Ray Tharpe - Director of IR Steve Odland - Chairman and CEO Chuck Rubin - President, North American Retail Patricia McKay - EVP and CFO Charles E. Brown - President, International

Matthew J. Fassler - Goldman Sachs & Co.

Michael Baker - Deutsche Banc North America Gary Balter - Credit Suisse First Boston Mitch Kaiser - Piper Jaffray Bill Sims - Citigroup Investment Research Armando Lopez - Morgan Stanley Colin McGranahan - Sanford C. Bernstein & Co., LLC Danielle E.

Fox - Merrill Lynch Chris Horvers - Bear, Stearns & Co. Daniel T.

Binder - Buckingham Research

Thank you and good morning everyone. Before beginning today's conference call, I would remind you that certain statements made during this call are forward-looking statements under the Private Securities Litigation Reform Act.

Except for historical, financial and business performance information, comments made during this call should be considered forward-looking. Actual future results may differ materially from those discussed on this call due to risks and uncertainties, both foreseen and unforeseen.

Certain risks and uncertainties are described in detail in our report on Form 10-K filed with the SEC on February 14, 2007 and in our Form 10-Q filed this morning. During portions of this call, we may refer to results which are not GAAP numbers.

A reconciliation of non-GAAP numbers to GAAP results is available on the Investor Relations area of our website at officedepot.com. Now, I would like to introduce Office Depot's Chairman and CEO, Steve Odland.

Thank you and thank you for joining us for Office Depot's fiscal 2007 second quarter conference call. With me today are Pat McKay, Executive Vice President and Chief Financial Officer; Chuck Rubin, President, North American Retail Division; Charlie Brown, President of International Division and Ray Tharpe from Investor Relations.

I hope you've had an opportunity to read our press release and learn about the second quarter results. If not, the press release along with the accompanying webcast slides are available on our website at www.officedepot.com.

Just click on the Company Information and then on Investor Relations. For eight straight quarters now, we have executed the initiatives in our strategic plan to consistently deliver double-digit earnings per share growth to our shareholders, averaging 32% growth in earnings per share as adjusted over the period.

Unfortunately, the Street came to a halt this quarter. As we have previously disclosed, we knew that we were facing significant headwinds as we entered the second quarter this year, a quarter which is also our seasonally lowest point for sales.

While we are frustrated that we weren't able to grow earnings at the same rate as in the previous two years, we are pleased that in this challenging sales environment, we delivered earnings per share consistent with the prior year and we were able to invest in our global business for the future. In North America, we maintained our focus on pursuing only those sales which would yield profitable growth.

This approach allowed us to somewhat mitigate the effects of a softening economy in the United States while continuing to position us for margin expansion when economic conditions improve. We remain positive on the long-term growth and margin expansion opportunities for Office Depot.

Second quarter sales grew 4% to $3.6 billion compared to the second quarter of 2006. Sales growth in North America was flat in the second quarter, down from 3% in the first quarter, reflecting a continuation of the macroeconomic conditions that we began to experience in the first quarter, particularly in our small business customer sector.

Sales in our North American Retail Division grew 1% with comparable store sales down 5% for the quarter. International Division sales increased 14% in U.S.

dollars and 7% in local currencies. Our U.S.

businesses were depressed by a continuation of the slow down in housing sales and the softening economy. Particularly affected were our small business customers in both our North American Retail Division as well as our North American Business Solutions Division.

Despite these soft market conditions, data from The NPD Group indicates that Office Depot's retail revenue share among office supply stores increased sequentially in the quarter. We recorded charges in the second quarter of both years associated with the implementation of plans announced in 2005 and disclosed in our previous SEC filings.

Excluding certain items in both periods from second quarter charges, net earnings as adjusted were $118 million in the second quarter of 2007 versus $125 million in 2006. Diluted earnings per share were $0.43, unchanged versus the same period last year.

Gross margin declined 50 basis points, principally due to a shift in mix and increased property costs associated with new stores, partially upset by higher private brand sales. Operating expenses increased as a percentage of sales by approximately 10 basis points, reflecting investments made which more than offset benefits from cost management initiatives.

EBIT as adjusted was $176 million for the quarter or 4.9% as a percentage of sales versus an adjusted EBIT margin of 5.3% in the prior year period. Our as adjusted effective tax rate for the second quarter was 26% and for the first half was 28%.

We expect the rate for the remainder of the year to be between 28.5% and 29%. Net earnings for the quarter on a GAAP basis were $109 million compared to earnings of $118 million in the same period of 2006.

GAAP earnings per share on a diluted basis were $0.40 for the quarter versus $0.41 in quarter two of 2006. Second quarter charges had a negative effect on EPS in both years, $0.03 per share in 2007 and $0.02 per share in 2006.

We recognized $12 million of charges during the second quarter and anticipate charges of approximately $30 million for the remainder of 2007 and $65 million in 2008. However, future charges may change as plans are implemented.

We have provided a reconciliation of GAAP to non-GAAP results which you can access on our website, officedepot.com under Company Information and Investor Relations. Now, Chuck Rubin will take you through the second quarter results of the North American Retail Division.

Chuck?

Thanks Steve. Second quarter sales increased 1% to $1.5 billion, down from 3% growth in the first quarter.

Comparable store sales in the 1063 stores in the U.S. and Canada that have been opened for more than one year decreased 5% for the second quarter.

Comps were negatively impacted during the quarter by the continued softness in the economy. You will recall that our retail customers are predominately small and home office businesses as well as non-business consumers.

