**United StatesSecurities and Exchange Commission**

**Washington,D.C. 20549**

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**FORM 10-K**

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**x** Annual Report Pursuant to Section 13or 15(d) of theSecurities Exchange Act of 1934

**or**

**oTransition Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

| For the fiscal year ended                               |   |       |   | Commission File  Number |
|---------------------------------------------------------|--------|------------|--------|-------------------------|
| **February 3,  2007**                              |   |       |   | **0-17586**             |
| **STAPLES, INC.**                                  |
| (Exact name of  registrant as specified in its charter) |
|                                                    |   | ** ** |   | **04-2896127**          |
| **Delaware**                                            |   |       |   | (I.R.S. Employer        |
| (State of  Incorporation)                               |   |       |   | Identification  No.)    |

 

**Five HundredStaples DriveFramingham, Massachusetts 01702508-253-5000Securities registered pursuant to Section 12(b) of the Act:**
|                                            | **Title of each class** | ** **               | ** ** | ** ** | **Name of each exchange on which registered** | ** ** |
|--------------------------------------------|-------------------------|--------------------------|------------|------------|-----------------------------------------------|------------|
| Common Stock, par  value $0.0006 per share |                    | The NASDAQ Stock  Market |

 

**Securitiesregistered pursuant to Section 12(g) of the Act:None**

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15 (d) of the Act. Yes o  No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of  “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone): Large accelerated filer x Acceleratedfiler oNon-accelerated filer o

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

The aggregate market value of the voting stock held bynon-affiliates of the registrant, based on the last sale price of Staples’common stock on July 28, 2006, as reported by NASDAQ, was approximately$15.7 billion. In determining the market value of non-affiliate votingstock, shares of Staples’ common stock beneficially owned by each executiveofficer and director have been excluded. This determination of affiliate statusis not necessarily a conclusive determination for other purposes.

Theregistrant had 716,997,983 shares of common stock, par value $0.0006,outstanding as of February 26, 2007.

**DocumentsIncorporated By Reference**

Listed below is the document incorporated by referenceand the part of the Form 10-K into which the document isincorporated:

Portionsof the Proxy Statement for the 2007 Annual Meeting of Stockholders      Part III

 

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**PART I**

**Item 1.**                        Business

**Staples**

Staples is the world’s leading office products company.We pioneered the office products superstore concept by opening the first officeproducts superstore in Brighton, Massachusetts in 1986 to serve the needs ofsmall businesses. The office products industry has experienced significantgrowth since 1986, expanding to include a variety of retailers, dealers, anddistributors, including other high-volume office supply chains.

Staples, Inc. and itssubsidiaries (“we”, “Staples” or the “Company”) operate three businesssegments: North American Retail, North American Delivery, and InternationalOperations. Additional information regarding our operating segments ispresented in Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in this Annual Report on Form 10-K,and financial information regarding these segments is provided in Note Kin the Notes to Consolidated Financial Statements contained in this AnnualReport on Form 10-K.

**Business Strategy**

We view the office products market as a large,diversified market for office supplies and services, business machines andrelated products, computers and related products, and office furniture. Althoughthere are no clear demarcations among customer segments, we target fourprincipal groups: home offices (customers spending over $500 per year on officeproducts excluding computers and furniture; including home-based businesses andteachers); small businesses and organizations with up to 20 office workers;medium-size businesses and organizations with between 20 and 500 officeworkers; and large businesses and organizations with more than 500 officeworkers. We effectively reach each sector of the office products market throughthree sales channels designed to be convenient to the needs of our customers:retail stores, catalog, and Internet. Our ability to address all four majorcustomer groups increases and diversifies our available market opportunities;increases awareness of the Staples brand among customers in all four groups,who often shop across multiple sales channels; and allows us to benefit from anumber of important economies of scale, such as increased buying power,enhanced efficiencies in distribution and advertising, and improved capacity toleverage general and administrative functions.

We strive to provide superior value to our customersthrough a combination of everyday low prices, a broad selection of products,convenient store locations, easy to use web sites, and reliable and fast orderdelivery. Our strategy is to maintain our leadership in the office productsindustry by differentiating ourselves from our competition, deliveringindustry-best execution, and expanding our market share.

To achieve differentiationwe strive to execute our brand promise, *we makebuying office products easy*, in response to extensive customerresearch revealing the significant value customers place on an easy shoppingexperience. Our commitment to making it easy for our customers to shop isreflected both in terms of the shopping experience and product offering. Wehave implemented initiatives in both retail and delivery to improve thecustomer experience, infused the “Easy” brand personality in all of ourmarketing vehicles, web sites, and store signage, actively promoted ouradvertising tagline, “that was easy”, and increased the quality and value ofour Staples brand products. To respond to the importance our customers place oncourteous and helpful associates, we continue to emphasize our customer servicemodel in our retail business to ensure a positive shopping experience driven byhigher customer engagement. We continually upgrade our web sites to make iteasier for customers to shop for products and services on-line. In addition, weare growing our copy and print centers through enhanced service and technology,introducing innovative products that customers can buy only at Staples, andhelping customers run their offices by offering technology services such ascomputer repair and installation of wireless networks performed by in-store andmobile technicians through our “EasyTech” service.

We are committed to delivering industry-best executionwith a focus on improved service and profitability. Our recent initiatives haveincluded a focus on our domestic supply chain program. We have improved ouroverall end-to-end order to fulfillment execution, increasing in-stock levels,achieving higher inventory turns, and driving better customer service in retailand delivery. In addition, over the past several years we have continued tofocus on driving profitable sales growth; improving profit margins; andincreasing asset productivity. As a result, we have dramatically improvedreturn on net assets, the primary metric we use to measure shareholder valuecreation. During 2006 we reached our long-

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term goal for return onnet assets and we expect to maintain our disciplined financial strategy,allocating resources between short and long-term investments and businessimprovement programs.

We plan to expand ourmarket share by continuing to grow our existing businesses as well asdeveloping new growth ideas and strengthening our global presence. Initiativesto expand our existing businesses include growing the copy and print centerbusiness, growing our delivery business, and entering new geographic markets. Newgrowth ideas include selling office products through additional retailchannels, experimenting with new store formats such as stand-alone copy andprint shops, and developing innovative products. To strengthen our globalpresence, we are investing in our existing businesses in Europe and makingtargeted investments in high growth markets in Asia and South America, which weexpect to become meaningful contributors to our long-term growth.

***North American Retail***

Our North American Retail segment, consisting of 1,620stores throughout the United States and Canada at the end of fiscal 2006,generates the majority of our sales and profits. Our North American retailstores are located in 47 states, the District of Columbia, and 11 Canadianprovinces in major metropolitan markets and smaller markets. Our retailoperations focus on serving the needs of small businesses and home offices. Weoperate different retail formats tailored to the unique characteristics of thestore locations, including our 20,000 square foot prototypical superstore, a14,600 square foot format designed for rural markets, and smaller stores suitedto dense, urban markets such as New York City.

Our strategy for our North American superstoresfocuses on several key objectives: offer an easy-to-shop store environment withquality products that are in-stock and easy to find, with fast checkout andcourteous, helpful and knowledgeable sales associates. As part of our strategyof delivering on our “Easy” brand promise, we focus on several key categoriesfor which our customers rely on us to be an authority: ink and toner, paper,business machines, and copy and print services. For instance, to make it easierto shop for printer cartridges, we expanded our cartridge offering, made themmore accessible to our customers and offered an in-stock guarantee. We alsooffer our retail customers the ability to make purchases on-line through *Staples.com*Internet access points to acquire products thatare not available in our stores. Customers can pay for these purchases at theregister or through our *Staples.com*accesspoints for delivery to their home or business. In 2006, we launched aninnovative technology and process called “Fast Forward” to shorten checkoutwait time during periods of high customer traffic such as our holiday andback-to-school seasons. Store associates pre-scan customers’ purchases whilethey wait in line with a portable device, expediting the payment process. Wealso added the capability for customers to pay directly at self service copiersinstead of at the registers. We continue to deliver on our “Easy” brand promisewith our “EasyTech” services and the continued offering of our “easy rebate”program, which allows on-line submission for rebates, eliminating the need tomail in forms and receipts.

Many of our stores benefit from the customer-friendlystore layout we refer to as the “Dover” format. This design was created toimprove the appeal of the store to the customer and to open up the interior ofthe store to give the customer a better view of our wide selection of products,making it easier to find what they are shopping for. We continue to improve ourDover store format with on-going refinements in store design, productplacement, and adjacencies. Currently, we operate more than 660 Dover stores,and have implemented key elements of the Dover model in the majority of ourother store formats. In 2005, we began testing a stand-alone copy &print shop. This full-service store, approximately 4,000 square feet, isdesigned for prime, urban locations and offers a 1,200 stock keeping unit (SKU)supplies assortment.

Our growth strategy is to expand our store base in acontrolled fashion to produce strong sales and yield high returns on ourinvestments. We believe that our network of stores and delivery businesses invarious metropolitan markets enhances our profitability by allowing us toleverage marketing, distribution and supervision costs. In determining where toopen new retail stores, we assess potential real estate sites through astringent approval process which evaluates the financial return for each store.Our evaluations consider such factors as the concentration of small and medium-sizedbusinesses and organizations, the number of home offices, household incomelevels, our current market presence, proximity to competitors, the availabilityof quality real estate locations and other factors.

We plan to open at least 100 new stores in NorthAmerica in 2007, compared to 99 new stores in 2006, and 99 new stores in 2005. Thegrowth program for fiscal 2007 will continue to focus on adding stores toexisting markets as well as expansion into new markets. We successfully enteredthe Chicago market in 2005, launched the South Florida market in 2006, andannounced our plans to enter Denver in 2007. We are well positioned to enterseveral other major North American markets where we currently have no presence.

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We are pursuing theopportunity to sell office products through other retail channels and haverolled out a Staples aisle in more than 2,400 grocery stores, where we featurea high percentage of Staples brand products. This initiative is designed tocapture incremental sales and strengthen our brand.

***North American Delivery***

Our North American Delivery segment is comprised ofthree business units: “Staples Business Delivery”, “Quill Corporation,” and ourContract business, operating under the names “Staples National Advantage” and “StaplesBusiness Advantage.”

*StaplesBusiness Delivery:*   Our Staples Business Deliveryoperations combine the activities of our direct mail catalog business,operating since 1990, our *Staples.com* website, and Canadian Internet sites. Staples Business Delivery is primarilydesigned to reach small businesses and home offices, offering next business daydelivery for most office supply orders in major metropolitan areas. We marketStaples Business Delivery through catalog mailings, direct mail advertising, atelesales group generating new accounts and growing existing accounts, andInternet and other broad-based media advertising.

*QuillCorporation:*   Founded in 1956 and acquired byStaples in May 1998, Quill is a direct mail catalog and Internet businesswith a targeted approach to servicing the business product needs ofapproximately one million small and medium-sized businesses in the UnitedStates. To attract and retain its customers, Quill offers outstanding customerservice, Quill brand products, and special services. Quill also operatesMedical Arts Press, a specialty internet and catalog business offering productsfor medical professionals.

*StaplesNational Advantage and Staples Business Advantage:*   OurContract operations focus primarily on serving the needs of medium-sized tolarge businesses that often require more service than is provided by atraditional retail or mail order business. Through our Contract sales force, weoffer customized pricing, payment terms, usage reporting, the stocking ofcertain proprietary items, and full service account management. Our Contractoperations are divided into two businesses. Staples National Advantage is anationwide Contract business selling to large multi-regional businesses. StaplesBusiness Advantage primarily sells to medium-sized and large regional companies.We initially established the Contract business through acquisitions, and sincethat time have entered certain metropolitan markets through the expanded salesand distribution capabilities of Staples Business Advantage. *StaplesLink.com*, which offers the highest level ofprocurement functionality available on our web sites, meets the onlineprocurement needs of our Contract customers. In 2006, we began to leverage oursales force and delivery network to offer copy services to our Contractcustomers. We operate three dedicated copy facilities to service the copy andprint needs of corporate accounts, and plan to open several more Contract copyfacilities in 2007.

Our strategies for NorthAmerican Delivery focus on customer service and customer acquisition andretention to grow our delivery business and increase its profitability. Wecontinue to focus on improving our perfect order metric, which measures thenumber of orders that we fulfill on time and without error. We have establishedcustomer service standards to improve recovery of service failures and to makeit easy for customers to resolve any issues with their orders. We are alsoworking to enhance our distribution capabilities to support rapid growth in ourdelivery businesses by expanding the number of multi-business fulfillmentcenters and reducing the number of single business facilities, in order toenhance our ability to provide next business day delivery to more markets. Wecontinue to expand our sales force as we increase our market share and sell abroader assortment of products and services to new and existing customers. Wealso plan to continue to enter new geographic markets, add new products andservices, and consider small, “tuck-in” acquisition opportunities to drivesales growth in this segment of our business. In addition, we continue to driveprofitability by increasing our customers’ average order size and the percentageof orders placed electronically. Rapid growth in higher margin “share of wallet”categories such as janitorial and break room supplies and copy and printservices are designed to drive profitability in each of the three businessunits in North American Delivery.

***International Operations***

Our International Operations consist of retail stores,catalog and Internet businesses operating under various names in 19 countriesin Europe, South America, and Asia. As of February 3, 2007, we operatedretail stores in Belgium, Germany, The Netherlands, Portugal, and the UnitedKingdom. In addition, we operate catalog and Internet businesses in Argentina,Austria, Belgium, Brazil, China, the Czech Republic, Denmark, France, Germany,Hungary, Italy, Luxembourg, The Netherlands, Poland, Spain, Sweden,Switzerland, and the United Kingdom.

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Europe is an important growth platform for Staples. Weexpect that over time we will achieve the level of profitability we haveattained in North America with our strong multi-channel offering by improvingexecution, expanding penetration of own brand products, and capitalizing onpotential synergies in procurement, supply chain activities and sharedadministrative services. In our retail business, we are implementing strategiesthat were successful in North America, which focus on developing relationshipswith small business customers and home offices by driving steady sales ofconsumable office supplies. We plan to open approximately 10 new stores inEurope in 2007, compared to 6 new stores in 2006, and 8 new stores in 2005. Webelieve our delivery business in Europe is a significant growth opportunity. Withour acquisitions over the past several years in the delivery channel combinedwith our Staples branded delivery business, we believe that we are wellpositioned for success as a multi-channel distributor of office products inEurope. We plan to continue to grow our delivery business rapidly throughimproved execution, enhanced segmentation of customers, an improved on-lineoffering and increased sharing of best practices.

Although small today,Staples’ businesses in high growth  markets in Asia and South America are expectedto become meaningful to our long-term growth. In 2004, we acquired OfficenetS.A. to gain access to Brazil and Argentina through a delivery business withoperations in Sao Paulo, Brasilia and Buenos Aires. We also entered the Asianoffice products market in 2004 through a joint venture in China, operating adelivery business primarily based in Shanghai. In 2005, we launched deliveryoperations in Beijing, and we entered the Taiwan market in 2006 operating adelivery business through a joint venture with UB Express. We also announced ajoint venture with Pantaloon Retail Limited in India in January 2007.

**Merchandising**

We sell a wide variety of office supplies andservices, business machines and related products, computers and relatedproducts, and office furniture. While our buying and merchandising staff usesintegrated computer systems to perform centrally the vast majority of ourmerchandise planning and product purchasing, some of our business units,particularly Quill, our Canadian operations and our multiple Internationalbusinesses, leverage our global buying and merchandising staff along with theirown staff to meet their more localized buying and merchandising needs. Wepurchase products from several hundred vendors worldwide, and we believe thatcompetitive sources of supply are available to us for substantially all of theproducts we carry.

We have approximately 8,000 SKUs stocked in each ofour typical North American retail stores and approximately 15,000 SKUs stockedin our North American Delivery fulfillment centers. In order to minimize unitcosts and selling prices, we sell many products in multi-unit packages. Ourmerchandising team constantly reviews and updates our product assortment torespond to changing customer needs and to maximize the performance of our keycategories: ink and toner, paper, business machines, and copy and printservices.

Our product offering includes Staples, Quill, andother proprietary branded products which represented approximately 20% of ourtotal sales in 2006. We offer more than 2,000 own brand products, deliveringvalue to our customers with prices that are on average 10% to 15% lower thanthe national brand. These products also generate higher gross margins onaverage than national brands. Our own brand strategy focuses on offeringnational brand quality at lower prices with a full range of marketinginitiatives including clear and impactful packaging, in-store displays, samplingand advertising. We have brought to market hundreds of new Staples brandproducts, many of which are innovative and exclusive to Staples. Our long-termgoal is to grow own brand products to 30% of total product sales.

We also offer an array of services, includinghigh-speed, color and self-service copying, other printing services, faxing andpack and ship. The multi-billion dollar copy and print market is highlyfragmented, and we believe we have a significant opportunity to gain share inthis market. Over the past three years, we have upgraded the technology,signage, labor, training and quality processes in our copy and print centersacross the chain. More recently we invested in marketing and pricing offers todrive customer awareness of our capabilities. These efforts have resulted inincreased sales and average order size as well as improved gross margins as ourcopy and print business has much higher than average margins.

Another important service opportunity is in thetechnology services arena, a fragmented market largely served by localindependents. We provide a full range of installation, upgrade, and repairservices, as well as data protection, privacy, and security services throughour “EasyTech” program. In fiscal 2006, we added a resident tech in every storeand will continue to invest in our technology services infrastructure tofurther develop our range of capabilities.

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Thefollowing table shows our sales by each major product line as a percentage oftotal sales for the periods indicated:

| ** **                              | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **February 3, 2007**  | ** ** | **January 28, 2006** | ** ** | **January 29, 2005** | ** ** |
| Office supplies  and services           |       |                            | 39.0       | % |   |   | 40.5 | % |   |   | 40.1 | % |   |
| Business machines  and related products |       |                            | 31.1       | % |   |   | 30.4 | % |   |   | 30.7 | % |   |
| Computers and  related products.        |       |                            | 22.3       | % |   |   | 22.2 | % |   |   | 21.9 | % |   |
| Office furniture                        |       |                            | 7.6        | % |   |   | 6.9 | % |   |   | 7.3 | % |   |
|                                    |       |                            | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

**Supply Chain**

We operate two distinct networks to service themajority of the replenishment and delivery requirements for North America: anetwork of 4 retail distribution centers in California, Connecticut, Indianaand Maryland to support our US retail operations, and a separate network of 29 deliveryfulfillment centers to support our North American delivery operations. Mostproducts are shipped from our suppliers to the distribution and fulfillmentcenters for reshipment to our stores and delivery to our customers through ourdelivery hubs. Of our 29 North American Delivery fulfillment centers, 13locations service more than one of our delivery businesses and 5 of the 13locations support all three of our delivery businesses. In fiscal 2007, we planto expand our multi-business capabilities by adding one additional deliveryfulfillment center in Denver. We also plan to open a small fulfillment centerin Nova Scotia to serve our Canadian catalog customers.

