Beginning in 2007, we discussed in our periodic reports the adverse impacts on our business from several broad economic drivers. We continually adjusted our activities during 2008 in an effort to address the impact these factors were having on our customers and lessen the adverse impact on our results. Through the third quarter of 2008, we assessed our 2008 full year forecast compared to the base year used in our prior year goodwill test and looked to a recent acquisition in the office supply sector as an indicator of then-current market participant information. At that time, our stock price had begun to decline, but it had not sustained a low valuation for an extended period of time. We had announced the beginning of a business review to be conducted by each of the Divisions, but the potential impacts were uncertain at that time. Considering these factors, we concluded that the accounting criteria requiring an acceleration of our goodwill testing had not been met at the end of the third quarter.
The changes in business conditions since that time are considered significant. Initial decisions from our fourth quarter business review included the closing of stores in North America and internationally, the exiting of certain unproductive businesses and the curtailing of capital expenditures throughout the company. Because of the current real estate markets, some of these decisions will require the use of cash for several years as the opportunities for subleasing vacant locations appears limited. These changes, combined with the extreme volatility and related deepening economic crisis experienced during the fourth quarter, lower-than-expected full year 2008 operating results, continued recessionary projections for 2009 and significant uncertainty about when the global economy will recover, have contributed to reduced projected cash flows and higher risk-adjusted discount rates used in our current analysis compared to those used in our goodwill test for 2007 and carried forward through our third quarter considerations. For our 2008 test, we assessed our valuations with discount rates of approximately 19% to 22% without changing the impairment conclusion. Our 2007 test included a 13% discount rate. This increase reflects the significantly higher risk in the overall market and particularly with specialty retailers, as well as a reduction in our credit rating during 2008. Our projections include anticipated benefits from a re-leveraging of sales when conditions improved. We anticipate a continued challenging environment for 2009 followed by some recovery beginning in 2010 in North America and beginning in 2011 for our international operations. In each of the reporting units, we have estimated a terminal value based on a normal growth model. Given current market uncertainties, we believe this captures the periodic cycles inherent in any forward forecast of operations and is a better indicator than the multiple of ending year cash flow used in prior analyses.
To assess the reasonableness of our calculations, the resulting estimated fair values of all reporting units were aggregated and compared to an average market capitalization (equity and debt) during late 2008, including a control premium of approximately 20% to 50%, depending on the discount rate used to assess the projected cash flows (22% - 19%; the higher the discount rate, the lower the resulting control premium). The market capitalization around the 2007 goodwill test was in excess of then-current book value and corroborated the conclusion of no impairment at that time. For the 2008 test, the estimated fair values indicated that the second step of goodwill impairment analysis was required in four of our five reporting units, and that analysis showed that the current value of goodwill could not be sustained in those four reporting units. Accordingly, we recorded a goodwill impairment charge of $1.2 billion, relating to the following reporting units: North American Retail, $2 million; North American Contract, $348 million; Europe, $794 million; and Asia, $69 million. Included in these impairment charges is goodwill resulting from 1990 and later acquisitions. All of these entities are considered integrated into their respective reporting units and their cash flows were aggregated with all other cash flows of the respective reporting unit in the determination of estimated fair value. Additionally, in light of the significant adverse economic conditions which developed later in the year, we looked for current market transactions that could provide perspective to our analysis, but no relevant purchase transactions could be found.
Approximately $19 million of goodwill associated with the North American Direct reporting unit was not impaired. This reporting unit has a relatively low net investment and projected cash flows were sufficient to recover its net assets. Based on the fair value estimate in excess of the carrying value, the company currently does not anticipate a risk of goodwill impairment for this reporting unit.
The impairment of trade names totaled approximately $57 million and primarily relates to the Niceday™ brand name which was part of a business acquisition in 2003. We have decided to shift the emphasis in the related markets away from this brand name to products with the Office Depotฎ and other private brand names. Accordingly, we lowered the expected contribution from this trade name and, combined with the factors above, a non-cash impairment charge was recorded to reduce the asset to its estimated fair value. Because the brand is expected to be retained but with lower prominence, it remains a non-amortizing intangible asset.
Exit Costs
During 2005, we announced a number of material charges relating to asset impairments, exit costs and other operating decisions that resulted from a wide-ranging assessment of assets and commitments. It was disclosed that additional charges would be recognized when the identified plans were implemented and the related accounting criteria were met. Associated pre-tax Charges in 2006 and 2007 totaled $63 million and $40 million, respectively. The few remaining exit activities from the 2005 planned business changes

