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

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"). 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 condensed consolidated financial statements and notes to condensed 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.

Acquisition of Corporate Express

In July 2008, we 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 a contract business in Europe and Canada and increases our contract business in the United States. The acquisition also extends our geographic reach to Australia and New Zealand. As a result of the acquisition, we have 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 and for our repayment of most of Corporate Express debt was funded primarily with the sale of notes under our Commercial Paper Program, which is backstopped by our 2008 Agreement, and additional funds from our 2008 Term Credit Facility, our existing Revolving Credit Facility (each as defined below), and our available cash and short-term investments.

At the time the tender offer was fully settled on July 23, 2008, we had acquired more than 99% of the outstanding capital stock of Corporate Express. We intend 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, we 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 we 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.

Results of Operations

We have provided below an overview of our operating results as well as a summary of our consolidated performance and details of our segment performance. In order to enhance comparability between our 2007 and 2008 results, certain operational measures for fiscal 2008 are accompanied by a presentation of such measure after removing the impact of the Corporate Express acquisition. Management is using such adjusted operational measures in the initial post acquisition period to evaluate our pre-acquisition operating results against prior year results and our operating plan. This adjusted information supplements and is not intended to represent measures that are calculated or presented in accordance with disclosures required by accounting principles generally accepted in the United States.

Overview

The second quarter of 2008 produced stable results despite the challenging economic environment. On a consolidated basis including Corporate Express for the month of July, we reached $5.07 billion in sales, with sales growth of 18% compared to the second quarter of 2007. Excluding sales of $672.5 million related to Corporate Express, our consolidated sales grew 3% in the second quarter of 2008. We continued to execute our business strategy and make investments in customer service and long term growth initiatives to improve our business during a time of slower economic growth. Major contributors to the second quarter of 2008 results are summarized below and reviewed further in the Consolidated Performance and Segment Performance discussions.

† North American Retail's comparable stores sales declined 7% and business unit income rate fell to 5.3% from 7.4%, as negative comparable store sales drove deleverage in rent and occupancy expense and labor. We achieved excellent customer service as we continue to maintain our investments in labor.

† North American Delivery drove positive sales growth behind successful customer acquisition and retention effort and achieved excellent customer service, growing sales 25%, with 2% sales growth excluding the $355 million in sales related to Corporate Express. Business unit income rate declined from 10.7% to 8.8%, with only a slight decline to 10.5% excluding the results of Corporate Express.

† International Operations grew sales 69%, with 17% sales growth excluding the $318 million in sales related to Corporate Express. Excluding Corporate Express, sales grew 6% in local currency. Business unit income rate increased to 1.5% from 0.7% and remained flat excluding the results of Corporate Express.

† We opened 28 new stores in North America, 3 new stores in Europe and 4 new stores in emerging markets. We acquired 65 stores with the acquisition of Corporate Express. We now operate 2,171 stores worldwide.

While maintaining our focus on expense control, we are also continuing to invest in new strategic initiatives and customer service programs to ensure our long term success, despite the current weak economic climate. As of the date of this filing, we expect earnings per diluted share to grow in the low single digits on a GAAP basis, including the results of Corporate Express which we expect to be slightly accretive, and including the prior year impact of the California wage and hour class action litigation settlement. For our pre-acquisition business, excluding Corporate Express, we anticipate sales in fiscal 2008 to grow in the low single digits and earnings per diluted share to be flat compared to 2007, excluding the impact of the California wage and hour class action litigation settlement.

Consolidated Performance:

Net income for the second quarter of 2008 was $150.2 million or $0.21 per diluted share compared to $178.8 million or $0.25 per diluted share for the second quarter of 2007, a decrease in net income of 16.0%. Net income for the first half of 2008 was $362.5 million or $0.51 per diluted share compared to $388.0 million or $0.53 per diluted share for the first half of 2007. Our results for the second quarter and first half of 2008 include the results of the newly acquired Corporate Express business of $5.3 million, net of taxes, representing activity for the month of July, as well as $8.7 million, net of taxes, of additional interest expense related to the acquisition financing. Our results for the second quarter and first half of 2008 reflect our continuing focus on our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity while operating in a difficult economic environment. We continue to work to deliver 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, the continued success of our customer acquisition and retention efforts, and expense control were key contributors to sustaining our performance in the second quarter of 2008, despite the negative impact of a weakened economy on our customers and our organic sales growth.