Over the past several years, we have implemented acomprehensive program to improve our domestic retail supply chain performanceas we looked to improve our processes across all functions. The main objectivesof the plan included improving our sales demand and inventory managementprocesses and optimizing our distribution network. By implementing thisprogram, we have made significant progress in improving supply chainreliability and inventory in-stock levels. We expect to reap further benefitsto sales, inventory turns and operating margins over the next several years inour North American Retail business. In addition, we have increased sales andinventory turns through better store execution, improved attachment selling andproduct ordering, and strengthening collaboration with our vendors andincreasing the amount of merchandise that flows, or is “cross docked”, throughour supply chain without being stored in our distribution centers. We have alsoexpanded operating margins by decreasing total product costs and improvingsell-through on promotional goods. We have evolved to taking an allencompassing view of our supply chain performance, focusing on the best “totaldelivered cost.”  We believe that ourmanagement approach allows us to make better tradeoffs to drive improvements inoverall costs and inventory productivity.

We believe our distribution centers provide us with significantlabor and merchandise cost savings by centralizing receiving and handlingfunctions and by enabling us to purchase in full truckloads and othereconomically efficient quantities from suppliers. We also believe that thereduction in the number of purchase orders and invoices processed results insignificant administrative cost savings. Our centralized purchasing anddistribution systems also permit our store associates to spend more time oncustomer service and store presentation. Since our distribution centersmaintain backup inventory, our in-store inventory requirements are reduced, andwe operate smaller gross square footage stores than would otherwise be required.A smaller store size reduces our rental costs and provides us with greateropportunity to locate stores closer to our target customers.

In 2006, we turned ourfocus to improving our North American Delivery supply chain to sustain rapidgrowth and excellent customer service. We began to implement a series ofprojects as part of a multi-year program to reduce inventory while maintainingstrong performance in our perfect order metric. Our goals are to driveinventory turn improvement; leverage logistics expense; increase productmargins by stocking more product in our own facilities and driving down shrinkand damages in our network; drive greater efficiency and throughput in ourfulfillment centers; and give our customers more control over how Staplesservices them.

**Marketing**

We pursue a variety of marketing strategies tomaintain high brand awareness and attract and retain our target customers. Thesestrategies include broad-based media advertising such as television,radio, newspaper circulars, print, and Internet advertising, as well ascatalogs, e-mail marketing, a loyalty program, and a sophisticated directmarketing system. In addition, we market to larger companies through acombination of direct mail catalogs, customized catalogs, 

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and a field sales force. Wechange our level of marketing spend as well as the mix of media employed dependingupon market, customer value, seasonal focus, competition, and cost factors. Thisflexible approach allows us to optimize the effectiveness and efficiency of ourmarketing expenditures.

Our retail, catalog and *Staples.com*marketing efforts focus on small businesses and home offices. Our marketingstrategies emphasize our strong brand and leverage all of our retail anddelivery vehicles to send a consistent message to our core customers, as wellas to target our back-to-school, holiday, and tax-time selling seasons. Inaddition, we continue to focus more on targeted direct marketing and on ourcustomer loyalty program. We have upgraded our systems and capabilities toenable us to have a deeper understanding of our customers’ multi-channelpurchasing behaviors.

We continue to focus ourmarketing message on the communication of our brand promise: *we make buying office products easy*. The look and feel ofour advertising vehicles reflect our “Easy” brand promise and we areconsistently communicating the brand across all channels and customer touchpoints, including our signage, television commercials, product placement onnational television programs, catalogs, web sites, circulars, direct marketing,and store uniforms.

**Associates andTraining**

We have a strong corporate culture that values ethics,high performance, entrepreneurship, and teamwork. We place great importance onrecruiting, training, retaining, and providing the proper incentives for highquality associates. Offering attractive career opportunities and a commitmentto a diverse and safe work environment, we pride ourselves on being a workplaceof choice. We recruit actively on college campuses, hire talented individualswith experience in successful retail operations, and reward current associatesfor referring new associates.

We consider customer relations and our associates’knowledge of office products and related capital goods to be significant to ourmarketing approach and our ability to deliver customer satisfaction. Associatesare trained in a number of areas, including, where appropriate, salestechniques, management skills, and product knowledge. In many areas of ourbusiness, associates are required to complete ethics training on a regularbasis. We have continued to make investments in computer-based, multi-mediatraining programs to upgrade associates’ selling skills and improve customerservice at our retail stores and delivery operations. Store management traineesadvance through the store management structure by taking on assignments indifferent areas as they are promoted. Store and call center associates preparefor new assignments through Staples and third party designed training modules,written manuals, video instruction, and self-testing.

As of February 3,2007, Staples employed 39,437 full-time and 34,209 part-time associates.

**Corporate Values**

We believe that adhering to soundcorporate values is good for our business. We strive****tomake a positive impact on our associates, customers, and the environment byacting responsibly and with integrity, conducting our global business as anethical employer and good corporate citizen.

*Ethics*—Wemaintain ethical business practices by encouraging open and honestcommunication and providing associates with practical tools to make soundbusiness decisions. We launched an extensive ethics training program in 2005. Ourtraining identifies ethical dilemmas that associates might face, and providesinformation on the many ways associates can get help and report concerns. Indoing this, we ensure that Staples associates act in the best interest of ourshareholders and protect our brand reputation.

*Environment*—Weare committed to offering environmentally preferable products and focus onrecycling services to our customers, investing in renewable energy and energyconservation, and supporting environmental education efforts. These initiativeshelp preserve natural resources for future generations and can help meetcustomer needs, create operational efficiencies, spark new businessopportunities, reduce future risks to our environment, and enhance our brand.

*Diversity*—Westrive to offer a diverse and inclusive work environment where associates aregiven the support they need to learn, grow and reach their potential. Ouremployees represent a wide variety of life experiences and ethnic backgrounds. Webelieve our workforce reflects the communities in which we operate. Thisstrategy makes our workforce better able to relate to our customers.

*Community**—Through*StaplesFoundation for Learning, national charitable partnerships, and in-kinddonations, we support communities worldwide by providing resources tonon-profit organizations that provide educational 

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opportunities forall people, with a special emphasis on disadvantaged youth. Since 2002, StaplesFoundation for Learning has been a national supporter of the Boys and GirlsClubs of America. In 2006, Staples partnered with its first global charity,Ashoka. Staples Foundation for Learning supports Ashoka’s Youth Ventureprogram, which empowers youth to act as positive agents for social change intheir communities.

**Competition**

We compete with a variety of retailers, dealers anddistributors in the highly competitive office products market. We compete inmost of our geographic markets with other high-volume office supply chains,including Office Depot and OfficeMax, that are similar in concept to us interms of pricing strategy and product selection, as well as mass merchants suchas Wal-Mart, warehouse clubs such as Costco, computer and electronicssuperstores such as Best Buy, copy and print businesses such as FedEx Kinko’s,ink cartridge specialty stores, and other discount retailers. In addition, bothour retail stores and delivery operations compete with numerous mail orderfirms, contract stationer businesses, electronic commerce distributors, localdealers and direct manufacturers such as Dell. Many of our competitors haveincreased their presence in our markets in recent years. Some of our currentand potential competitors are larger than we are and have substantially greaterfinancial resources.

We believe we are able tocompete favorably against other high-volume office supply chains, massmerchants and other retailers, dealers and distributors because of severalfactors: our focus on the business customer and home office; our ability torespond to the dynamic markets in which we operate and the changing needs ofour customers; courteous, helpful and knowledgeable associates servingcustomers; a wide assortment of office supplies that are in-stock and easy to find;fast checkout; easy to use web sites; reliability and speed of order shipment;convenient store locations; hassle-free returns and fair prices.

**Trademarks**

In connection with our North American Retail business,we have registered the marks “Staples”, “Staples the Office Superstore” and “thatwas easy” in the Principal Register of the United States Patent and TrademarkOffice, and the marks “Staples the Office Superstore”, “Staples” and “that waseasy” in Canada. In connection with our North American Delivery businesses, wehave registered the marks “Staples.com”, “Staples National Advantage”, “StaplesBusiness Advantage”, “Staples Business Delivery”, “StaplesLink.com”, “Quill”, “Quill.com”,“Medical Arts Press”, “HMI”, and “SmileMakers” on the Principal Register of theUnited States Patent and Trademark Office. In connection with our InternationalOperations, we have registered the mark “Staples” in many foreignjurisdictions, including, but not limited to, the United Kingdom, Germany, TheNetherlands, Poland, Portugal, Belgium and China; the mark “Office Centre” inmany foreign jurisdictions, including, but not limited to, The Netherlands,Portugal and Belgium; the mark “Bernard” in multiple foreign jurisdictions,including, but not limited to, France and Belgium; the mark “JPG” in manyforeign jurisdictions, including, but not limited to, France and Belgium; themark “Neat Ideas” in many foreign jurisdictions, including, but not limited to,the United Kingdom; the mark “Sistemas Kalamazoo” in Spain; the mark “MondOffice”in Italy; the mark “Quill Kontorslagret” in Sweden; the mark “Pressel” inAustria, Germany, Switzerland, Poland and the Czech Republic; the mark “MallingBeck” in Denmark; and the mark “Officenet” in Argentina and Brazil. Our jointventure in China owns the mark “OA365”.

We maintain a web site with the addresswww.staples.com. We are not including the information contained on our web siteas a part of, or incorporating it by reference into, this Annual Report on Form 10-K.We make available free of charge through our web site our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,and amendments to these reports, as soon as reasonably practicable after weelectronically file such material with, or furnish such material to, theSecurities and Exchange Commission (SEC).

We were organized in 1985and are incorporated in Delaware.

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**EXECUTIVE OFFICERSOF THE REGISTRANT**

Our executive officers, their respective ages andpositions as of February 28, 2007 and a description of their businessexperience is set forth below. There are no family relationships among any ofthe executive officers named below.

**Joseph G. Doody,**age 54

Mr. Doody has served asPresident-Staples North American Delivery since March 2002. Prior to that,he served as President-Staples Contract & Commercial from November 1998to March 2002.

**Christine T. Komola,**age 39

Ms. Komola has served asSenior Vice President and Corporate Controller since July 2004. Prior tothat, she served as the Senior Vice President, General Merchandise Manager forfurniture from January 2002 to July 2004. She has also held otherroles within Staples since joining in 1997.

**John J. Mahoney,**age 55

Mr. Mahoney has served as Vice Chairman and ChiefFinancial Officer since January 2006. Prior to that, he served asExecutive Vice President, Chief Administrative Officer and Chief FinancialOfficer since October 1997, and as Executive Vice President and ChiefFinancial Officer from September 1996 to October 1997.

**Michael A. Miles,**age 45

Mr. Miles has served asPresident and Chief Operating Officer since January 2006. Prior to that,he served as Chief Operating Officer since September 2003. Prior tojoining Staples, Mr. Miles was Chief Operating Officer, Pizza Hut for Yum!Brands, Inc. from January 2000 to August 2003.

**Demos Parneros,** age 44

Mr. Parneros has served as President—U.S. Storessince April 2002. Prior to that, he served in various capacities sincejoining Staples in October 1987, including Senior Vice President of Operationsfrom March 1999 to March 2002 and Vice President of Operations from October 1996to February 1999.

**Ronald L. Sargent,** age 51

Mr. Sargent has served as Chairman since March 2005,as Chief Executive Officer since February 2002 and as a Director since 1999.Prior to that, he served in various capacities since joining Staples in March 1989,including President from November 1998 to January 2006, ChiefOperating Officer from November 1998 to February 2002,President-North American Operations from October 1997 to November 1998,and President-Staples Contract & Commercial from June 1994 to October 1997.

**Jack A. VanWoerkom,**age 53

Mr. VanWoerkom has served as Executive VicePresident, General Counsel and Secretary since March 2003. Prior to that,he was Senior Vice President, General Counsel and Secretary from March 1999to March 2003.

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**FORWARD-LOOKINGSTATEMENTS**

This Annual Reporton Form 10-K and, in particular, the description of our Business setforth in Item 1 and our Management’s Discussion and Analysis of FinancialCondition and Results of Operations set forth in Appendix B contain orincorporate a number of forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934, including statements regarding:

·       projectedfuture sales growth, comparable store sales, earnings and earnings per share;

·       expectedfuture revenues, operations, expenditures and cash needs;

·       paymentof cash dividends;

·       theprojected number, timing and cost of new store openings;

·       estimatesof the potential markets for our products and services, including theanticipated drivers for future growth;

·       salesand marketing plans;

·       thepotential growth and levels of profitability of our European operations;

·       ourassessment of the outcome and financial impact of litigation, including theclass action lawsuits that have been brought against us for alleged violationsof what is known as California’s “wage and hour” law, and other governmentalproceedings and the potential impact of unasserted claims;

·       projectedimprovements to our infrastructure and impact of such improvements on ourbusiness and operations;

·       assessmentof competitors and potential competitors;

·       potentialmergers, acquisitions or joint ventures; and

·       assessmentof the impact of recent tax legislation and accounting pronouncements,including SFAS No. 123R, FIN 48 and SFAS No. 157.

In addition, anystatements contained in or incorporated by reference into this report that arenot statements of historical fact should be considered forward-lookingstatements. You can identify these forward-looking statements by use of thewords “believes,” “expects,” “anticipates,” “plans,”  “may,” “will,” “would,” “intends,” “estimates”and other similar expressions, whether in the negative or affirmative. Wecannot guarantee that we actually will achieve the plans, intentions orexpectations disclosed in the forward-looking statements made. There are anumber of important risks and uncertainties that could cause our actual resultsto differ materially from those indicated by such forward-looking statements.These risks and uncertainties include, without limitation, those set forthbelow under the heading “Risk Factors.” We do not intend to update publicly anyforward-looking statements whether as a result of new information, futureevents or otherwise.

**Item 1A.**                RiskFactors

***Our market is highly competitive and we may notcontinue to compete successfully.***

The office products marketis highly competitive. We compete with a variety of local, regional, nationaland international retailers, dealers and distributors for customers, employees,locations, products, services and other important aspects of our business. Inmost of our geographic markets, we compete with other high-volume office supplychains such as Office Depot and OfficeMax that are similar in concept to us interms of pricing strategy and product selection, as well as mass merchants suchas Wal-Mart, warehouse clubs such as Costco, computer and electronicssuperstores such as Best Buy, copy and print businesses such as FedEx Kinko’s,ink cartridge specialty stores, and other discount retailers. In addition, bothour retail stores and delivery operations compete with numerous mail orderfirms, contract stationer businesses, electronic commerce distributors, localdealers and direct manufacturers such as Dell. Many of our competitors haveincreased their presence in our markets in recent years. Some of our currentand potential competitors are larger than we are and have substantially greaterfinancial resources that may be devoted to sourcing, promoting and sellingtheir products. Increased competition or improved performance by ourcompetitors could reduce our market share, profit margin and projectedoperating results, and could adversely affect our business and financialperformance in other ways.

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***We may be unable to continue to open new stores andenter new markets successfully.***

An important part of ourbusiness plan is to increase our number of stores and enter new geographicmarkets. We currently plan to open at least 110 new stores in fiscal 2007. Forour growth strategy to be successful, we must identify and lease favorablestore sites, hire and train associates and adapt management and operationalsystems to meet the needs of our expanded operations. These tasks may bedifficult to accomplish successfully. If we are unable to open new stores asquickly as planned, our future sales and profits may be adversely affected. Evenif we succeed in opening new stores, these new stores may not achieve the samesales or profit levels as our existing stores. Also, our expansion strategyincludes opening new stores in markets where we already have a presence so wecan take advantage of economies of scale in marketing, distribution andsupervision costs. However, these new stores may result in the loss of sales inexisting stores in nearby areas, which could adversely affect our business andfinancial performance.

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

Our business has growndramatically over the past several years and continues to grow through organicgrowth and strategic acquisitions. Accordingly, sales of our products andservices, the number of stores that we operate, the number of countries inwhich we conduct business and the number of associates have grown and likelywill continue to grow. This growth places significant demands on management andoperational systems. If we are not successful in continuing to support ouroperational and financial systems, expanding our management team and increasingand effectively managing our associate base, this growth is likely to result inoperational inefficiencies and ineffective management of the business andassociates, which will in turn adversely affect our business and financialperformance. In addition, as we grow, our business is subject to a wider arrayof complex state, federal and international regulations, and may beincreasingly the target of private actions alleging violations of suchregulations. This increases the cost of doing business and the risk that ourbusiness practices could unknowingly result in liabilities that may adverselyaffect our business and financial performance.

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

Our operating results aredirectly impacted by the health of the North American, European, South Americanand Asian economies. Our business and financial performance may be adverselyaffected by current and future economic conditions, including unemploymentlevels, energy costs, interest rates, recession, inflation, the impact ofnatural disasters and terrorist activities, and other matters that influencebusiness and consumer spending.

***Our business and financial performance is dependent uponour ability to attract and retain qualified associates.***

Our performance isdependent on attracting and retaining a large and growing number of qualityassociates. We face intense competition for qualified associates, and many ofour associates are in entry-level or part-time positions with historically highrates of turnover. Our ability to meet our labor needs generally whilecontrolling our labor costs is subject to numerous external factors, includingthe availability of a sufficient number of qualified persons in the work force,unemployment levels, prevailing wage rates, changing demographics, health andother insurance costs and changes in employment legislation. If we are unableto attract and retain qualified associates or our labor costs increasesignificantly, our business and financial performance may be adverselyaffected.

***Our stock price may fluctuate based on marketexpectations.***

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

***Our quarterly operating results are subject tosignificant fluctuation.***

Our operating results havefluctuated from quarter to quarter in the past, and we expect that they willcontinue to do so in the future. Our earnings may not continue to grow at ratessimilar to the growth rates achieved in recent years and may fall short ofeither a prior fiscal period or investors’ expectations. Factors that couldcause these quarterly fluctuations include: the extent to which sales in newstores result in the loss of sales in existing stores; the mix of 

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productssold; pricing actions of competitors; the level of advertising and promotionalexpenses; extreme weather-related disruptions; and seasonality, primarilybecause the sales and profitability of our stores are typically slightly lowerin the first and second quarter of the fiscal year than in other quarters. Mostof our operating expenses, such as rent expense, advertising expense andemployee salaries, do not vary directly with the amount of sales and aredifficult to adjust in the short term. As a result, if sales in a particularquarter are below expectations for that quarter, we may not proportionatelyreduce operating expenses for that quarter, and therefore such a salesshortfall would have a disproportionate effect on our net income for thequarter.

***Our expanding international operations expose us tothe unique risks inherent in foreign operations.***

As of February 3,2007, we had operations in 19 countries in Europe, South America and Asia and asignificant presence in Canada. As evidenced by our recent entry into the SouthAmerican and Asian markets, we may also seek to expand further into otherinternational markets. Our foreign operations encounter risks similar to thosefaced by our U.S. operations, as well as risks inherent in foreign operations,such as local customs and regulatory constraints, foreign trade policies,competitive conditions, foreign currency fluctuations and unstable politicaland economic conditions. Further, our recent acquisitions in Europe and SouthAmerica and our investments in Asia have increased our exposure to theseforeign operating risks, which could have an adverse impact on ourinternational income and worldwide profitability.