We experienced softer sales in furniture and supplies and to a lesser extent technology during the quarter as our consumers adjusted their spending in reaction to macroeconomic conditions such as changes in the housing market and higher fuel costs. Despite these soft market conditions, data from The NPD Group indicates that Office Depot's retail revenue share among office supply stores increased sequentially in the second quarter.

As U.S. new home construction continued to decline during the second quarter, the pace slowed to a rate of 24% below that of a year ago, underlying a persistent slump in the broader housing market.

This trend significantly impacted our furniture business, which continued to experience soft sales and accounted for approximately 160 basis points of impact to our overall comp sales decrease. In addition, we believe that the impact of this housing slump has adversely affected a broad range of small businesses and resulted in a reduction in our customers' overall spending patterns.

Combined with rising fuel prices, these macroeconomic conditions have negatively impacted our sales. Other drivers of the negative comps include new store build out of about 70 basis points, increases in private brand penetration impacting about 10 basis points and changes in our mail-in rebate programs which impacted about 40 basis points.

Although comparable store sales were disappointing, the North American Retail Division successfully delivered a 7% increase in operating profit to $104 million for the second quarter of 2007 compared to $96 million in the same period of the prior year. Higher product margins and cost management initiatives more than offset the impact of the negative comps and increased property costs associated with new stores.

Operating profit margins expanded to 6.8%, an increase of 40 basis points from 6.4% in the prior year period. However, looking ahead to the third quarter, we are seeing early indications of a tough retail environment from a consumer slowdown in spending that could result in a more competitive and promotional environment for the back to school season.

In this challenging macro environment, we have pursued a number of initiatives to stimulate sales. Some examples include increased small packet sizing to appeal to very small business customers, new customer service programs, which resulted in improved customer service scores, continued enhanced productivity of our advertising, particularly in print media, introduction of buy more save more offers that offer even greater value to our customers, and furniture floor sets that are new and allow more take with products for our customers.

At the same time, we chose not to repeat certain promotions that generated increased sales in the second quarter of 2006 because they did not generate an acceptable profit margin. The discontinuation of these promotions negatively impacted comps by approximately 70 basis points in the second quarter.

Average ticket size increased slightly. The comp decline was entirely driven by a reduction in the number of transactions.

And comparable average sales per square foot were $219 for the quarter. We remain pleased with the results of our overall remodel efforts, completing 54 remodels in the quarter.

As previously communicated, our goal is to remodel substantially all remaining North American retail stores within the next few years. We exclude a brief remodel period from our comps to account partially to some of the disruption.

These remodeling activities do create a short-term negative impact on our retail results, but represent an important part of our longer term retail profitable growth strategy. We believe our new M2 format provides a clearly differentiated shopping experience to our customers with intuitive signage, clearer sight lines and better product adjacencies, all contributing to a more pleasant shopping experience for our customers.

At the end of the second quarter, Office Depot operated a total of 1186 office product stores throughout the U.S. and Canada, approximately half of which are operating under the M2 format.

Our current plans are to open approximately 125 stores this year, down from our previous estimate of 150. We anticipate opening approximately 150 stores in 2008, down from our previous estimate of 200.

We believe that we continue to have significant opportunity to expand our store count but have moderated our rollout strategy in response to current economic conditions. Most of these stores will be open as fill ins in markets in which we currently operate, enabling us to leverage regional advertising spend and supply change costs.

We continue to be very disciplined in evaluating both individual and new store openings and our overall execution strategy based on our internal hurdle rate. Our financial model also recognizes that the opening of new stores as fill ins is likely to negatively impact sales of existing stores.

And in the second quarter of 2007, comp sales were negatively impacted by approximately 70 basis points in the quarter due to the effect of these fill ins. Despite this, the impact of new store openings on the total market is positive and the net effect exceeds our 13% IRR hurdle.

We feel it is important to maintain and strengthen our market position in core market areas and remain committed to doing so as long as these actions result in profitable growth. I also would like to highlight that the overall retail store expansion has been rationale and in fact the impact of new store growth by competitors has had less than a 50 basis point effect on our comps.

In the second quarter, our Design, Print & Ship business experienced double-digit growth, contributing 40 basis points in comp growth to the division as we increased customer awareness and expanded our service offerings. During the second quarter, our Design, Print & Ship associates became Xerox-certified print specialists by completing a comprehensive training program developed in conjunction with Xerox, our strategic partner in copy and print.

This program is exclusive to Office Depot and will further position Office Depot as the destination for printing solutions for small businesses. We continue to broaden our scope of services also with the introduction of logo design and other graphic design services, digital passport photos and the roll out of additional large format printing and finishing equipment.

We also enhanced our online digital print operating, Print on Demand, making it even simpler for customers to use. Private brand penetration continued to expand in the second quarter as furniture, supplies and technology all realized increase penetration.

A private brand customer service program roll out was completed during the second quarter with development of a call center and website. Private brand penetration...

present penetration from North American Retail is in the mid 20s and we believe there continues to be substantial opportunity for further private brand penetration as we continue to expand our assortment in each of our proprietary brands. While improving product margins, increasing private plan penetration negatively impacted comp sales by 10 basis points in the second quarter due to their lower average selling prices.

During the quarter, we continued to shift numerous mail and rebates to instant rebates. This was part of our efforts to optimize the overall value proposition and buying experience for our customers.

However, this shift negatively impacted sales comps by 40 basis points in Q2. We remain committed to profitably expanding our presence in existing markets as well as selectively targeting new markets where we see opportunities for profitable growth.

We believe that the deployment of capital to new stores and remodeling of our existing stores coupled with our other marketing and merchandising growth initiatives should enable our North American Retail Division to continue to deliver profitable sales growth and build shareholder value into the future. We believe that we are doing the right things for the long-term health of the business while not pursuing unprofitable short-term comp growth.