Sales: Sales for the second quarter of 2008 were $5.07 billion, an increase of 18.3% from the second quarter of 2007. Sales for the first half of 2008 were $9.96 billion, an increase of 12.2% from the first half of 2007. Our sales growth in the second quarter and first half of 2008 reflects sales of $672.5 million from the Corporate Express business. Excluding the sales from Corporate Express, sales increased 2.6% for the second quarter and 4.6% for the first half of 2008. The 2.6% sales growth for the second quarter of 2008 was primarily driven by the following three factors, in order of magnitude, each of which had a fairly comparable impact on sales: increased sales from new stores opened: the positive impact of foreign exchange rates of $94.3 million; and organic growth in our delivery businesses. The second quarter of 2008 sales growth was substantially reduced by a 7% decrease in comparable store sales in our retail businesses. The 4.6% sales growth for the first half of 2008 was primarily driven by the following three factors, in order of magnitude, each of which had a fairly comparable impact on sales: the positive impact of foreign exchange rates of $248.1 million: increased sales from

new stores opened; and organic growth in our delivery businesses. This growth was partially offset by a 5% decrease in comparable store sales in our retail businesses.

Gross Profit: Gross profit as a percentage of sales was 26.6% for the second quarter of 2008 and 27.3% for the first half of 2008 compared to 28.2% for the second quarter of 2007 and 28.1% for the first half of 2007. Our gross profit rate for the second quarter and first half of 2008 was negatively impacted by 1.0% and 0.6%, respectively, due to the inclusion of the results of Corporate Express, whose gross profit rate is lower than our existing businesses. The remaining decrease in gross profit rate for the second quarter and first half of 2008 primarily reflects deleverage in fixed occupancy costs on a decrease in comparable store sales in North American Retail.

Selling, General and Administrative Expenses: Selling, general and administrative expenses were 21.5% of sales for the second quarter and first half of 2008 compared to 21.6% for the second quarter of 2007 and 21.2% for the first half of 2007. Selling, general and administrative expenses as a percentage of sales for the second quarter and first half of 2008 includes a 0.8% and 0.3% improvement, respectively related to the inclusion of the results of Corporate Express, whose selling, general and administrative expense rate is lower than our existing businesses. This net increase in selling, general and administrative expenses for the second quarter and first half of 2008, after adjusting for the improvement from Corporate Express, was primarily driven by deleverage in labor and fixed expenses on a decrease in comparable store sales in North American Retail, partially offset by decreased marketing expense in our North American Retail and Delivery businesses. Our results also reflect our continued focus on expense control in a challenging economic environment.

Integration and Restructuring Costs: Integration and restructuring costs were $0.2 million for the second quarter and first half of 2008. These costs reflect incremental expenses related to the acquisition of Corporate Express.

Amortization of Intangibles: Amortization of intangibles was $14.3 million for the second quarter of 2008 and $18.4 million for the first half of 2008 compared to $3.9 million for the second quarter of 2007 and $7.3 million for the first half of 2007, reflecting the amortization of certain trade names, customer relationships and noncompetition agreements. Amortization expense relating to the intangibles resulting from our acquisition of Corporate Express was $8.6 million for the second quarter and the first half of 2008.

Interest income: Interest income decreased to $6.3 million in the second quarter of 2008 and $17.8 million for the first half of 2008 from $10.6 million in the second quarter of 2007 and $26.2 million in the first half of 2007. The decrease in interest income in the second quarter and first half of 2008 is primarily due to a decrease in interest rates, combined with a decrease in our average cash and short-term investment portfolio resulting from our acquisition of Corporate Express.

Interest expense: Interest expense increased to $21.2 million for the second quarter of 2008 and $28.4 million for the first half of 2008 from $11.1 million for the second quarter of 2007 and $22.2 million for the first half of 2007. The increase in interest expense in the second quarter and first half of 2008 is primarily due to the borrowings under our Commercial Paper Program (as defined in Note D to the condensed consolidated financial statements) relating to our acquisition of Corporate Express. We use interest rate swap agreements to convert our fixed rate debt obligations into variable rate obligations. Excluding the impact of our interest rate swap agreements, interest expense would have been $22.4 million for the second quarter of 2008 and $29.7 million for the first half of 2008 compared to $10.6 million for the second quarter of 2007 and $21.5 million for the first half of 2007.