***Our business may be adversely affected by the actionsof and risks associated with our third party vendors.***

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

***Our expandedoffering of proprietary branded products may not improve our financialperformance and may expose us to product liability claims.***

Our product offeringincludes Staples, Quill and other proprietary branded products whichrepresented approximately 20% of our total sales in fiscal 2006. While we havefocused on the quality of our proprietary branded products, we rely on thirdparty manufacturers for these products. Such third party manufacturers mayprove to be unreliable, or the quality of our globally sourced products may notmeet our expectations. Furthermore, economic and political conditions in areasof the world where we source such products may adversely affect theavailability and cost of such products. In addition, our proprietary brandedproducts compete with other manufacturers’ branded items that we offer. As wecontinue to increase the number and types of proprietary branded products thatwe sell, we may adversely affect our relationships with our vendors, who maydecide to reduce their product offerings through Staples and increase theirproduct offerings through our competitors. Finally, if any of our customers areharmed by our proprietary branded products, they may bring product liabilityand other claims against us.  Any ofthese circumstances could have an adverse effect on our business and financialperformance.

***Our debt level andoperating lease commitments could impact our ability to obtain future financingand continue our growth strategy.***

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

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***Fluctuations in our effective tax rate may adverselyaffect our business and results of operations.***

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

***Compromises of our information security may adverselyaffect our business.***

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

***The California wage and hour class action lawsuit mayadversely affect our business and financial performance.***

Various class actionlawsuits have been brought against us for alleged violations of what is knownas California’s “wage and hour” law. The plaintiffs have alleged that weimproperly classified store managers as exempt under the California wage andhour law, making such managers ineligible for overtime wages. The plaintiffsare seeking to require us to pay overtime wages to the putative class for theperiod from October 21, 1995 to the present. The court has granted classcertification to the plaintiffs. The court’s ruling is procedural only and doesnot address the merits of the plaintiffs’ allegations. The trial date for thecase has been scheduled for November 2007. We believe we have meritoriousdefenses in the litigation and expect to prevail. If, however, there is anadverse judgment from which there is no successful appeal, damages could rangefrom $10 million to $150 million, excluding interest and attorneys’ fees.

**Item 1B.**               UnresolvedStaff Comments

None.

**Item 2.**                        Properties

As of February 3,2007, we operated a total of 1,884 superstores in 47 states and the District ofColumbia in the United States, 11 provinces in Canada, 11 regions in the UnitedKingdom, 8 regions in Germany and in The Netherlands, Portugal and Belgium. Asof that same date, we also operated 55 distribution and fulfillment centers in20 states of the United States, 4 provinces in Canada, 2 regions in the UnitedKingdom, 2 regions in France, and in Austria, Belgium, Denmark, Germany, Italy,The Netherlands, Spain, Sweden, Brazil, Argentina and China. The followingtable sets forth the locations of our facilities as of February 3, 2007.

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**RETAILSTORES**

| Country/State/Province/Region | ** ** | ** ** | ** ** | **Number of  Stores** | ** ** |
|-------------------------------|------------|------------|------------|----------------------------|------------|
| **United States**             | ** ** |       | ** ** | ** **                 |       |
| Alabama                       |       |       | 12         |                       |       |
| Arizona                       |       |       | 33         |                       |       |
| Arkansas                      |       |       | 5          |                       |       |
| California                    |       |       | 189        |                       |       |
| Colorado                      |       |       | 6          |                       |       |
| Connecticut                   |       |       | 39         |                       |       |
| Delaware                      |       |       | 7          |                       |       |
| District of Columbia          |       |       | 2          |                       |       |
| Florida                       |       |       | 69         |                       |       |
| Georgia                       |       |       | 35         |                       |       |
| Idaho                         |       |       | 9          |                       |       |
| Illinois                      |       |       | 50         |                       |       |
| Indiana                       |       |       | 31         |                       |       |
| Iowa                          |       |       | 14         |                       |       |
| Kansas                        |       |       | 3          |                       |       |
| Kentucky                      |       |       | 12         |                       |       |
| Maine                         |       |       | 12         |                       |       |
| Maryland                      |       |       | 43         |                       |       |
| Massachusetts                 |       |       | 69         |                       |       |
| Michigan                      |       |       | 43         |                       |       |
| Minnesota                     |       |       | 2          |                       |       |
| Mississippi                   |       |       | 2          |                       |       |
| Missouri                      |       |       | 9          |                       |       |
| Montana                       |       |       | 6          |                       |       |
| Nebraska                      |       |       | 3          |                       |       |
| Nevada                        |       |       | 1          |                       |       |
| New Hampshire                 |       |       | 22         |                       |       |
| New Jersey                    |       |       | 80         |                       |       |
| New Mexico                    |       |       | 8          |                       |       |

 

| Country/State/Province/Region | ** ** | ** ** | ** ** | **Number of  Stores** | ** ** |
|-------------------------------|------------|------------|------------|----------------------------|------------|
| New York                      |       |       | 117        |                       |       |
| North Carolina                |       |       | 45         |                       |       |
| North Dakota                  |       |       | 2          |                       |       |
| Ohio                          |       |       | 57         |                       |       |
| Oklahoma                      |       |       | 16         |                       |       |
| Oregon                        |       |       | 18         |                       |       |
| Pennsylvania                  |       |       | 87         |                       |       |
| Rhode Island                  |       |       | 11         |                       |       |
| South Carolina                |       |       | 16         |                       |       |
| South Dakota                  |       |       | 1          |                       |       |
| Tennessee                     |       |       | 19         |                       |       |
| Texas                         |       |       | 36         |                       |       |
| Utah                          |       |       | 11         |                       |       |
| Vermont                       |       |       | 7          |                       |       |
| Virginia                      |       |       | 36         |                       |       |
| Washington                    |       |       | 27         |                       |       |
| West Virginia                 |       |       | 5          |                       |       |
| Wisconsin                     |       |       | 11         |                       |       |
| Wyoming                       |       |       | 4          |                       |       |
|                          |       |       | 1,342      |                       |       |
| **Canada**                    | ** ** |       | ** ** | ** **                 |       |
| Alberta                       |       |       | 32         |                       |       |
| British Columbia              |       |       | 35         |                       |       |
| Manitoba                      |       |       | 9          |                       |       |
| New Brunswick                 |       |       | 7          |                       |       |
| Newfoundland                  |       |       | 3          |                       |       |
| Nova Scotia                   |       |       | 12         |                       |       |
| Ontario                       |       |       | 103        |                       |       |
| Prince Edward  Island         |       |       | 2          |                       |       |
| Quebec                        |       |       | 65         |                       |       |

 

| Country/State/Province/Region | ** ** | ** ** | ** ** | **Number of  Stores** | ** ** |
|-------------------------------|------------|------------|------------|----------------------------|------------|
| Saskatchewan                  |       |       | 9          |                       |       |
| Yukon                         |       |       | 1          |                       |       |
|                          |       |       | 278        |                       |       |
| **United  Kingdom**           | ** ** |       | ** ** | ** **                 |       |
| Anglia                        |       |       | 11         |                       |       |
| Borders                       |       |       | 1          |                       |       |
| Central                       |       |       | 32         |                       |       |
| Granada                       |       |       | 16         |                       |       |
| HTV                           |       |       | 10         |                       |       |
| London                        |       |       | 29         |                       |       |
| Meridien                      |       |       | 11         |                       |       |
| Tyne-Tees                     |       |       | 5          |                       |       |
| West Country                  |       |       | 5          |                       |       |
| Yorkshire                     |       |       | 12         |                       |       |
| Scotland                      |       |       | 5          |                       |       |
|                          |       |       | 137        |                       |       |
| **Germany**                   | ** ** |       | ** ** | ** **                 |       |
| Baden-Wurttemberg             |       |       | 3          |                       |       |
| Bayern                        |       |       | 5          |                       |       |
| Bremen                        |       |       | 2          |                       |       |
| Hamburg                       |       |       | 9          |                       |       |
| Hessen                        |       |       | 5          |                       |       |
| Niedersachsen                 |       |       | 9          |                       |       |
| Nordrhein-Westfalen           |       |       | 21         |                       |       |
| Schleswig-Holstein            |       |       | 3          |                       |       |
|                          |       |       | 57         |                       |       |
| **The  Netherlands**          |       |       | 45         |                       |       |
| **Portugal**                  |       |       | 22         |                       |       |
| **Belgium**                   |       |       | 3          |                       |       |

 

**DISTRIBUTIONAND FULFILLMENT CENTERS**

| Country/State/Province/Region | ** ** | ** ** | ** ** | **Number of  Centers** | ** ** |
|-------------------------------|------------|------------|------------|-----------------------------|------------|
| **United States**             |       |       |       |                        |       |
| California                    |       |       | 4          |                        |       |
| Colorado                      |       |       | 1          |                        |       |
| Connecticut                   |       |       | 2          |                        |       |
| Florida                       |       |       | 1          |                        |       |
| Georgia                       |       |       | 2          |                        |       |
| Illinois                      |       |       | 1          |                        |       |
| Indiana                       |       |       | 1          |                        |       |
| Kansas                        |       |       | 1          |                        |       |
| Maryland                      |       |       | 1          |                        |       |
| Massachusetts                 |       |       | 1          |                        |       |
| Minnesota                     |       |       | 1          |                        |       |
| New Jersey                    |       |       | 1          |                        |       |
| New York                      |       |       | 2          |                        |       |
| North Carolina                |       |       | 1          |                        |       |

 

| Country/State/Province/Region | ** ** | ** ** | ** ** | **Number of  Centers** | ** ** |
|-------------------------------|------------|------------|------------|-----------------------------|------------|
| Ohio                          |       |       | 1          |                        |       |
| Oregon                        |       |       | 1          |                        |       |
| Pennsylvania                  |       |       | 2          |                        |       |
| South Carolina                |       |       | 1          |                        |       |
| Texas                         |       |       | 2          |                        |       |
| Wisconsin                     |       |       | 1          |                        |       |
|                          |       |       | 28         |                        |       |
| **Canada**                    |       |       |       |                        |       |
| Alberta                       |       |       | 1          |                        |       |
| British Columbia              |       |       | 1          |                        |       |
| Ontario                       |       |       | 2          |                        |       |
| Quebec                        |       |       | 1          |                        |       |
|                          |       |       | 5          |                        |       |
| **United Kingdom**            |       |       |       |                        |       |
| Buckinghamshire               |       |       | 1          |                        |       |
| Northamptonshire              |       |       | 2          |                        |       |
| ** **                    |       |       | 3          |                        |       |

 

| Country/State/Province/Region | ** ** | ** ** | ** ** | **Number of  Centers** | ** ** |
|-------------------------------|------------|------------|------------|-----------------------------|------------|
| **France**                    | ** ** |       |       |                        |       |
| Ile de France                 |       |       | 2          |                        |       |
| Nord—Pas de Calais       |       |       | 1          |                        |       |
| ** **                    |       |       | 3          |                        |       |
| **Austria**                   |       |       | 1          |                        |       |
| **Belgium**                   |       |       | 1          |                        |       |
| **Denmark**                   |       |       | 1          |                        |       |
| **Germany**                   |       |       | 2          |                        |       |
| **Italy**                     |       |       | 1          |                        |       |
| **The  Netherlands**          |       |       | 1          |                        |       |
| **Spain**                     |       |       | 1          |                        |       |
| **Sweden**                    |       |       | 1          |                        |       |
| **Brazil**                    |       |       | 3          |                        |       |
| **Argentina**                 |       |       | 1          |                        |       |
| **China**                     |       |       | 3          |                        |       |

 

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Most of the existing facilities are leased by us withinitial lease terms expiring on dates between 2007 and 2024. In most instances,we have renewal options at increased rents. Leases for 169 of the existingstores provide for contingent rent based upon sales.

Our Framingham,Massachusetts corporate office is owned by us and consists of approximately650,000 square feet.

**Item 3.**                        LegalProceedings

From time to time, we may be subject to routinelitigation incidental to our business.

As previously disclosed,various class action lawsuits have been brought against us for allegedviolations of what is known as California’s “wage and hour” law. The first ofthese lawsuits was filed on October 21, 1999. These cases weresubsequently consolidated as the “Staples Overtime Cases,” Superior Court forthe State of California, County of Orange, Civil Complex Center (JudicialCouncil Coordination Proceeding No. 4235, Lead Case No. 816121). Theplaintiffs have alleged that we improperly classified store managers as exemptunder the California wage and hour law, making such managers ineligible forovertime wages. Staples and the general manager class have reached a tentativesettlement. The settlement requires court approval. The case involvingassistant store managers is unaffected by the settlement. The plaintiffs areseeking to require us to pay overtime wages to the putative class for theperiod from October 21, 1995 to the present. The court has granted classcertification to the plaintiffs. The court’s ruling is procedural only and doesnot address the merits of the plaintiffs’ allegations. The trial date for thecase has been scheduled for November 2007. We believe we have meritoriousdefenses in the litigation and expect to prevail. If, however, there is an adversejudgment from which there is no successful appeal, damages could range from $10million to $150 million, excluding interest and attorneys’ fees.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

No matter was submitted toa vote of our security holders during the fourth quarter of fiscal 2006.

**PART II**

**Item 5.**                        Marketfor the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

Our common stock is traded on the NASDAQ Global SelectMarket under the symbol “SPLS”.

At February 23, 2007, the number of holders ofrecord of our common stock was 6,913.

Thefollowing table sets forth for the periods indicated the high and low salesprices per share of our common stock on the NASDAQ Global Select Market, asreported by NASDAQ and reflecting the three-for-two common stock split that waseffected in the form of a common stock dividend distributed on April 15,2005.

| ** **                                 | ** ** | **High**     | ** ** | **Low**      | ** ** |
|--------------------------------------------|------------|--------------|------------|--------------|------------|
| *Fiscal  Year Ended February 3, 2007* |       |         |       |         |       |
| First Quarter                              |       | $            | 26.79      |         | $          | 22.31 |   |
| Second Quarter                             |       |   27.71 |       |   21.57 |       |
| Third Quarter                              |       |   27.04 |       |   21.08 |       |
| Fourth Quarter                             |       |   28.00 |       |   24.94 |       |
| *Fiscal Year Ended January 28, 2006*  | ** ** | ** **   | ** ** | ** **   | ** ** |
| First Quarter                              |       | $            | 22.02      |         | $          | 18.64 |   |
| Second Quarter                             |       | 23.84        |       | 18.87        |       |
| Third Quarter                              |       | 23.24        |       | 20.36        |       |
| Fourth Quarter                             |       | 24.14        |       | 21.90        |       |

 

While we will continue to retain earnings for use inthe operation and expansion of our business, in 2004 we decided to return cashto our stockholders by initiating a cash dividend. Our first cash dividend of$0.13 per outstanding share of our common stock was paid on May 17, 2004.Thereafter, we paid an annual cash dividend of $0.17 per share of ouroutstanding common stock on April 14, 2005, and an annual cash dividend of$0.22 per share of our outstanding common stock on April 20, 2006. On March 1,2007, we announced that we would pay a cash dividend of $0.29 per share on April 19,2007 to shareholders of record on March 30, 2007. Our payment of dividendsis permitted under our revolving 

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credit agreement, whichonly restricts the payment of dividends in the event we are in default underthe agreement or such payout would cause a default under the agreement. Whileit is our current intention to pay cash dividends in years following 2007, anydecision to pay future cash dividends will be made by our Board of Directorsand will depend upon our earnings, financial condition and other factors.

For information regardingsecurities authorized for issuance under our equity compensation plans, pleasesee Note H in the Notes to Consolidated FinancialStatements contained in this Annual Report on Form 10-K.

**Stock PerformanceGraph**

The following graphcompares the cumulative total stockholder return on Staples common stockbetween February 2, 2002 and February 3, 2007 (the end of the 2006fiscal year) with the cumulative total return of (1) the Standard &Poor’s 500 Stock Index and (2) the Standard & Poor’s Retail Index.This graph assumes the investment of $100.00 on February 2, 2002 inStaples common stock, the Standard & Poor’s 500 Stock Index and theStandard & Poor’s Retail Index, and assumes dividends are reinvested.Measurement points are February 1, 2003, January 31, 2004, January 29,2005, January 28, 2006 and February 3, 2007 (Staples’ last fivefiscal year ends).

**Dividendsto ReinvestedTOTAL RETURN TO STOCKHOLDERS**

 

| ** **                   | ** ** | **2-Feb-02** | ** ** | **1-Feb-03** | ** ** | **31-Jan-04** | ** ** | **29-Jan-05** | ** ** | **28-Jan-06** | ** ** | **3-Feb-07** | ** ** |
|------------------------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|---------------|------------|--------------|------------|
| SPLS                         |       | $            | 100.00     |         |       | $             | 95.77      |          |       |          | $          | 148.41       |       |   |   | $ | 180.37 |   |   |   | $ | 199.20 |   |   | $ | 221.28 |   |
| S & P  Retail Index |       | $            | 100.00     |         |       | $             | 71.53      |          |       |          | $          | 106.11       |       |   |   | $ | 120.92 |   |   |   | $ | 131.10 |   |   | $ | 148.62 |   |
| S & P 500 Index     |       | $            | 100.00     |         |       | $             | 76.25      |          |       |          | $          | 100.80       |       |   |   | $ | 104.38 |   |   |   | $ | 160.88 |   |   | $ | 129.07 |   |

 

16

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The following tableprovides information about our purchases during the fourth quarter of fiscal2006 of equity securities that are registered by the Company pursuant to Section 12of the Securities Exchange Act of 1934.

**IssuerPurchases of Equity Securities**

| **Fiscal Period**                              | ** ** | ** ** | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per Share(1)** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(2)** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Plans or  Programs(2)** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 29,  2006—November 25, 2006  |       |       | 1,772,799  |                                             |       |                                                | $          | 25.98                                                                                                                               |       |                                                                                                                                                  |       | 1,772,799 |   |   |   | $ | 788,868,000 |   |   |
| November 26,  2006—December 30, 2006 |       |       | 3,581,658  |                                             |       |                                                | $          | 26.37                                                                                                                               |       |                                                                                                                                                  |       | 3,581,658 |   |   |   | $ | 694,410,000 |   |   |
| December 31,  2006—February 3, 2007  |       |       | 3,673,429  |                                             |       |                                                | $          | 26.29                                                                                                                               |       |                                                                                                                                                  |       | 3,673,429 |   |   |   | $ | 597,819,000 |   |   |
| Total  for Fourth Quarter of Fiscal 2006            |       |       | 9,027,886  |                                             |       |                                                | $          | 26.26                                                                                                                               |       |                                                                                                                                                  |       | 9,027,886 |   |   |   | $ | 597,819,000 |   |   |

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(1)          Averageprice paid per share includes commissions and is rounded to the nearest twodecimal places.

(2)          On October 7, 2005,we announced that our Board of Directors approved the repurchase of $1.5billion of our common stock through February 2, 2008 following thecompletion of our prior $1.0 billion repurchase program.

**Item 6.**                        SelectedFinancial Data

The information required by this Item is attached as *Appendix A.*

**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The information required by this Item is attached aspart of Appendix B under the caption “*Quantitative andQualitative Disclosures about Market Risks*”.