Now I would like to turn the call over to Pat McKay.

Thanks Chuck. North American Business Solutions Division sales were unchanged compared to the second quarter of last year, down 3% from the growth that we experienced in the first quarter.

Second quarter 2007 revenue reflects growth in the contract channel of 4%, which was offset by expected declines in our direct channel from the continued effects of our brand consolidation in the prior year. As we've discussed with you previously, this was a deliberate action geared towards reducing unprofitable business from our portfolio.

As with retail, sales in this division are being impacted by a soft macroeconomic environment particularly in small-sized businesses. Where we are offsetting softer sales in small-sized businesses is strong momentum in large and national segments, especially in the government and the education customer verticals.

These are profitable customers for the division that carry higher average total sales, albeit at lower margins. The North American Business Solutions Division had an operating profit of $80 million for the second quarter of 2007 compared to $105 million for the same period of the prior year.

On a sequential basis, operating margins improved 80 basis points from Q1 despite the lower sales volume. On a comparable basis, however, operating margins declined as expected versus the second quarter of 2006, reflecting a continuation of the temporarily higher expense levels associated with the investments that we have made in the expansion of both the contract sales force as well as the implementation costs associated with a new furniture delivery program coupled with the impact of changes in sales mix.

We anticipate that our operating margins will continue to improve sequentially during the second half of the year. The additions that we made to our sales force in the fourth quarter of 2006 continued to produce encouraging results with our prospecting sales personnel performing at levels better than anticipated.

Our new hires have been with us for nearly six months and historically we have seen them reach breakeven returns after being with the company for 9 to 12 months. As you know, our telephone account management service was outsourced at the end of 2006 and we currently have two service providers in the Continental U.S.

up and running. Our management team will continue to seek new approaches to optimize our telephone account management service.

While our run rate in the former Allied Office Products business remains down versus peak-free acquisition rates as we've outlined before, this is a normal and anticipated part of the acquisition process. We are seeing positive sequential trends in this part of our business as we reacquire Allied customers through focused recovery efforts following our period of initial service issues.

We are gaining momentum because our total solution sell-in and our customer satisfaction focus. We successfully recaptured a significant portion of targeted lost customers and are increasing our sales for order metric with the goal of returning them to pre-acquisition spend levels.

As of now, the trends in this business suggest we will meet or exceed our IRR hurdle rate. During the second quarter, we acquired Axidata, a small Canadian-based office products delivery company with approximately $60 million in annual sales.

The internal and external reaction to our Axidata acquisition, while only one month old, is very encouraging. Our new employees are excited about the opportunity to partner with our Business Solutions Division team to grow the Canadian business, an underdeveloped market for us and the integration process has gone well to date.

Our Internet sales continue to grow in the second quarter with sales in the previous 12 months totaling $4.7 billion globally compared to $4.5 billion a year ago. While the past two quarters have been challenging for the North American Business Solutions Division, we have taken the appropriate steps to improve our results in the second half of 2007.

As our new sales personnel reach their full productivity potential, our enhanced furniture delivery service is fully implemented and our new solutions-based initiatives are deployed beyond our already improved service results, we are positioned for continuing margin recovery during 2007. Now Charlie will review the results of our International Division.

Charlie?

Thanks Pat. At almost $1 billion, the International Division reported increased revenues of $124 million, on an increase of 14% compared to the prior year.

Sales in local currency increased 7% over the prior year. This marks the sixth consecutive quarter of sales growth in local currency.

In particular, our focus on expanding the contract sales force and new account acquisition continues to drive the top line with sales in the contract channel growing by double digits in local currency versus the same period last year. Division operating profit of $42 million for the quarter compares to $48 million in the same period of 2006.

Operating profit margin at 4.3% is 130 basis points lower when compared to the same period last year. During the quarter, the division made a number of investments that resulted in short-term operating margin compression of approximately 100 basis points, but positioned us to deliver long-term operating margin expansion.

For example, we added almost 200 sales reps in Europe and Asia. We expanded our global sourcing office in China and expanded our regional office in Asia and Latin America.

We also re-branded our Korean business from Best Office to Office Depot, which introduces the benefits of a global brand to that market. We completed a similar re-branding in China last year.

These investments during the quarter more than offset the benefits from our continued focus or reducing ongoing operating costs. Our efforts here are focused on investing in strategies that provide long-term growth potential.

Acquisitions in the second half of 2006 also resulted in approximately 30 basis points of operating margin compression compared to the second quarter last year. However, collectively, the companies acquired in the same...

in the prior year have grown revenues by over 50% on an annualized basis. We see these smaller acquisitions as opportunities to seed emerging market growth.

It is expected that these investments will begin to expand operating margin beginning next year. During the second quarter, the International Division continued to execute against several strategic initiatives aimed at driving profitable growth in all regions.

In Europe, we have sales growth in all channels, which are driven by an expanded contract sales force and a redesigned contract selling model that improves effectiveness and delivers more targeted value propositions. We also expanded the use of telephone account measurement across Europe and increased retail penetration with 5 new stores year-to-date in France, Hungary and Israel.

Over the next few years, we also intend to migrate our Viking brand to Office Depot and grow the portfolio of private brands to expand our growing brand equity with our customers globally. We will do this through a measured and thoughtful dual-branding approach.

Unlike the transition in North America, we do not have an owned brand that competes with the Viking in Europe. And importantly, we will not change the customer value proposition.

In Asia, we doubled our contract sales force in China, and we expanded our retail presence with 8 new stores opened year-to-date including 2 new stores opening in Japan in the second quarter. We continue the ramp up of our global sourcing office in Shenzhen, China with Office Depot associates working to transition product sourcing in house and accelerate the direct sourcing of private branded products.