have been incorporated into the activities related to our internal review that began in the fourth quarter of 2008. As mentioned above, we manage the costs and programs associated with these activities (the "Charges") at a corporate level, and accordingly, these amounts are not included in determining Division operating profit. Additional information about the costs and programs associated with the Charges is provided below.
A summary of the Charges and the line item presentation of these amounts in our accompanying Consolidated Statements of Operations is as follows.

                                                       2008         2007          2006
(Dollars in millions, except per share amounts)      Amounts       Amounts       Amounts

Cost of goods sold and occupancy costs               $     16     $       -     $       1
Store and warehouse operating and selling expenses         52            25            37
Goodwill and trade name impairments                     1,270             -             -
Other asset impairments                                   114             -             7
General and administrative expenses                        17            15            18

Total pre-tax Charges                                   1,469            40            63
Income tax effect                                        (103 )         (11 )         (21 )

After-tax impact                                     $  1,366     $      29     $      42
Per share impact                                     $   5.01     $    0.11     $    0.15

The primary components of Charges associated with exit activities include:
• Store closures (North America) - During the fourth quarter of 2008, we identified 112 stores in North America to be closed by the end of the first quarter of 2009, with an additional 14 stores identified to be closed during 2009 as their leases expire or other lease arrangements are finalized. As of December 27, 2008, six of the 112 stores had been closed, and the number of additional stores to be closed had been reduced to ten, net of relocated stores. The stores being closed are underperforming stores or stores that are no longer a strategic fit for the company. In making the decision on which stores to close, we considered sales, operating profit, cash flow, condition of the shopping center, location of other stores in the proximity and customer demographics, among other factors. The stores to be closed are located in various geographic regions, including 45 in the Central U.S., 40 in the Northeast and Canada, 19 in the West and eight in the South. Many of these customers may shop in alternative locations or through the company's other distribution channels. We have not accounted for these closures as discontinued operations. The total charges for these closures are estimated to be $180 million, with approximately $89 million recorded in the fourth quarter of 2008 and the balance to be recognized during 2009 as the stores are closed. The 2008 amounts include approximately $15 million of inventory write downs because the company executed an agreement with a third party liquidator in North America establishing the recoverable amount for inventory in those specific stores. These inventory write downs are presented in cost of goods sold and occupancy costs in our Consolidated Statements of Operations. Additionally, approximately $66 million is for asset impairment, $1 million is associated with severance and one-time termination benefit accruals, and $1 million represents other facility closure costs. As mentioned above, six of the stores were closed by year end 2008 and approximately $6 million was recognized for the estimated period of economic loss under the associated operating lease contracts. Additional severance of approximately $3 million will be recognized as services are performed over the closure period and applicable lease accruals will be recognized when the facilities are closed during 2009. We currently estimate approximately $88 million of lease charges to be recognized in 2009, but the amount may change as sublease assumptions are refined and then-current risk-adjusted discount rates applied. We are currently using discount rates ranging from 13.5% to 15.0% to discount these multi-year obligations.

• Reduction in store openings (North America) - We have reduced the number of new store openings for 2009 to approximately 15, from the previous estimate of 40 stores. This reduction resulted in the recognition in 2008 of approximately $9 million for the estimated period of economic loss under the operating lease contracts associated with the stores that will not be opened. We expect to record approximately $3 million in lease costs for these activities during 2009.

• Store closures (International) - We have decided to exit the retail sales channel in Japan during 2009 because most of our stores in that country are unprofitable. The total charges for these closures is estimated to be $13 million, with approximately $6 million recorded in the fourth quarter of 2008 and the balance to be recognized during 2009 as the stores are closed. The 2008 charges are primarily associated with asset impairments, and the 2009 charges include severance related expenses, lease costs and other facility closure costs of $4 million, $2 million and $1 million, respectively. Additionally, we expect to incur charges associated with residual inventory values from these closed facilities, however, these values cannot be reasonably estimated.

