UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: May 5, 2007

o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 0-17586

STAPLES, INC.
(Exact name of registrant as specified in its charter)

Delaware		04-2896127
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Five Hundred Staples Drive, Framingham, MA 01702
(Address of principal executive office and zip code)

508-253-5000
(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x

The registrant had 715,225,174 shares of common stock outstanding as of May 18, 2007.

STAPLES, INC. AND SUBSIDIARIES

FORM 10-Q

May 5, 2007

	Page
Part I – Financial Information:

Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6-14


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-20

Item 3. Quantitative and Qualitative Disclosures about Market Risk	20

Item 4. Controls and Procedures	20

Part II – Other Information	21

Signatures	25

Exhibit Index	26

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

STAPLES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

	May 5, 2007			February 3, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	883,468		$	1,017,671
Short-term investments	403,938			457,759
Receivables, net	738,832			720,797
Merchandise inventories, net	1,997,586			1,919,714
Deferred income tax asset	126,924			141,108
Prepaid expenses and other current assets	186,623			174,314
Total current assets	4,337,371			4,431,363

Property and equipment:
Land and buildings	811,162			791,264
Leasehold improvements	1,004,702			996,434
Equipment	1,602,610			1,539,617
Furniture and fixtures	778,662			757,408
Total property and equipment	4,197,136			4,084,723
Less accumulated depreciation and amortization	2,219,164			2,110,602
Net property and equipment	1,977,972			1,974,121

Lease acquisition costs, net of accumulated amortization	33,998			33,579
Intangible assets, net of accumulated amortization	223,394			232,383
Goodwill	1,505,542			1,455,113
Other assets	282,611			270,706
Total assets	$	8,360,888		$	8,397,265

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,493,181		$	1,486,188
Accrued expenses and other current liabilities	958,383			1,101,018
Debt maturing within one year	202,035			201,177
Total current liabilities	2,653,599			2,788,383

Long-term debt	320,555			316,465
Deferred income tax liability	9,176			8,986
Other long-term obligations	323,190			252,657
Minority interest	10,138			9,109

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued	—			—
Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 854,300,147 shares at May 5, 2007 and 849,338,568 shares at February 3, 2007	513			510
Additional paid-in capital	3,460,632			3,338,412
Cumulative foreign currency translation adjustments	283,467			189,115
Retained earnings	4,007,016			4,005,424
Less: Treasury stock at cost - 138,099,976 shares at May 5, 2007, and 130,605,591 shares at February 3, 2007	(2,707,398		)	(2,511,796		)
Total stockholders’ equity	5,044,230			5,021,665
Total liabilities and stockholders’ equity	$	8,360,888		$	8,397,265

See notes to consolidated financial statements.

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

	13 weeks ended
	May 5, 2007			April 29, 2006

Sales	$	4,589,465		$	4,237,646
Cost of goods sold and occupancy costs	3,304,526			3,048,649
Gross profit	1,284,939			1,188,997

Operating and other expenses:
Operating and selling	759,714			716,157
General and administrative	199,181			183,723
Amortization of intangibles	3,433			3,203
Total operating expenses	962,328			903,083

Operating income	322,611			285,914

Other income (expense):
Interest income	15,551			19,517
Interest expense	(11,135		)	(14,656		)
Miscellaneous expense	(597		)	(428		)
Income before income taxes and minority interest	326,430			290,347
Income tax expense	117,515			104,525
Income before minority interest	208,915			185,822
Minority interest	(228		)	(252		)
Net income	$	209,143		$	186,074

Earnings Per Share:

Basic earnings per common share	$	0.29		$	0.26
Diluted earnings per common share	$	0.29		$	0.25

Dividends declared per common share	$	0.29		$	0.22

See notes to consolidated financial statements.

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

	13 Weeks Ended
	May 5, 2007			April 29, 2006

Operating Activities:
Net income	$	209,143		$	186,074
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	93,560			79,704
Stock-based compensation	34,260			34,962
Deferred tax benefit	23,632			882
Excess tax benefits from stock-based compensation arrangements	(12,555		)	(14,856		)
Other	(2,587		)	1,777
Changes in assets and liabilities:
Increase in receivables	(10,272		)	(27,152		)
Increase in merchandise inventories	(49,600		)	(35,451		)
Increase in prepaid expenses and other assets	(15,347		)	(8,863		)
Decrease in accounts payable	(11,618		)	(4,460		)
Decrease in accrued expenses and other liabilities	(121,417		)	(53,256		)
Increase in other long-term obligations	55,113			8,954
Net cash provided by operating activities	192,312			168,315

Investing Activities:
Acquisition of property and equipment	(64,101		)	(114,557		)
Investment in joint ventures	(7,299		)	—
Purchase of short-term investments	(2,083,962		)	(2,257,198		)
Proceeds from the sale of short-term investments	2,137,785			2,351,975
Net cash used in investing activities	(17,577		)	(19,780		)

Financing Activities:
Proceeds from the exercise of stock options and the sale of stock under employee stock
purchase plans	63,933			55,141
Proceeds from borrowings	887			—
Payments on borrowings	(675		)	(1,487		)
Cash dividends paid	(207,551		)	(160,490		)
Excess tax benefits from stock-based compensation arrangements	12,555			14,856
Purchase of treasury stock, net	(195,602		)	(168,522		)
Net cash used in financing activities	(326,453		)	(260,502		)

Effect of exchange rate changes on cash and cash equivalents	17,515			9,257

Net decrease in cash and cash equivalents	(134,203		)	(102,710		)
Cash and cash equivalents at beginning of period	1,017,671			977,822
Cash and cash equivalents at end of period	$	883,468		$	875,112

See notes to consolidated financial statements.

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note A – Basis of Presentation

The accompanying interim unaudited consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples”, “the Company”, “we”, “our” or “us”). These financial statements are for the period covering the thirteen weeks ending May 5, 2007 (also referred to as the “first quarter of 2007”) and the period covering the thirteen weeks ending April 29, 2006 (also referred to as the “first quarter of 2006”). All intercompany accounts and transactions are eliminated in consolidation. Certain previously reported amounts have been reclassified to conform with the current period presentation.

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2007.