Global sourcing will further expand the already substantial product margin improvements realized from the migration to private branded products. In addition, our sourcing office will ultimately source products from all Office Depot regions.

We continue to expand our global reach and have begun Greenfield operations in Poland. We expect to grow our contract sales force to support expanded customer acquisitions in that market.

The acquisition we completed in the Czech Republic last year is providing the support to this start up and is just one example of how we plan to efficiently leverage our acquisitions to accelerate growth internationally. The International Division has also made good progress against its long-term cost management initiatives in the second quarter.

First, as part of our warehouse and supply chain consolidation strategy in Europe, we opened a new warehouse in Leicester, England during the quarter. This warehouse is ideally located to serve our existing and new customers and will offer increased efficiencies compared to the warehouses it will replace, which are our oldest facilities in Europe.

This does create short-term duplicate costs through the end of this year until the managed transition is complete. We continue to have a strong focus on spending through tight expense control and increased efforts around centralization.

We are very excited to have begun the implementation of a pan European financial shared services function in Eastern Europe that will allow us to standardize certain back office finance and accounting processes and functions. This will result in better service to our internal and external customers, better working capital management and lower costs.

In addition, we have already begun the centralization of certain procurement and inventory management activities in Europe. We are also expanding our implementation of tools to optimize processes and improve spending effectiveness including the sourcing of lower turn products through a virtual inventory model now operational in all major European countries and are implementing global standard tools to enhance product pricing and marketing spend effectiveness.

As you can see, exciting things are happening in International. We continue to believe we have significant growth opportunities in all regions as well as significant margin expansion opportunities in Europe.

We will focus on realizing these opportunities as quickly as possible and making the investments needed to turn these opportunities into reality. Now Pat will take you through the cash flow and balance sheet.

During the first half of 2007, cash provided by operating activities totaled $293 million compared to $484 million during the same period last year. Changes in net working capital and other components resulted in a $159 million use of cash in 2007 compared to a source of $56 million in 2006, primarily reflecting the timing of cash payments in both periods.

Management of the timing of payments to vendors is subject to variability quarter-to-quarter depending on a variety of factors. These may include the flow of goods, credit terms, timing of promotions, vendor production and planning, new product introductions and working capital management.

For example, the timing of back to school activity is expected to be later this year than last year. The variability could result in an incremental use of about $150 million in cash during the third quarter versus a year ago.

Year-to-date free cash flow before share repurchases was $68 million versus $362 million in the prior period. A greater amount of cash flow was used this year for investments made in our core businesses.

Depreciation and amortization totaled $140 million year-to-date, slightly up from $137 million in the same period last year. EBITDA was $541 million, an increase of 5% when compared to EBITDA last year.

Capital expenditures year-to-date were $225 million, up from last year due to the implementation of previously announced growth plans. CapEx for 2007 are now expected to be under $500 million, in part due to a decrease in planned new store openings from 150 to 125 stores.

CapEx in 2008 are estimated to be between $500 million to $550 million, down from the $600 million estimated in the first quarter, which reflects a reduction in the number of planned new store openings from 200 to 150 stores. Office Depot will continue to evaluate spending in accordance with its financial guidelines.

year-to-date, we have repurchased approximately 5.7 million shares of our common stock for $200 million, completing a $500 million share repurchase program previously approved by our Board of Directors. The company also previously announced that its Board has authorized the repurchase of an additional $500 million of its common stock.

Now on to the balance sheet. We ended the second quarter with $123 million in cash and short-term investments.

Our investment in inventories totaled $1.6 billion globally. Our second quarter inventory includes inventory associated with recent acquisitions.

Inventory per store was $965,000 at the end of the second quarter of 2007, 3% lower than the same period last year. On an average basis, inventory per store was just over $1 million for the second quarter of 2007, which is 4% higher than the same period last year.

Working capital increased 78% as compared to the second quarter of the prior year. But excluding the impact of our adoption of FIN 48, working capital increased by 58%, which reflects the effect of acquisitions completed during the prior year.

Our long-term debt at the end of the second quarter was $564 million while adjured debt including leases was approximately $4.6 billion and adjusted debt to EBITDA was at 2.9 times. Our outstanding 2013 senior notes related investment grade by both Moody's and Standard & Poor's and our capital structure strategy has been to maintain our investment grade rating.

Our Board remains committed to maintaining flexibility in our balance sheet. Return on invested capital for the trailing four quarters adjusted for charges increased to 15.5% from 13.9% in the prior year.

Our return on equity adjusted for charges and credits for the trailing four quarters improved by 460 basis points to 22.2% as compared to 17.6% for the pervious four quarter period. That concludes my remarks.

Now I would like to turn the call back over to Steve.

Thanks Pat. I am pleased to announce today the appointment of two new members to our executive committee.

Steven M. Schmidt has joined the company as President of North American Business Solutions Division.

Steve succeeds Cindy Campbell who has served as Executive Vice President of BSD since 2003. Cindy will continue as an Executive Vice President until her planned retirement in March 2008, and we thank her for all of her years of service to Office Depot.

Steve brings to Office Depot 30 years of diverse business experience and leadership. He comes from ACNielsen Corporation, the world's largest marketing information and research company where he spent 12 years in senior management roles, most recently as President and Chief Executive Officer.

Prior to ACNielsen, Steve spent eight years at Pillsbury Food Company serving as the company's President of Canada and Southeast Asia. He also held management positions at PepsiCo and Procter & Gamble.

Another new member of the management team is Elisa Garcia who has joined the company as Executive Vice President, General Counsel and Corporate Secretary. Elisa succeeds David Fannin who has served as General Counsel since 1998.