• Supply chain consolidation (North America) - During 2009, our current plan is to close five distribution centers and one crossdock facility to streamline our supply chain. These facilities are near the end of their initial lease terms and projected closure costs total approximately $8 million, with $2 million recognized during 2008 for severance related costs. The remainder of the charges relate to one-time termination benefits of $1 million, lease costs of $2 million and other exit costs including deconstruction expenses of $3 million. Additionally, we expect to incur charges associated with residual inventory values from these closed facilities, however, these values cannot be reasonably estimated.

• Supply chain consolidation (International) - We have substantially completed the consolidation of our distribution centers in Europe with one closure planned for 2009. During 2008, we recorded approximately $20 million in exit costs associated with this activity. These costs consisted primarily of accelerated depreciation, severance related expenses and future lease obligations, which totaled $8 million, $4 million and $4 million, respectively. We also recorded $4 million in charges related to other facility closure costs in 2008. We expect to record approximately $23 million in charges for these activities during 2009. The 2009 charges include lease costs, severance related expenses, accelerated depreciation and other facility closure costs of $11 million, $4 million, $4 million and $4 million, respectively.

• Call center and back office restructuring (International) - During 2007, we began the consolidation of our call centers and back office operations in Europe. We recorded approximately $13 million of charges related to these activities in 2008, of which $12 million was associated with severance and other one-time termination benefits. The remaining $1 million of charges incurred in 2008 related to other exit activities. We expect to record approximately $10 million in severance related charges and $1 million in lease costs for these activities during 2009.

• Additional employee reductions - Each of the Divisions, as well as Corporate, have identified positions that have been or will be eliminated in an effort to be more responsive to either customer needs or to centralize activities and eliminate geographic redundancies. Total severance and one-time benefit costs associated with these actions are estimated to be approximately $33 million, with $13 million recognized during 2008.

• Asset write downs - As a result of the fourth quarter 2008 business review, the company determined that it would no longer use the functionality in certain software applications and accordingly, recognized a charge of approximately $31 million to write down previously capitalized software costs that will not be providing future economic benefit. Additionally, during late 2008, the company substantially lowered its expectations for new store openings and store remodels and determined that certain other projects would not be completed. The company also concluded that possible acquisitions would not be completed before the end of the year, if at all. Previously deferred costs for these activities, which totaled approximately $11 million, were expensed during the fourth quarter of 2008.

• Other restructuring activities - During 2008, we recorded approximately $5 million of charges associated with other restructuring activities related to enhancing efficiencies throughout the company. Of these charges, approximately $1 million related to the harmonization of our product offerings in Europe, which resulted in a write down of inventory in the fourth quarter of 2008. Of the remaining charges, approximately $2 million related to the acceleration of depreciation on certain assets and $2 million was for lease costs. We expect to recognize additional charges of approximately $25 million in 2009 related to restructuring activities not identified above.

A summary of past and estimated future Charges is presented below:

                                                2006            2007           2008             2009
(Dollars in millions)                          Actual          Actual         Actual          Projected

Goodwill and trade name impairments           $      -        $      -        $ 1,270        $         -
Other asset impairments and accelerated
depreciation                                        28              20            124                  8
Cost of goods sold                                   1               -             16                  -
Lease obligations/Contract terminations              9               2             21                111
One-time termination benefits                       22              19             32                 46
Other associated costs                               3              (1 )            6                 21

Total pre-tax Charges                         $     63        $     40        $ 1,469        $       186

As with any estimate, the timing and amounts may change when projects are implemented. Additionally, changes in foreign currency exchange rates may impact amounts reported in U.S. dollars related to our foreign activities. Of the total 2008 and projected 2009 Charges, approximately $237 million either have or are expected to require cash settlement, including longer-term lease obligations that will require cash over multi-year lease terms; approximately $1,418 million of Charges are non-cash items.

SUMMARY OF OPERATING RESULTS
A summary of factors important to understanding our results for 2008 is provided below and further discussed in the narrative that follows this overview.
• Total company sales were $14.5 billion in 2008, down 7% compared to 2007. Sales in North America decreased 10% for the year and comparable store sales in North American Retail decreased 13%. International Division sales increased 1% in U.S. dollars and decreased 2% in local currencies.