Miscellaneous expense: Miscellaneous expense was $0.6 million for the second quarter of 2008 and $0.4 million for the first half of 2008 compared to $0.9 million for the second quarter of 2007 and $1.5 million for the first half of 2007. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

Income Taxes: Our effective tax rate was 33.8% for the second quarter and 34.5% for the first half of 2008 compared to 36.0% for the second quarter and first half of 2007. The decrease in our effective tax rate in 2008 was due to geographical changes in the mix of earnings, primarily attributable to the acquisition of Corporate Express.

Segment Performance:

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 Contract (including Corporate Express). The International Operations segment consists of operating 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 our acquisition of Corporate Express, we allocated assets of $3.65 billion and $3.45 billion to the North American Delivery and International segments, respectively. The Corporate Express assets include goodwill and intangible assets of $3.51 billion, of which $1.97 billion and $1.54 billion were allocated to the North American Delivery and International segments, respectively.

The following tables provide a summary of our sales and business unit income by reportable segment. Business unit income excludes integration and restructuring costs, stock-based compensation, interest and other expense, income taxes, the impact of changes in accounting principles and non-recurring items (see reconciliation of total segment income to consolidated income before income taxes and minority interest in Note H to the Condensed Consolidated Financial Statements included in this report):

                                                                               August 2, 2008    August 4, 2007
                                                                                  Increase
                                              (Amounts in thousands)             (Decrease)
                                                  13 Weeks Ended                    From         Increase From
                                        August 2, 2008      August 4, 2007       Prior Year        Prior Year
Sales:
North American Retail                  $      2,087,863    $      2,111,192              (1.1 )%            4.9 %
North American Delivery                       1,965,801           1,576,829              24.7 %            16.1 %
International Operations                      1,021,056             602,403              69.5 %            18.2 %
Total sales                            $      5,074,720    $      4,290,424              18.3 %            10.6 %




                                           (Amounts in thousands)
                                               13 Weeks Ended            August 2, 2008    August 4, 2007
                                        August 2, 2008     August 4,
                                                             2007          % of Sales        % of Sales
Business Unit Income:
North American Retail                  $        110,542    $  156,832               5.3 %             7.4 %
North American Delivery                         173,555       168,099               8.8 %            10.7 %
International Operations                         14,917         4,401               1.5 %             0.7 %
Business unit income                            299,014       329,332               5.9 %             7.7 %
Stock-based compensation                        (53,435 )     (48,858 )            (1.1 )%           (1.2 )%
Integration and restructuring costs                (163 )           -                 0 %               0 %
Total segment income                   $        245,416    $  280,474               4.8 %             6.5 %

                                        (Amounts in thousands)           August 2, 2008    August 4, 2007
                                            26 Weeks Ended               Increase From     Increase From
                                  August 2, 2008      August 4, 2007       Prior Year        Prior Year
Sales:
North American Retail            $      4,496,364    $      4,474,795               0.5 %             3.6 %
North American Delivery                 3,686,292           3,169,858              16.3 %            15.5 %
International Operations                1,776,618           1,235,236              43.8 %            17.2 %
Total sales                      $      9,959,274    $      8,879,889              12.2 %             9.4 %




                                              (Amounts in thousands)
                                                  26 Weeks Ended               August 2, 2008    August 4, 2007
                                        August 2, 2008      August 4, 2007       % of Sales        % of Sales
Business Unit Income:
North American Retail                  $        278,784    $        346,384               6.2 %             7.7 %
North American Delivery                         336,817             319,929               9.1 %            10.1 %
International Operations                         38,740              19,890               2.2 %             1.6 %
Business unit income                            654,341             686,203               6.6 %             7.7 %
Stock-based compensation                        (86,797 )           (83,118 )            (0.9 )%           (0.9 )%
Integration and restructuring costs                (163 )                 -                 0 %               0 %
Total segment income                   $        567,381    $        603,085               5.7 %             6.8 %

North American Retail: Sales decreased 1.1% for the second quarter of 2008 and increased 0.5% for the first half of 2008. The decrease in the second quarter is primarily attributable to a 7% decrease in comparable store sales reflecting reduced traffic and, to a lesser extent, average order size. This decline was substantially offset by non comparable sales for new stores opened in the past 12 months and, to a lesser extent, the positive impact of foreign exchange rates of $25.5 million. The slight increase in sales for the first half of 2008 primarily reflects non comparable sales for new stores opened in the past 12 months and, to a lesser extent, the positive impact of foreign exchange rates of $97.2 million, substantially offset by a 6% decrease in comparable store sales in the first half of 2008. We added 29 stores to the North American store base in the second quarter of 2008. As of August 2, 2008, the North American store base included 1,802 open stores compared to 1,672 stores as of August 4, 2007 and 1,738 stores as of February 2, 2008. Our comparable store sales decrease in the second quarter and first half of 2008 primarily reflects a significant decline in the performance of non-consumable products including business machines, furniture and computer peripherals, partially offset by a modest decline in consumables, which was driven by core office supplies and paper. For the first half of 2008, our decrease in consumable sales was slightly offset by positive performance in ink and toner.