David will remain as an Executive Vice President until his long-planned retirement at the end of 2008. And again, we thank David for all of his years of service to the company.

Elisa has been an attorney for 22 years, the last 7 of which have been spent as the Executive Vice President and General Counsel, Corporate Secretary for Domino's Pizza, Incorporated in Ann Arbor, Michigan. Prior to joining Domino's, Elisa served as Latin American Regional Counsel for Philip Morris International and Corporate Counsel for GAF Corporation, one of the largest building products companies in North America.

She began her legal career as a corporate associate with Willkie, Farr & Gallagher in New York. The addition of Steve and Elisa will further strengthen the leadership of Office Depot as we continue to execute our long-term strategic plan.

To that end, I would like to remind you that we have three key strategic growth key priorities. First, North American Retail.

We will continue to work to improve our store productivity. However, recognizing the current economic environment, we have refined our 2007 store expansion plans.

We opened 15 new retail stores during the quarter and have reduced our 2007 plan for new stores from 150 to 125. Approximately half of our stores now are in the M2 format, and we are in the process of substantially refreshing the remaining stores in our chain over the next few years.

Our second key strategic growth priority is North American Business Solutions. We plan on profitably growing our market share through new customer acquisitions and new product and service offerings and supplementing with available tuck-in acquisitions.

The new addition to our sales force are progressing right on schedule and will soon be up to full productivity in driving profitable sales. We will lap the merger of the brands in our catalog business during the third quarter and the investments made during the fourth quarter of 2006.

Margin recovery from recent investments in this division is expected to sequentially recover over the balance of the year. Our third priority is International.

We want to continue the progress of profitable market share growth in Europe and continue to increase our geographic reach. Our management team in Europe is making great progress, achieving a 6th consecutive quarter of growth and improving.

Our management team in Asia is growing our sourcing office that will allow us to globally source a greater percentage of our private brand products and increase margins. We are also making progress in our pan European supply chain restructuring with the opening of a new highly efficient warehouse in Leicester, England that Charlie talked about that will ultimately replace three current sites.

We have a business that generates substantial cash flow year in and year out and we can use our cash flow to profitably grow our business by opening new stores and new geographic markets globally, by making necessary investments in the core business like store remodels and distribution facilities and acquiring assets or businesses in our key priority areas, and finally, repurchasing stock from excess cash flow as long as we believe it's accretive. We are pleased with the significant progress that we have made to date relative to cost management initiatives and remain excited and confident about the long-term opportunities that lie ahead of us.

We are less bullish in this period of U.S. economic challenge however.

Our comps have not improved since the second quarter ended and it will be difficult to show earnings per share growth until the macro situation allows sales growth again. We will do our best to balance long-term investment and short-term return.

While no company is completely immune from the effects of external events, we have established an environment that ensures our team has every incentive to optimize results for our customers, employees and shareholders over time. We are building a strong track record of delivering winning solutions both within the organization and to our extended stake holders...

our external stake holders. We believe that the initiatives we've just described will yield profitable growth over the long term and we remain confident about the long-term opportunity to drive long-term profitable growth.

Now I would like to open up the call for questions. Question And Answer

Thanks so much and good morning. I would like to dig into just two brief issues.

First of all, if we could go a little deeper into the balance sheet, your leverage ratios are still quite moderate, your stock price has obviously come off and the multiples on the earnings estimates out there are reasonably low. What's your view on perhaps levering up a bit more?

Where do you stand with the rating agencies in terms of review processes and would you be inclined perhaps to accelerate your stock buyback activity at these levels?

Matt, we continue to view our opportunities to ensure that we drive for long-term profitable growth in accordance with our overall strategic plan. And as you know, we routinely have...

we review our plan and our Board is very participative in terms of the review of that process. And as we look at again, our overall long-term prospects, we believe that our...

and the Board believe that the best approach to that is remain financial... retain our financial flexibility, which means that our investment grade rating is still the appropriate way to look at things.

So as we move forward again, we'd be looking to making sure that we are funding with our cash flow any appropriate opportunities to be able to grow our business profitably with investments that meet our hurdle rates. And then to the extent that we have excess cash flow, as we've described before, we'll continue to return that to our investors and our shareholders in the form of share repurchases to the extent that we believe it's accretive.

Got you. And just a second question, if you could elaborate a bit more on what you are seeing that's leading you to expect a somewhat more promotional back to school season.

It sounds like that's essentially what you are indicating. So any sense of what you are taking note of out there?

Good morning Matt. Yes, we are seeing...

back to school, first of all, has shifted later in many parts of the country, the that actual opening of school days. And when you combine that with some of the moves that are just out in the retail field, I am sure you have read about other retailers lowering prices on a lot of products specifically focused in the back to school arena.

I think those are going to combine into a relatively aggressive timeframe.

And are those... and we certainly have read the press releases.

Are you seeing those cuts reflected in the field these days or are they actually... have they been implemented yet to your observation?

To my knowledge, yes, they have.

Got you. Thank you so much.

Hi, really, it's a follow up to Matt's question. So I am trying to understand some of the initiatives that you have to stimulate demand within the third quarter promotional environment.

Are you implementing the same strategy in the second quarter where you are going to be less promotional and therefore that might impact sales but help the margins, or are you sort of following along with that promotional activity?

Well I think in the second quarter, we had success in trying to balance the basket that the customer brought. So we will be promotional.

We've talked before about out category management approach, and that's what we'll continue to be. So there were certain items at certain times that we'll be promotional about, but we are pleased with our efforts in our stores, with our customer service efforts and our scores have improved nicely on customer service in the past quarter in building a basket, which is good for the customer and providing a solution to them and it's good for our financials, because we are able to balance out the margin of the products that we actually offer to the customer.