Note B – New Accounting Pronouncement

In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertain income tax positions that are recognized in a company’s financial statements in accordance with the provisions of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 also provides guidance on the derecognition of uncertain positions, financial statement classification, accounting for interest and penalties, accounting for interim periods and new disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted FIN 48 as of February 4, 2007. The adoption of FIN 48 did not result in any material adjustments to the Company’s reserves for uncertain tax positions. At the beginning of fiscal 2007, the Company had $81.8 million of gross unrecognized tax benefits, $65.9 million of which, if recognized would affect the Company’s tax rate. At May 5, 2007, the Company had $85.3 million of gross unrecognized tax benefits, $68.7 of which would affect the Company’s tax rate. The Company does not reasonably expect any material changes to the estimated amount of liability associated with its uncertain tax positions through February 2, 2008.

Staples is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2001 and all material state, local and foreign income tax matters for years through 2000. Federal income tax returns for 2002 through 2005 are currently under examination.

Staples’ continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had $7.9 million accrued for interest and penalties as of February 3, 2007 and $8.9 million as of May 5, 2007.

Note C – Employee Benefit Plans

Employee Stock Purchase Plans

The Amended and Restated 1998 Employee Stock Purchase Plan authorizes a total of up to 15.8 million shares of the Company’s common stock to be sold to participating employees and the Amended and Restated International Employee Stock Purchase Plan authorizes a total of up to 1.3 million shares of the Company’s common stock to be sold to participating employees of non-U.S. subsidiaries of the Company. Under both plans, participating employees may purchase shares of common stock at 85% of its market price at the beginning or end of an offering period, whichever is lower, through payroll deductions in an amount not to exceed 10% of an employee’s annual base compensation.

Stock Award Plans

The Amended and Restated 2004 Stock Incentive Plan (the “2004 Plan”) was implemented in July 2004 and replaces the amended and restated 1992 Equity Incentive Plan (the “1992 Plan”) and the amended and restated 1990 Director Stock Option Plan (the “1990 Plan”). Unexercised options under both the 1992 Plan and the 1990 Plan remain outstanding. In addition to these unexercised options, the 2004 Plan authorizes the issuance of up to 62.3 million shares of the Company’s common stock to management and employees using various forms of awards, including nonqualified options and restricted stock, subject to certain restrictions. All employee stock awards are made using registered shares. Except as disclosed in Note H in our 2006 annual report on Form 10-K, options outstanding under these plans have an exercise price equal to the market price of the common stock on the date of grant. Some options outstanding are exercisable at various percentages of the total shares subject to the option starting one year after the grant date, while other options are exercisable in their entirety three to five years after the grant date. All options expire ten years after the grant date, subject to earlier termination in the event of employment termination.

Stock Options

Information with respect to stock options granted under the above plans is as follows:

	Number of Shares		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
					(in thousands)
Outstanding at January 29, 2006	68,472,992		$	15.68
Granted	58,750		24.21
Exercised	(4,401,217	)	12.22
Canceled	(823,799	)	18.44
Outstanding at April 29, 2006	63,306,726		$	15.90

	Number of Shares		Weighted Average Exercise Price Per Share
Outstanding at February 4, 2007	57,655,917		$	16.75
Granted	67,100		26.08
Exercised	(4,770,697	)	13.59
Canceled	(527,290	)	20.89
Outstanding at May 5, 2007	52,425,030		$	17.01	$	433,591

Exercisable at May 5, 2007	31,174,501		$	14.21	$	345,019

The weighted average fair value of options granted during the thirteen weeks ended May 5, 2007 and April 29, 2006 was $8.65 and $7.87, respectively.

The following table summarizes information concerning outstanding and exercisable options for common stock as of May 5, 2007:

		Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$0.00 - $9.00	887,205	2.06	$	6.99	885,687	$	6.99
$9.001 - $10.00	4,722,771	3.76	9.73		4,701,619	9.73
$10.001 - $11.00	5,464,609	4.58	10.51		5,435,109	10.51
$11.001 - $13.00	7,744,476	5.82	12.23		7,259,809	12.22
$13.001 - $14.00	1,786,210	3.21	13.36		1,777,026	13.36
$14.001 - $19.00	1,234,081	5.53	17.12		1,020,419	17.18
$19.001 - $20.00	10,228,673	6.94	19.16		4,424,145	19.16
$20.001 - $21.00	3,323,176	3.09	20.67		2,993,974	20.67
$21.001 - $22.00	11,979,329	8.15	21.31		2,439,639	21.32
$22.001 - $25.00	5,054,500	8.96	24.30		237,074	22.71
$0.00 - $25.00	52,425,030	6.23	$	17.01	31,174,501	$	14.21

For stock options granted prior to May 1, 2005, the fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. For stock options granted on or after May 1, 2005, the fair value of each award is estimated on the date of grant using a binomial valuation model. The binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as expected volatility, dividend yield rate, and risk free interest rate. However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. For these reasons, the Company believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than that value calculated using the Black-Scholes model.

The fair value of options granted in each year was estimated at the date of grant using the following weighted average assumptions:

	Thirteen weeks ended
	May 5, 2007		April 29, 2006
Risk free interest rate	4.6	%	4.5	%
Expected dividend yield	0.8	%	0.8	%
Expected stock volatility	31	%	32	%
Expected life of options	5.4 years		5.1 years

The expected stock volatility factor was calculated using an average of historical and implied volatility measures to reflect the different periods in the Company’s history that would impact the value of the stock options granted to employees.

The fair value of stock options is expensed over the applicable vesting period using the straight line method. In connection with the purchase of shares under the employee stock purchase plans and the issuance of stock options, Staples included $17.5 million and $21.0 million in compensation expense for the thirteen weeks ended May 5, 2007 and April 29, 2006, respectively. At May 5, 2007, the Company had $106.3 million of stock options to be expensed over the period through January 2011.

Restricted Stock and Restricted Stock Units

In 2003, the Company began granting restricted stock and restricted stock units (collectively, restricted shares) in lieu of special grants of stock options. All shares underlying these awards are restricted in that they are not transferable (i.e., they may not be sold) until they vest. Subject to limited exceptions, if the employees who received the restricted shares leave Staples prior to the applicable vesting date for any reason, the unvested restricted shares will be forfeited and returned to

Staples. The fair value of restricted shares is based upon the market price of the underlying common stock as of the date of grant and is expensed over the applicable vesting period using the straight line method. The following table summarizes the Company’s restricted share activities in the thirteen weeks ended May 5, 2007:

	Number of Shares		Weighted Average Exercise Price Per Share
Outstanding at February 4, 2007	5,335,665		$	24.32
Granted	926,897		26.12
Released	(2,432	)	21.75
Forfeitures	(111,771	)	24.38
Outstanding at May 5, 2007	6,148,359		$	24.59

In connection with the issuance of restricted shares, Staples included $10.7 million and $2.2 million in compensation expense for the thirteen weeks ended May 5, 2007 and April 29, 2006, respectively. At May 5, 2007, Staples had $104.8 million of restricted shares to be expensed over the period through January 2012.

