UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended:  November 1, 2008

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

For the transition period  from                   to                 

Commission File Number: 0-17586

STAPLES, INC.

(Exact name of registrant as specified in its charter)

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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

The registrant had 713,387,435 shares of common stock outstanding as of November 28, 2008.

STAPLES, INC. AND SUBSIDIARIES

FORM  10-Q

November 1, 2008

TABLE OF CONTENTS

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

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STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

4

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Note A - Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples”, “the Company”, “we”, “our” or “us”), and the recent acquisition of Corporate Express N.V. (“Corporate Express”) (see Note C). These financial statements are for the period covering the thirteen and thirty-nine weeks ended November 1, 2008 (also referred to as the “third quarter of 2008” and “year-to-date 2008”, respectively) and the period covering the thirteen and thirty-nine weeks ended November 3, 2007 (also referred to as the “third quarter of 2007” and “year-to-date 2007”, respectively). 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 accounting principles generally accepted in the United States of America 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 2, 2008.

Note B – New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement). In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective date of FASB Statement No. 157”, which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Effective February 3, 2008, the Company adopted SFAS No. 157 for its financial assets. The adoption had no impact on the Company’s financial condition, results of operations or cash flows. The Company has not yet determined the impact on its financial statements of the February 1, 2009 adoption of SFAS No. 157 as it pertains to non-financial assets and liabilities.

The following table shows assets and liabilities as of November 1, 2008, that are measured at fair value on a recurring basis (in thousands):

In September 2006, the FASB issued SFAS No. 158, “Employers: Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires deferred pension gains and losses to be reflected in accumulated other comprehensive income and requires that the valuation date of plan accounts be changed to the end of the company’s fiscal year, with that change required to be implemented for fiscal years ending after December 15, 2008. The Company will adopt the provisions of SFAS No. 158 in fiscal 2008 as a result of the assumption of pension plans in connection with the acquisition of Corporate Express (see Note C). This adoption will have no impact on the Company’s financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value.  Unrealized gains and losses on items for which

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

the fair value option has been elected will be recognized in earnings at each subsequent reporting date.  SFAS No. 159 was effective for the Company on February 3, 2008.  The adoption of SFAS No. 159 did not have an impact on the Company’s financial condition, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 enhances disclosures for derivative instruments and hedging activities, including: (i) the manner in which a company uses derivative instruments; (ii) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and (iii) the effect of derivative instruments and related hedged items on a company’s financial position.  SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.  The Company will adopt this statement as of February 1, 2009. As SFAS No. 161 relates specifically to disclosures, this standard will have no impact on the Company’s financial condition, results of operations or cash flows.

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The adoption of FSP No. 142-3 is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company does not expect SFAS No. 162 to have a material impact on its financial condition, results of operations or cash flows.

Note C – Business Acquisition

In July 2008, Staples acquired Corporate Express N.V. (“Corporate Express”), a Dutch office products distributor with operations in North America, Europe and Australia, through a tender offer for all of its outstanding capital stock. The acquisition of Corporate Express establishes Staples’ contract business in Europe and Canada and increases Staples’ contract business in the United States.  The acquisition also extends Staples geographic reach to Australia and New Zealand. As a result of the acquisition, the Company has operations in 27 countries.

The aggregate cash purchase price of 2.8 billion Euros (approximately $4.4 billion, net of cash acquired) for the capital stock of Corporate Express and for the repayment of most of Corporate Express’ debt was funded primarily with the sale of notes under the Commercial Paper Program, which is backstopped by the 2008 Agreement, and additional funds from the 2008 Term Credit Facility, the Company’s existing Revolving Credit Facility (each as described in Note E), and the Company’s available cash and short-term investments.

At the time the tender offer was fully settled on July 23, 2008, Staples had acquired more than 99% of the outstanding capital stock of Corporate Express. Staples intends by the end of fiscal year 2009 to acquire the remaining capital of Corporate Express by means of a compulsory acquisition procedure in accordance with the Dutch Civil Code. In July 2008, Staples also acquired all of the outstanding 8.25% Senior Subordinated Notes due July 1, 2014 and all of the outstanding 7.875% Senior Subordinated Notes due March 1, 2015 of Corporate Express U.S. Finance Inc., a wholly owned subsidiary of Corporate Express.

