GENERAL

Office Depot, Inc., together with our subsidiaries, is a global supplier of office products and services. We sell to consumers and businesses of all sizes through our three segments (or "Divisions"): North American Retail Division, North American Business Solutions Division, and International Division.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist in better understanding and evaluating our financial condition and results of operations. We recommend that you read this MD&A in conjunction with our condensed consolidated financial statements and the notes to those statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our 2008 Annual Report on Form 10-K (the "2008 Form 10-K"), filed with the U.S. Securities and Exchange Commission (the "SEC").

This MD&A contains significant amounts of forward-looking information. Without limitation, when we use the words "believe," "estimate," "plan," "expect," "intend," "anticipate," "continue," "may," "project," "probably," "should," "could," "will" and similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Our discussion of Risk Factors, found in Item 1A of this Form 10-Q and our 2008 Form 10-K, and Forward-Looking Statements, found immediately following the MD&A in our 2008 Form 10-K, apply to these forward-looking statements.

RESULTS OF OPERATIONS

OVERVIEW

A summary of factors important to understanding the results for the second quarter of 2009 is provided below and further discussed in the narrative that follows this overview.

• Second quarter sales decreased 22% to $2.8 billion when compared to the second quarter of 2008. Sales in North America were down 20%, and International sales decreased 25% in U.S. dollars and 12% in local currencies. North American Retail Division comparable store sales decreased 18% for the quarter.

• Gross profit totaled $764 million in the second quarter of 2009, down 22% from the same period in 2008. This comparison primarily reflects the flow through from our sales volume decline, partially offset by lower charges for shrink and inventory valuation.

• As part of our previously announced strategic reviews, we recorded $35 million of charges in the second quarter of 2009 and $16 million of charges in the second quarter of 2008 (the "Charges"). Implementation of activities during the second quarter of 2009 resulted in charges primarily for lease accruals, severance expenses and asset impairments related to sale-leaseback transactions that closed during the period.

• Total operating expenses were down 12% compared to the second quarter of 2008. This decrease primarily reflects lower payroll and advertising expenses as well as reductions in distribution costs and professional and legal fees. These decreases were significantly offset by the increase in Charges from the second quarter of 2008.

• We reported a net loss attributable to Office Depot, Inc. of $82 million for the second quarter of 2009 compared to a net loss attributable to Office Depot, Inc. of $2 million in the same quarter of the prior year, and we reported a diluted loss per share of $0.31 in the second quarter of 2009 versus a diluted loss per share of $0.01 in the same period a year ago. After-tax Charges negatively impacted earnings per share by $0.09 in the second quarter of 2009 and $0.05 in the second quarter of 2008.

• On June 23, 2009, we issued $350 million of redeemable preferred stock and received cash, net of fees paid in the quarter, of approximately $327 million.

Charges and Division Results

Charges

During the fourth quarter of 2008, we performed an internal review of assets and processes with the goal of positioning the company to respond to the continued degradation in the global economy and to position the company for the economy's eventual improvement. The results of that internal review led to decisions to close stores, close certain distribution facilities, exit certain businesses, write off certain assets that were not seen as providing sufficient future benefit, and undertake certain actions to improve liquidity. Expenses associated with future activities will be recognized as the individual plans are implemented and the related accounting recognition criteria are met. Our full year 2009 estimate has increased from our last estimate in April 2009 primarily from sale-leaseback transactions, adjustments to sublease assumptions because of the weak real estate market and changes in other project costs. We currently estimate Charges to be recognized during the remainder of 2009 to be in a range of approximately $85 million to $115 million, bringing our estimate of 2009 total Charges to be in a range of $240 million to $270 million. We anticipate all activities to be completed by the end of 2009; however, changes in long-term accruals such as lease obligations, may continue to impact results in future periods. As with any estimate, the timing and amounts may change when projects are implemented and such changes may be significant. Also, changes in foreign currency exchange rates will have an impact on amounts reported in U.S. dollars related to foreign operations. Charges recognized in the second quarter and first half of 2008 related to a previous business review program.