Performance Accelerated Restricted Stock (“PARS”)

PARS are shares of Staples common stock that may be issued to employees (including officers) of Staples. The shares, however, are restricted in that they are not transferable (i.e., they may not be sold) by the employee until they vest, generally after the end of five years. Such vesting date may accelerate if Staples achieves certain compound annual earnings per share growth over a certain number of interim years. Subject to limited exceptions, if the employee leaves Staples prior to the vesting date for any reason, PARS will be forfeited by the employee and will be returned to Staples. Once PARS have vested, they become unrestricted and may be transferred and sold. Based on the terms of these awards, the Company accounts for PARS using fixed plan accounting and recognizes compensation expense over the expected life of the award on a straight-line basis.

The fair value of PARS is based upon the market price of the underlying common stock as of the date of grant. As of May 5, 2007, Staples had no PARS outstanding. PARS issued in fiscal year 2005 had a weighted-average fair market value of $21.72 and vested in March 2007 as a result of Staples achieving its earnings per share growth target for the fiscal year ended February 3, 2007.

In connection with the issuance of PARS, Staples recorded no compensation expense for the thirteen weeks ended May 5, 2007 and included $6.2 million in compensation expense for the thirteen weeks ended April 29, 2006.

Performance Shares

In fiscal 2006 the Company began issuing performance share awards. Performance share awards represent shares of restricted stock that may be issued only if the Company meets minimum performance targets at the end of the applicable performance period. For the 2006 and 2007 performance share awards, the performance target was established based on cumulative returns on net assets over a three year period. If, at the end of the third fiscal year, the Company achieves 100% of the performance target, all of the shares underlying the performance share awards will be issued; if the Company achieves at least 90% of the performance target or exceeds the performance target, then a percentage of the shares underlying the performance share award, from 90% up to 200%, will be issued. If the Company does not achieve at least 90% of the performance target, then none of the shares underlying the performance share awards will be issued.

The fair value of performance share awards is based upon the market price of the underlying common stock as of the date of grant. As of May 5, 2007, Staples had 935,726 performance share awards that were issued during fiscal year 2007 and 2006. The underlying shares have a weighted-average fair market value of $24.62. In connection with the issuance of performance share awards, Staples included $2.4 million in compensation expense for the thirteen weeks ended May 5, 2007 and $1.1 million for the thirteen weeks ended April 29, 2006.

Employees’ 401(k) Savings Plan

Staples’ Employees’ 401(k) Savings Plan (the “401(k) Plan”) is available to all United States based employees of Staples who meet minimum age and length of service requirements. Company contributions are based upon a matching formula applied to employee contributions that are made in the form of Company common stock and vest ratably over a five year period.

In connection with the 401(k) plan, Staples included approximately $3.6 million and $4.5 million in expense for the first quarter of 2007 and 2006, respectively.

Note D - Comprehensive Income

Comprehensive income includes net income, foreign currency translation adjustments and changes in the fair value of derivatives that are designated as hedges of net investments in foreign subsidiaries (net of the related tax effects), which are reported separately in stockholders’ equity (in thousands):

	13 Weeks Ended
	May 5, 2007			April 29, 2006
Net income	$	209,143		$	186,074
Other comprehensive income:
Foreign currency translation adjustments, net	105,111			25,662
Changes in the fair value of derivatives	(18,550		)	(7,251		)
Tax effect of changes in the fair value of derivatives	7,791			3,046
Total comprehensive income	$	303,495		$	207,531

Note E - Computation of Earnings Per Common Share

The computation of basic and diluted earnings per share for the first quarter of 2007 and 2006 is as follows (in thousands, except per share data):

	13 Weeks Ended
	May 5, 2007		April 29, 2006
Net income	$	209,143	$	186,074
Denominator:
Weighted-average common shares outstanding	711,499		725,767
Effect of dilutive securities:
Employee stock options and restricted stock	17,418		18,537
Weighted-average common shares outstanding assuming dilution	728,917		744,304

Basic earnings per common share	$	0.29	$	0.26
Diluted earnings per common share	$	0.29	$	0.25

Note F - Segment Reporting

Staples has three reportable segments: North American Retail, North American Delivery, and International Operations. Staples’ North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Staples Business Delivery, Quill and Staples’ Contract operations (Staples National Advantage and Staples Business Advantage). The International Operations segment consists of operating units that operate office products stores and that sell and deliver office products and services directly to customers in 20 countries in Europe, South America and Asia.

Staples evaluates performance and allocates resources based on profit or loss from operations before stock-based compensation, interest and income taxes, the impact of changes in accounting principles and non-recurring items (“business unit income”). Intersegment sales and transfers are recorded at Staples’ cost; therefore, there is no intercompany profit or loss recognized on these transactions.

The following is a summary of sales and business unit income by reportable segment for the first quarter of 2007 and 2006 and a reconciliation of business unit income to consolidated income before income taxes (in thousands):

	13 Weeks Ended
	May 5, 2007		April 29, 2006
	Sales

North American Retail	$	2,363,603	$	2,305,912
North American Delivery	1,593,029		1,387,239
International Operations	632,833		544,495
Total reportable segments	$	4,589,465	$	4,237,646

	Business Unit Income

North American Retail	$	189,552		$	180,461
North American Delivery	151,830			129,895
International Operations	15,489			10,520
Business unit income	$	356,871		$	320,876
Stock-based compensation	(34,260		)	(34,962		)
Total reportable segments	322,611			285,914
Interest and other income, net	3,819			4,433
Income before income taxes and minority interest	$	326,430		$	290,347

Note G - Guarantor Subsidiaries

Under the terms of the Company’s 7.375% senior notes and 7.125% senior notes, certain subsidiaries guarantee repayment of the debt. The 7.375% senior notes and 7.125% senior notes are fully and unconditionally guaranteed on an unsecured, joint and several basis by Staples the Office Superstore, LLC, Staples the Office Superstore East, Inc., Staples Contract & Commercial, Inc. and Staples the Office Superstore, Limited Partnership, all of which are wholly owned subsidiaries of Staples (the “Guarantor Subsidiaries”). The term of the guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the 7.375% senior notes and 7.125% senior notes and illustrates the composition of Staples (the “Parent Company”), the Guarantor Subsidiaries, and the non-guarantor subsidiaries for the first quarter of 2007 and 2006. The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.

Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investment in subsidiaries and intercompany balances and transactions.

Condensed Consolidating Balance Sheet

As of May 5, 2007

(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated

Cash and cash equivalents	$	297,442		$	37,142	$	548,884	$	—.		$	883,468
Short-term investments	403,938			—		—		—			403,938
Merchandise inventories	—			1,242,824		754,762		—			1,997,586
Other current assets	37,875			556,954		457,550		—			1,052,379
Total current assets	739,255			1,836,920		1,761,196		—			4,337,371
Net property, equipment and other assets	340,550			1,233,990		943,435		—			2,517,975
Goodwill	175,625			116,208		1,213,709		—			1,505,542
Investment in affiliates and intercompany, net	(978,201		)	3,163,387		2,846,619		(5,031,805		)	—
Total assets	$	277,229		$	6,350,505	$	6,764,959	$	(5,031,805	)	$	8,360,888

Total current liabilities	$	202,128		$	1,444,916	$	1,006,555	—			$	2,653,599
Total long-term liabilities	130,006			439,515		83,400		—			652,921
Minority interest	—			—		10,138		—			10,138
Total stockholders’ equity	(54,905		)	4,466,074		5,664,866		(5,031,805		)	5,044,230
Total liabilities and stockholders’ equity	$	277,229		$	6,350,505	$	6,764,959	$	(5,031,805	)	$	8,360,888

Condensed Consolidating Balance Sheet

As of February 3, 2007

(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated

Cash and cash equivalents	$	476,549		$	49,687	$	491,435	$	—.		$	1,017,671
Short-term investments	457,759			—		—		—			457,759
Merchandise inventories	—			1,203,498		716,216		—			1,919,714
Other current assets	122,172			457,068		456,979		—			1,036,219
Total current assets	1,056,480			1,710,253		1,664,630		—			4,431,363
Net property, equipment and other assets	460,678			1,156,073		894,038		—			2,510,789
Goodwill	175,625			110,140		1,169,348		—			1,455,113
Investment in affiliates and intercompany, net	(892,119		)	3,067,979		2,822,520		(4,998,380		)	—
Total assets	$	800,664		$	6,044,445	$	6,550,536	$	(4,998,380	)	$	8,397,265

Total current liabilities	$	416,459		$	1,378,130	$	993,794	—			$	2,788,383
Total long-term liabilities	34,412			416,607		127,089		—			578,108
Minority interest	—			—		9,109		—			9,109
Total stockholders’ equity	349,793			4,249,708		5,420,544		(4,998,380		)	5,021,665
Total liabilities and stockholders’ equity	$	800,664		$	6,044,445	$	6,550,536	$	(4,998,380	)	$	8,397,265

Condensed Consolidating Statement of Income

For the thirteen weeks ended May 5, 2007

(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidated
Sales	$	—		$	3,038,042	$	1,551,423		$	4,589,465
Cost of goods sold and occupancy costs	1,979			2,225,558		1,076,989			3,304,526
Gross profit	(1,979		)	812,484		474,434			1,284,939
Operating and other expenses	8,212			616,525		333,772			958,509
Income (loss) before income taxes and minority interest	(10,191		)	195,959		140,662			326,430
Income tax expense	—			94,541		22,974			117,515
Income (loss) before minority interest	(10,191		)	101,418		117,688			208,915
Minority interest	—			—		(228		)	(228		)
Net income (loss)	$	(10,191	)	$	101,418	$	117,916		$	209,143

Condensed Consolidating Statement of Income

For the thirteen weeks ended April 29, 2006

(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidated

Sales	$	—		$	2,814,590	$	1,423,056		$	4,237,646
Cost of goods sold and occupancy costs	2,045			2,055,245		991,359			3,048,649
Gross profit	(2,045		)	759,345		431,697			1,188,997
Operating and other expenses	59,657			530,863		308,130			898,650
Income (loss) before income taxes and minority interest	(61,702		)	228,482		123,567			290,347
Income tax expense	—			63,078		41,447			104,525
Income (loss) before minority interest	(61,702		)	165,404		82,120			185,822
Minority interest	—			—		(252		)	(252		)
Net income (loss)	$	(61,702	)	$	165,404	$	82,372		$	186,074

Condensed Consolidating Statement of Cash Flows

For the thirteen weeks ended May 5, 2007

(in thousands)

	Staples, Inc. (Parent Co.).			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated
Net cash provided by operating activities	$	104,783		$	20,391		$	67,138		$	192,312
Investing Activities:
Acquisition of property and equipment	(6,796		)	(37,256		)	(20,049		)	(64,101		)
Investment in joint ventures	—			—			(7,299		)	(7,299		)
Purchase of short-term investments	(2,083,962		)	—			—			(2,083,962		)
Proceeds from the sale of short-term investments	2,137,785			—			—			2,137,785
Cash used in investing activities	47,027			(37,256		)	(27,348		)	(17,577		)
Financing Activities:
Payments on borrowings	(675		)	—			—			(675		)
Purchase of treasury stock	(195,602		)	—			—			(195,602		)
Excess tax benefits from stock-based compensation arrangements	8,091			4,320			144			12,555
Cash dividends paid	(207,551		)	—			—			(207,551		)
Other	64,820			—			—			64,820
Cash used in financing activities	(330,917		)	4,320			144			(326,453		)
Effect of exchange rate changes on cash and cash equivalents	—			—			17,515			17,515
Net decrease in cash and cash equivalents	(179,107		)	(12,545		)	57,449			(134,203		)
Cash and cash equivalents at beginning of period	476,549			49,687			491,435			1,017,671
Cash and cash equivalents at end of period	$	297,442		$	37,142		$	548,884		$	883,468

Condensed Consolidating Statement of Cash Flows

For the thirteen weeks ended April 29, 2006

(in thousands)

	Staples, Inc. (Parent Co.).			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated

Net cash provided by operating activities	$	36,434		$	69,929		$	61,952		$	168,315