The operating results of Corporate Express have been included in the condensed consolidated financial statements since July 2, 2008, the date Staples declared the terms of the tender offer unconditional. The Corporate Express results are reported in Staples’ North American Delivery and International Operations for segment reporting.

The acquisition is being accounted for using the purchase method in accordance with SFAS No. 141, “Business Combinations”. Accordingly, the purchase price has been allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

The purchase price allocation, including an independent appraisal for certain tangible and intangible assets, has been prepared on a preliminary basis based on the information that was available to management at the time the Condensed Consolidated Financial Statements were prepared, and revisions to the preliminary purchase price allocation are expected as additional information becomes available.

The Company has not finalized its integration and restructuring plans for Corporate Express, including severance, facility closures, systems consolidation and tax elections, the results of which will impact the final purchase price allocation.  This may also include asset impairments related to Staples historical operations as its corporate infrastructure and related assets adapt to business changes.  These amounts will be recognized in the income statement as integration and restructuring costs.  In addition, certain historical tax assets may be negatively impacted by the acquisition, which could result in additional tax expense that would be recognized through an increase in the Company’s effective tax rate.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date the terms the tender offer were declared unconditional (in thousands):

At July 2, 2008, the date the terms of the tender offer were declared unconditional, Staples allocated assets of $3.90 billion and $3.09 billion to the North American Delivery and International Operations segments, respectively.  Included in total assets were goodwill and intangible assets totaling $3.35 billion, of which $2.22 billion and $1.14 billion were allocated to the North American Delivery and International Operations segments, respectively.  Of the $865.2 million of estimated acquired intangible assets, $692.9 million was assigned to customer relationships that are being amortized over a weighted average useful life of 12.6 years, $162.3 million was assigned to tradenames, which have lives ranging from 18 months to 10 years with a weighted average useful life of 6.9 years, and $10.0 million was assigned to order backlog that is being amortized over its useful life of 18 months.

For the preliminary valuation of customer relationships the Company used the multi-period excess earnings method.  This approach discounts the estimated after tax cash flows (including gross margins on revenues, operating expenses and market participant synergies, less a charge for the tradename and contributory charges) associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing customer base.  The present value of the cash flows was calculated using a discount rate of 10%.

The activity related to the Company’s reserves for the periods subsequent to the acquisition date is as follows (in thousands):

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

The following unaudited proforma summary presents information as if Corporate Express had been acquired as of February 4, 2007.  In addition to an adjustment to amortization expense to reflect the value of intangibles recorded for this acquisition, the proforma amounts include incremental interest expense for all periods to reflect the increase in borrowings under the 2008 Agreement, the Commercial Paper Program, the 2008 Term Credit Facility, and the Revolving Credit Facility (each as defined in Note E) to finance the acquisition as if the increase had occurred at the beginning of fiscal 2007.  Proforma interest expense also reflects the elimination of interest expense on Corporate Express debt that was repaid at the time of acquisition.  No adjustment was made to reduce historical interest income to reflect the Company’s use of available cash in this acquisition.  The proforma summary also reflects the effective tax rate applicable for the combined company.  The proforma amounts do not reflect any benefits from economies that might be achieved from combining the operations of the two companies.

The proforma information presented below (in thousands, except per share data) does not necessarily reflect the actual results that would have occurred had the companies been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.

(1)          Fiscal 2008 results include $124,012 of costs, net of taxes, related to strategic initiatives and certain transaction costs incurred by Corporate Express prior to the transaction date.