Our measurement of Division operating profit excludes the Charges because they are evaluated internally at the corporate level. The Charges recognized during the second quarter and first half of 2009 and 2008 are included in the following lines in our Condensed Consolidated Statement of Operations.

(In millions)                                           Second Quarter          First Half
                                                        2009       2008       2009       2008
Cost of goods sold and occupancy costs                 $    -      $  -      $   10      $   -
Store and warehouse operating and selling expenses         30        12         126         20
General and administrative expenses                         5         4          19          7

Total Charges                                          $   35      $ 16      $  155      $  27

For additional information on the Charges, see Note C.

Other

The portion of General and Administrative ("G&A") expenses considered directly or closely related to unit activity is included in the measurement of Division operating profit. Other companies may charge more or less G&A expenses to their divisions, and our results therefore may not be comparable to similarly titled measures used by some other entities. Our measure of Division operating profit should not be considered as an alternative to operating income or net earnings determined in accordance with accounting principles generally accepted in the United States of America.

We have prepared our financial statements in each period based on information available at the time, however, changes in estimates may impact our financial statements in future periods. For additional information on our accounting estimates, see Critical Accounting Policies in our 2008 Form 10-K.

North American Retail Division



                                          Second Quarter                First Half
  (Dollars in millions)                 2009          2008          2009          2008

  Sales                               $ 1,126.0     $ 1,433.1     $ 2,562.4     $ 3,146.5
  % change                                (21)%          (6)%         (19)%          (7)%

  Division operating profit (loss)    $  (13.1)     $   (4.4)     $    68.3     $    78.1
  % of sales                             (1.2)%        (0.3)%          2.7%          2.5%

Second quarter sales in the North American Retail Division were $1.1 billion, down 21% from the prior year. Comparable store sales in the 1,138 stores in the U.S. and Canada that have been open for more than one year decreased 18% for the quarter and 17% for the first half of 2009. While transaction counts were down in the second quarter of 2009 compared to the same period last year, the greater decline in the quarter resulted from a drop in average order value. Consistent with previous periods, the decrease in sales was driven by macroeconomic factors such as reduced spending by consumers and small business customers, especially on large ticket items like furniture and computers. Additionally, our decision to proactively reduce promotions in certain categories negatively impacted our comparable store sales. Within each of our three major product categories of supplies, technology and furniture, we experienced a sales decline compared to the second quarter of 2008. The negative comparable store sales continue to be driven by fewer sales of higher priced, discretionary categories in furniture, technology and peripherals. Some of our best performing categories were consumables, including ink, toner and paper as well as Design, Print and Ship services. Weak sales in Florida, Texas and California continue to weigh heavily on our results as our small business customers in those areas continue to be impacted by weak economic conditions, high unemployment levels and limited access to liquidity.

The North American Retail Division reported an operating loss of approximately $13 million in the second quarter of 2009, compared to a loss of $4 million in the same period of the prior year. The first half results were an operating profit of $68 million in 2009 compared to $78 million in 2008. This measure of operating performance is consistent with the internal reporting of results used to manage the business and allocate resources but does not include charges associated with the strategic decisions made as part of the internal review initiated during the fourth quarter of 2008. Please see Charges discussion in the MD&A Overview section above.

Improvement in product margins resulted in an increase in operating profit of approximately $6 million. This was due to an improvement in product mix as core supplies and key services contributed a larger portion of our sales compared to the second quarter of 2008. Additionally, we recognized a $23 million benefit from lower charges for shrink and inventory valuation in the second quarter of 2009. This reduction, resulted from our efforts to lower our inventory, minimize clearance and reduce shrink exposure. We also had a $15 million comparative benefit from closing the underperforming stores identified as part of the strategic review we initiated in the fourth quarter of 2008. Reduced operating expenses, including lower depreciation from prior impairments, resulted in a $16 million improvement in operating profit compared to the second quarter of 2008. On the negative side, operating profit decreased by approximately $64 million as a result of the gross margin and operating expense impacts linked to our sales volume decline (the "flow through" impact). Finally, we increased our reserve for previously closed stores by approximately $5 million to reflect current assumptions related to subleases. The factors discussed for the second quarter results are largely the same factors impacting the first half of 2009 compared to 2008.