Investing Activities:
Acquisition of property and equipment	(18,254		)	(78,151		)	(18,152		)	(114,557		)
Purchase of short-term investments	(2,257,198		)	—						(2,257,198		)
Proceeds from the sale of short-term investments	2,351,975			—			—			2,351,975
Cash used in investing activities	76,523			(78,151		)	(18,152		)	(19,780		)
Financing Activities:
Payments on borrowings	(1,487		)	—			—			(1,487		)
Purchase of treasury stock	(168,522		)	—			—			(168,522		)
Excess tax benefits from stock-based compensation arrangements	9,327			5,193			336			14,856
Cash dividends paid	(160,490		)	—			—			(160,490		)
Other	55,141			—			—			55,141
Cash used in financing activities	(266,031		)	5,193			336			(260,502		)
Effect of exchange rate changes on cash and cash equivalents	—			—			9,257			9,257
Net decrease in cash and cash equivalents	(153,074		)	(3,029		)	53,393			(102,710		)
Cash and cash equivalents at beginning of period	479,704			49,390			448,728			977,822
Cash and cash equivalents at end of period	$	326,630		$	46,361		$	502,121		$	875,112

STAPLES, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our business is comprised of three segments: North American Retail, North American Delivery and International Operations. Our North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Staples Business Delivery, Quill, and our Contract operations (Staples National Advantage and Staples Business Advantage). The International Operations segment consists of operating units that operate office products stores and that sell and deliver office products and services directly to customers in 20 countries in Europe, South America and Asia.

Beginning in fiscal 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”). The adoption of FIN 48 did not result in any material adjustments to our reserves for uncertain tax positions.

Forward Looking Statements

This Quarterly Report on Form 10-Q and, in particular, this management’s discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including statements regarding:

· expected future revenues, operations, expenditures, generation of cash and cash needs;

· future activity under our stock repurchase program and payment of future cash dividends;

· the projected number, timing and cost of new store openings;

· estimates of the potential markets for our products and services, including the anticipated drivers for future growth;

· sales and marketing plans;

· projected credit profile;

· potential mergers or acquisitions and acquisition strategy; and

· projected improvements to our infrastructure and impact of such improvements on our business and operations.

In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions, and should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included in this report. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those set forth under the heading “Risk Factors” of this Quarterly Report on Form 10-Q. We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Results of Operations

We have provided below a summary of our operating results at the consolidated level, followed by an overview of our segment performance.

Consolidated Performance:

Net income for the first quarter of 2007 was $209.1 million or $0.29 per diluted share compared to $186.1 million or $0.25 per diluted share for the first quarter of 2006, an increase in net income of 12%. Our results for the first quarter of 2007 were achieved by continuing to execute our strategy of driving profitable sales growth, improving profit margins and

increasing asset productivity. This includes delivering on our “Easy” brand promise to make buying office products easy for our customers in order to differentiate us from our competitors. Our commitment to customer service, our focus on higher margin Staples brand products, strong results in our copy and print center business, the continued success of our customer acquisition efforts and expense management were key drivers of our results in the first quarter of 2007.

Sales: Sales for the first quarter of 2007 were $4.6 billion, an increase of 8.3% from the first quarter of 2006. Comparable sales for our North American retail locations increased 1% for the first quarter of 2007 and comparable sales for our International retail locations increased 2% for the first quarter of 2007. We had 1,927 open stores as of May 5, 2007 compared to 1,786 stores as of April 29, 2006 and 1,884 stores as of February 3, 2007. This includes 32 stores opened, 1 store closed and 12 stores added through an investment in Asia during the first quarter of 2007. North American Delivery sales increased 14.8% for the first quarter of 2007. The increase in total sales also reflects a positive impact of foreign currency of $56.0 million for the first quarter of 2007.

Our sales growth in the first quarter of 2007 reflects our performance in core office supplies, ink and toner, paper, computers and computer peripherals and our copy and print center business. The increase also reflects our continued focus on customer service as well as the continued success of our customer acquisition and retention efforts in our North American delivery business.

Gross Profit: Gross profit as a percentage of sales was 28.0% for the first quarter of 2007 compared to 28.1% for the first quarter of 2006. The decrease in the gross profit rate for the first quarter of 2007 is primarily due to margin pressure in paper in our North American Delivery business, partially offset by our focus on higher margin Staples brand products and our copy and print center business.

Operating and Selling Expenses: Operating and selling expenses, which consist of payroll, advertising and other operating expenses, were 16.6% of sales for the first quarter of 2007 compared to 16.9% for the first quarter of 2006. The decrease in operating expenses as a percentage of sales for the first quarter of 2007 primarily reflects our continued focus on expense management, more efficient and effective marketing spend in our North America Delivery businesses as well as the inclusion of investments to grow our copy and print business in the first quarter of 2006.

General and Administrative Expenses: General and administrative expenses as a percentage of sales were 4.3% for the first quarter of 2007 and 2006. This reflects our continued focus on expense control and leveraging of fixed expenses on higher sales, offset by the impact of increased investments in information systems.

Amortization of Intangibles: Amortization of intangibles was $3.4 million for the first quarter of 2007 compared to $3.2 million for the first quarter of 2006, reflecting the amortization of customer-related intangible assets and noncompetition agreements.

Interest income: Interest income decreased to $15.6 million in the first quarter of 2007 from $19.5 million in the first quarter of 2006. The decrease in interest income in fiscal 2007 is primarily due to a reduction in our average cash and short-term investment portfolio, partially offset by an increase in interest rates.

Interest expense: Interest expense decreased to $11.1 million in the first quarter of 2007 from $14.7 million in the first quarter of 2006. The decrease in interest expense in 2007 is primarily due to a reduction in average borrowings for our International Operations segment in 2007 compared to 2006, partially offset by higher interest rates. We use interest rate swap agreements to convert our fixed rate debt obligations into variable rate obligations. As a result of rising interest rates, these interest rate swap agreements had a negative impact on interest expense in 2007. Excluding the impact of our interest rate swap agreements, interest expense would have been $10.9 million for the first quarter of 2007 and $15.0 million for the first quarter of fiscal 2006.

Miscellaneous expense: Miscellaneous expense was $0.6 million for the first quarter of 2007 and $0.4 million for the first quarter of 2006. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

Income Taxes: Our effective tax rate was 36.0% for both the first quarter of 2007 and 2006.

