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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: October 30, 2010

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  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 723,195,266 shares of common stock outstanding as of November 16, 2010.

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STAPLES, INC. AND SUBSIDIARIES

FORM 10-Q

October 30, 2010

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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)

See notes to condensed consolidated financial statements.

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STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

See notes to condensed consolidated financial statements.

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STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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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”).  These financial statements are for the period covering the thirteen and thirty-nine weeks ended October 30, 2010 (also referred to as the “third quarter of 2010” and “year-to-date 2010”) and the period covering the thirteen and thirty-nine weeks ended October 31, 2009 (also referred to as the “third quarter of 2009” and “year-to-date 2009”).  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 based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods.  For a more complete discussion of significant accounting policies and certain other information, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2010.  In the opinion of management, these 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.

Note B — New Accounting Pronouncements

In June 2009, a pronouncement was issued relating to information a company needs to provide regarding the sales of securitized financial assets and similar transactions, particularly if the company has continuing exposure to the risks related to transferred financial assets (Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 860). This pronouncement eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. This pronouncement is effective for fiscal years beginning after November 15, 2009.  The Company adopted this pronouncement as of January 31, 2010.  This pronouncement did not have any impact on the Company’s consolidated financial condition, results of operations or cash flows.

In June 2009, a pronouncement was issued that clarified how a company determines whether an entity, that is insufficiently capitalized or not controlled through voting (or similar rights), should be consolidated (ASC Topic 810).  This determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This pronouncement requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. This pronouncement also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This pronouncement is effective for fiscal years beginning after November 15, 2009.  The Company adopted this pronouncement as of January 31, 2010.  This pronouncement did not have any impact on the Company’s consolidated financial condition, results of operations or cash flows.

In October 2009, a pronouncement was issued that amended the rules on revenue recognition for multiple-deliverable revenue arrangements.  This amendment eliminated the residual method of allocation for multiple-deliverable revenue arrangements and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method (ASC Topic 605). This pronouncement establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available.  In addition, this pronouncement expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements.  This pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Company will adopt this pronouncement as of January 30, 2011.  The Company is currently evaluating the potential impact, if any, of the adoption of this pronouncement on its consolidated financial condition, results of operations and cash flows.

Note C — Business Combinations

ASC Topic 805 (“Business Combinations”) requires that companies record acquisitions under the purchase method of accounting.  Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill.  ASC Topic 350 (“Goodwill and Intangible Assets”) indicates that goodwill and purchased intangibles with indefinite lives are not amortized

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Notes to Condensed Consolidated Financial Statements (Continued)

but are reviewed for impairment annually, or more frequently, if impairment indicators arise.  Purchased intangibles with definite lives are amortized over their respective useful lives.

With the acquisition of Corporate Express N.V. (“Corporate Express”), the Company became a 58.6% shareholder of Corporate Express Australia Limited (“Corporate Express Australia”), a public company traded on the Australian Securities Exchange.  On March 16, 2010, the Company announced that it had made an offer to acquire all of the noncontrolling interest in Corporate Express Australia for cash consideration of AUD $5.60 per share (the “Offer”).  On July 9, 2010, the Company declared the offer unconditional, and on September 6, 2010, through a compulsory acquisition process, the Company acquired the final outstanding shares, bringing the Company’s ownership of this business to 100% for an aggregate purchase price of approximately AUD $407 million (approximately $361 million). The purchase of the additional shares in 2010 is being accounted for in accordance with ASC Topic 810, “Noncontrolling Interest in Consolidated Financial Statements,” as an equity transaction, by adjusting the carrying amount of the noncontrolling interest to reflect the change in the Company’s ownership interest in Corporate Express Australia.  The purchase of the noncontrolling interest is reflected as a financing cash outflow in the condensed consolidated statement of cash flows.

Note D — Integration and Restructuring Costs

Integration and restructuring costs represent the costs associated with the integration of Corporate Express, including Corporate Express Australia, with the Company’s pre-existing business and the consolidation of certain operations of the combined Company.

Integration and restructuring costs are comprised of the following (in thousands):

In connection with the Company’s acquisition of Corporate Express, acquisition reserves of $181.0 million were established.  The activity related to the Company’s acquisition reserves (in thousands) for fiscal 2010 is as follows:

The Company believes that the reserves above should be substantially utilized by the end of fiscal year 2010; however, some payments related to facility closures may be made over the remaining lease terms.