At the end of the second quarter of 2009, Office Depot operated 1,158 office products stores throughout the U.S. and Canada. We closed five stores and opened three stores during the period. We closed 112 stores during the first half of 2009, of which 111 were closed as part of the strategic review initiated in the fourth quarter of 2008. We plan to open ten or fewer new stores over the remainder of 2009.

Our inventory per store at the end of the second quarter of 2009 was approximately $714,000, down 21% from the end of the second quarter of 2008. Average inventory per store in the second quarter of 2009 was $670,000, down 28% from the same period last year. These declines are a result of improved inventory management and our reduced exposure to higher dollar value inventory items.

As we look at the third quarter, we expect our results to improve compared to the second quarter of 2009. However, we anticipate the back to school season to be promotional and our competition to be very aggressive.

North American Business Solutions Division



                                       Second Quarter               First Half
      (Dollars in millions)          2009         2008          2009          2008

      Sales                        $  868.1     $ 1,064.1     $ 1,782.3     $ 2,168.1
      % change                        (18)%          (5)%         (18)%          (5)%

      Division operating profit    $   22.5     $    49.3     $    55.6     $   108.9
      % of sales                       2.6%          4.6%          3.1%          5.0%

Second quarter sales in the North American Business Solutions Division were $868 million, down 18% compared to the second quarter of 2008 as our customers continued to reduce spending on office products. Sales in both our small- to medium-sized business customers and our large, national account customers continued to decline in the second quarter, reflecting a decrease in the number of transactions by our customers. Additionally, in the large national accounts, we experienced extremely aggressive pricing from some of our competitors. On a product category basis, the Division continued to see weakness in durables such as furniture, technology and peripherals, as customers delayed their purchases of these products in favor of consumables like paper, ink and toner. We have not yet seen any indication that this purchasing trend will be changing in the near term. The sales decline in our business in Florida and California continued to exceed the overall rate of decline for the Division in the second quarter of 2009. These two states continue to represent about 30% of Division revenue and about one-third of the revenue decline from the second quarter and first half of 2008.

The North American Business Solutions Division reported an operating profit of approximately $23 million in the second quarter of 2009, compared to $49 million in the same period of the prior year. Approximately $6 million of the decline resulted from lower product margins, reflecting a less profitable product mix and cost increases that could not be passed on to our customers. Approximately $36 million of the operating profit decline relates to the flow through impact of lower sales levels. Partially offsetting this decline were positive impacts of approximately $16 million from lower customer rebates tied to volume, lower charges for inventory shrink and reduced selling and G&A expenses. The North American Business Solutions Division reported an operating profit of approximately $56 million in the first half of 2009, compared to $109 million in the same period of the prior year. The factors discussed for the second quarter results are largely the same factors impacting the first half of 2009 compared to 2008.

As we look at the third quarter, we expect the year-over-year sales decline to improve as we compare against our weak sales results from the third quarter of 2008. In addition, we anticipate that operating profit in the third quarter will be relatively consistent with the second quarter of 2009.