**Item 7A.**                Quantitativeand Qualitative Disclosures about Market Risk

The information required by this Item is attached aspart of *Appendix B.*

**Item 8.**                        FinancialStatements and Supplementary Data

The information required by this Item is attached as *Appendix C.*

**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

**1.****                 DisclosureControls and Procedures**

The Company’s management, with the participation ofthe Company’s chief executive officer and chief financial officer, evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of February 3,2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by a company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the company’s management, including its principal executive and principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure. Management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving their objectives and management necessarily applies its judgment inevaluating the cost-benefit relationship of possible controls and procedures. Basedon the evaluation of the Company’s disclosure controls and procedures as of February 3,2007, the Company’s chief executive officer and chief financial officerconcluded that, as of such date, the Company’s disclosure controls andprocedures were effective at the reasonable assurance level.

17

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**2.****                 InternalControl over Financial Reporting**

**(a)****         Management’sAnnual Report on Internal Control Over Financial Reporting**

The management of Staplesis responsible for establishing and maintaining adequate internal control overfinancial reporting for the Company. Internal control over financial reportingis defined in Rule 13a-15(f) or 15d-15(f) promulgatedunder the Securities Exchange Act of 1934 as a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers and effected by the company’s board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles andincludes those policies and procedures that:

·       Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the company;

·       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and

·       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

Staples’ internal control system was designed toprovide reasonable assurance to the Company’s management and Board of Directorsregarding the preparation and fair presentation of published financialstatements. All internal control systems, no matter how well designed, haveinherent limitations which may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.Projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

Staples’ management assessed the effectiveness of theCompany’s internal controls over financial reporting as of February 3,2007. In making this assessment, it used the criteria set forth in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on our assessment, webelieve that, as of February 3, 2007, the Company’s internal control overfinancial reporting is effective based on those criteria.

Staples’ Independent Registered Public Accounting Firmhas issued a report on our assessment of the Company’s internal control overfinancial reporting. This report appears below.

18

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**(b)****          AttestationReport of the Independent Registered Public Accounting Firm**

**Reportof Independent Registered Public Accounting Firm**

Board of Directors and ShareholdersStaples, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control Over FinancialReporting, that Staples, Inc. maintained effective internal control overfinancial reporting as of February 3, 2007, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). Staples, Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and proceduresthat (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that Staples, Inc.maintained effective internal control over financial reporting as of February 3,2007, is fairly stated, in all material respects, based on the COSO criteria. Also,in our opinion, Staples, Inc. maintained, in all material respects,effective internal control over financial reporting as of February 3,2007, based on****the COSO criteria**.**

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Staples, Inc. as of February 3, 2007and January 28, 2006, and the related consolidated statements of income,stockholders’ equity, and cash flows for each of the three years in the periodended February 3, 2007 of Staples, Inc. and our report dated February 27,2007 expressed an unqualified opinion thereon.
|        | /s/  Ernst & Young LLP |   |
|--------|---------------------------------|--------|
|   | Ernst &  Young LLP     |   |

 

Boston, MassachusettsFebruary 27, 2007

19

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**(c)****           Changesin Internal Control Over Financial Reporting**

No change in the Company’sinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) occurred duringthe fiscal quarter ended February 3, 2007 that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**Item 9B.**               OtherInformation

None.

**PART III**

Certain informationrequired by Part III is omitted from this Annual Report on Form 10-Kand incorporated herein by reference to the definitive proxy statement withrespect to our 2007 Annual Meeting of Stockholders (the “Proxy Statement”),which we will file with the Securities and Exchange Commission not later than120 days after the end of the fiscal year covered by this Report.

**Item 10.**                 Directors,Executive Officers and Corporate Governance

Certain information required by this Item is containedunder the heading “Executive Officers of the Registrant” in Part I of thisAnnual Report on Form 10-K. Other information required by this Itemwill appear under the headings “Proposal 1 - Election of Directors”, “ShareholderProposals” and “Corporate Governance” in our Proxy Statement, which sectionsare incorporated herein by reference.

The information required by this Item pursuant to Item405 of Regulation S-K will appear under the heading “Section 16(a) BeneficialOwnership Reporting Compliance” in our Proxy Statement, which section is incorporatedherein by reference.

We have adopted a writtencode of ethics that applies to our principal executive officer, principalfinancial officer, and principal accounting officer or controller, or personsperforming similar functions. Our code of ethics, which also applies to ourdirectors and all of our officers and employees, can be found on our web site,which is located at www.staples.com, and is also an exhibit to this report. Weintend to make all required disclosures concerning any amendments to, orwaivers from, our code of ethics on our web site.

**Item 11.**                 ExecutiveCompensation

The information requiredby this Item will appear under the heading “Executive Compensation” including “CompensationDiscussion and Analysis”, “Director Compensation”, “Compensation CommitteeInterlocks and Insider Participation” and “Compensation Committee Report” inour Proxy Statement, which sections are incorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

The information requiredby this Item will appear under the headings “Beneficial Ownership of CommonStock” and “Securities Authorized for Issuance under Equity Compensation Plans”in our Proxy Statement, which sections are incorporated herein by reference.

**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

The information requiredby this Item will appear under the headings “Certain Relationships and RelatedTransactions” and “Director Independence” in our Proxy Statement, whichsections are incorporated herein by reference.

**Item 14.**                 PrincipalAccountant Fees and Services

The information requiredby this Item will appear under the heading “Independent Registered PublicAccounting Firm’s Fees” in our Proxy Statement, which section is incorporatedherein by reference.

20

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**Item15.**                 Exhibits andFinancial Statement Schedules

(a)           Index to ConsolidatedFinancial Statements.

1.                *Financial Statements.*The following financial statements andschedules of Staples, Inc. are included as *Appendix C*of this Report:

·        ConsolidatedBalance Sheets—February 3, 2007 and January 28, 2006.

·        ConsolidatedStatements of Income—Fiscal years ended February 3, 2007, January 28,2006, and January 29, 2005.

·        ConsolidatedStatements of Stockholders’ Equity—Fiscal years ended February 3, 2007, January 28,2006, and January 29, 2005.

·        ConsolidatedStatements of Cash Flows—Fiscal years ended February 3, 2007, January 28,2006, and January 29, 2005.

·        Notes to ConsolidatedFinancial Statements.

2.                *Financial Statement Schedules.*

·        ScheduleII—Valuation and Qualifying Accounts

All schedules for which provision is made in theapplicable accounting regulations of the Securities and Exchange Commissionother than the one listed above are not required under the related instructionsor are not applicable, and, therefore, have been omitted.

3.                *Exhibits.*The exhibits which are filed or furnished withthis report or which are incorporated herein by reference are set forth in the Exhibit Indexon page D-1, which is incorporated herein by reference.

21

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**Signatures**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on February 28,2007.
|        |   | STAPLES, INC. |
|--------|--------|--------------------|
|   |   | By:                |   | /s/  RONALD L. SARGENT |
|   |   |               |   | Ronald L.  Sargent, |
|   |   |               |   | *Chairman  and Chief Executive Officer  (Principal Executive Officer)* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                           | **Signature** | ** **                                         | ** ** | ** **              | **Capacity** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------|---------------|----------------------------------------------------|------------|-------------------------|--------------|------------|------------|------------|----------|------------|
| /s/ RONALD L. SARGENT     |          | Chairman of the  Board and Chief Executive Officer |       | February 28, 2007  |
| Ronald  L. Sargent        |          | (Principal Executive  Officer)                     |       |                    |
| /s/ BASIL L. ANDERSON     |          | Director                                           |       | February 26, 2007  |
| Basil  L. Anderson        |          |                                               |       |                    |
| /s/ BRENDA C. BARNES      |          | Director                                           |       | February 26, 2007  |
| Brenda  C. Barnes         |          |                                               |       |                    |
| /s/ ARTHUR M. BLANK       |          | Director                                           |       | February 27 , 2007 |
| Arthur  M. Blank          |          |                                               |       |                    |
| /s/ MARY ELIZABETH BURTON |          | Director                                           |       | February 27 , 2007 |
| Mary  Elizabeth Burton    |          |                                               |       |                    |
| /S/ GARY L. CRITTENDEN    |          | Director                                           |       | February 27, 2007       |
| Gary  L. Crittenden       |          |                                               |       |                    |
| /s/ ROWLAND T. MORIARTY   |          | Director                                           |       | February 26, 2007  |
| Rowland  T. Moriarty      |          |                                               |       |                    |
| /s/ ROBERT C. NAKASONE    |          | Director                                           |       | February 27, 2007  |
| Robert  C. Nakasone       |          |                                               |       |                    |
| /s/ MARTIN TRUST          |          | Director                                           |       | February 24, 2007  |
| Martin  Trust             |          |                                               |       |                    |
| /s/ PAUL F. WALSH         |          | Director                                           |       | February 24 , 2007 |
| Paul  F. Walsh            |          |                                               |       |                    |
| /s/ JOHN J. MAHONEY       |          | Vice Chairman and  Chief Financial Officer         |       | February 28, 2007  |
| John  J. Mahoney          |          | (Principal Financial  Officer)                     |       |                    |
| /s/ CHRISTINE T. KOMOLA   |          | Senior Vice  President and Corporate Controller    |       | February 28, 2007  |
| Christine T.  Komola      |          | (Principal Accounting Officer)                     |       |                    |

 

22

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**APPENDIX A**

**STAPLES,INC. AND SUBSIDIARIESSELECTED FINANCIAL DATA(Dollar Amounts in Thousands, Except Per Share Data)**

| ** **                                 | ** ** | **Fiscal Year Ended**                | ** ** |
|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                 | ** ** | **February 3,  2007(2)  (53 weeks)** | ** ** | **January 28,  2006(2)  (52 weeks)** | ** ** | **January 29,  2005(3)  (52 weeks)** | ** ** | **January 31,  2004(4)(5)  (52 weeks)** | ** ** | **February 1,  2003(6)(7)  (52 weeks)** | ** ** |
| **Statement of Income Data:**              |       |                                           |       |   |   |   |   |   |   |   |   |
| Sales                                      |       | $                                              | 18,160,789 |   | $ | 16,078,852 |   | $ | 14,448,378 |   | $ | 12,967,022 |   | $ | 11,596,075 |   |
| Gross profit                               |       | 5,194,001                                      |       | 4,582,618 |   | 4,102,322 |   | 3,496,036 |   | 2,941,696 |   |
| Net income                                 |       | 973,677                                        |       | 784,117 |   | 664,575 |   | 450,211 |   | 412,783 |   |
| Basic  earnings per common share(1):       |       | 1.35                                           |       | 1.07 |   | 0.90 |   | 0.62 |   | 0.59 |   |
| Diluted  earnings per common share(1):     |       | 1.32                                           |       | 1.04 |   | 0.87 |   | 0.61 |   | 0.58 |   |
| Dividends (1)                              |       | $                                              | 0.22       |   | $ | 0.17 |   | $ | 0.13 |   | $ | — |   | $ | — |   |
| Statistical Data:                          |       |                                           |       |   |   |   |   |   |   |   |   |
| Stores open at end of period               |       | 1,884                                          |       | 1,780 |   | 1,680 |   | 1,559 |   | 1,488 |   |
| Balance Sheet Data:                        |       |                                           |       |   |   |   |   |   |   |   |   |
| Working capital                            |       | $                                              | 1,642,980  |   | $ | 1,664,637 |   | $ | 1,584,751 |   | $ | 1,355,670 |   | $ | 542,150 |   |
| Total assets                               |       | 8,397,265                                      |       | 7,732,720 |   | 7,127,150 |   | 6,564,972 |   | 5,782,716 |   |
| Total long-term debt, less current portion |       | 316,465                                        |       | 527,606 |   | 557,927 |   | 567,433 |   | 732,041 |   |
| Stockholders’  equity                 |       | $                                              | 5,021,665  |   | $ | 4,481,601 |   | $ | 4,174,424 |   | $ | 3,730,655 |   | $ | 2,723,754 |   |

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(1)          Allshare and per share amounts reflect, or have been restated to reflect, thethree-for-two common stock split that was effected in the form of a commonstock dividend distributed on April 15, 2005.

(2)          Results of operations for this period include theacquired businesses since the relevant acquisition date and Staples China sincebecoming a majority-owned subsidiary of the Company during the first quarter of2005. See Note B to the Consolidated Financial Statements.

(3)          Results of operations for this period include theresults of acquired businesses since the relevant acquisition date. The Companyacquired Globus Office World plc on August 4, 2004, Malling Beck A/S on September 2,2004, Pressel Versand International GmbH on September 7, 2004 andOfficenet SA on November 29, 2004 (see Note B to the ConsolidatedFinancial Statements).

(4)          Results of operations for this period have beenreclassified to conform with EITF Issue No. 03-10, “Application ofIssue No. 02-16 by Resellers to Sales Incentives Offered toConsumers by Manufacturers”, which requires that vendor consideration receivedin the form of sales incentives be recorded as a reduction of cost of goodssold when recognized, rather than as a component of sales. As a result of thisreclassification and a reclassification of certain other coupons, sales, grossprofit and operating and selling expenses decreased, but there was no impact onnet income.

(5)          Results of operations for this period reflect a $98.0million ($61.7 million net of taxes) non-cash adjustment for the inclusion ofcooperative advertising and other performance based rebates in inventory asrequired by EITF Issue No. 02-16, “Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor”.

(6)          Results of operations for this period include a taxbenefit of $29.0 million related to Staples Communications. In fiscal 2000, theCompany recognized an impairment loss related to the goodwill and fixed assetsof Staples Communications, which was not recorded as a deduction for taxpurposes. In fiscal 2002, the Company received approval from the InternalRevenue Service to take an ordinary deduction for the Company’s investment in,and advances to, Staples Communications.

(7)          Results of operations for this period include theresults of acquired businesses since the relevant acquisition date. The Companyacquired Medical Arts Press, Inc. on July 17, 2002 and the Europeanmail order businesses on October 18, 2002.

The Company’s fiscal year is the 52 or 53 weeks endingthe Saturday closest to January 31.

A-1

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**APPENDIX B**

**STAPLES, INC. ANDSUBSIDIARIESManagement’s Discussion and Analysis of Financial Condition andResults of Operations**

**Overview**

Our business is comprised of three segments: NorthAmerican Retail, North American Delivery and International Operations. OurNorth American Retail segment consists of the U.S. and Canadian business unitsthat operate office products stores. The North American Delivery segmentconsists of the U.S. and Canadian business units that sell and deliver officeproducts and services directly to customers, and includes Staples BusinessDelivery, Quill, and our Contract operations (Staples National Advantage andStaples Business Advantage). The International Operations segment consists ofoperating units that operate office products stores and that sell and deliveroffice products and services directly to customers in 19 countries in Europe,South America and Asia. Our fiscal year ended February 3, 2007 (“fiscal2006” or “2006”) contained 53 weeks (one week more than a normal fiscal year),while our fiscal years ended January 28, 2006 (“fiscal 2005” or “2005”)and January 29, 2005 (“fiscal 2004” or “2004”) contained 52 weeks. Inorder to enhance comparability between fiscal 2006 and prior fiscal years,certain operational measures for fiscal 2006 are accompanied by a presentationof such measure after removing the estimated effect of the 53rd week in fiscal 2006. All share and per shareamounts reflect, or have been restated to reflect, the three-for-two commonstock split that was effected in the form of a common stock dividenddistributed on April 15, 2005.

Beginning in fiscal 2006, we adopted FinancialAccounting Standards Board Statement No. 123 (revised 2004) (“SFAS No. 123R”)on a modified retrospective basis. Our results for 2006 reflect and our resultsfor 2005 and 2004 have been restated to reflect the impact of adopting SFAS No. 123R.

During 2006 we paid an aggregate of $52.7 million toacquire all or a majority interest in certain delivery businesses headquarteredin the United States and Taiwan and to increase our previous investment in adelivery business in the People’s Republic of China. Results of these entitieshave been consolidated in our financial statements since the dates ofacquisition.

During 2004 we acquiredthe United Kingdom office products company Globus Office World plc (“OfficeWorld”), Pressel Versand International GmbH, a mail order company based inAustria and operating in nine European countries, Malling Beck A/S, a mail order company operating in Denmark,and Officenet SA, a mail order and internet business operating in Brazil andArgentina. We paid an aggregate of $114.7 million to acquire these businesses. Theresults of the acquired businesses have been included in the consolidatedfinancial statements since the dates of acquisition and are reported as part ofour International Operations segment for segment reporting. Additionally, in2004, we entered the Asian market by investing in a mail order and internetcompany in the People’s Republic of China.

**Forward LookingStatements**

This Annual Report on Form 10-Kand, in particular, this management’s discussion and analysis contain orincorporate a number of forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. Any statements contained in or incorporated by reference into thisreport that are not statements of historical fact should be consideredforward-looking statements. You can identify these forward-looking statementsby the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”,“would”, “intends”, “estimates” and other similar expressions, whether in thenegative or affirmative. These forward-looking statements are based on currentexpectations, estimates, forecasts and projections about the industry andmarkets in which we operate and management’s beliefs and assumptions, andshould be read in conjunction with our consolidated financial statements andnotes to consolidated financial statements included in this report. We cannotguarantee that we actually will achieve the plans, intentions or expectationsdisclosed in the forward-looking statements made. There are a number ofimportant risks and uncertainties that could cause our actual results to differmaterially from those indicated by such forward-looking statements. Thesefactors include, without limitation, those included in this Annual Report on Form 10-Kin Item 1A—Risk Factors. We do not intend to update publicly anyforward-looking statements whether as a result of new information, futureevents or otherwise.

B-1

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

**Results ofOperations**

We have provided below asummary of our operating results at the consolidated level, followed by anoverview of our segment performance. Our discussion includes our resultspresented on the basis required by accounting principles generally accepted inthe United States (“GAAP”).

**ConsolidatedPerformance and Outlook:**

Net income for 2006 was $973.7 million or $1.32 perdiluted share compared to $784.1 million or $1.04 per diluted share for 2005and $664.6 million or $0.87 per diluted share for 2004. Net income increased24% for 2006 and 18% for 2005. Our results for 2006 include a $33.3 million($0.05 per diluted share) reduction in income taxes related to the favorableresolution of certain foreign and domestic tax matters and an $8.6 millioncharge, net of taxes ($0.01 per diluted share) to correct the measurement datesused to calculate prior years’ stock-based compensation (see Note H). Inaddition, our results for 2006 include the impact of the 53rd week on net earnings of approximately $0.04per diluted share.

We achieved the results for 2006 by continuing toexecute our strategy of driving profitable sales growth, improving profitmargins and increasing asset productivity. This includes delivering on our “Easy”brand promise to make buying office products easy for our customers in order todifferentiate us from our competitors. Our commitment to customer service, ourfocus on higher margin Staples brand products, strong results in our copy andprint center business, the continued success of our customer acquisition andretention efforts, increased penetration of existing customers, supply chainimprovements and expense management were also key drivers of our results in2006.