Note D – Integration and Restructuring Costs

Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with the Company’s pre-existing business and the consolidation of certain operations of the Company.  Integration and restructuring costs were $132.3 million and $132.4 million for the third quarter of 2008 and year-to-date 2008, respectively.  Included in integration and restructuring costs for the third quarter of 2008 and year-to-date 2008 is a $123.8 million charge related to the write-down of indefinite lived intangible tradenames associated with the European catalog business.  The tradename write-down was the result of the Company’s decision to move toward one global brand with the acquisition of Corporate Express, eliminating, over time, the legacy Staples brands used in the European catalog business.  For the third quarter of 2008, integration and restructuring costs also include $7.4 million of consulting fees, $0.6 million of travel related expenses and a $0.5 million charge for employee retention costs.

Note E – Debt and Credit Agreements

In September 2008, Barclays Bank PLC agreed to assume the obligations of Lehman Brothers, Inc. and their affiliates under the Company’s 2008 Agreement, the Revolving Credit Facility, the Commercial Paper Program, and the 2008 Term Credit Facility as described below.

The 2008 Agreement

On April 1, 2008, Staples entered into a $3.0 billion credit agreement (the “2008 Agreement”) with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., as lead arranger and bookrunner, for a commitment period beginning on July 9, 2008 and continuing until 364 days thereafter, unless earlier terminated pursuant to the terms of the 2008 Agreement.  The 2008 Agreement provides financing solely (1) for the Company’s acquisition of all of the outstanding capital stock of Corporate Express, including related transaction fees, costs and expenses, and (2) backstop the Company’s Commercial Paper Program.  Amounts borrowed under the 2008 Agreement may be borrowed, repaid and reborrowed from time to time, with the aggregate principal amount of the loans outstanding not to exceed the maximum borrowing amount of $3.0 billion. Borrowings made pursuant to the 2008 Agreement will bear interest at either (a) the base rate (the higher of the prime rate, as defined in the 2008 Agreement, or the federal funds rate plus 0.50%) plus an “applicable margin,” defined as a percentage spread based on Staples’ credit

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

rating or (b) the Eurocurrency rate plus a different “applicable margin,” also defined as a percentage spread based on Staples’ credit rating.  The applicable margin for each base rate loan and Eurocurrency rate loan increases periodically, as set forth in the 2008 Agreement. The payments under the 2008 Agreement are guaranteed by the same subsidiaries of Staples (see Note J) that guarantee Staples’ publicly issued notes, the Commercial Paper Program, the 2008 Term Credit Facility and the Revolving Credit Facility (each as defined below).  Under the 2008 Agreement, Staples agrees to pay a commitment fee, payable quarterly, at rates that range from 0.080% to 0.175% based on Staples’ credit rating.  The 2008 Agreement also contains financial covenants that require Staples to maintain a minimum fixed charge coverage ratio of 1.5:1.0 and a maximum adjusted funded debt to total capitalization ratio of 0.75:1.0.  The 2008 Agreement also contains affirmative and negative covenants that are consistent with those contained in Staples’ 2008 Term Credit Facility and Revolving Credit Facility.  The 2008 Agreement contains certain customary events of default with corresponding grace periods.  On July 1, 2008, Staples entered into the first amendment to the 2008 Agreement.  The amendment was entered into to provide that certain events, including the establishment of the 2008 Term Credit Facility (as described below) and maintaining certain obligations of Corporate Express after the acquisition, will not reduce the maximum commitment available under the 2008 Agreement.  On September 12, 2008, Staples entered into the second amendment to the 2008 Agreement.  The amendment provides Staples with the flexibility, within ten business days of the receipt of proceeds from other indebtedness, to use such proceeds to repay the Commercial Paper Program (as described below).

As of November 1, 2008, $1.57 billion of borrowings were outstanding under the 2008 Agreement at a weighted average interest rate of 4.38%.  As of November 1, 2008, the available credit under this agreement was $478.1 million.

The Revolving Credit Facility

On May 5, 2008, Staples entered into the first amendment (the “Amendment”) to the Amended and Restated $750.0 million Revolving Credit Agreement, as amended, dated as of October 13, 2006 (the “Revolving Credit Facility”).  The Amendment was entered into in connection with the Company’s acquisition of the outstanding capital stock of Corporate Express and provided certain post-acquisition cure periods to allow the Company to cure defaults that could arise (i) as a result of change in control provisions contained in Corporate Express’ outstanding debt obligations and (ii) under Corporate Express’ and the Company’s outstanding debt obligations as a result of events or circumstances, such as litigation, liens or defaults, affecting Corporate Express. The Amendment did not alter the amount that may be borrowed under, or the terms of, the Revolving Credit Facility and confirmed the obligations of the Company to the lenders and administrative agent who are parties thereto.