Okay. That makes sense.

And then finally, one quick question. Can you discuss how many...

where are you in terms of leases signed for this year and next year towards the goal of 125 stores this year and 150 next year?

For this year, we are give or take a couple. We are substantially complete.

So we expect to be opening those 125 and we are well on the way for next year.

Okay. Thank you.

Thank you. Steve, what I'm trying to get a handle on, and maybe you can probably help here is, one of the things that I think has hurt the stock is we get these margin surprises each quarter like your...

like one by one, like this quarter International with down 130 basis points based on investments that we didn't see... we didn't know about from the first quarter conference call.

BSG last year in the fourth quarter was down a lot on investments again that we didn't know about from the third quarter. As we look at Retail, which is up now, are there things that you are investing in in retail that we should be aware of that can have similar impacts?

I think we've talked about our investments so far. Our re-models and our new stores, we have articulated where those stand.

Long term, we continue to see margin improvement; short term, we have commented on the promotional environment that's there.

But there is no other spending that you are doing. Like International, you picked up the Korea change etcetera, some of that stuff that really it's the first time we are hearing about it.

Is there other things you are doing in Retail we should be aware of, or that's... or we know what's going on?

For Q3, our margins will be... what we are seeing is higher property costs due to the new stores.

So that's having an impact to our gross margin, and that's a deleverage just as a result of the sales that we are seeing overall with the challenging economic environment. Beyond that, it's balancing that with the promotional environment that we've commented on for back to school and then mixing out the products to try to offset that.

Okay, thank you.

Thanks guys. I was wondering if you could talk about the sequential improvement in BSG and the margin, just the drivers behind that.

Yes. As we've been talking about, some of the investments that we had been making in Q4, beginning with Q4 that continued to occur during Q1 as well as Q2.

So we had sequential improvement in the overall operating margins from Q1 to Q2. And so we'll see again more of that occurring as we move into Q3 and Q4.

But again, had substantial investments in sales force expansion as well as the telephone account management as well as the furniture delivery that again had impact in Q4 through Q1 and Q2, but again, we'll see some sequential improvement as we get into Q3 and Q4 as well.

Okay. Does the mix impact that at all, just the seasonality of the mix with --?

Yes, one of the things that we did talk about as well is we've had very good success as it relates to our larger national account businesses, and particularly in the government and education sector. And during this period of macroeconomic challenges, our smaller business customer segment has been more challenged, and those tend to be a little bit higher margin businesses.

So part of the margin move as well, although not the bigger driver, is really the mix in terms of that larger customer segment that tends to be a little bit lower margin, but predominantly really was related to the investments that we've made and the other items that I mentioned.

Okay. Thank you.

Thank you and good morning. Steve, you brought in Brad Baken [ph] about six months ago to help clean up stores.

Can you give us an idea of what the strategy is that Brad is pursuing and what are you seeing to date and what do you expect to see over the next 6 to 12 months?

Bill, what we are seeing in the stores is a clean up on multiple levels. We are about halfway through.

Actually, we commented in the script about halfway trough on an M2 format. So we are presenting a more uniform environment for our customer and we are going to continue on that path.

What Brad's been focused on along with the whole store operations group is improving our standards both in how we present the store as well as how we wait on our customers. And we are seeing good results on both fronts.

As I mentioned earlier, our customer service scores, as measured by outsiders, have shown improvement during the second quarter. So we are not where we want to be ultimately; we think we still have runway ahead of us, but we are pleased with the progress that the store operations group has made so far.

That will be continuing their... that will be their continued focus for the balance of this year as well as getting these re-models and new stores up to par quickly.

Thank you. And just one other follow up from some earlier caller's questions.

With transactions down and comparative pressure obviously on pricing, what is the strategy to drive sequential improvement in comps or this more just waiting for macros to improve?

We are not waiting for the macro environment. We are fighting as hard as we can everyday to deliver on profitable sales.

I think that we need to continue to be focus on what the customer wants and provide products as well as services to that customer. And in all of our businesses, we see growth opportunity; the question is how quickly we'll get that.

So I mentioned in my comments that in furniture, we've shifted more to a take with strategy. So a customer can come in, and while we still offer the big collections which are delivered to a customers, he'll be seeing an increasing amount of actual take with furniture that someone can throw into their car or truck and take it home and assemble it.

We have added lower price point, lower packaged size quantities within a package really to tailor more into a very small business customer, sole proprietor for instance. So it's those kinds of efforts multiplied multiple, multiple times that we are working hard on to attract more customers into the stores.

And we continue to use advertising, we continue to use our weekly circular, our ROPs all of our direct mail efforts, our Worklife Reward card efforts to be as effective as possible in driving store traffic. And what we are trying to do is balance the level of promotionalism so that we don't just give away margin on sales that aren't going to increase.

We are trying to drive that increase in traffic. And I think Chuck's done a good job of laying out all sorts of examples of things that we are doing and trying.

Suffice it to say there are dozens of things beyond what we have talked about that we are testing and we are trying. And as soon as the market becomes reacted to that, we are going to be in a position to roll them out.

But we are really trying to balance the short term and the long term, we are trying to balance driving transactions with not just wasting margin.

I understand. Thank you.

Thanks. Good morning.

Just two quick questions. I guess first, maybe, you talked a little bit about like housing and putting pressure on the small and medium businesses.

Can you talk... have you seen what trends you're seeing maybe by region, how the regions are playing out?

Well we don't typically discuss regional situations, but suffice it to say that we are seeing the housing market impact several of our categories, including furniture and things that are related to home office. And small businesses sometimes are in commercial office parts, but they are often in households.