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Notes to Condensed Consolidated Financial Statements (Continued)

Note E — Credit Agreements

On November 4, 2010, Staples, Inc. entered into a new Credit Agreement (the “New Credit Agreement” or “Agreement”) with Bank of America, N.A, as Administrative Agent and other lending institutions named therein. The New Credit Agreement replaces the Amended and Restated Revolving Credit Agreement dated as of October 13, 2006, as amended, which provided for a maximum borrowing of $750.0 million and was due to expire in October 2011 (the “Prior Agreement”).  As of November 4, 2010, no borrowings were outstanding under the Prior Agreement.

The New Credit Agreement provides for a maximum borrowing of $1.0 billion which, pursuant to an accordion feature, may be increased to $1.5 billion upon the request of Staples and the agreement of the lenders participating in the increase.  Borrowings made pursuant to the New Credit Agreement may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount.  Borrowings made pursuant to the New Credit Agreement will bear interest at various interest rates, depending on the type of borrowing, plus a percentage spread based on Staples’ credit rating and fixed charge coverage ratio.  Under the Agreement, Staples also agrees to pay a facility fee at rates that range from 0.15% to 0.35% per annum depending on Staples’ credit rating and fixed charge coverage ratio.  Amounts borrowed under the New Credit Agreement may be borrowed, repaid, and reborrowed from time to time until November 4, 2014.

The New Credit Agreement is unsecured and ranks pari passu with Staples’ public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type. The borrowings under this New Credit Agreement are unconditionally guaranteed on an unsecured unsubordinated basis by the same subsidiaries that guarantee Staples’ publicly issued notes.

Note F — Fair Value Measurements, Derivative Instruments and Hedging Activities

Fair Value Measurements:  ASC 820 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).

The following table shows the Company’s assets and liabilities as of October 30, 2010 that are measured at fair value on a recurring basis (in thousands):

(1)          Based on model-based valuation techniques

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Notes to Condensed Consolidated Financial Statements (Continued)

The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses, other current liabilities and short-term debt with the exception of the $500 million, 7.75% notes due April 1, 2011 (the “April 2011 Notes”), approximate their carrying values because of their short-term nature.  The Company has $1.5 billion, 9.75% notes due January 15, 2014 (the “January 2014 Notes”) of which $750.0 million was hedged in March 2010.  The fair value of long-term debt, with the exception of the unhedged portion of the January 2014 Notes, approximates the carrying value because of the Company’s use of derivative instruments that qualify for hedge accounting.  The fair value of the April 2011 Notes and unhedged portion of the January 2014 Notes was determined based on quoted market prices.  The following table reflects the difference between the carrying value and fair value of these notes as of October 30, 2010 and January 30, 2010 (in thousands):

Derivative Instruments and Hedging Activities:  Staples uses interest rate swaps to turn certain fixed rate debt into variable rate debt and certain variable rate debt into fixed rate debt and currency swaps to hedge a portion of the value of Staples’ net investment in Canadian dollar denominated subsidiaries and to fix the value of intercompany debt denominated in a foreign currency. These derivatives qualify for hedge accounting treatment as the derivatives have been highly effective in offsetting changes in fair value of the hedged items.

All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative are recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of the Company’s net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income (loss) to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions.  There are no amounts excluded from the assessment of hedge effectiveness.

The Company classifies the fair value of all its derivative contracts and the fair value of its hedged firm commitments as either current or long-term assets or liabilities depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in the Company’s condensed consolidated statement of cash flows in the same category as the item being hedged.

Interest Rate Swaps:  On January 8, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325 million, designed to convert Staples’ $325 million, 7.375% notes due October 1, 2012 (the “October 2012 Notes”) into a variable rate obligation.  The swap agreement, scheduled to terminate on October 1, 2012, is designated as a fair value hedge of the October 2012 Notes.  Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.375% and is required to make semi-annual interest payments at a floating rate equal to the 6 month LIBOR plus 3.088%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the October 2012 Notes.  At October 30, 2010, the interest rate swap agreement had a fair value gain of $23.6 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010, year-to-date 2010, the third quarter of 2009 or year-to-date 2009 related to ineffectiveness associated with this fair value hedge.