Business unit income as a percentage of sales decreased to 5.3% for the second quarter of 2008 and 6.2% for the first half of 2008 from 7.4% for the second quarter of 2007 and 7.7% for the first half of 2007. The decrease in business unit income as a percentage of sales for the second quarter and first half of 2008 primarily reflects deleverage in fixed costs resulting from a decrease in comparable store sales and, to a lesser extent, deleverage in labor in order to maintain our customer service standards. These negative factors were partially offset by reduced marketing spend, and, to a lesser extent, supply chain improvements and our focus on expense control.

North American Delivery: Sales increased 24.7% for the second quarter of 2008 and 16.3% for the first half of 2008 compared to the second quarter and first half of 2007. Excluding non-comparable sales from Corporate Express of $354.9 million, sales growth would have been 2.2% and 5.1% for the second quarter and first half of 2008, respectively. This sales growth reflects the impact of our customer acquisition and retention efforts, partially offset by lower sales to existing customers.

Business unit income as a percentage of sales was 8.8% for the second quarter of 2008 and 9.1% for the first half of 2008 compared to 10.7% for the second quarter of 2007 and 10.1% for the first half of 2007. Of the 1.9% decrease in business unit income as a percentage of sales for the second quarter and the 1.0% decrease in business unit income as a percentage of sales for the first half of 2008, 1.7% and 0.9%, respectively, was due to the inclusion of the results of Corporate Express, whose business unit income rate is lower than our existing businesses. The remaining slight decrease for the second quarter and first half of 2008 primarily reflects a shift in mix of business towards our Contract business unit which

has a lower business unit income rate than our other North American Delivery businesses, partially offset by reduced marketing expense and, to a lesser extent, supply chain improvements.

International Operations: Sales increased 69.5% for the second quarter of 2008 and 43.8% for the first half of 2008. Excluding non-comparable sales from Corporate Express of $317.7 million, sales growth would have been 16.8% and 18.1%, respectively. This growth reflects the positive impact of foreign exchange rates of $65.0 million for the second quarter of 2008 and $136.9 million for the first half of 2008 and, to a lesser extent, organic growth from our delivery businesses, partially offset by a decrease in comparable store sales of 7% for the second quarter and 1% for the first half of 2008 in our European retail businesses. As of August 2, 2008, the International store base included 369 open stores compared to 290 stores as of August 4, 2007 and 300 stores as of February 2, 2008.

Business unit income as a percentage of sales increased to 1.5% for the second quarter of 2008 and 2.2% for the first half of 2008 from 0.7% for the second quarter of 2007 and 1.6% for the first half of 2007. Of the 0.8% increase in business unit income as a percentage of sales for the second quarter and the 0.6% increase in business unit income as a percentage of sales in the first half of the year, 0.8% and 0.2%, respectively, was due to the inclusion of the results of Corporate Express, whose business unit income rate is higher than our existing businesses. The business unit income rate was flat for the second quarter of 2008, excluding the impact of Corporate Express. The flat performance for the second quarter reflects improvement in product margin rates due to mix, better buying and own brand penetration in our European businesses and, to a lesser extent, supply chain improvements. These improvements were offset by increased losses in our Asian business and, to a lesser extent, deleverage in labor and fixed costs in our European retail businesses due to decreasing comparable store sales. The net improvement in the first half excluding the impact of Corporate Express primarily reflects improvement in product margin rates due to mix, better buying and own brand penetration in our European businesses, as well as supply chain improvements, partially offset by increased losses in our Asian business.

Stock-Based Compensation: Stock-based compensation increased to $53.4 million in the second quarter of 2008 and $86.8 million for the first half of 2008 from $48.9 million in the second quarter of 2007 and $83.1 million for the first half of 2007. 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 increase in the second quarter and first half of 2008 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 2007 Annual Report on Form 10-K, filed on March 4, 2008, in Note A of the Notes to the Condensed Consolidated Financial Statements . . .