Segment Performance:

The following tables provide a summary of our sales and business unit income by reportable segment (see reconciliation of business unit income to consolidated income before income taxes in Note F to our Consolidated Financial Statements):

	(Amounts in thousands)				May 5, 2007		April 29, 2006
	13 Weeks Ended				Increase From		Increase From
	May 5, 2007		April 29, 2006		Prior Year		Prior Year
Sales:
North American Retail	$	2,363,603	$	2,305,912	2.5	%	6.5	%
North American Delivery	1,593,029		1,387,239		14.8	%	17.1	%
International Operations	632,833		544,495		16.2	%	(0.8	)%
Total sales	$	4,589,465	$	4,237,646	8.3	%	8.7	%

	(Amounts in thousands)
	13 Weeks Ended						May 5, 2007		April 29, 2006
	May 5, 2007			April 29, 2006			% of Sales		% of Sales
Business Unit Income:
North American Retail	$	189,552		$	180,461		8.0	%	7.8	%
North American Delivery	151,830			129,895			9.5	%	9.4	%
International Operations	15,489			10,520			2.4	%	1.9	%
Business unit income	356,871			320,876			7.8	%	7.6	%
Stock-based compensation	(34,260		)	(34,962		)	(0.8	)%	(0.8	)%
Total reportable segments	$	322,611		$	285,914		7.0	%	6.7	%

North American Retail: Sales for North American Retail increased 2.5% for the first quarter of 2007 compared to the first quarter of 2006. The growth primarily reflects non-comparable store sales for the net stores opened in the prior year and throughout the first quarter of 2007, as well as an increase in comparable store sales of 1%. We added 24 stores to the North American store base in the first quarter of 2007. As of May 5, 2007, the North American store base included 1,644 open stores compared to 1,527 stores as of April 29, 2006 and 1,620 stores as of February 3, 2007. The increase in sales also reflects the negative impact of Canadian exchange rates to the U.S. dollar of $2.2 million for the first quarter of 2007. Our comparable store sales growth reflects positive performance in computers, business software, computer peripherals and our copy and print center business partially offset by negative performance in furniture. Business unit income as a percentage of sales increased to 8.0% for the first quarter of 2007 from 7.8% for the first quarter of 2006. The increase in business unit income primarily reflects increased sales in higher margin categories including Staples brand products and copy and print services.

North American Delivery: Sales for North American Delivery increased 14.8% for the first quarter of 2007 compared to the first quarter of 2006. The sales growth for the first quarter of 2007 reflects the continued success of our customer acquisition and retention efforts, increased penetration of existing customers and more effective marketing spend. Business unit income as a percentage of sales increased to 9.5% for the first quarter of 2007 from 9.4% for the first quarter of 2006. The increase in business unit income primarily reflects more efficient and effective marketing spend as we continue to acquire and retain customers as well as improvement in our supply chain and customer service expenses. These gains were partially offset by gross margin pressure in paper.

International Operations: Sales for International Operations increased 16.2% for the first quarter of 2007 compared to the first quarter of 2006. The increase primarily reflects the positive impact of foreign exchange rates of $58.5 million, growth in local currency in our international delivery businesses as well as an increase in comparable store sales of 2%. As of May 5, 2007, the store base included 283 (including 12 stores added through an investment in Asia) open stores compared to 259 stores as of April 29, 2006 and 264 stores as of February 3, 2007. Business unit income increased to $15.5 million for the first quarter of 2007 from $10.5 million for

the first quarter of 2006. This primarily reflects growth in our European businesses along with our continued focus on expense management.

Stock-Based Compensation: Stock-based compensation decreased to $34.3 million in the first quarter of 2007 from $35.0 million in the first quarter of 2006. Stock-based compensation includes expenses associated with our employee stock purchase plans, the issuance of stock options, restricted shares, and performance share awards, as well as the company match in the employee 401(K) savings plan. The decrease in the first quarter of 2007 primarily reflects changes in the mix of equity awards granted.

Critical Accounting Policies and Significant Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make significant judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2006 Annual Report on Form 10-K, filed on March 1, 2007, in Note A of the Notes to the Consolidated Financial Statements and the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no material changes to the Accounting Policies or our application of the Accounting Policies since March 1, 2007.

Liquidity and Capital Resources

Cash Flows

Cash provided by operations was $192.3 million for the first quarter of 2007 compared to $168.3 million for the first quarter of 2006. The increase in operating cash flow from 2006 to 2007 is primarily due to an increase in net income.

Cash used in investing activities was $17.6 million for the first quarter of 2007 compared to $19.8 million for the first quarter of 2006. This change is primarily due to a reduction in capital spending in the first quarter of 2007 compared to the first quarter of 2006, offset by fluctuations in our short-term investment portfolio.

Cash used in financing activities was $326.5 million for the first quarter of 2007 compared to $260.5 million for the first quarter of 2006. Cash used in financing activities primarily relates to cash used for the payment of our annual cash dividend and the purchase of shares under our share repurchase program, offset by cash received upon the exercise of employee stock options. On April 19, 2007, we paid a cash dividend of $0.29 per outstanding common share, or $207.6 million in the aggregate, to shareholders of record on March 30, 2007. The dividend declared and paid in 2007 represents an increase of 32% over the per share value of the cash dividend declared and paid in 2006. Under our share repurchase program, we repurchased 7.2 million shares for $187.8 million in the first quarter of 2007 and 6.2 million shares for $151.8 million in the first quarter of 2006.

Sources of Liquidity

We utilize cash generated from operations, short-term investments and our main revolving credit facility to cover seasonal fluctuations in cash flows and to support our various growth initiatives.

We had $2.1 billion in total cash, short-term investments and funds available through credit agreements at May 5, 2007, which consisted of $815.2 million of available credit and $1.29 billion of cash and cash equivalents and short-term investments.

A summary, as of May 5, 2007, of balances available under credit agreements and debt outstanding is presented below (amounts in thousands):

	Available Credit		Debt Outstanding
Revolving Credit Facility effective through October 2011	$	679,008	$	—
Senior Notes due August 2007	—		200,000
Senior Notes due October 2012	—		325,000
Lines of credit	136,149		715
Capital leases and other notes payable	—		8,448
Total	$	815,157	$	534,163

We issue letters of credit under our revolving credit facility in the ordinary course of business. At May 5, 2007, we had $71.0 million of open letters of credit, thus reducing the available credit under our revolving credit facility from $750.0 million to $679.0 million.

We expect that our cash generated from operations, together with our current cash, short-term investments and funds available under our main revolving credit facility, will be sufficient to fund our planned store openings and other recurring operating cash needs for at least the next twelve months.