• Gross margin for 2008 declined 140 basis points from 2007, following a 200 basis point decline in the prior year. The 2008 decline reflects deleveraging of fixed property costs resulting from the reduced sales, as well as increased promotional activity, partially offset by shifts in product and customer mix.

• Non-cash charges for impairment of goodwill and trade names totaled $1.3 billion.

• Other non-cash asset impairment charges in 2008 totaled $222 million, pretax, and relate primarily to the impairment of store assets in the North American Retail Division, certain software applications no longer used and impairment of customer list intangible assets in the International Division. Of this total, $114 million is included as a component of the 2008 Charges.

• Additional pre-tax Charges of approximately $85 million, $40 million and $63 million were recognized in 2008, 2007 and 2006, respectively.

• Our effective tax rate for 2008 was 6%, reflecting the largely non-deductible nature of the goodwill impairment charge, as well as the impact of deferred tax asset valuation allowances and other adjustments.

• Diluted (loss) earnings per share for 2008, 2007, and 2006 were $(5.42), $1.43, and $1.75, respectively. The Charges had a per share impact of $5.01, $0.11 and $0.15 in 2008, 2007 and 2006, respectively.

• Cash flow from operating activities was $468 million in 2008, compared to $411 million in 2007, primarily reflecting improvement in working capital that was significantly offset by the reduction in business performance.

TOTAL COMPANY
Our overall sales decreased 7% in 2008, and increased 3% in 2007, and 5% in 2006. Adverse economic conditions throughout our sales territories contributed to the 2008 decline. The 2007 sales increase was driven by higher U.S. dollar sales in the International Division and essentially flat sales in North America. The decrease in gross profit as a percentage of sales reflects significant deleveraging of fixed property costs in 2008, as well as the impact of a highly promotional environment in both 2008 and 2007. In 2008, gross margin benefited from a shift to core supplies. Gross margins in 2007 were adversely impacted by a shift in category mix to lower margin products, a shift in customer mix, inventory clearance activities, and cost increases. An increase in private brand sales benefited gross margin in both periods.
Total operating expenses as a percentage of sales was 38.3% in 2008, 25.9%in 2007 and 26.2% in 2006. The 2008 amount includes goodwill and trade name impairment charges of 8.8% of sales and other asset impairments of 1.5% of sales. Expressed as a percentage of sales, the remaining 2008 operating expenses were approximately 210 basis points higher than in 2007. This change reflects the impact of relatively fixed levels of labor costs on a declining sales base, as well as increases in legal and professional fees and the impact of no bonus expense in 2007. The 2007 decrease in total operating expenses as a percentage of sales resulted primarily from lower performance-based pay across all of our Divisions in response to lower operating results. Lower advertising costs and pre-opening expenses also contributed to the decrease in operating and selling expenses as a percentage of sales. These positive impacts were partially offset by higher selling expenses and supply chain costs, as well as investments made to support growth initiatives in our International Division.
Discussion of other income and expense items, including changes in interest and taxes follows our review of the operating segments.

NORTH AMERICAN RETAIL DIVISION

         (Dollars in millions)                2008          2007          2006

         Sales                              $ 6,112.3     $ 6,813.6     $ 6,789.4
         % change                               (10)%            -%            4%

         Division operating profit (loss)   $  (29.2)     $   354.5     $   454.3
         % of sales                            (0.5)%          5.2%          6.7%

Total sales in the North American Retail Division were $6.1 billion in 2008, a decrease of 10% from 2007. Sales in 2007 were up slightly compared to 2006. Comparable store sales in 2008 from the 1,207 stores that were open for more than one year decreased 13% for the full year and showed successive declines throughout each quarter of the year. The 2008 comparable sales declines were across all three primary categories of supplies, technology and furniture and other with more discretionary items such as desks and filing showing the greatest declines. Some of our core supplies areas showed the lowest declines. Comparable store sales in 2007 from the 1,158 stores that were open for more than one year decreased 5%. The comparable store sales declines in both 2008 and 2007 were significantly influenced by the macroeconomic environment, which grew increasingly challenging in 2008 as the year progressed. In 2007, softness in the U.S. housing market resulted in weaker small business and consumer spending, particularly in Florida and California, which combined, represented . . .