As of November 1, 2008, $668.0 million of borrowings were outstanding under the Revolving Credit Facility and $21.3 million of letters of credit were issued against this facility.  As of November 1, 2008, the available credit under this facility was $60.7 million.

The Commercial Paper Program

On June 9, 2008, Staples entered into a commercial paper program (the “Commercial Paper Program”) on a private placement basis under which the Company may issue unsecured commercial paper notes (the “Notes”) up to a maximum aggregate principal amount outstanding at any time of $3.0 billion.  The 2008 Agreement serves as a backstop to the Commercial Paper Program.  Under the Commercial Paper Program, Staples may issue Notes from time to time, and the proceeds of the Notes will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases.  Maturities of the Notes vary but may not exceed 397 days from the date of issue.  The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and Staples.  The payments under the Commercial Paper Program are guaranteed by the same subsidiaries (see Note J) that guarantee the publicly issued notes, the 2008 Agreement, the 2008 Term Credit Facility, and the Revolving Credit Facility.  The Commercial Paper Program contains customary events of default with corresponding grace periods.

As of November 1, 2008, $948.7 million of Notes were outstanding under the Commercial Paper Program.  The Notes have a weighted average remaining maturity of 15 days with a weighted average interest rate of 3.97%.

The 2008 Term Credit Facility

On July 1, 2008, Staples entered into a $400.0 million credit facility (the “2008 Term Credit Facility”) with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as joint lead arrangers and joint bookrunners.  The 2008 Term Credit Facility provides for borrowing of a maximum principal amount of up to $400.0 million.  Borrowings under the 2008 Term Credit Facility may be used by Staples for working capital and in connection with the acquisition of Corporate Express, including the repayment of Corporate Express’ indebtedness.  Amounts borrowed under the 2008 Term Credit Facility once borrowed may not be reborrowed.  The 2008 Term Credit Facility contains customary affirmative and negative covenants that are substantially the same as those in the 2008 Agreement and the Revolving Credit Facility, has the same financial covenants as the 2008 Agreement and the Revolving Credit Facility and provides for customary events of default with corresponding grace periods that are substantially the same as those in our 2008 Agreement.

As of November 1, 2008, $150.0 million of borrowings were outstanding under the 2008 Term Credit Facility.  On November 26, 2008, the Company repaid the entire remaining balance due.  No further credit is available under this facility.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Corporate Express Securitization Programs

In connection with the acquisition of Corporate Express, the Company assumed the obligations under Corporate Express’ U.S. Securitization Program and the European Securitization Program (the “Securitization Programs”).  As of November 1, 2008, the Company was able to borrow a maximum of $200.0 million and EUR 75.0 million (approximately $98 million based on exchange rates on that date) under the Securitization Programs.  As of November 1, 2008, the utilized balance under the U.S. Securitization Program was $186.7 million and, based on the exchange rates on this date, the utilized balance under the European Securitization Program was $47.9 million.  Borrowings outstanding under the Securitization Programs are included as a component of current liabilities in the Company’s condensed consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables.

There were no instances of default during 2008 under any of the Company’s debt agreements.

Deferred Financing Fees

In connection with entering into the 2008 Agreement and the 2008 Term Credit Facility, the Company incurred financing fees of $16.5 million, which are being amortized over the term of the related debt instrument.  Amortization of the financing fees are classified as interest expense.  Deferred financing fees amortized to interest expense for the quarter and year to date period ended November 1, 2008 amounted to $5.5 million and $9.0 million, respectively.  Unamortized financing fees at November 1, 2008 were $7.5 million and included in prepaid expenses and other current assets.