Uses of Capital

As a result of our strong financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions, we also expect to continue to return capital to our shareholders through our stock repurchase program and an annual cash dividend.

We expect to open approximately 80 new stores in the next three quarters of 2007. We estimate that our cash requirements, including pre-opening expenses, net inventory, leasehold improvements and fixtures, will be approximately $1.4 million for each new store. We also plan to continue to make investments in information systems and distribution centers to improve operational efficiencies and customer service. We currently plan to spend approximately $500 million on capital expenditures during the last three quarters of 2007.

Historically, we have primarily grown organically, and while we do not expect this to change, we may also use capital to engage in strategic acquisitions or joint ventures in markets where we currently have a presence and in new geographic markets that could become significant to our business in future years. We do not expect to rely on acquisitions to achieve our targeted growth plans. While we will consider many types of acquisitions on an opportunistic basis, we target acquisitions that are small, aligned with our existing businesses, focused on both strengthening our presence in existing markets and expanding our presence into new geographies that could become long-term meaningful drivers of our business and financed from our operating cash flows. In connection with such targeted acquisitions, we plan to exercise the same discipline as we use for other investments, pursuing those that we believe will earn a return above our internal return on net assets hurdle rate within a two to three year time frame.

We believe that we will need to spend approximately $550 million in 2007 and $525 million a year for the next few years on capital expenditures to fund organic growth and ongoing operations. With this level of capital spending and an acquisition strategy that is not projected to require significant amounts of capital, it is likely that the cash we generate from operations will exceed our investing needs, thereby strengthening our credit profile. To use this excess cash to benefit our stockholders, we implemented a share repurchase program and an annual cash dividend. In the third quarter of 2005, we announced a repurchase program under which we may repurchase up to $1.5 billion of Staples common stock through February 2, 2008. We paid a cash dividend of $0.29 per share of common stock on April 19, 2007 to shareholders of record on March 30, 2007, resulting in a total dividend payment of $207.6 million. While it is our intention to pay annual cash dividends in years following 2007, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.

Inflation and Seasonality

While neither inflation nor deflation has had, and we do not expect either to have, a material impact upon our operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future. Our business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of our fiscal year.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

At May 5, 2007, there had not been a material change in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended February 3, 2007. More detailed information concerning market risk can be found under the sub-caption “Quantitative and Qualitative Disclosures about Market Risks” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page B-10 of our Annual Report on Form 10-K filed on March 1, 2007 for the year ended February 3, 2007.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of May 5, 2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of May 5, 2007, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended May 5, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

STAPLES, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1A. Risk Factors

Our market is highly competitive and we may not continue to compete successfully.

The office products market is highly competitive. We compete with a variety of local, regional, national and international retailers, dealers and distributors for customers, employees, locations, products, services and other important aspects of our business. In most of our geographic markets, we compete with other high-volume office supply chains such as Office Depot and OfficeMax that are similar in concept to us in terms of pricing strategy and product selection, as well as mass merchants such as Wal-Mart, warehouse clubs such as Costco, computer and electronics superstores such as Best Buy, copy and print businesses such as FedEx Kinko’s, ink cartridge specialty stores, and other discount retailers. In addition, both our retail stores and delivery operations compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, local dealers and direct manufacturers such as Dell. Many of our competitors have increased their presence in our markets in recent years. Some of our current and potential competitors are larger than we are and have substantially greater financial resources that may be devoted to sourcing, promoting and selling their products. Increased competition or improved performance by our competitors could reduce our market share, profit margin and projected operating results, and could adversely affect our business and financial performance in other ways.

We may be unable to continue to open new stores and enter new markets successfully.

An important part of our business plan is to increase our number of stores and enter new geographic markets. We currently plan to open approximately 80 new stores in the last three quarters of fiscal 2007. For our growth strategy to be successful, we must identify and lease favorable store sites, hire and train associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully. If we are unable to open new stores as quickly as planned, our future sales and profits may be adversely affected. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores. Also, our expansion strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs. However, these new stores may result in the loss of sales in existing stores in nearby areas, which could adversely affect our business and financial performance.

Our growth may continue to strain operations, which could adversely affect our business and financial performance.

Our business has grown dramatically over the past several years and continues to grow through organic growth and strategic acquisitions. Accordingly, sales of our products and services, the number of stores that we operate, the number of countries in which we conduct business and the number of associates have grown and likely will continue to grow. This growth places significant demands on management and operational systems. If we are not successful in continuing to support our operational and financial systems, expanding our management team and increasing and effectively managing our associate base, this growth is likely to result in operational inefficiencies and ineffective management of the business and associates, which will in turn adversely affect our business and financial performance. In addition, as we grow, our business is subject to a wider array of complex state, federal and international regulations, and may be increasingly the target of private actions alleging violations of such regulations. This increases the cost of doing business and the risk that our business practices could unknowingly result in liabilities that may adversely affect our business and financial performance.

Our operating results may be impacted by changes in the economy that impact business and consumer spending.

Our operating results are directly impacted by the health of the North American, European, South American and Asian economies. Our business and financial performance may be adversely affected by current and future economic conditions, including unemployment levels, energy costs, interest rates, recession, inflation, the impact of natural disasters and terrorist activities, and other matters that influence business and consumer spending.

Our business and financial performance is dependent upon our ability to attract and retain qualified associates.

Our performance is dependent on attracting and retaining a large and growing number of quality associates. We face intense competition for qualified associates, and many of our associates are in entry-level or part-time positions with

historically high rates of turnover. Our ability to meet our labor needs generally while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. If we are unable to attract and retain qualified associates or our labor costs increase significantly, our business and financial performance may be adversely affected.

Our stock price may fluctuate based on market expectations.

The public trading of our stock is based in large part on market expectations that our business will continue to grow and that we will achieve certain levels of net income. If the securities analysts that regularly follow our stock lower their rating or lower their projections for future growth and financial performance, the market price of our stock is likely to drop significantly. In addition, if our quarterly financial performance does not meet the expectations of securities analysts, our stock price would likely decline. The decrease in the stock price may be disproportionate to the shortfall in our financial performance.

Our quarterly operating results are subject to significant fluctuation.

Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Our earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior fiscal period or investors’ expectations. Factors that could cause these quarterly fluctuations include: the extent to which sales in new stores result in the loss of sales in existing stores; the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; extreme weather-related disruptions; and seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the first and second quarters of the fiscal year than in other quarters. Most of our operating expenses, such as rent expense, advertising expense and employee salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall would have a disproportionate effect on our net income for the quarter.

Our expanding international operations expose us to the unique risks inherent in foreign operations.

As of May 5, 2007, we had operations in 20 countries in Europe, South America and Asia and a significant presence in Canada. We may also seek to expand further into other international markets. Our foreign operations encounter risks similar to those faced by our U.S. operations, as well as risks inherent in foreign operations, such as local customs and regulatory constraints, foreign trade policies, competitive conditions, foreign currency fluctuations and unstable political and economic conditions. Further, our acquisitions in Europe and South America and our investments in Asia have increased our exposure to these foreign operating risks, which could have an adverse impact on our international income and worldwide profitability.

Our business may be adversely affected by the actions of and risks associated with our third-party vendors.

The products we sell are sourced from a wide variety of third-party vendors. We cannot control the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including without limitation paper, ink, toner and technology products. Disruptions in the availability of raw materials used in production of these products may adversely affect our sales and result in customer dissatisfaction. In addition, global sourcing of many of the products we sell is an important factor in our financial performance. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, merchandise quality issues, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could adversely affect our business and financial performance.

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.

Our product offering includes Staples, Quill and other proprietary branded products, which represented approximately 20% of our total sales in fiscal 2006. While we have focused on the quality of our proprietary branded products, we rely on third-party manufacturers for these products. Such third party manufacturers may prove to be unreliable, or the quality of our globally sourced products may not meet our expectations. Furthermore, economic and political conditions in areas of the world where we source such products may adversely affect the availability and cost of such products. In addition, our proprietary branded products compete with other manufacturers’ branded items that we

offer. As we continue to increase the number and types of proprietary branded products that we sell, we may adversely affect our relationships with our vendors, who may decide to reduce their product offerings through Staples and increase their product offerings through our competitors. Finally, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us. Any of these circumstances could have an adverse effect on our business and financial performance.

Our debt level and operating lease commitments could impact our ability to obtain future financing and continue our growth strategy.

Our consolidated debt and operating lease obligations may have the effect generally of restricting our flexibility in responding to changing market conditions and could make us more vulnerable in the event of a downturn in our business. In addition, our level of indebtedness may have other important consequences, including: restricting our growth; making it more difficult for us to satisfy our obligations; limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate purposes; and limiting our ability to use operating cash flow in other areas of our business. In such a situation, additional funds may not be available on satisfactory terms when needed, or at all, whether in the next twelve months or thereafter.

Fluctuations in our effective tax rate may adversely affect our business and results of operations.

We are a multi-national, multi-channel provider of office products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, and the tax filing positions we take in various jurisdictions. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple jurisdictions in which we operate or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate could result in an unfavorable change in our effective tax rate, which could have a material adverse effect on our business and results of our operations.

Compromises of our information security may adversely affect our business.

Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our website, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our or our vendors’ network security and, if successful, misappropriate confidential customer or business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of customer or business information could disrupt our operations and expose us to claims from customers, financial institutions, payment card associations and other persons, which could have a material adverse effect on our business, financial condition and results of operations.

The California wage and hour class action lawsuit may adversely affect our business and financial performance.

Various class action lawsuits have been brought against us for alleged violations of what is known as California’s “wage and hour” law. The plaintiffs have alleged that we improperly classified store managers as exempt under the California wage and hour law, making such managers ineligible for overtime wages. The plaintiffs are seeking to require us to pay overtime wages to the putative class for the period from October 21, 1995 to the present. The court has granted class certification to the plaintiffs. The court’s ruling is procedural only and does not address the merits of the plaintiffs’ allegations. The trial date for the case has been scheduled for November 2007. We believe we have meritorious defenses in the litigation and expect to prevail. If, however, there is an adverse judgment from which there is no successful appeal, damages could range from $10 million to $150 million, excluding interest and attorneys’ fees.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information about our purchases of our common stock during the first quarter of fiscal 2007.

Fiscal Period	Total Number of Shares Purchased	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
February 4, 2007 – March 3, 2007	2,424,535	$	26.62	2,424,535	$	533,289,000
March 4, 2007 – April 7, 2007	3,000,074	$	25.87	3,000,074	$	455,666,000
April 8, 2007 – May 5, 2007	1,761,900	$	25.93	1,761,900	$	409,989,000
Total for the First Quarter of Fiscal 2007	7,186,509	$	26.14	7,186,509	$	409,989,000

(1) Average price paid per share includes commissions and is rounded to the nearest two decimal places.

(2) On October 7, 2005, we announced that our Board of Directors approved the repurchase by us of up to $1.5 billion of our common stock through February 2, 2008.

Item 6 – Exhibits

The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference, are filed or furnished as part of this Quarterly Report on Form 10-Q.

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.

			STAPLES, INC.


Date:	May 21, 2007	By:	/s/ JOHN J. MAHONEY
			John J. Mahoney
			Vice Chairman and
			Chief Financial Officer
			(Principal Financial Officer)


		By:	/s/ CHRISTINE T. KOMOLA
			Christine T. Komola
			Senior Vice President, Corporate Controller
			(Principal Accounting Officer)

EXHIBIT INDEX

Exhibit Number		Description of Exhibit

10.1 +		Amended and Restated 2004 Stock Incentive Plan, as amended
10.2 +		Amended and Restated 1992 Equity Incentive Plan, as amended
10.3 +		Amended and Restated 1990 Director Stock Option Plan, as amended
10.4 +		Amended and Restated 1998 Employee Stock Purchase Plan, as amended
10.5 +		Amended and Restated International Employee Stock Purchase Plan, as amended
10.6 +*		Performance Share Award Agreement dated March 8, 2007 by and between the Company and Ronald L. Sargent
10.7 +		Restricted Stock Award Agreement dated March 8, 2007 by and between the Company and Ronald L. Sargent
31.1 +		Principal Executive Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 +		Principal Financial Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 ++		Principal Executive Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 ++		Principal Financial Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Filed herewith
++ Furnished herewith
* Portions of the exhibit have been omitted pursuant to a request for confidential treatment.

FORM 10-Q

May 5, 2007

TABLE OF CONTENTS

Note G - Guarantor Subsidiaries

Condensed Consolidating Statement of Cash Flows

Inflation and Seasonality