International Division



                                          Second Quarter               First Half
  (Dollars in millions)                 2009         2008          2009          2008

  Sales                               $  830.0     $ 1,107.9     $ 1,704.7     $ 2,252.5
  % change                               (25)%           13%         (24)%            9%
  % change in local currency sales       (12)%            2%         (10)%          (1)%

  Division operating profit           $    3.1     $    51.2     $    21.7     $   111.3
  % of sales                              0.4%          4.6%          1.3%          4.9%

The International Division reported second quarter sales of $830 million, a decrease of 25% in U.S. dollars. Local currency sales decreased 12%, with all but a few countries in which we operate reporting sales declines compared to the second quarter of 2008. The U.K., France, and Germany all reported double-digit declines in local currency sales and combined, accounted for approximately 70% of the overall decrease in local currency sales. Similar to North America, the global recession is causing worsening cash flows, tight credit conditions and deteriorating profitability by our customers, and is driving a reduction in both business investment and office supply expenditures. Sales in the direct business declined 15% in local currency and sales in the contract business declined 11% in local currency. These sales declines were driven by continued softness in higher priced items such as furniture and technology, increased purchasing from sale catalogs, increased competitiveness and a general decline in transactions as customers limit purchases to their essential needs. Additionally, the International Division's sales were reduced as a result of our previously announced plans to exit the retail business in Japan, which will continue through the third quarter of 2009.

The International Division reported an operating profit of approximately $3 million in the second quarter of 2009, compared to $51 million in the same period of the prior year. Division operating profit for the first half of 2009 was $22 million, compared to $111 million in the same period of 2008. This measure of operating performance is consistent with the internal reporting of results used to manage the business and allocate resources but does not include charges associated with the strategic decisions made as part of the internal review initiated during the fourth quarter of 2008. Please see Charges discussion in the MD&A Overview section above.

Approximately $49 million of the decrease in operating profit from the second quarter of 2008 to the second quarter of 2009 resulted from the flow through impact of lower sales levels, and $13 million of the decrease resulted from the curtailment of a U.K. pension plan, which resulted in a gain in the second quarter of 2008. Additionally, an increase in promotional activity and cost increases that could not fully be passed on to our customers negatively impacted operating profit by approximately $8 million. Changes in foreign exchange rates, driven by a stronger U.S. dollar, unfavorably impacted operating profit by $2 million compared to the second quarter of 2008. Partially offsetting these negative factors was an improvement of approximately $24 million in our operating expenses as we reduced selling and distribution costs.

As we look at the third quarter, we do not expect a significant change in the economic conditions in our broad international markets. We expect to see declines in local currency sales and lower operating profit when compared to the prior year.

Corporate and Other

General and Administrative Expenses: Total G&A decreased from $175 million in the second quarter of 2008 to $170 million in the second quarter of 2009. As noted above, the portion of G&A expenses considered directly or closely related to unit activity is included in the measurement of Division operating profit above. The remainder of the total G&A expenses are considered corporate expenses. A breakdown of G&A is provided in the following table:

                                Second Quarter                First Half
           (In millions)      2009          2008          2009          2008

           Division G&A     $    89.8     $    87.7     $   179.0     $   194.8
           Corporate G&A         80.6          87.5         167.8         179.0

           Total G&A        $   170.4     $   175.2     $   346.8     $   373.8

Corporate G&A includes Charges of $5 million in the second quarter of 2009 and $4 million in the second quarter of 2008. After considering the impact of Charges recognized in the period, Corporate G&A fell by approximately $8 million during the second quarter of 2009 compared to the same period of 2008 primarily reflecting reduced legal and professional fees and lower payroll costs including severance. During the second quarter of 2008, the company initiated a voluntary exit incentive program for certain employees that resulted in a charge of approximately $6 million for severance expenses in the period. The positive factors were partially offset by increases in performance-based variable pay and depreciation expense from the second quarter of 2008 to the second quarter of 2009. Corporate G&A includes Charges of $19 million in the first half of 2009 and $7 million in the first half of 2008. The decrease in G&A on a year to date basis resulted from similar factors as those that impacted the quarterly results.