We strive to maintain a balance between investing forour long-term growth and delivering strong current earnings growth. For each ofthe past three years, we have chosen to make significant investments to drivesustainable earnings growth by investing in productivity improvements andbetter processes in such areas as store labor, supply chain, marketing andStaples brand products. We are expanding our market share by continuing to growour existing businesses as well as developing new growth ideas andstrengthening our global presence. Initiatives to expand our existingbusinesses include growing the copy and print center business, growing ourdelivery businesses and entering new geographic markets. New growth ideasinclude selling office products through additional retail channels,experimenting with new store formats such as stand-alone copy and print shops,and developing innovative products. To strengthen our global presence, we areinvesting in our existing businesses in Europe and making targeted investmentsin high growth markets in Asia and South America, which we expect to becomemeaningful contributors to our long-term growth.

We expect operating income improvement to continue infiscal 2007. As of the date of this filing, we anticipate sales growth infiscal 2007 to be in the high single digits on a GAAP basis inlcuding the 53rd week of sales in 2006, reflecting low singledigit North American retail comparable store sales. We expect earnings per sharegrowth of approximately 8% to 13% for fiscal 2007 compared to GAAP earnings in2006, which included the benefit from the 53rd week, the favorable resolution of certain taxmatters and the charge associated with prior year’s stock-based compensation. Aswith all forward looking statements made in this Annual Report on Form 10-K,we do not intend to update publicly any of the forward-looking statements inthis paragraph.

*Sales:**  *Sales increased 12.9% in fiscal 2006 and 11.3% in fiscal2005. Sales for 2006 include $369.8 million related to the additional week in2006. Excluding the additional week in 2006, sales increased 10.6%. Excludingnon-comparable sales from our 2004 acquisitions of $212 million in 2005, salesincreased 9.8% in 2005. Comparable sales for our North American retaillocations, which include stores open for more than one year and exclude salesrelated to the additional week in 2006, increased 3% in both 2006 and 2005 andcomparable sales for our International retail locations increased 3% in 2006and were flat in 2005. We had a net addition of 104 stores in 2006 and a netaddition of 100 stores in 2005, and a net addition of 121 stores in 2004,including the 59 Office World stores that were acquired in August 2004 (ofwhich 10 stores were subsequently closed during 2004 and 3 stores were closedduring 2005). North American Delivery sales increased 18.6% in fiscal 2006 and17.8% in 2005. Sales for 2006 include $128.5 million related to the additionalweek in 2006. Excluding the additional week in 2006, sales increased 16.0% in2006. The increase in total sales also reflects the positive impact of foreigncurrency rates of $185 million in 2006 and $104 million in 2005.

B-2

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

Our strong sales growth in both 2006 and 2005 primarilyreflects increases in office supplies, ink and toner, paper and portablecomputers as well as computer peripherals, furniture and our copy and printcenter business. These increases reflect our continued focus on customerservice and the continued success of our customer acquisition and retentionefforts and increased penetration of our existing customers in our NorthAmerican delivery business.

*GrossProfit:*   Gross profit as a percentage of saleswas 28.6% for fiscal 2006, 28.5% for fiscal 2005 and 28.4% for fiscal 2004. Theincrease in the gross profit rate for 2006 from 2005 reflects increased salesin higher margin categories including office supplies, copy and print servicesand Staples brand products as well as supply chain efficiencies which lower thecost of moving product from our vendors to our customers. Our 2006 results werepartially offset by the costs associated with the opening of our newfulfillment centers. The increase in the gross profit rate for 2005 from thegross profit rate for 2004 reflects the continued positive impact of targetingour product mix and marketing at more profitable small businesses and homeoffices, our continued focus on higher margin Staples brand products, strongresults in our copy and print center business and supply chain initiativeswhich lower the cost of moving product from our vendors to our customers. Theimprovements in our North American businesses in 2005 were primarily offset byweakness in our International Operations segment.

*Operatingand Selling Expenses:*   Operating and sellingexpenses, which consist of payroll, advertising and other operating expenses,were 16.2% of sales for fiscal 2006 and 16.5% of sales for fiscal 2005 andfiscal 2004. The decrease in operating expenses as a percentage of sales for2006 primarily reflects our continued focus on expense management andleveraging of fixed expenses on higher sales including the added leverage ofthe 53rd week of sales, partially offset by investmentsin marketing and customer service. The flat performance in 2005 reflects ourcontinued focus on expense management and leveraging of fixed expenses onhigher sales. Our 2005 results were offset by declining productivity andinvestments in our International Operations segment as well as planned investmentsfor long-term growth including labor and marketing to grow our copy and printcenter business and investments for our Chicago market entry.

*Generaland Administrative:*   General and administrativeexpenses as a percentage of sales were 4.2% for fiscal 2006, 4.3% for fiscal2005 and 4.5% for fiscal 2004. The decrease for 2006 primarily reflects strongexpense control and leveraging of fixed expenses on higher sales including theadded leverage of the 53rd week of sales, partially offset by an increasein stock-based compensation. The decrease in general and administrativeexpenses as a percentage of sales in 2005 reflects strong expense control aswell as lower investments in our supply chain program compared to 2004.

*Amortizationof Intangibles:*   Amortization of intangibles was$14.4 in fiscal 2006, $13.0 million in fiscal 2005 and $8.7 million in fiscal2004, reflecting the amortization of certain trade names, customer-relatedintangible assets and non-competition agreements associated with acquisitions.

*Interestincome:*   Interest income decreased to $58.8million in fiscal 2006 from $59.9 million in fiscal 2005 and increased from$31.0 million in fiscal 2004. The decrease in interest income for 2006 is dueto the reduction in average cash and short-term investment portfolio, partiallyoffset by an increase in interest rates. The increase in interest income infiscal 2005 is primarily due to a sustained increase in interest rates.

*Interestexpense:*   Interest expense decreased to $47.8million in fiscal 2006 from $56.8 million in fiscal 2005 and increased from$39.9 million in fiscal 2004. The decrease in interest expense for 2006 isprimarily due to a reduction in average borrowings for our InternationalOperations segment in 2006 compared to 2005, partially offset by higherinterest rates. The increase in interest expense in 2005 is primarily due to anincrease in interest rates, partially offset by a reduction in outstandingborrowings. We use interest rate swap agreements to convert our fixed rate debtobligations into variable rate obligations. As a result of rising interestrates, these interest rate swap agreements had a negative impact on interestexpense in 2006. Excluding the impact of our interest rate swap agreements,interest expense would have been $47.2 million for fiscal 2006, $63.7 millionfor fiscal 2005 and $61.0 million for fiscal 2004.

*Miscellaneousexpense:**  *Miscellaneousexpense was $2.8 million for fiscal 2006, $1.9 million for fiscal 2005 and $1.5million for fiscal 2004. These amounts primarily reflect foreign exchange gainsand losses recorded in the respective periods.

B-3

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

*Income Taxes:*   Our effective tax rate was 33.8% for fiscal2006 and 36.5% for fiscal 2005 and fiscal 2004. Our effective tax ratefor 2006 reflects an adjustment for a change in estimate regarding certain taxuncertainties as well as the favorable resolution of certain foreign anddomestic tax matters, which were recorded as discrete items in the thirdquarter. Our effective tax rate excluding the impact of discrete items was36.0%. The decrease in our effective tax rate, excluding the effect of thediscrete items, resulted from changes in the geographic mix of our earnings.

**SegmentPerformance:**

Thefollowing tables provide a summary of our sales and business unit income byreportable segment and store activity for the last three fiscal years (seereconciliation of business unit income to income before income taxes andminority interest in Note K to the Consolidated Financial Statements):

| **Sales**                 | ** ** | ** ** | ** ** | **(Amounts in thousands)** | ** ** | **2006  Increase From** | ** ** | **2005  Increase From** | ** ** |
|---------------------------|------------|------------|------------|--------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **2006**   | ** ** | **2005**                             | ** ** | **2004**                     | ** ** | **Prior Year**          | ** ** | **Prior Year** | ** ** |
| North American  Retail    |       | $          | 9,938,885  |                                 | $          | 9,037,513                    |       | $                            | 8,324,299  |   |   | 10.0 | % |   |   | 8.6 | % |   |
| North American  Delivery  |       | 5,863,094  |       | 4,945,661                            |       | 4,196,882                    |       |                         | 18.6       | % |   |   | 17.8 | % |   |
| International  Operations |       | 2,358,810  |       | 2,095,678                            |       | 1,927,197                    |       |                         | 12.6       | % |   |   | 8.7 | % |   |
| Consolidated  Staples     |       | $          | 18,160,789 |                                 | $          | 16,078,852                   |       | $                            | 14,448,378 |   |   | 12.9 | % |   |   | 11.3 | % |   |

 

| **Business Unit Income** | ** ** | ** ** | ** ** | **(Amounts in thousands)** | ** ** | **2006  % of** | ** ** | **2005  % of** | ** ** | **2004  % of** | ** ** |
|------------------------------------|------------|------------|------------|--------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|
| ** **                         | ** ** | **2006**   | ** ** | **2005**                             | ** ** | **2004**            | ** ** | **Sales**           | ** ** | **Sales**           | ** ** | **Sales** | ** ** |
| North American  Retail             |       | $          | 956,565    |                                 | $          | 843,140             |       | $                   | 706,419    |                |       | 9.6 | % |   |   | 9.3 | % |   |   | 8.5 | % |   |
| North American  Delivery           |       | 624,729    |       | 507,131                              |       | 396,065             |       |                | 10.7       | %                   |       |   | 10.3 | % |   |   | 9.4 | % |   |
| International  Operations          |       | 50,511     |       | 13,616                               |       | 69,253              |       |                | 2.1        | %                   |       |   | 0.6 | % |   |   | 3.6 | % |   |
| Total                              |       | $          | 1,631,805  |                                 | $          | 1,363,887           |       | $                   | 1,171,737  |                |       | 9.0 | % |   |   | 8.5 | % |   |   | 8.1 | % |   |
| Equity  compensation               |       | (168,736   | )          | (129,806                             | )          | (114,861            | )          |                |       |                |       |   |   |   |   |   |   |   |   |
| Consolidated  Staples              |       | 1,463,069  |       | $                                    | 1,234,081  |                | $          | 1,056,876           |       |                |       |   |   |   |   |   |   |   |   |   |   |

 

| ** **          | ** ** | **Stores  Open at  Beginning** | ** ** | **Stores**         | ** ** | **Net Stores** | ** ** | **Stores**   | ** ** | **Stores  Open at  End** | ** ** |
|---------------------|------------|-------------------------------------|------------|--------------------|------------|---------------------|------------|--------------|------------|-------------------------------|------------|
| **Store  Activity** | ** ** | ** **                          | ** ** | **of Period** | ** ** | **Opened**          | ** ** | **Acquired** | ** ** | **Closed**                    | ** ** | **of Period** | ** ** |
| 2004                |       | North American  Retail              |       |               | 1,358      |                |       |         | 77         |                          |       |   | — |   |   |   | 9 |   |   |   | 1,426 |   |   |
| 2004                |       | International  Operations           |       |               | 201        |                |       |         | 11         |                          |       |   | 49 |   |   |   | 7 |   |   |   | 254 |   |   |
| 2004                |       | Total                               |       |               | 1,559      |                |       |         | 88         |                          |       |   | 49 |   |   |   | 16 |   |   |   | 1,680 |   |   |
| 2005                |       | North American  Retail              |       |               | 1,426      |                |       |         | 99         |                          |       |   | — |   |   |   | 3 |   |   |   | 1,522 |   |   |
| 2005                |       | International  Operations           |       |               | 254        |                |       |         | 8          |                          |       |   | — |   |   |   | 4 |   |   |   | 258 |   |   |
| 2005                |       | Total                               |       |               | 1,680      |                |       |         | 107        |                          |       |   | — |   |   |   | 7 |   |   |   | 1,780 |   |   |
| 2006                |       | North American  Retail              |       |               | 1,522      |                |       |         | 99         |                          |       |   | — |   |   |   | 1 |   |   |   | 1,620 |   |   |
| 2006                |       | International  Operations           |       |               | 258        |                |       |         | 6          |                          |       |   | — |   |   |   | — |   |   |   | 264 |   |   |
| 2006                |       | Total                               |       |               | 1,780      |                |       |         | 105        |                          |       |   | — |   |   |   | 1 |   |   |   | 1,884 |   |   |
|                     |            |                                     |            |                    |            |                     |            |              |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*NorthAmerican Retail:**  *Salesincreased 10.0% in fiscal 2006 and 8.6% in fiscal 2005. Sales for 2006 include$210.1 million related to the additional week in 2006. Excluding the additionalweek in fiscal 2006, sales increased 7.6%. Comparable store sales in NorthAmerica, excluding the additional week in 2006, increased 3% in both 2006 and2005. Our sales growth in both fiscal 2006 and 2005 primarily reflectsnon-comparable store sales for the net stores opened during the fiscal year aswell as the increase in comparable store sales. The increase in sales alsoincludes the positive impact of the Canadian exchange rate to the U.S. dollarof $111 million in 2006 and $120 million in 2005. Our comparable sales growthin 2006 reflects positive performance in office supplies, portable computers,our copy and print business, ink and toner and computer peripherals. Ourcomparable sales growth in fiscal 2005 reflects positive 

B-4

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

performance in portablecomputers, computer peripherals, office supplies, our copy and print centerbusiness and office machines.

Business unit income as apercentage of sales increased to 9.6% in 2006 from 9.3% in 2005 and 8.5% in2004. The increase in business unit income for 2006 primarily reflectsincreased sales in higher margin categories including copy and print services,office supplies, Staples brand products as well as supply chain initiativeswhich lower the cost of moving product from our vendors to our customers,expense management and leveraging of fixed expenses on higher sales includingthe added leverage from the 53rd week of sales. Our 2006 results were partiallyoffset by planned investments in marketing.The increase in business unit income for 2005 reflects the continued positiveimpact of targeting our product mix and marketing at more profitable smallbusinesses and home offices, strong results in our copy and print centerbusiness, our continued focus on higher margin Staples brand products andsupply chain initiatives which lower the cost of moving product from our vendorsto our customers. The increase for 2005 also reflects continued improvements inexpense management, leveraging of fixed expenses on higher sales and our focuson customer service. Our 2005 results were partially offset by plannedinvestments for long-term growth including labor and marketing to grow our copyand print center business and investments in our Chicago market entry. We alsobenefited from the positive impact of foreign exchange rates in both 2006 and2005. Going forward, we will continue to focus on our “Easy” brand promise,customer service and our Staples brand products, as we believe that these arekey to our success. We expect that we will continue to expand our copy andprint center business and enter new geographic markets as well as explore newgrowth ideas including selling office products through other retail channelsand developing innovative products.

*NorthAmerican Delivery:*   Sales increased 18.6% infiscal 2006 and 17.8% in fiscal 2005. Sales for 2006 include $128.5 million relatedto the additional week in 2006. Excluding the additional week in fiscal 2006,sales increased 16.0%. The sales growth reflects the continued success of ourcustomer acquisition and retention efforts, increased penetration of existingcustomers and more effective marketing spend. The sales growth in 2005 reflectsthe increased investment in our expanded Contract sales force, more efficientand targeted marketing spend and the continued success of our customeracquisition and retention efforts as well as increased penetration of existingcustomers.

Business unit income as apercentage of sales increased to 10.7% in 2006 from 10.3% in 2005 and 9.4% in2004. The increase in 2006 primarily reflects more efficient andeffective marketing spend; our continued focus on higher margin Staples brandproducts; our supply chain efforts focused on improving our perfect ordermetric, decreasing the number of trips per order and lowering our reliance onwholesalers; continued increases in the number of orders placed electronically;and leveraging of fixed expenses on higher sales, partially offset by the costsassociated with the opening of three new fulfillment centers in 2006. The increase for 2005 reflects our continued focuson higher margin Staples brand products, supply chain efforts focused onimproving our perfect order metric and lowering our reliance on wholesalers,continued increases in the number of orders placed electronically, leveragingof fixed expenses on higher sales as well as more efficient and effectivemarketing spend. During 2007, we will focus on growing sales in all of ourdelivery businesses and continuing to improve profits through our supply chainprograms, penetration of existing customers and driving service improvements.

*InternationalOperations:**  *Salesincreased 12.6% in fiscal 2006 and 8.7% in fiscal 2005. Sales for 2006 include$31.1 million related to the additional week in 2006. Excluding the additionalweek in fiscal 2006, sales increased 11.1% and excluding non-comparable salesfrom our 2004 acquisitions and Staples China of $211.7 million, sales decreased2.2% in 2005. Comparable store sales in Europe increased 3% in 2006 and wereflat in 2005. The sales growth in 2006 reflects growth in local currency in ourInternational delivery businesses, the positive impact of foreign exchangerates to the U.S. dollar of $61 million, the increase in comparable store salesas well as non-comparable store sales for stores opened in 2006. The salesdecrease in 2005 primarily reflects lower sales in our retail business in theUnited Kingdom and our delivery business in France as well as a decrease inEuropean exchange rates against the U.S. dollar of $29 million.

B-5

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

Business unit income increased$36.9 million in fiscal 2006 and decreased $55.6 million in fiscal 2005.  The improvement for 2006 reflects prioryear costs associated with the integration of the Office World stores and theintegration of our two delivery businesses in the United Kingdom, which reducedbusiness unit income for 2005, as well as improved sales and focus on expensemanagement across our international businesses. The decrease in business unit income in 2005 reflects lower sales in ourretail business in the United Kingdom and our delivery business in France aswell as increased investments in our European delivery business during thefirst half of 2005 and the continued costs associated with the integration ofthe Office World stores, and our two delivery businesses in the United Kingdom.We believe that we have a significant opportunity to grow our Internationalbusiness by expanding our multi-channel offering in our existing Europeanbusinesses and making targeted investments in high growth markets in Asia andSouth America.

*Stock-Based Compensation:*   Stock-basedcompensation increased to $168.7 million in fiscal 2006 from $129.8 million infiscal 2005 and $114.9 million in fiscal 2004. Stock-based compensationincludes expenses associated with our employee stock purchase plans, theissuance of stock options, restricted shares, performance shares, as well asthe company match in the employee 401(K) savings plan. The increase inthis expense for 2006 reflects an increase in the market value of our commonstock, changes in the mix of stock awards granted and the correction ofmeasurement dates used to calculate prior years’ stock-based compensation (seeNote H). The increase in this expense for 2005 reflects an increase in themarket value of our common stock.

**Critical AccountingPolicies and Significant Estimates**

Our financial statements are based on the applicationof significant accounting policies, many of which require management to makesignificant estimates and assumptions (see Note A to the ConsolidatedFinancial Statements). We believe that the following are some of the morecritical judgment areas in the application of our accounting policies thatcurrently affect our financial condition and results of operations.

*Inventory:*   Werecord inventory at the lower of weighted-average cost or market value. Wereserve for obsolete, overstocked and inactive inventory based on thedifference between the weighted-average cost of the inventory and the estimatedmarket value using assumptions of future demand and market conditions. Ifactual market conditions are less favorable than those projected by management,additional reserves may be required.