And so the kinds of trends you are seeing across the country in the housing market are being experienced by us as well. The transaction issue is the biggest frustration; the store traffic is being impacted, and there is a combination of factors that have gone into that.

The larger businesses seem to have held up, and in fact, we are doing reasonably well in our BSD division there. But as you know, we are weighted small...

to smaller and medium businesses in BSD, and of course our North American Retail Division is two-third small businesses and one-third consumer. So that's getting hit on both fronts.

Right. Okay.

And then second, on the International side, with some of the incremental investments that it sounds like are supposed to start realizing the benefit in next year. And then I think you talked about the Czech Republic and some of the other opportunities that you are pursuing.

How should we think about margins with that incremental investment on the International side of the business?

Yes, good morning Armando. This is Charlie.

I think what you have in the International Division is really an emerging business. We have a core that's solid in Europe, but we are going to be adding, as we have in the Czech republic.

Now we are adding Poland. We are going to fund those.

We expect the margins to start improving early part of next year.

Okay.

And then moving sequentially towards historic levels.

Okay. Thank you.

Good morning. Thank you.

Two questions. First on BSD, and I think originally you had expected the margins to sequentially improve in the second quarter and then even potentially flat or be up year-over-year in the second half.

Obviously, that sounds like it's not the case anymore, understanding that there is a softer environment and in fact your comments on mixed away from some of the smaller businesses. But it sounds like the new account reps are doing even better than had expected.

So, can you comment on the turnover in existing account people in the contract business given the 4% growth there includes the Allied and partnered [ph] revenues? Is that pressuring margins and can you just talk about other factors that might have changed relative to your previous expectation?

And then I have a follow up for Charlie in International.

I don't think we have seen a change in our expectations in the BSD margin pattern. What we've said is that the second quarter was going to continue to show the results of our investments that we started to see in the fourth quarter and through the first quarter.

So that's what we've said. And we've said pretty consistently that the results, the margins will improve sequentially beginning in the third quarter and extending through the fourth quarter.

So we still believe that. And we planned the investments in BSD in order to drive long-term growth.

And so it was a deliberate effort to do that, so nothing's changed with that. We are seeing the...

remember, we tested the addition of sales people pretty heavily and tracked their productivity curves through their... through the maturity of their life cycle, if you will, with us.

And we made that decision to expand beginning in the fourth quarter of 2006 based on that result. Those new people that we added beginning in the fourth quarter of 2006 where we added quite a few are progressing consistent with our experience in the pilots of that.

And so we are seeing the results and we are pleased with the results in that. So I think...

so we are seeing good results from that investment, we are seeing good results in the high end. It's the smaller customers where the slow down has happened consistent with what we have seen in North American Retail.

Okay, Steve, that's helpful. But just is there...

has your turnover in your existing account rep been consistent with what you expected or is that higher?

No, it's been very consistent.

Okay. And then Charlie, could you just give us just a quick update on the transition from SAP to Oracle in Europe, and I know you'll be...

I think you're relocating some jobs possibly to the Netherlands through the year. Just any update on there?

And are those costs being run through the P&L currently?

Well, in terms of the costs that you are talking about relocating jobs, as I have mentioned, we announced last week the kick off of our shared service center in Eastern Europe. And that's going to result in the movement of several hundred jobs from Western Europe into Eastern Europe.

And that's going to be... I will leave it to Pat to talk about where that's going to show up.

But that movement is happening, that's going to get a substantial reduction in our back office support costs. And in terms of I think --?

Charlie? Just the SAP transition to Oracle?

Yes, that will start in Europe probably in 2008.

Okay.

It will start here in North America first.

Okay.

Well, we only have SAP in some of the acquired businesses in Europe. So --

It will be a old contract business.

Right. And so we are in the process of migrating more than...

Colin, it's more than the SAP to Oracle ERP; it's the whole variety of systems that we have globally throughout the company. And so we already have begun migrations, for instance, in PeopleSoft and we will do so in finance and so forth.

So we are doing this sequentially. One piece of it is to take the remaining ERP, the SAP piece in Europe and convert that.

So this a multi-year project to convert all of our systems and get us all on the same systems globally.

Okay. That's helpful.

Thank you.

Thanks. Good morning.

I have two questions. First, could you be a little more specific on how you are able to expand the retail operating margins, especially on the SG&A line with the negative 5% comp?

Where do you find opportunities to cut costs essentially?

Well, as I mentioned in my comments, it was both product margin expansion as well as cost management. So we saw a good margin expansion through some of the efforts that we had through market basket efforts and the such.

On cost side of it, it wasn't focused on labor. We really became very focused in on a continuation of some of the things we've talked about before, some of the backroom efforts that we have in there.

So there is hundreds of smaller projects that continue to reap some benefit for us overall.

Okay, thanks. And --

Again, the margins really were delivered through some good strong efforts on the product margin side of it. And as I mentioned again in my comments, a good part of that was as a result of fewer promotions.

Okay. So it sounds like you were able to moderate the deleverage, but the gain actually came from the gross margin line.

Is that fair to say?

Well, it came from both higher product margins as well... as a result of a lot of things that we in fact did, what we sold, less promotions, also in addition to strong cost management on the Retail group's part.

Okay, that's helpful. And then the second quarter is I was just wondering if you could talk a little bit more about the NPD data that you cited.

Where are the market share gains coming from? Do new stores account for a lot of the market share gain and sort of what does the data say about industry growth, sales growth in general for the quarter?

Were industry sales down for example in the quarter?

What we look at is the market share information. I would refer you to NPD for further expansion, but we saw sequential improvement in most categories across.