Effective for the beginning of the third quarter of 2009, the company implemented a new enterprise software system which will increase quarterly amortization expense included in corporate G&A by approximately $7 million over the corresponding prior periods. Corporate G&A for the third quarter of 2009 will include approximately $10 million from the effect of accelerated vesting of certain employee stock grants if shareholders approve aspects of the redeemable preferred stock issuance. Also, change in control features in certain employment contracts could result in additional G&A expenses in future periods if covered executives' are involuntarily, or in certain cases, voluntarily terminated.

During 2006, we sold our former corporate campus and leased the facility back as construction of a new facility was being completed. The amortization of the deferred gain on the sale recognized during the first half of 2008 largely offset the rent expense incurred during the period.

Other income (expense): The increase in net interest costs was driven by increased interest expense, which resulted from the amortization of debt issuance costs related to our asset based credit facility, higher average borrowing rates on lower average borrowings, and the interest expense recognized on the capital lease associated with our new corporate campus. We also experienced lower levels of interest income compared to the second quarter of 2008.

The decrease in net miscellaneous income in the second quarter reflects additional foreign currency losses and lower equity in earnings from our joint venture in Mexico, Office Depot de Mexico, which resulted primarily from changes in foreign currency exchange rates. In addition to these factors, the decrease in the year to date amount also reflects the comparison to a $5 million gain recognized in the first quarter of 2008 from the sale of a non-operating asset.

Other - Income Taxes: Our effective tax rate was 27.0% and 41.0% for the second quarters of 2009 and 2008, respectively. The change in effective tax rates is attributable to a shift in the mix of anticipated domestic and international results partially offset by $10 million of a change in our accrual for uncertain tax positions and a valuation allowance on certain deferred tax assets. The 2008 effective rate also reflects the reclassification of prior year losses from noncontrolling interests to a separate line following the adoption of a new accounting standard at the beginning of 2009. The effective tax rate may change due to shifts in domestic and international income and other factors. We anticipate our full year base operating rate to be approximately 31% to 34%. However, the effective tax rate in future periods can be affected by variability in our mix of income, the tax rates in various jurisdictions, changes in the rules related to accounting for income taxes, outcomes from tax audits that regularly are in process and our assessment of the need for accruals for uncertain tax positions.

Under existing accounting rules (Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes,[Accounting Standards Codification ("ASC") 740-10-30]), we regularly consider both positive and negative information in assessing whether a valuation allowance is needed on our deferred tax assets. The downturn in the economy and our results are sources of negative evidence to be weighed in this evaluation. The longer the weak economic conditions persist and our results decline compared to prior periods, the more significant these considerations become. Though the company believes that it will return to profitability in future periods, we will be monitoring closely the potential realizability of our deferred tax assets. A decline in our performance could result in valuation allowances being required for some or a significant portion of our deferred tax assets, perhaps as early as this year, and could reverse previously-recognized tax benefits and negatively impact our ability to recognize future tax benefits. The net deferred tax asset balance at December 27, 2008 and June 27, 2009 was $394 million and $434million, respectively. Further, certain of the restructuring activities associated with our strategic review could result in an increase in tax expense, depending on the ultimate structures put in place. Should any of these outcomes materialize, the company currently does not believe this additional tax expense would have a cash tax impact in the current fiscal year.

The company periodically seeks to limit future tax expense by entering into tax ruling agreements with international jurisdictions. It is possible that the company may have to concede significant tax attributes in the negotiating process which may increase tax expense. Such a concession should not have a near-term cash tax impact.

LIQUIDITY AND CAPITAL RESOURCES

At June 27, 2009, we had approximately $559 million of cash and cash equivalents and $753 million available under our asset based revolving credit facility based on the June borrowing base certificate. The current and anticipated future challenging economic conditions impact the market for short-term liquidity, but we consider our resources adequate to satisfy our cash needs at least over the next twelve months. We anticipate that market conditions will continue to be challenging through 2009, and in response, we are focused on maximizing cash flow. We have made strong progress towards reducing inventory levels and remain focused on accelerating the collection of our accounts receivable balances. . . .