------------------------------------------------------------------------------



|                     |  |             |  |          
|-------------------- |  | ----------- |  | ---------
|Nominee              |  | For         |  | Withheld 
|Toshifumi Suzuki     |  | 98,482,746  |  | 5,212,316
|Yoshitami Arai       |  | 102,894,277 |  | 800,685  
|Masaaki Asakura      |  | 98,485,927  |  | 5,209,135
|Jay W. Chai          |  | 102,470,455 |  | 1,224,607
|R. Randolph Devening |  | 102,680,659 |  | 1,014,403
|Gary J. Fernandes    |  | 102,499,537 |  | 1,195,525
|Masaaki Kamata       |  | 98,444,568  |  | 5,250,494
|James W. Keyes       |  | 98,521,602  |  | 5,173,460
|Kazuo Otsuka         |  | 98,444,631  |  | 5,250,431
|Lewis E. Platt       |  | 102,680,418 |  | 1,014,644



| | (b) | The votes for, against, abstaining and broker non-votes in connection with the ratification of the appointment of PricewaterhouseCoopers LLP to be our independent auditors for 2004
were as follows:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



103,035,059 shares were voted
for; 634,316 shares were voted against; 14,687 shares abstained from voting; and no broker non-votes were received.



| | (c) | The votes for, against, abstaining and broker non-votes in connection with the approval of the Companys Annual Performance Incentive Plan were as follows:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



98,124,878 shares were voted for; 285,313
shares were voted against; 28,003 shares abstained from voting; and 5,256,868 broker non-votes were received.



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Item 6. Exhibits and Reports on Form 8-K.



| | (a) | Exhibits:
| | --- | ---------



| | 1. | Exhibit 15  Letter re Unaudited Interim Financial Information. Letter of PricewaterhouseCoopers LLP.
| | -- | -----------------------------------------------------------------------------------------------------



| | 2. | Exhibit 31(1)  Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
| | -- | -----------------------------------------------------------------------------------------------------------



| | 3. | Exhibit 31(2)  Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
| | -- | -----------------------------------------------------------------------------------------------------------



| | 4. | Exhibit 32(1)  Certification by Chief Executive Officer Pursuant to 18 U.S.C. § 1350.
| | -- | --------------------------------------------------------------------------------------



| | 5. | Exhibit 32(2)  Certification by Chief Financial Officer Pursuant to 18 U.S.C. § 1350.
| | -- | --------------------------------------------------------------------------------------



| | (b) | 8-K Reports:
| | --- | ------------



|               |  |                                                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Date of report |  | Description                                                                                                                           
|April 22, 2004 |  | Furnished copy of press release issued on April 20, 2004, announcing the Companys earnings for the first quarter ended March 31, 2004



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SIGNATURES



Pursuant to the
requirements 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)                                     
|                     | 
|Date: August 6, 2004 |  | /s/ James W. Keyes                               
|                     |  | (Officer)                                        
|                     |  | James W. Keyes                                   
|                     |  | President and Chief Executive Officer            
|                     | 
|Date: August 6, 2004 |  | /s/ Edward W. Moneypenny                         
|                     |  | (Principal Financial Officer)                    
|                     |  | Edward W. Moneypenny                             
|                     |  | Senior Vice President and Chief Financial Officer



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