Okay, thank you.

Thank you. Can you talk about sequential changes in different aspects of your business?

Has the consumer worsened over the past four months? Is it spreading upwards now to medium and kind of trending and eventually we see something hitting the large business customer?

Well, we are not economists, but... so we can only talk about what we have experienced.

And we have seen, beginning in the first quarter, a pretty stiff [ph] slowdown. And we said it was...

it started at the back part of the first quarter and it continued all the way through the second quarter, and we are seeing it continue now year-to-date or quarter to date in the third quarter. So an unchanging situation with the consumer traffic slowing down as well as the small business.

And we found that small businesses tend to act more like consumers than they do like medium to larger businesses. Those small businesses are typically under nine employees, a lot of them are home-based, one or two person kinds of operations.

And their source of financing for start up and operations tend to be more consumer-based kinds of sources of liquidity and borrowing. And so all of the impacts of the housing market including home equity access, including rate adjustments and so forth, gas prices seemed to have hit those small businesses more than you would see in a larger business.

So we have not seen the larger businesses impacted at all. In fact, we've said we are doing better in the larger business segment because of...

particularly in our BSD division. And all what we have talked about economically has been the U.S.

Again, I want to point out that our international businesses have improved and the economies in Europe and Asia continue to improve as well as Latin America continue to improve.

So characterization is the consumer are really not getting better after that slowdown. Any change in the medium businesses or the 50 to 100 employee businesses?

I don't think that we've seen... I don't think we've seen a big discrimination between the medium to large-sized businesses.

So it's mostly in the smaller end.

And could you talk about the category performance? I was curious at the retail side that technology is holding up.

Is it... did it comp positively and what are your thoughts on that?

Technology was growing really very strongly and has for the past couple of years. We had the Vista slowdown.

Technology still continues to be positive, but at a lower level of growth than it was before. And then of course the furniture business is down substantially, and that ties directly to the housing market.

When people move, they tend to replace their home office furniture, and our furniture tends to be more geared to collections that are suitable for home style offices. So it's a matter of movement of houses, and that's hit it pretty strongly.

Thank you very much,

Okay. It looks like...

okay, we've got time for one more question So why don't we take one more and then we'll end it.

Hi, it's Dan Binder. A couple of questions for you.

First, you talked earlier about the Board wanting to maintain flexibility in the balance sheet. I guess taking that into consideration and what's going on in the industry, can you comment at all about your appetite for acquisitions at this point, whether it's relative to a year ago or recent quarters or how you are sort of viewing that opportunity going forward?

That's the first question.

Yes, I think our focus on acquisitions continue to be primarily fold-in acquisitions internationally to expand our geographic reach. These have been non-dilutive acquisitions.

Our focus has been on relatively small established businesses which give us a base of operation in new countries. We've done so in Asia and we've done so in Eastern Europe, and there are others that we are interested in doing.

These are important to us because it gives us a low risk way to expand geographically while also being able to care for our global customers better. And so often times we are able to take these acquisitions, these companies, improve their margins through our global purchasing cost and direct import efforts, private brand efforts and at the same time add the overlay of the global customers that we have elsewhere and begin to take care of them.

So that's really our primary focus on acquisitions.

And then I am struggling to understand the reason that you need to switch the Viking brand to Office Depot. I guess my understanding was that Viking's brand in Europe was even more powerful than it was here in the U.S.

And there are multiple examples in retail here in the U.S. and elsewhere where companies have successfully built and grown and operated dual brands.

And I guess I am trying to understand where you see... what it is you see in that brand consolidation that can get us comfortable with it?

Hi Dan, this is Charlie. I think the important thing to consider is how we are going to go about it.

Literally, initially, all we are doing is putting a co-brand Office Depot, Viking on the cover of the catalog on our delivery boxes. So I mean it's not a wholesale change.

Also, this drives a tremendous amount... by initially moving to Office Depot, it removes a tremendous amount of complexity out of the back office in terms of being able to simplify your SKU assortment, being able to simplify your marketing materials and actually being able to prospect across multiple customer databases.

So we see a huge amount of benefit there. Importantly, in this whole transition, we are not going to touch the business model that has really built this very loyal following.

And so it's really kind of a reeducation of the customer that they can get the same service they've been accustomed to getting from Office Depot.

I think people are reacting to... we did this in the United States and, by the way, we gave up deliberate unprofitable business.

I think you've got to remember that the change was made deliberately, but that it's apples and oranges U.S. to Europe.

In the U.S., we had two separate businesses, two separate catalogs. In Europe, it's one business.

The way to think about it is we are going to add the Office Depot name to the cover of the Viking catalog for a multi-year period to begin to start to get the Viking customers to understand that we are Office Depot, introduce the Office Depot private brand and go through a slow, deliberate, multi-year conversion. Now if we find that there is resistance to it, we won't do it.

And that's what a multi-year process of dual-branding does to us. But it allows us to do the things that Charlie said as well as to access cross-channel shoppers, which are your best shoppers and to leverage the business across Europe.

And also Dan, you know that in Europe, some of our country operations are larger than others. We are going to start this process in the smallest of the countries, and so that will also further mitigate the risks to the point that Steve raised.

Okay. And then just one last one on the NPD data, you talked about the sequential improvement.

I'm just curious, if you look at the year-over-year data, I mean is this sequential improvement just mean that you've lost less market share versus a year ago or do you actually have market share gains year-over-year?

The sequential is over the past quarters. On an overall to last year, it was essentially flat.

Okay, great. Thanks.

Alright. Well, thank you.

It looks like we are over our time. I apologize.

But thanks everybody for joining us. This concludes our conference call and we appreciate your participation.