In connection with Staples’ acquisition of Corporate Express, the Company assumed interest rate swaps, for a notional amount of AUD $103 million, designed to convert Corporate Express’ variable rate credit facilities into fixed rate obligations.  AUD $30 million of these swaps matured in July 2009, AUD $8 million of these swaps matured in January 2010, and AUD

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Notes to Condensed Consolidated Financial Statements (Continued)

$40 million of these swaps matured in July 2010, as scheduled.  The Company also entered into interest rate swap agreements in August 2009, for a notional amount of AUD $35 million, designed to convert local variable rate credit facilities into fixed rate obligations.  As of October 30, 2010, the total notional amount of all outstanding interest rate swaps was AUD $60 million (approximately $58.7 million based on foreign exchange rates at October 30, 2010).  The remaining swap agreements are scheduled to terminate in three stages:  AUD $25 million in July 2011, AUD $10 million in August 2011 and the remaining AUD $25 million in August 2012.  Under the terms of the agreements, the Company is required to make monthly interest payments at a weighted average interest rate of 6.0% and is entitled to receive monthly interest payments at a floating rate equal to the average bid rate for borrowings having a term closest to the relevant period displayed on the appropriate page of the Reuters screen (BBSY).  The interest rate swaps are being accounted for as a cash flow hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreements.  At October 30, 2010, the interest rate swap agreements had a fair value loss of $0.6 million, which was included in stockholders’ equity as a component of accumulated other comprehensive loss.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010, year-to-date 2010, the third quarter of 2009 or year-to-date 2009 related to ineffectiveness associated with this cash flow hedge.  The amount of estimated cash flow hedges’ unrealized net gains or losses expected to be reclassified to earnings in the next twelve months is not significant.

On March 16, 2010, Staples entered into an interest rate swap, for an aggregate notional amount of $750 million, designed to convert half of the aggregate principal amount of the January 2014 Notes into a variable rate obligation.  The swap agreement, scheduled to terminate on January 15, 2014, is designated as a fair value hedge of half of the aggregate principal amount of the January 2014 Notes.  Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 9.75% and is required to make semi-annual interest payments at a floating rate equal to the 3 month LIBOR plus 7.262%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the January 2014 Notes.  At October 30, 2010, the interest rate swap agreement had a fair value gain of $38.9 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010 or year-to-date 2010 related to ineffectiveness associated with this fair value hedge.

Foreign Currency Swaps:  On August 15, 2007, the Company entered into a $300 million foreign currency swap that has been designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries.  Staples, upon maturity of the agreement in October 2012, will be entitled to receive $300 million and will be obligated to pay 316.2 million in Canadian dollars. Staples will also be entitled to receive quarterly interest payments on $300 million at a fixed rate of 5.28% and will be obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%.  At October 30, 2010, the currency swap had an aggregate fair value loss of $3.8 million, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010, year-to-date 2010, the third quarter of 2009 or year-to-date 2009 related to ineffectiveness associated with this net investment hedge.

On June 30, 2010, Staples entered into a currency swap, for an aggregate notional amount of 40 million Canadian dollars.  Upon maturity of the agreement in July 2011, Staples will be entitled to receive $37.8 million and will be obligated to pay 40 million Canadian dollars.  This swap was designated as a foreign currency hedge of a short-term intercompany loan with a Canadian dollar denominated subsidiary.  Gains and losses on this foreign currency hedge will be recorded to other income (expense) over the life of the agreement, which will offset the gains and losses of the underlying hedged item.  At October 30, 2010, the currency swap had a fair value loss of $1.2 million, which was included in accrued expenses and other current liabilities.

Accumulated other comprehensive loss includes foreign currency losses, net of taxes of $1.6 million and $6.0 million for the third quarter and year-to-date 2010, respectively and foreign currency gains, net of taxes of $1.8 million and foreign currency losses, net of taxes of $19.0 million for the third quarter and year-to-date 2009, respectively.

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Notes to Condensed Consolidated Financial Statements (Continued)

Note G — Equity Based Employee Benefit Plans

Staples offers its associates share ownership through certain equity based employee benefit plans, including 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.

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 restricted stock and restricted stock units (collectively, “Restricted Shares”) and nonqualified stock options to associates.  The Restricted Shares are restricted in that they are not transferable (i.e. they may not be sold) until they vest. The nonqualified stock options cannot be exercised until they vest.  Vesting of the Restricted Shares and nonqualified stock options 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.

The following table summarizes the nonqualified stock option and Restricted Share activity for year-to-date 2010:

(1) At October 30, 2010, the aggregate intrinsic value of the outstanding nonqualified stock options was $90.4 million and the aggregate intrinsic value of the exercisable nonqualified stock options was $82.9 million.

(2) Restricted Shares do not include performance shares (“Performance Shares”) which Staples grants to certain employees. These are awards under which restricted stock is only issued if the Company meets minimum performance targets.  If, at the end of each performance period, the Company’s performance falls between minimum and maximum targets, performance shares ranging from 50% to 200% of the underlying award will be issued.   The fair value of Performance Shares is based upon the market price of the underlying common stock as of the date of grant. As of October 30, 2010, Staples had 1.2 million awards of Performance Shares outstanding, which were granted during 2008 and 2010 and remain subject to satisfaction of performance targets. The shares have a weighted-average fair market value per share of $20.10. Additionally, Performance Shares granted during 2009 were issued in 2010 based on the Company meeting certain performance targets.  These shares continue to be subject to vesting restrictions and will fully vest in January 2013.  The price of these issued Performance Shares was $20.12 per share and 0.5 million of these shares are included in the outstanding Restricted Shares as of October 30, 2010.