*Purchaseand Advertising Rebates:*   We earn rebates from our vendors, which are based on variousquantitative contract terms that can be complex and subject to interpretation.Amounts expected to be received from vendors relating to the purchase ofmerchandise inventories and reimbursement of incremental costs, such asadvertising, are recognized as a reduction of inventory cost and realized aspart of cost of goods sold as the merchandise is sold. Several controls are inplace, including direct confirmation with vendors, that we believe allow us toensure that these amounts are recorded in accordance with the terms of thecontracts.

*Impairmentof Long-Lived Assets:*   We review our long-livedassets for impairment when indicators of impairment are present and theundiscounted cash flow estimated to be generated by those assets is less thanthe assets’ carrying amount. Our policy is to evaluate long-lived assets forimpairment at a store level for retail operations and an operating unit levelfor our other operations. If actual market conditions are less favorable thanmanagement’s projections, future write-offs may be necessary.

*Impairmentof Goodwill and Indefinite Lived Intangible Assets:*   Statementof Financial Accounting Standards No. 142 “Goodwill and Other IntangibleAssets” (“SFAS No. 142”) requires that we annually review goodwill andother intangible assets that have indefinite lives for impairment and whenevents or changes in circumstances indicate the carrying value of these assetsmight exceed their current fair values. We determine fair value usingdiscounted cash flow analysis, which requires us to make certain assumptionsand estimates regarding industry economic factors and future profitability ofacquired businesses. It is our policy to allocate goodwill and conductimpairment testing at the individual business unit level based on our mostcurrent business plans, which reflect changes we anticipate in the economy andthe industry. If actual results are not consistent with our assumptions andjudgments, we could be exposed to a material impairment charge.

B-6

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

*Deferred Taxes:*   Werecord a valuation allowance to reduce our deferred tax assets to the amountthat is more likely than not to be realized. We have considered estimatedfuture taxable income and ongoing tax planning strategies in assessing theamount needed for the valuation allowance. If actual results differ unfavorablyfrom those estimates used, we may not be able to realize all or part of our netdeferred tax assets and additional valuation allowances may be required.

**New AccountingPronouncements**

In July 2006, the Financial Accounting StandardsBoard issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertain incometax positions that are recognized in a company’s financial statements inaccordance with the provisions of FASB Statement No. 109, “Accounting forIncome Taxes”. FIN 48 also provides guidance on the derecognition of uncertainpositions, financial statement classification, accounting for interest andpenalties, accounting for interim periods and new disclosure requirements. FIN48 is effective for fiscal years beginning after December 15, 2006. Whileour analysis of the impact of this Interpretation is not yet complete, we donot anticipate it will have a material impact on our retained earnings at thetime of adoption.

In September 2006,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 157, “FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. The adoption of SFAS No. 157is not expected to have a material impact on our financial position, results ofoperations or cash flows.

**Liquidity andCapital Resources**

*Cash Flows*

Cash provided by operations decreased to $1.16 billionin fiscal 2006, from $1.20 billion in fiscal 2005 and $1.14 billion in fiscal2004. The decrease in cash flow from operations in 2006 is primarily due to anincrease in working capital partially offset by an increase in net income. Theincrease in cash flow from operations in 2005 is primarily the result of anincrease in net income.

Cash used in investing activities was $424.9 millionin fiscal 2006, $634.1 million in fiscal 2005 and $14.4 million in fiscal 2004.The change in investing activities for 2006 and 2005 is primarily due tofluctuations in our short-term investment portfolio. While maintaining ouroverall investment guidelines, we shift between cash and cash equivalents,including commercial paper and money markets investments, and short-terminvestments, including auction rate preferred stock and debt securities asrates of return and attractiveness of these asset classes change.

Cash used in financingactivities was $710.6 million in fiscal 2006, $584.0 million in fiscal 2005 and$598.7 million in fiscal 2004. We repurchased 30.3 million shares of our commonstock for a total purchase price of $ 749.9 million under our share repurchaseprogram in 2006, we repurchased 30.1 million shares of our common stock for atotal purchase price of $649.6 million in 2005 and we repurchased 26.1 millionshares of our common stock for a total purchase price of $502.7 million in 2004.We paid $160.9 million in 2006, $123.4 million in 2005 and $99.5 million in2004 to shareholders in connection with our annual cash dividend on our commonstock. In 2004, we repaid the outstanding principal and interest due on our5.875% 150 million Euro Notes, pursuant to the terms of the original debtagreement.

*Sources ofLiquidity*

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

We had $2.3 billion in total cash, short-terminvestments and funds available through credit agreements at February 3,2007, which consisted of $810.8 million of available credit, $1.02 billionof cash and cash equivalents and 

B-7

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

$457.8 million ofshort-term investments. During fiscal 2006, we also issued letters of credit inthe ordinary course of business to satisfy certain vendor contracts. At February 3,2007, we had $70.9 million of open letters of credit, which reduces theavailable amounts under our revolving credit facility. We finance the majorityof our stores and certain equipment with operating leases.

As of February 3,2007, the balances available under credit agreements, debt outstanding andprincipal payments due on our outstanding debt, operating lease obligations andpurchase obligations are presented below (amounts in thousands):

| ** **                                                     | ** ** | ** ** | ** ** | ** **            | ** ** | **Payments Due By Period** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations(1)**                            | ** ** | ** ** | ** ** | **Available  Credit** | ** ** | **Total  Outstanding  Obligations**       | ** ** | **Less than  1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **More than  5 Years** | ** ** |
| Revolving Credit  Facility effective through October 2011 |       | $          | 679,065    |                  | $          | —                                    |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Senior Notes due  August 2007                             |       | —     |       | 200,000               |       | 200,000                                   |       | — |   | — |   | — |   |
| Notes due  October 2012                                   |       | —     |       | 325,000               |       | —                                    |       | — |   | — |   | 325,000 |   |
| Lines of credit                                                |       | 131,749    |       | 229                   |       | 229                                       |       | — |   | — |   | — |   |
| Capital leases  and other notes payable                        |       | —     |       | 8,473                 |       | 1,657                                     |       | 4,284 |   | 2,120 |   | 412 |   |
| Total Debt Obligations                                         |       | $          | 810,814    |                  | $          | 533,702                                   |       | $ | 201,886 |   | $ | 4,284 |   | $ | 2,120 |   | $ | 325,412 |   |
| Operating leases                                               |       | $          | —     |                  | $          | 6,027,757                                 |       | $ | 676,655 |   | $ | 1,295,312 |   | $ | 1,131,545 |   | $ | 2,924,245 |   |
| Purchase  obligations(2)                                       |       | $          | —     |                  | $          | 528,709                                   |       | $ | 295,879 |   | $ | 115,134 |   | $ | 59,298 |   | $ | 58,398 |   |
| Total                                                          |       | $          | 810,814    |                  | $          | 7,090,168                                 |       | $ | 1,174,420 |   | $ | 1,414,730 |   | $ | 1,192,963 |   | $ | 3,308,055 |   |
|                                                                |            |            |            |                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The above table excludesscheduled interest payments on debt obligations since all of the Company’sfixed rate debt agreements are hedged with derivative instruments that areintended to convert the fixed rate debt agreements into variable interest rateobligations. Therefore, the amount of future interest payments due on theseobligations is not currently determinable (see Notes D and E to theconsolidated financial statements).

(2)          Many of our purchasecommitments may be canceled by us without advance notice or payment, and wehave excluded such commitments, along with intercompany commitments. Contractsthat may be terminated by us without cause or penalty, but that require advancenotice for termination are valued on the basis of an estimate of what we wouldowe under the contract upon providing notice of termination.

On October 13, 2006, we entered into an Amendedand Restated Revolving Credit Agreement (the “Agreement”) with Bank of America,N.A and other lending institutions. The Agreement amends and restates theRevolving Credit Agreement dated as of December 14, 2004, which providedfor a maximum borrowing of $750.0 million and was due to expire in December 2009(the “Prior Agreement”).

The Agreement provides for a maximum borrowing of$750.0 million which, upon approval of the lenders, we may increase to $1.0 billion,and expires on October 13, 2011. Borrowings made pursuant to the Agreementmay be syndicated loans, competitive bid loans, or swing line loans, thecombined sum of which may not exceed the maximum borrowing amount. Amountsborrowed under the Agreement may be borrowed, repaid and reborrowed from timeto time until October 13, 2011.

Borrowings made pursuant to the Agreement assyndicated loans will bear interest, payable quarterly or, if earlier, at theend of any interest period, at either (a) the base rate, described in theAgreement as the higher of the annual rate of the lead bank’s prime rate or thefederal funds rate plus 0.50%, or (b) the Eurocurrency rate (a publiclypublished rate) plus a percentage spread based on our credit rating and fixedcharge coverage ratio. Borrowings made as competitive bid loans bear thecompetitive bid rate as specified in the applicable competitive bid. Swing lineloans bear interest that is the lesser of the base rate or the swing line rateas quoted by the administrative agent under the terms of the Agreement. Underthe Agreement, we agree to pay a facility fee, payable quarterly, at rates thatrange from 0.060% to 0.125% depending on our credit rating and fixed chargecoverage ratio, and when applicable, a utilization fee. The 

B-8

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

payments under thisAgreement are guaranteed by the same subsidiaries that guarantee our publiclyissued notes (see Note L).

We expect that our cashgenerated from operations, together with our current cash, short-terminvestments and funds available under our Credit Facility, will be sufficientto fund our planned store openings and other recurring operating cash needs forat least the next twelve months.

*Uses of Capital*

We expect to open at least 100new stores during fiscal 2007. We estimate that our cash requirements,including leasehold improvements and fixtures, net inventory and pre-openingexpense, will be approximately $1.4 million for each new store. We also plan tocontinue to make investments in information systems and distribution centers toimprove operational efficiencies and customer service. We currently plan tospend approximately $550 million on capital expenditures during fiscal 2007. Wemay also expend additional funds to purchase lease rights from tenantsoccupying retail space that is suitable for a Staples store.

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

Webelieve that we will need to spend approximately $550 million in 2007 and $525million a year for the next few years on capital expenditures to fund organicgrowth and ongoing operations. The combination of capital spending in thisrange and an acquisition strategy that is not projected to require significantamounts of capital means that we will likely generate operating cash flow inexcess of our expected needs, thereby strengthening our credit profile. To usethis excess cash to benefit our stockholders, in 2004 we implemented a $1.0billion share repurchase program and paid an annual cash dividend. Under therepurchase program, we repurchased approximately $500 million of common stockduring 2004 and approximately $500 million in 2005. During the third quarter of2005, we announced a new repurchase program under which we may repurchase up toan additional $1.5 billion of Staples common stock through February 2,2008, following completion of our $1.0 billion repurchase program. Under ournew repurchase program, we repurchased approximately $150 million of commonstock during 2005 and approximately $750 million during 2006. We paid anannual cash dividend of $0.22 per share of common stock on April 20, 2006to shareholders of record on March 31, 2006, resulting in a total dividendpayment of $160.9 million. On March 1, 2007, we announced that we wouldpay a cash dividend of $0.29 per share on April 19, 2007 to shareholdersof record on March 30, 2007. While it is our current intention to pay cashdividends in years following 2007, any decision to pay future cash dividendswill be made by our Board of Directors and will depend upon our earnings,financial condition and other factors.

**Inflation andSeasonality**

While neither inflationnor deflation has had, nor do we expect them to have, a material impact uponoperating results, there can be no assurance that our business will not beaffected by inflation or deflation in the future. We believe that our businessis somewhat seasonal, with sales and profitability slightly lower during thefirst and second quarters of our fiscal year.

B-9

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**STAPLES, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition andResults of Operations (Continued)**

**Quantitative andQualitative Disclosures about Market Risks**

We are exposed to market risk from changes in interestrates and foreign exchange rates. We have a risk management control process tomonitor our interest rate and foreign exchange risks. The risk managementprocess uses analytical techniques, including market value, sensitivityanalysis and value at risk estimates.

As more fully described in the notes to theconsolidated financial statements, we use interest rate swap agreements tomodify fixed rate obligations to variable rate obligations, thereby adjustingthe interest rates to current market rates and ensuring that the debtinstruments are always reflected at fair value. While our variable rate debtobligations, approximately $525.0 million at February 3, 2007, expose usto the risk of rising interest rates, management does not believe that thepotential exposure is material to our overall financial performance or resultsof operations. Based on February 3, 2007 borrowing levels, a 1.0% increaseor decrease in current market interest rates would have the effect of causing a$5.3 million additional pre-tax charge or credit to our statement ofoperations.

As more fully described in thenotes to the consolidated financial statements, we are exposed to foreignexchange risks through subsidiaries in Canada, Austria, Belgium, the CzechRepublic, Denmark, France, Germany, Hungary, Italy, Luxembourg, Poland,Portugal, Spain, Sweden, Switzerland, The Netherlands, the United Kingdom,Argentina, Brazil, China and Taiwan. We have entered into a currency swap inCanadian dollars in order to hedge a portion of our foreign exchange riskrelated to our net investment in foreign subsidiaries. Any increase or decreasein the fair value of our currency exchange rate sensitive derivativeinstruments would be offset by a corresponding decrease or increase in the fairvalue of the hedged underlying asset.

We account for our interest rate and currency swapagreements using hedge accounting treatment as the derivatives have been determinedto be highly effective in achieving offsetting changes in fair value of thehedged items. Under this method of accounting, at February 3, 2007, wehave recorded a $0.3 million asset representing gross unrealized gains on oneof our derivatives and a $70.7 million liability representing gross unrealizedlosses on three other derivatives. During fiscal 2001, we terminated aninterest swap agreement resulting in a realized gain of $18.0 millionwhich is being amortized into income through August 2007, the remainingterm of the original agreement. We do not enter into derivative agreements fortrading purposes.

B-10

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| **ITEM 8** | ** ** | **APPENDIX C** |
|------------|------------|----------------|

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                       | ** ** | **Page**              | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                              |       | C-2                   |       |
| Consolidated  Balance Sheets—February 3, 2007 and January 28, 2006                                                                     |       | C-3                   |       |
| Consolidated Statements of Income—Fiscal years ended  February 3, 2007, January 28, 2006 and January 29, 2005                     |       | C-4                   |       |
| Consolidated Statements of Stockholders’ Equity—Fiscal  years ended February 3, 2007, January 28, 2006 and January 29,  2005 |       | C-5                   |       |
| Consolidated Statements of Cash Flows—Fiscal years  ended February 3, 2007, January 28, 2006 and January 29, 2005                 |       | C-6                   |       |
| Notes to Consolidated Financial Statements                                                                                                            |       | C-7 to C-28 |       |
| Schedule II—Valuation  and Qualifying Accounts                                                                                                   |       | C-29                  |       |

 

C-1

----

**Reportof Independent Registered Public Accounting Firm**

Board of Directors and ShareholdersStaples, Inc.

We have audited the accompanying consolidated balancesheets of Staples, Inc. and subsidiaries as of February 3, 2007 and January 28,2006, and the related consolidated statements of income, stockholders’ equity,and cash flows for each of the three years in the period ended February 3,2007. Our audits also included the financial statement schedule listed in theIndex at Item 15(a)2. These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Staples, Inc. and subsidiaries at February 3, 2007 and January 28,2006, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended February 3, 2007, inconformity with U.S. generally accepted accounting principles. Also, in ouropinion, the financial statement schedule referred to above, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

As discussed in Note A to the consolidated financialstatements, effective January 29, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123(R), *Share-BasedPayments*.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Staples Inc.’s internal control overfinancial reporting as of February 3, 2007, based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 27,2007 expressed an unqualified opinion thereon.
|        | /s/  Ernst & Young LLP |   |
|--------|---------------------------------|--------|
|   | Ernst &  Young LLP     |   |

 

Boston, MassachusettsFebruary 27, 2007

C-2

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**STAPLES, INC. AND SUBSIDIARIESConsolidated Balance Sheets(Dollar Amounts in Thousands, Except Share Data)**

| ** **                                                                                                                                                            | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2007**             | ** ** | **2006**             | ** ** |
| **ASSETS**                                                                                                                                                            | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Current assets:**                                                                                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| Cash and cash equivalents                                                                                                                                             |       | $                    | 1,017,671  |                 | $          | 977,822 |   |
| Short-term investments                                                                                                                                                |       | 457,759              |       | 593,082              |       |
| Receivables, net                                                                                                                                                      |       | 720,797              |       | 576,672              |       |
| Merchandise inventories, net                                                                                                                                          |       | 1,919,714            |       | 1,706,372            |       |
| Deferred income tax asset                                                                                                                                             |       | 141,108              |       | 149,257              |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 174,314              |       | 141,339              |       |
| **Total current assets**                                                                                                                                              |       | 4,431,363            |       | 4,144,544            |       |
| **Property  and equipment:**                                                                                                                                          | ** ** | ** **           | ** ** | ** **           | ** ** |
| Land and buildings                                                                                                                                                    |       | 791,264              |       | 705,978              |       |
| Leasehold improvements                                                                                                                                                |       | 996,434              |       | 884,853              |       |
| Equipment                                                                                                                                                             |       | 1,539,617            |       | 1,330,181            |       |
| Furniture and fixtures                                                                                                                                                |       | 757,408              |       | 672,931              |       |
| **Total property and equipment**                                                                                                                                      |       | 4,084,723            |       | 3,593,943            |       |
| Less accumulated depreciation and amortization                                                                                                                        |       | 2,110,602            |       | 1,835,549            |       |
| **Net property and equipment**                                                                                                                                        |       | 1,974,121            |       | 1,758,394            |       |
| **Lease  acquisition costs, net of accumulated amortization**                                                                                                         |       | 33,579               |       | 34,885               |       |
| **Intangible  assets, net of accumulated amortization**                                                                                                               |       | 232,383              |       | 240,395              |       |
| **Goodwill**                                                                                                                                                          |       | 1,455,113            |       | 1,378,752            |       |
| **Other  assets**                                                                                                                                                     |       | 270,706              |       | 175,750              |       |
| **Total assets**                                                                                                                                                      |       | $                    | 8,397,265  |                 | $          | 7,732,720 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                        | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Current liabilities:**                                                                                                                                              | ** ** | ** **           | ** ** | ** **           | ** ** |
| Accounts payable                                                                                                                                                      |       | $                    | 1,486,188  |                 | $          | 1,435,815 |   |
| Accrued expenses and other current liabilities                                                                                                                        |       | 1,101,018            |       | 1,041,201            |       |
| Debt maturing within one year                                                                                                                                         |       | 201,177              |       | 2,891                |       |
| **Total current liabilities**                                                                                                                                         |       | 2,788,383            |       | 2,479,907            |       |
| **Long-term debt**                                                                                                                                                    |       | 316,465              |       | 527,606              |       |
| **Deferred  income tax liability**                                                                                                                                    |       | 8,986                |       | 5,845                |       |
| **Other  long-term obligations**                                                                                                                                      |       | 252,657              |       | 233,426              |       |
| **Minority  interest.**                                                                                                                                               |       | 9,109                |       | 4,335                |       |
| **Stockholders’  Equity:**                                                                                                                                       | ** ** | ** **           | ** ** | ** **           | ** ** |
| Preferred stock, $.01 par value, 5,000,000 shares  authorized; no shares issued                                                                                       |       | —               |       | —               |       |
| Common stock, $.0006 par value, 2,100,000,000 shares  authorized; issued 849,338,568 shares at February 3, 2007 and  829,695,100 shares at January 28, 2006 |       | 510                  |       | 498                  |       |
| Additional paid-in capital                                                                                                                                            |       | 3,338,412            |       | 2,937,362            |       |
| Cumulative foreign currency translation adjustments                                                                                                                   |       | 189,115              |       | 87,085               |       |
| Retained earnings                                                                                                                                                     |       | 4,005,424            |       | 3,192,630            |       |
| Less: treasury stock at cost, 130,605,591 shares at  February 3, 2007 and 99,253,565 shares at January 28, 2006                                             |       | (2,511,796           | )          | (1,735,974           | )          |
| **Total stockholders’ equity**                                                                                                                                   |       | 5,021,665            |       | 4,481,601            |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                  |       | $                    | 8,397,265  |                 | $          | 7,732,720 |   |

 

See notes to consolidated financial statements.