Note F – Equity Based Employee Benefit Plans

Staples offers its associates share ownership through certain equity based employee benefit plans, including the Employees’ 401(k) Savings Plan (the “401(k) Plan”), the Amended and Restated 1998 Employee Stock Purchase Plan and the Amended and Restated International Employee Stock Purchase Plan (collectively the “Employee Stock Purchase Plans”), and the Amended and Restated 2004 Stock Incentive Plan.

All U.S. based associates who meet minimum age and length of service requirements are eligible to participate in the 401(k) Plan.  Company contributions to the 401(k) Plan are calculated on a matching formula applied to associates’ contributions that are made in the form of Company common stock and vest ratably over a five year period.  After five years of service, participants are fully vested in all contributions.  Under the Employee Stock Purchase Plans, U.S and International associates may purchase shares of Staples common stock at 85% of the lower of the market price of the common stock at the beginning or end of an offering period through payroll deductions in an amount not to exceed 10% of an employee’s annual base compensation.  Under the Amended and Restated 2004 Stock Incentive Plan, the Company grants nonqualified stock options and restricted stock and restricted stock units (collectively, “Restricted Shares”) to associates.  The nonqualified stock options and Restricted Shares are restricted in that they are not transferable (i.e. they may not be exercised or sold) until they vest.  Vesting of these awards occurs over different periods, depending on the terms of the individual award, but expenses relating to these awards are all recognized on a straight line basis over the applicable vesting period.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

The following table summarizes the nonqualified stock option and Restricted Share activity during year-to-date 2008:

Staples also grants performance share awards to certain employees, which are awards of restricted stock that only are issued and vest if the Company meets minimum performance targets (the “Performance Shares”).  If at the end of each three year period, the Company’s performance falls between the minimum and maximum targets, a percentage of the Performance Shares, ranging from 90% to 200%, will vest depending on the performance achieved.  If the Company does not achieve the minimum performance target, none of the Performance Shares will be issued.

In connection with its equity based employee benefit plans, Staples included $47.4 million and $134.2 million in compensation expense for the thirteen weeks and thirty-nine weeks ended November 1, 2008, respectively, and $50.1 million and $133.2 million in compensation expense for the thirteen and thirty-nine weeks ended November 3, 2007, respectively.  As of November 1, 2008, Staples had $286.5 million of nonqualified stock options and Restricted Shares to be expensed over the period through September 2012.

Note G – Comprehensive Income

Comprehensive (loss) 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):

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Note H – Computation of Earnings Per Common Share

The computation of basic and diluted earnings per share for the third quarter and year-to-date 2008 and 2007 is as follows (in thousands, except per share data):

Note I – 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 Contract (including Corporate Express).  The International Operations segment consists of  business units (including Corporate Express)  that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 25 countries in Europe, Asia, Australia and South America.

 In connection with the acquisition of Corporate Express, Staples allocated assets of $3.90 billion and $3.09 billion to the North American Delivery and International Operations segments, respectively.  Included in total assets were goodwill and intangible assets totaling $3.35 billion, of which $2.22 billion and $1.14 billion were allocated to the North American Delivery and International Operations segments, respectively.

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

Staples’ North American Retail and North American Delivery segments are managed separately because the way they market products is different, the classes of customers they service may be different, and the distribution methods used to deliver products to customers is different.  The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

The following is a summary of sales and business unit income by reportable segment for the third quarter and year-to-date 2008 and 2007 and a reconciliation of total segment income to income before income taxes and minority interest (in thousands):

Note J - Guarantor Subsidiaries

Under the terms of the Company’s 7.375% Senior Notes, the Revolving Credit Facility, the 2008 Agreement, the 2008 Term Credit Facility and the Commercial Paper Program, certain subsidiaries guarantee repayment of the debt. The debt is 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 guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the debt and illustrates the composition of Staples, Inc. (the “Parent Company”), the Guarantor Subsidiaries, and the non-guarantor subsidiaries as of November 1, 2008 and February 2, 2008 and for the third quarter and year-to-date 2008 and 2007. The non-guarantor subsidiaries, including Corporate Express, 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.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Condensed Consolidating Balance Sheet
As of November 1, 2008
(in thousands)