In connection with its equity based employee benefit plans, Staples included $39.6 million and $109.2 million in compensation expense for the third quarter and year-to-date 2010, respectively, and $42.0 million and $132.5 million in compensation expense for the third quarter and year-to-date 2009, respectively.   As of October 30, 2010, Staples had $260.7 million related to grants of nonqualified stock options and Restricted Shares to be expensed over the period through August 2014.

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Notes to Condensed Consolidated Financial Statements (Continued)

Note H — Pension Plans

In connection with the acquisition of Corporate Express, Staples assumed the obligations under the defined benefit pension plans Corporate Express sponsored.  The pension plans cover most Corporate Express employees in Europe and certain employees in the United States.  The benefits due to U.S. plan participants are frozen.  A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts.  Contributions are made to these trusts, as necessary, to meet legal and other requirements.

Net periodic pension cost recognized for the third quarter and year-to-date 2010 and for the third quarter and year-to-date 2009 are based upon preliminary estimates pending the final actuarial determination of such costs for fiscal 2010 and fiscal 2009, respectively.   The following tables present a summary of the total net periodic cost recorded in the condensed consolidated statement of income (in thousands):

Cash contributions made to Corporate Express pension plans for the third quarter and year-to-date 2010 and the third quarter and year-to-date 2009 are as follows (in thousands):

The Company expects to make additional cash contributions of $0.2 million and $3.5 million to the U.S. Plans and International Plans, respectively, during the remainder of fiscal 2010.

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Notes to Condensed Consolidated Financial Statements (Continued)

Note I — Stockholders’ Equity and Comprehensive Income

The following table reflects the changes in stockholders’ equity and comprehensive income attributable to Staples, Inc. and its noncontrolling interests for year-to-date 2010 and 2009 (in thousands):

(1) Changes in the fair value of derivatives are net of taxes of $(1.2) million for the thirteen weeks ended October 30, 2010 and $1.2 million for the thirteen weeks ended October 31, 2009, and net of taxes of $(4.5) million for the thirty-nine weeks ended October 30, 2010 and $(14.2) million for the thirty-nine weeks ended October 31, 2009.

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Notes to Condensed Consolidated Financial Statements (Continued)

The following table summarizes the components of accumulated other comprehensive loss as of October 30, 2010 and January 30, 2010 (in thousands):

Note J - Computation of Earnings Per Common Share

The computation of basic and diluted earnings per share for the third quarter and year-to-date 2010 and 2009 is as follows (in thousands, except per share data):

Options to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation.   Options to purchase 27.4 million and 13.7 million shares of Staples common stock were excluded from the calculation of diluted earnings per share at October 30, 2010 and October 31, 2009, respectively.

Note K - Segment Reporting

Staples has three reportable segments: North American Delivery, North American Retail and International Operations. 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 Contract, Staples Business Delivery and Quill.  The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 24 countries in Europe, Asia, Australia, and South America.

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,  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 Delivery and North American Retail segments are managed separately because the way they market products is different, the types of customers they service may be different, and the distribution methods used to deliver products to customers are 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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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 2010 and 2009 and a reconciliation of total segment income to consolidated income before income taxes (in thousands):

Note L - Guarantor Subsidiaries

Under the terms of the Company’s April 2011 Notes, $750.0 million Amended and Restated Revolving Credit Agreement (which was replaced by the New Credit Agreement (as defined in Note E) entered into on November 4, 2010),  the October 2012 Notes and the January 2014 Notes,  the Guarantor Subsidiaries, as defined below, 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 (collectively, the “Guarantor Subsidiaries”). The terms of guarantees are equivalent to the term of the related debt.  The following condensed consolidating financial data is presented for the holders of the April 2011 Notes, the October 2012 Notes, and the January 2014 Notes and illustrates the composition of Staples, Inc. (the “Parent Company”), Guarantor Subsidiaries, and non-guarantor subsidiaries as of October 30, 2010 and January 30, 2010 and for the third quarter and year-to-date 2010 and 2009.  The Guarantor Subsidiaries are wholly owned by Staples, Inc.  The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.

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Notes to Condensed Consolidated Financial Statements (Continued)

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 October 30, 2010

(in thousands)