C-3

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**STAPLES, INC. AND SUBSIDIARIESConsolidated Statements of Income(Dollar Amounts in Thousands, Except Share Data)**

| ** **                                           | ** **   | **Fiscal Year Ended** | ** **   |
|------------------------------------------------------|--------------|---------------------------------|--------------|
| ** **                                           | ** **   | **February 3,**            | ** **   | **January 28,** | ** ** | **January 29,** | ** ** |
| ** **                                           | ** **   | **2007**                        | ** **   | **2006** | ** ** | **2005** | ** ** |
| Sales                                                |         | $                               | 18,160,789   |   | $ | 16,078,852 |   | $ | 14,448,378 |   |
| Cost of goods  sold and occupancy costs              |         | 12,966,788                      |         | 11,496,234 |   | 10,346,056 |   |
| **Gross profit**                                     |         | 5,194,001                       |         | 4,582,618 |   | 4,102,322 |   |
| **Operating  and other expenses:**                   | ** **   | ** **                      | ** **   | ** ** | ** ** | ** ** | ** ** |
| Operating and selling                                |         | 2,946,249                       |         | 2,647,567 |   | 2,383,437 |   |
| General and administrative                           |         | 770,268                         |         | 687,962 |   | 653,266 |   |
| Amortization of intangibles                          |         | 14,415                          |         | 13,008 |   | 8,743 |   |
| **Total operating expenses**                         |         | 3,730,932                       |         | 3,348,537 |   | 3,045,446 |   |
| **Operating income**                                 |         | 1,463,069                       |         | 1,234,081 |   | 1,056,876 |   |
| **Other  income (expense):**                         | ** **   | ** **                      | ** **   | ** ** | ** ** | ** ** | ** ** |
| Interest income                                      |         | 58,839                          |         | 59,937 |   | 31,042 |   |
| Interest expense                                     |         | (47,810                         | )            | (56,774 | ) | (39,888 | ) |
| Miscellaneous expense                                |         | (2,770                          | )            | (1,945 | ) | (1,455 | ) |
| **Income before income taxes and minority interest** |         | 1,471,328                       |         | 1,235,299 |   | 1,046,575 |   |
| Income tax  expense                                  |         | 497,972                         |         | 450,884 |   | 382,000 |   |
| **Income before minority interests**                 |         | 973,356                         |         | 784,415 |   | 664,575 |   |
| Minority interest  (income) expense                  |         | (321                            | )            | 298 |   | — |   |
| **Net Income**                                       |         | $                               | 973,677      |   | $ | 784,117 |   | $ | 664,575 |   |
| ***Earnings  per common share***                     | *** *** | *** ***                    | *** *** | *** *** | *** *** | *** *** | *** *** |
| Basic                                                |         | $                               | 1.35         |   | $ | 1.07 |   | $ | 0.90 |   |
| Diluted                                              |         | $                               | 1.32         |   | $ | 1.04 |   | $ | 0.87 |   |
| Dividends declared per  common share                 |         | $                               | 0.22         |   | $ | 0.17 |   | $ | 0.13 |   |

 

See notes to consolidated financial statements.

C-4

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**STAPLES, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity(Dollar Amounts in Thousands)For the Fiscal Years Ended February 3, 2007, January 28, 2006 and January 29,2005**

| ** **                                                                              | ** ** | ** ** | ** ** | **Additional** | ** ** | **Cumulative**  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------------|------------|
| ** **                                                                              | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Translation** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                              | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Adjustments** | ** ** | **Earnings** | ** ** | **Stock**    | ** ** | **Income**        | ** ** |
| **Balances at January 31, 2004**                                                   |       |       | $          | 316            |       |            |       | $2,243,569   |       |         |       | $                 | 81,002     |   |   | $1,966,867 |   | $ | (561,099 | ) |   | $ | 559,732 |   |   |
| Issuance of common stock for stock options exercised                                    |       |       | 8          |           |       |            | 187,163    |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Tax benefit on exercise of options                                                      |       |       | —     |           |       |            | 35,546     |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Stock-based compensation                                                                |       |       | —     |           |       |            | 114,861    |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Sale of common stock under Employee Stock Purchase  Plan and International Savings Plan |       |       | 1          |           |       |            | 19,222     |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Stock split                                                                             |       |       | 163        |           |       |            | (163       | )            |       |         | —     |              |       | — |   | — |   |   |   |   |   |
| Net income for the year                                                                 |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | 664,575 |   | — |   |   | 664,575 |   |   |
| Common stock dividend                                                                   |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | (99,527 | ) | — |   |   | — |   |   |
| Foreign currency translation adjustments                                                |       |       | —     |           |       |            | —     |         |       |         | 46,861     |              |       | — |   | — |   |   | 46,861 |   |   |
| Changes in the fair value of derivatives (net of  taxes of $9,729)                      |       |       | —     |           |       |            | —     |         |       |         | (13,436    | )                 |       | — |   | — |   |   | (13,436 | ) |   |
| Purchase of treasury shares                                                             |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | — |   | (511,730 | ) |   | — |   |   |
| Other                                                                                   |       |       | —     |           |       |            | 225        |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| **Balances at January 29, 2005**                                                   |       |       | $          | 488            |       |            |       | $            | 2,600,423  |         |       |              | $          | 114,427 |   |   | $ | 2,531,915 |   | $ | (1,072,829 | ) |   | $ | 698,000 |   |   |
| Issuance of common stock for stock options exercised                                    |       |       | 9          |           |       |            | 159,727    |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Tax benefit on exercise of options                                                      |       |       | —     |           |       |            | 24,347     |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Stock-based compensation                                                                |       |       | —     |           |       |            | 129,806    |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Sale of common stock under Employee Stock Purchase  Plan                                |       |       | 1          |           |       |            | 23,181     |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Stock split and cash paid in lieu of fractional  shares                                 |       |       | —     |           |       |            | (921       | )            |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Net income for the year                                                                 |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | 784,117 |   | — |   |   | 784,117 |   |   |
| Common stock dividend                                                                   |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | (123,402 | ) | — |   |   | — |   |   |
| Foreign currency translation adjustments                                                |       |       | —     |           |       |            | —     |         |       |         | (15,837    | )                 |       | — |   | — |   |   | (15,837 | ) |   |
| Changes in the fair value of derivatives (net of  taxes of $8,332)                      |       |       | —     |           |       |            | —     |         |       |         | (11,505    | )                 |       | — |   | — |   |   | (11,505 | ) |   |
| Purchase of treasury shares                                                             |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | — |   | (663,145 | ) |   | — |   |   |
| Other                                                                                   |       |       | —     |           |       |            | 799        |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| **Balances at January 28, 2006**                                                   |       |       | $          | 498            |       |            |       | $            | 2,937,362  |         |       |              | $          | 87,085 |   |   | $ | 3,192,630 |   | $ | (1,735,974 | ) |   | $ | 756,775 |   |   |
| Issuance of common stock for stock options exercised                                    |       |       | 11         |           |       |            | 166,752    |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Tax benefit on exercise of options                                                      |       |       | —     |           |       |            | 36,069     |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Stock-based compensation                                                                |       |       | —     |           |       |            | 168,736    |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Sale of common stock under Employee Stock Purchase  Plan and International Savings Plan |       |       | 1          |           |       |            | 28,499     |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| Net income for the year                                                                 |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | 973,677 |   | — |   |   | 973,677 |   |   |
| Common stock dividend                                                                   |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | (160,883 | ) | — |   |   | — |   |   |
| Foreign currency translation adjustments                                                |       |       | —     |           |       |            | —     |         |       |         | 96,404     |              |       | — |   | — |   |   | 96,404 |   |   |
| Changes in the fair value of derivatives (net of  taxes of $4,073)                      |       |       | —     |           |       |            | —     |         |       |         | 5,626      |              |       | — |   |   |   |   | 5,626 |   |   |
| Purchase of treasury shares                                                             |       |       | —     |           |       |            | —     |         |       |         | —     |              |       | — |   | (775,822 | ) |   | — |   |   |
| Other                                                                                   |       |       | —     |           |       |            | 994        |         |       |         | —     |              |       | — |   | — |   |   | — |   |   |
| **Balances  at February 3, 2007**                                                  |       |       | $          | 510            |       |            |       | $            | 3,338,412  |         |       |              | $          | 189,115 |   |   | $ | 4,005,424 |   | $ | (2,511,796 | ) |   | $ | 1,075,707 |   |   |

 

See notes to consolidated financial statements.

C-5

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**STAPLES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows(Dollar Amounts in Thousands)**

| ** **                                                                                             | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                             | ** ** | **February 3,**            | ** ** | **January 28,** | ** ** | **January 29,** | ** ** |
| ** **                                                                                             | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating activities:**                                                                              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                             |       | $                               | 973,677    |   | $ | 784,117 |   | $ | 664,575 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                     |       |                            |       |   |   |   |   |
| Depreciation and amortization                                                                          |       | 339,299                         |       | 303,900 |   | 278,845 |   |
| Stock-based compensation                                                                               |       | 168,736                         |       | 129,806 |   | 114,861 |   |
| Deferred income tax (benefit) expense                                                                  |       | (65,401                         | )          | (96,189 | ) | 15,307 |   |
| Excess tax benefits from stock-based compensation  arrangements                                        |       | (36,069                         | )          | (36,748 | ) | (41,205 | ) |
| Other                                                                                                  |       | (365                            | )          | (6,513 | ) | 12,516 |   |
| Change in assets  and liabilities, net of companies acquired:                                          |       |                            |       |   |   |   |   |
| Increase in receivables                                                                                |       | (128,010                        | )          | (80,166 | ) | (49,786 | ) |
| Increase in merchandise inventories                                                                    |       | (191,957                        | )          | (97,538 | ) | (63,747 | ) |
| Increase in prepaid expenses and other assets                                                          |       | (44,298                         | )          | (15,646 | ) | (8,736 | ) |
| Increase in accounts payable                                                                           |       | 34,379                          |       | 187,402 |   | 82,355 |   |
| Increase in accrued expenses and other current  liabilities                                            |       | 93,175                          |       | 105,274 |   | 76,103 |   |
| Increase in other long-term obligations                                                                |       | 21,823                          |       | 20,922 |   | 56,915 |   |
| **Net cash provided by operating activities**                                                          |       | 1,164,989                       |       | 1,198,621 |   | 1,138,003 |   |
| **Investing  activities:**                                                                             |       |                            |       |   |   |   |   |
| Acquisition of property and equipment                                                                  |       | (528,475                        | )          | (456,103 | ) | (335,435 | ) |
| Acquisition of businesses, net of cash acquired                                                        |       | (29,654                         | )          | (40,560 | ) | (111,657 | ) |
| Investment in joint venture, net of cash acquired                                                      |       | (2,096                          | )          | (16,636 | ) | (29,330 | ) |
| Proceeds from the sale of short-term investments                                                       |       | 8,358,384                       |       | 8,097,199 |   | 10,708,696 |   |
| Purchase of short-term investments                                                                     |       | (8,223,063                      | )          | (8,218,049 | ) | (10,246,652 | ) |
| **Net cash used in investing activities**                                                              |       | (424,904                        | )          | (634,149 | ) | (14,378 | ) |
| **Financing  activities:**                                                                             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from the exercise of stock options and the  sale of stock under employee stock purchase plans |       | 195,263                         |       | 181,997 |   | 206,394 |   |
| Proceeds from borrowings                                                                               |       | —                          |       | 535 |   | — |   |
| Payments on borrowings                                                                                 |       | (5,191                          | )          | (16,735 | ) | (235,081 | ) |
| Cash dividends paid                                                                                    |       | (160,883                        | )          | (123,402 | ) | (99,527 | ) |
| Excess tax benefits from stock-based compensation  arrangements                                        |       | 36,069                          |       | 36,748 |   | 41,205 |   |
| Purchase of treasury stock, net                                                                        |       | (775,822                        | )          | (663,145 | ) | (511,730 | ) |
| **Net cash used in financing activities**                                                              |       | (710,564                        | )          | (584,002 | ) | (598,739 | ) |
| Effect of exchange rate changes on cash                                                                |       | 10,328                          |       | 42 |   | 14,959 |   |
| **Net increase (decrease) in cash and cash  equivalents**                                              |       | 39,849                          |       | (19,488 | ) | 539,845 |   |
| Cash and cash  equivalents at beginning of period                                                      |       | 977,822                         |       | 997,310 |   | 457,465 |   |
| **Cash and cash equivalents at  end of period**                                                        |       | $                               | 1,017,671  |   | $ | 977,822 |   | $ | 997,310 |   |

 

See notes to consolidated financial statements.

C-6

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements**

**NOTE A Summary ofSignificant Accounting Policies**

*Natureof Operations:*   Staples, Inc. andsubsidiaries (“Staples” or the “Company”) pioneered the office productssuperstore concept and Staples is a leading office products company. Staplesoperates three business segments: North American Retail, North AmericanDelivery and International Operations. The Company’s North American Retailsegment consists of the U.S. and Canadian business units that operate officeproducts stores. The North American Delivery segment consists of the U.S. andCanadian business units that sell and deliver office products and servicesdirectly to customers, and includes Staples Business Delivery, Quill and theCompany’s Contract operations (Staples National Advantage and Staples BusinessAdvantage). The International Operations segment consists of operating unitsthat operate office products stores and that sell and deliver office productsand services directly to customers in 19 countries in Europe, South America andAsia.

*Basisof Presentation:*   The consolidated financialstatements include the accounts of Staples, Inc. and its wholly andmajority owned subsidiaries. All intercompany accounts and transactions areeliminated in consolidation.

All share and per share amounts reflect, or have beenrestated to reflect, the three-for-two common stock split that was effected inthe form of a common stock dividend distributed on April 15, 2005.

*FiscalYear:*   Staples’ fiscal year is the 52 or 53 weeksending on the Saturday closest to January 31. Fiscal year 2006 consistedof the 53 weeks ended on February 3, 2007, while fiscal years 2005 and2004 consisted of the 52 weeks ended January 28, 2006 and January 29,2005, respectively.

*Useof Estimates:*   The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement of Staples to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

*CashEquivalents:*   Staples considers all highly liquidinvestments with an original maturity of three months or less to be cashequivalents.

*Short-termInvestments:**  *Short-terminvestments, which primarily consist of market auction rate preferred stock anddebt securities and treasury securities, are classified as “available for sale”under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115,“Accounting for Certain Investments in Debt and Equity Securities.”  Accordingly, the short-term investments arereported at fair value, with any related unrealized gains and losses includedas a separate component of stockholders’ equity, net of applicable taxes. Realizedgains and losses and interest and dividends are included in interest income orinterest expense, as appropriate. At February 3, 2007, the available forsale investments consisted of $334.4 million of market auction rate preferredstock and debt securities, $38.0 million of treasury securities and $85.4million of municipal securities, with contractual maturities ranging from February 2007through August 2046.

*Receivables:*   Receivablesinclude trade receivables financed under regular commercial credit terms andother non-trade receivables. Gross trade receivables were $511.1 million at February 3,2007 and $444.8 million at January 28, 2006. Concentrations of credit riskwith respect to trade receivables are limited due to Staples’ large number ofcustomers and their dispersion across many industries and geographic regions.

An allowance for doubtful accounts has been recordedto reduce trade receivables to an amount expected to be collectible fromcustomers based on specific evidence as well as historical trends. Theallowance recorded at February 3, 2007 and January 28, 2006 was $18.8million and $16.4 million, respectively.

Other non-trade receivables were $228.5 million at February 3,2007 and $148.3 million at January 28, 2006 and consisted primarily ofamounts due from vendors under various incentive and promotional programs.

*MerchandiseInventories:*   Merchandise inventories are valuedat the lower of weighted-average cost or market value.

C-7

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE ASummary of Significant Accounting Policies (Continued)**

*PrivateLabel Credit Card:*   Staples offers a privatelabel credit card which is managed by a financial services company. Under theterms of the agreement, Staples is obligated to pay fees which approximate thefinancial institution’s cost of processing and collecting the receivables,which are non-recourse to Staples.

*Propertyand Equipment:*   Property and equipment arerecorded at cost. Expenditures for normal maintenance and repairs are chargedto expense as incurred. Depreciation and amortization, which includes theamortization of assets recorded under capital lease obligations, are providedusing the straight-line method over the following useful lives: 40 years forbuildings; the lesser of 10-15 years or term of lease for leaseholdimprovements; 3-10 years for furniture and fixtures; and 3-10 yearsfor equipment, which includes computer equipment and software with estimateduseful lives of 3-5 years.

*LeaseAcquisition Costs:*   Lease acquisition costs arerecorded at cost and amortized using the straight-line method over therespective lease terms, including option renewal periods if renewal of thelease is probable, which range from 5 to 40 years. Accumulatedamortization at February 3, 2007 and January 28, 2006 totaled $64.4million and $61.5 million, respectively.

*Goodwilland Intangible Assets:*   SFAS No. 142, “Accountingfor Goodwill and Other Intangible Assets” requires that goodwill and intangibleassets that have indefinite lives not be amortized but, instead, tested atleast annually for impairment. Management uses a discounted cash flow analysis,which requires that certain assumptions and estimates be made regardingindustry economic factors and future profitability of acquired businesses toassess the need for an impairment charge. If actual results are not consistentwith management’s assumptions and judgments, the Company could be exposed to amaterial impairment charge. The Company has elected the fourth quarter to completeits annual goodwill impairment test. In addition, annual impairment tests forindefinite lived intangible assets are also performed in the fourth quarter. Asa result of the fourth quarter impairment analyses, management has determinedthat no impairment charges are required.

Thechanges in the carrying amount of goodwill during the year ended February 3,2007 are as follows (in thousands):

| ** **                | ** ** | **Goodwill  At January 28,  2006** | ** ** | **2006 Net  Additions** | ** ** | **2006 Foreign  Exchange  Fluctuations** | ** ** | **Goodwill  At February 3,  2007** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| North American  Retail    |       |                                         | $          | 37,109                       |       |                                          |       | $                                            | —     |   |   |   | $ | (803 | ) |   |   | $ | 36,306 |   |   |
| North American  Delivery  |       |                                         | 431,371    |                         |       |                                          | 13,404     |                                         |       |   | — |   |   |   | 444,775 |   |   |
| International  Operations |       |                                         | 910,272    |                         |       |                                          | 4,730      |                                         |       |   | 59,030 |   |   |   | 974,032 |   |   |
| Consolidated              |       |                                         | $          | 1,378,752                    |       |                                          |       | $                                            | 18,134     |   |   |   | $ | 58,227 |   |   |   | $ | 1,455,113 |   |   |

 

Intangible assets not subject to amortization, whichinclude registered trademarks and trade names, were $153.0 million at February 3,2007 and January 28, 2006; intangible assets subject to amortization,which include certain trademarks and trade names, customer related intangibleassets and non-competition agreements, were $126.5 million and $120.9 millionat February 3, 2007 and January 28, 2006, respectively. At February 3,2007, intangible assets subject to amortization had a weighted average life of11.1 years. Accumulated amortization for intangible assets subject toamortization was $47.1 million and $33.5 million at February 3, 2007 and January 28,2006, respectively.

*Impairmentof Long-Lived Assets:*   SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets “ (“SFAS No. 144”)requires impairment losses to be recorded on long-lived assets used inoperations when indicators of impairment are present and the undiscounted cashflows estimated to be generated by those assets are less than the assets’carrying amount. Staples’ policy is to evaluate long-lived assets forimpairment at a store level for retail operations and an operating unit levelfor Staples’ other operations.

*Fair Value of FinancialInstruments:*   Pursuantto SFAS No. 107, “Disclosure About Fair Value of Financial Instruments” (“SFASNo. 107”), Staples has estimated the fair value of its financialinstruments using the following methods and assumptions: the carrying amountsof cash and cash equivalents, short-term investments, receivables and 

C-8

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE ASummary of Significant Accounting Policies (Continued)**

accountspayable approximate fair value because of their short-term nature, and thecarrying amounts of Staples’ debt approximates fair value because of theCompany’s use of derivative instruments that qualify for hedge accounting.

*RevenueRecognition:*   Revenue is recognized at the pointof sale for the Company’s retail operations and at the time of shipment for itsdelivery sales. The Company offers its customers various coupons, discounts andrebates, which are treated as a reduction of revenue.

Sales of extended service plans are eitheradministered by an unrelated third party or by the Company. The unrelated thirdparty is the legal obligor in most of the areas they administer and accordinglybears all performance obligations and risk of loss related to the service planssold in such areas. In these areas, Staples recognizes a net commission revenueat the time of sale for the service plans. In certain areas where Staples isthe legal obligor, the revenues associated with the sale are deferred and recognizedover the life of the service contract, which is typically one to five years.

*Costof Goods Sold and Occupancy Costs:*   Cost of goodssold and occupancy costs includes the costs of merchandise sold, inbound andoutbound freight, receiving and distribution and store and distribution centeroccupancy (including real estate taxes and common area maintenance).

*Shippingand Handling Costs:**  *Allshipping and handling costs are included as a component of cost of goods soldand occupancy costs.

*Operatingand Selling Expenses:*   Operating and sellingexpenses include payroll, advertising and other operating expenses for theCompany’s stores and delivery operations not included in cost of goods sold andoccupancy costs.

*Advertising:*   Staplesexpenses the production costs of advertising the first time the advertisingtakes place, except for the cost of direct-response advertising,primarily catalog production costs, which are capitalized and amortized overtheir expected period of future benefits (i.e., the life of the catalog).Direct catalog production costs included in prepaid and other assets totaled$31.2 million at February 3, 2007 and $28.4 million at January 28,2006. Total advertising and marketing expense was $660.3 million, $588.2million and $526.0 million for fiscal years 2006, 2005 and 2004, respectively.

*Pre-openingCosts:*   Pre-opening costs, which consistprimarily of salaries, supplies, marketing and distribution costs, are expensedas incurred.

*Stock-BasedCompensation:*   TheCompany adopted Financial AccountingStandards Board (“FASB”) Statement No. 123 (revised 2004), “Share BasedPayment” (“SFAS No. 123R”) as of January 29, 2006, using themodified retrospective method. As a result, the consolidated financialstatements for fiscal years 2005 and 2004 have been restated to reflect theadoption of this standard. The impact on net income and earnings per share fromthe adoption of SFAS No. 123R is consistent with the pro forma amountspreviously disclosed in our annual reports. As a result of adopting SFAS No. 123R,the Company recorded an increase of $310.2 million to Additional Paid-InCapital at January 31, 2004 and a reduction of $242.4 million to RetainedEarnings at January 31, 2004.

*ForeignCurrency Translation:*   The assets and liabilitiesof Staples’ foreign subsidiaries are translated into U.S. dollars at currentexchange rates as of the balance sheet date, and revenues and expenses aretranslated at average monthly exchange rates. The resulting translationadjustments, and the net exchange gains and losses resulting from thetranslation of investments in Staples’ foreign subsidiaries are recorded as aseparate component of stockholders’ equity.

*DerivativeInstruments and Hedging Activities:*   The Companyrecognizes all derivative financial instruments in the consolidated financialstatements at fair value. Changes in the fair value of derivative financialinstruments that qualify for hedge accounting are recorded in stockholders’equity as a component of comprehensive income or as an adjustment to thecarrying value of the hedged item. Changes in fair values of derivatives notqualifying for hedge accounting are reported in earnings.

C-9

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE ASummary of Significant Accounting Policies (Continued)**

*New Accounting Pronouncements:*   In July 2006, the Financial Accounting StandardsBoard issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertain incometax positions that are recognized in a company’s financial statements inaccordance with the provisions of FASB Statement No. 109, “Accounting forIncome Taxes”. FIN 48 also provides guidance on the derecognition of uncertainpositions, financial statement classification, accounting for interest andpenalties, accounting for interim periods and new disclosure requirements. FIN48 is effective for fiscal years beginning after December 15, 2006. While theCompany’s analysis of the impact of this Interpretation is not yet complete, theCompany does not anticipate it will have a material impact on the Company’sretained earnings at the time of adoption.

In September 2006, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 157,“Fair Value Measurements”, (“SFASNo. 157”). SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair value measurements.SFAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. The adoption of SFAS No. 157 is not expected to have a materialimpact on the Company’s financial position, results of operations or cashflows.

*Reclassifications:*   Certainpreviously reported amounts have been reclassified to conform with the currentperiod presentation.

**NOTE B BusinessAcquisitions and Equity Method Investments**

In accordance with SFAS No. 141 “BusinessCombinations,” Staples records acquisitions under the purchase method ofaccounting. Accordingly, the purchase price is allocated to the tangible assetsand liabilities and intangible assets acquired, based on their estimated fairvalues. The excess purchase price over the fair value is recorded as goodwill. UnderSFAS No. 142, goodwill and purchased intangibles with indefinite lives arenot amortized but are reviewed for impairment annually, or more frequently, ifimpairment indicators arise. Purchased intangibles with definite lives areamortized over their respective useful lives.

During 2006, the Company paid an aggregate of $52.7million to acquire all or a majority interest in certain delivery businessesheadquartered in the United States and Taiwan and increased the Company’sprevious investment in a delivery business in the People’s Republic of China. Theresults of these businesses have been included in the consolidated financialstatements since the dates of acquisition.

During 2006, the Company recorded $16.5 million ofgoodwill and $13.0 million of intangible assets for all acquisitions andinvestments completed in 2006, of which $2.9 million of the goodwill recordedis expected to be deductible for tax purposes. The $13.0 million recorded forintangible assets was assigned to trade names and customer related intangibleassets that will be amortized over a weighted average life of 4.4 years.

During 2004, the Companypaid an aggregate of $114.7 million to acquire Officenet SA, a mail order andinternet company operating in Argentina and Brazil, Pressel VersandInternational GmbH, a mail order company based in Austria and operating in nineEuropean countries, Malling Beck A/S, a mail order company based in Denmark,and Globus Office World plc (“Office World”), a United Kingdom office productscompany. In connection with the acquisition of Office World, Staples accruedapproximately $17.2 million for merger-related and integration costs,reflecting costs associated with planned Office World store closures, adistribution center closure, severance and transaction related costs. As of February 3,2007, approximately $6.7 million has been charged against this accrual and$10.5 million remains accrued for these merger-related and integrationcosts. Additionally, in 2004, the Company entered the Asian market by investingin a delivery business in the People’s Republic of China (“Staples China”). TheCompany has been the majority shareholder of Staples China since the firstquarter of 2005.

C-10

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C Accrued Expensesand Other Current Liabilities**

Themajor components of accrued liabilities are as follows (in thousands):

| ** **                              | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Taxes                                   |       | $                          | 284,094    |                       | $          | 318,971 |   |
| Employee related                        |       | 268,046                    |       | 253,828                    |       |
| Acquisition and  store closure reserves |       | 48,798                     |       | 57,501                     |       |
| Advertising and  marketing              |       | 82,985                     |       | 71,005                     |       |
| Other                                   |       | 417,095                    |       | 339,896                    |       |
| Total                                   |       | $                          | 1,101,018  |                       | $          | 1,041,201 |   |

 

**NOTE D Debt and CreditAgreements**

Themajor components of debt outstanding are as follows (in thousands):

| ** **                                                                                                                                                        | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Notes due  October 2012 (see below)                                                                                                                          |       | $                          | 325,000    |                       |       | $ | 325,000 |   |   |
| Senior Notes due  August 2007 (see below)                                                                                                                    |       | 200,000                    |       |                       | 200,000    |   |   |
| Lines of credit  (see “Credit Agreements” below)                                                                                                        |       | 229                        |       |                       | 184        |   |   |
| Capital lease  obligations and other notes payable in monthly installments with effective  interest rates from 2% to 13%; collateralized by the related equipment |       | 8,473                      |       |                       | 12,803     |   |   |
|                                                                                                                                                              |       | 533,702                    |       |                       | 537,987    |   |   |
| Deferred gain on  settlement of interest rate swap and fair value adjustments on hedged debt                                                                      |       | (16,060                    | )          |                       | (7,490     | ) |   |
| Less current  portion                                                                                                                                             |       | (201,177                   | )          |                       | (2,891     | ) |   |
| Net long-term  debt                                                                                                                                               |       | $                          | 316,465    |                       |       | $ | 527,606 |   |   |
| Debt maturing within one year consists of the  following (in thousands):                                                                                          |       |                       |       |                       |       |   |   |
| Current portion  of long-term debt                                                                                                                                |       | $                          | 201,886    |                       |       | $ | 2,891 |   |   |
| Fair value  adjustments on hedged debt                                                                                                                            |       | (709                       | )          |                       | —     |   |   |
| Total debt maturing  within one year                                                                                                                              |       | $                          | 201,177    |                       |       | $ | 2,891 |   |   |

 

Aggregateannual maturities of long-term debt and capital lease obligations are asfollows (in thousands):

| **Fiscal Year:** | ** ** | **Total** | ** ** |
|-----------------------|------------|-----------|------------|
| 2007                  |       | $         | 201,886    |   |
| 2008                  |       | 2,943     |       |
| 2009                  |       | 1,341     |       |
| 2010                  |       | 1,690     |       |
| 2011                  |       | 430       |       |
| Thereafter            |       | 325,412   |       |
|                  |       | $         | 533,702    |   |

 

Future minimum lease payments under capital leases of$6.9 million, excluding $0.5 million of interest, are included in aggregateannual maturities shown above. Staples entered into no new capital leaseagreements during fiscal 2006; Staples entered into new capital leaseagreements totaling $3.1 million and $0.5 million during fiscal years 2005 and2004, respectively.

Interest paid by Staples totaled $45.9 million, $41.2million and $22.5 million for fiscal years 2006, 2005 and 2004,respectively. There was $0.2 million of capitalized interest in fiscal 2006; nointerest was capitalized in fiscal 2005 or 2004.

C-11

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE DDebt and Credit Agreements (Continued)**

*Notes:**  *On September 30, 2002, Staples issued $325million principal amount of senior notes due October 1, 2012 (the “Notes”),with a fixed interest rate of 7.375% payable semi-annually on April 1 and October 1of each year commencing on April 1, 2003. Staples has entered into aninterest rate swap agreement to turn the Notes into variable rate obligations(see Note E).

*SeniorNotes:**  *On August 12,1997, Staples issued $200 million principal amount of senior notes due August 15,2007 (the “Senior Notes”), with a fixed interest rate of 7.125% payablesemi-annually on February 15 and August 15 of each year commencing onFebruary 15, 1998. Staples has entered into interest rate swap agreementsto turn the Senior Notes into variable rate obligations (see Note E).

*CreditAgreements:*   OnOctober 13, 2006, Staples entered into an Amended and Restated RevolvingCredit Agreement (the “Agreement”) with Bank of America, N.A and other lendinginstitutions. The Agreement amends and restates the Revolving Credit Agreementdated as of December 14, 2004, which provided for a maximum borrowing of$750.0 million and was due to expire in December 2009 (the “PriorAgreement”).

The Agreement provides for a maximum borrowing of$750.0 million which, upon approval of the lenders, Staples may increase to$1.0 billion, and expires on October 13, 2011. Borrowings made pursuant tothe Agreement may be syndicated loans, competitive bid loans, or swing line loans,the combined sum of which may not exceed the maximum borrowing amount. Amountsborrowed under the Agreement may be borrowed, repaid and reborrowed from timeto time until October 13, 2011.

Borrowings made pursuant to the Agreement assyndicated loans will bear interest, payable quarterly or, if earlier, at theend of any interest period, at either (a) the base rate, described in theAgreement as the higher of the annual rate of the lead bank’s prime rate or thefederal funds rate plus 0.50%, or (b) the Eurocurrency rate (a publiclypublished rate) plus a percentage spread based on our credit rating and fixedcharge coverage ratio. Borrowings made as competitive bid loans bear thecompetitive bid rate as specified in the applicable competitive bid. Swing lineloans bear interest that is the lesser of the base rate or the swing line rateas quoted by the administrative agent under the terms of the Agreement. Underthe Agreement, Staples agrees to pay a facility fee, payable quarterly, atrates that range from 0.060% to 0.125% depending on the Company’s credit ratingand fixed charge coverage ratio, and when applicable, a utilization fee. Thepayments under this Agreement are guaranteed by the same subsidiaries thatguarantee the Company’s publicly issued notes (See Note L).

*EuroNotes:**  *Staplesissued notes in the aggregate principal amount of 150 million Euros onNovember 15, 1999 (the “Euro Notes”). These notes came due onNovember 15, 2004 and were repaid in full on this date. Prior to theirrepayment, these notes were designated as a foreign currency hedge on theCompany’s net investments in Euro denominated subsidiaries and gains or losseswere recorded in the cumulative translation adjustment line in Stockholders’Equity.

Staples had available$132.6 million available under lines of credit, which had an outstandingbalance of $0.2 million at February 3, 2007, with $0.6 million of lettersof credit issued under the facilities.

C-12

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE E DerivativeInstruments and Hedging Activities**

Staples uses interest rate swaps to turn fixed ratedebt into variable rate debt and currency swaps to fix the cash flowsassociated with debt denominated in a foreign currency and to hedge a portionof the value of Staples’ net investment in Canadian dollar denominatedsubsidiaries. These derivatives qualify for hedge accounting treatment as thederivatives have been highly effective in achieving offsetting changes in fairvalue of the hedged items.

*InterestRate Swaps:**  *Duringfiscal year 1999, Staples entered into interest rate swaps, for an aggregatenotional amount of $200 million, to turn Staples’ fixed rate Senior Notesinto a variable rate obligation. On October 23, 2001, Staples terminatedthese interest rate swaps which were originally scheduled to terminate on August 15,2007. Upon termination of the swaps, Staples realized a gain of$18.0 million, which is being amortized over the remaining term of theunderlying hedged debt instrument, as an adjustment to interest expense.Simultaneous to the termination of these interest rate swaps, Staples enteredinto another $200 million of interest rate swaps whereby Staples isentitled to receive semi-annual interest payments at a fixed rate of 7.125% andis obligated to make semi-annual interest payments at a floating rate based onthe LIBOR. These swap agreements, scheduled to terminate on August 15,2007, are designated as fair value hedges of the Senior Notes and thedifferential to be paid or received on the interest rate swap agreement isaccrued and recognized as an adjustment to interest expense over the life ofthe agreement. At February 3, 2007, the new interest rate swap agreementshad a fair value loss of $0.7 million, which was included in other long-termobligations.

On January 8, 2003, Staplesentered into an interest rate swap, for an aggregate notional amount of $325million, designed to convert Staples’ Notes into a variable rate obligation. Theswap agreement, scheduled to terminate on October 1, 2012, is designatedas a fair value hedge of the Notes. Under the interest rate swap agreement,Staples is entitled to receive semi-annual interest payments at a fixed rate of7.375% and is required to make semi-annual interest payments at a floating rateequal to the 6 month LIBOR plus 3.088%. The interest rate swap agreement isbeing accounted for as a fair value hedge and the differential to be paid orreceived on the interest rate swap agreement is accrued and recognized as anadjustment to interest expense over the life of the agreements. At February 3,2007, the interest rate swap agreement had a fair value loss of $17.1 million,which was included in other long-term obligations.

*Foreign Currency Swaps:**  *During fiscal year 2000, Staples entered into acurrency swap, for an aggregate notional amount of $200 million. Uponmaturity of the agreement, scheduled for August 15, 2007, or earliertermination thereof, Staples is entitled to receive $200 million and isobligated to pay 298 million in Canadian dollars. Staples is also entitledto receive monthly interest payments on $200 million at a fixed rate of7.125% and is obligated to make monthly interest payments on 298 millionCanadian dollars at a fixed rate of 6.445%. On November 16, 2006, Staplesentered into a currency swap, for an aggregate notional amount of$7.5 million. Upon maturity of the agreement, scheduled for August 15,2007, or earlier termination thereof, Staples is entitled to receive$7.5 million and is obligated to pay 8.6 million in Canadian dollars.Staples is also entitled to receive quarterly interest payments on$7.5 million at a fixed rate of 5.3725% and is obligated to make quarterlyinterest payments on 8.6 million Canadian dollars at a fixed rate of4.315%. These swaps have been designated as a foreign currency hedge on Staples’net investment in Canadian dollar denominated subsidiaries and gains or losseswere recorded as cumulative translation adjustments in stockholders’ equity. AtFebruary 3, 2007, the currency swaps had an aggregate fair value loss of$52.6 million, which was included in other long-term obligations. Duringfiscal years 2006, 2005 and 2004, foreign currency gains (losses), net of taxesof $5.6 million, $(11.5) million and $(13.4) million, respectively wererecorded in the cumulative translation adjustment line.

**NOTE F Commitments andContingencies**

Staples leases certain retail and support facilitiesunder long-term non-cancelable lease agreements. Most lease agreements containrenewal options and rent escalation clauses and, in some cases, allowtermination within a certain number of years with notice and a fixed payment.Certain agreements provide for contingent rental payments based on sales.

Other long-term obligations at February 3, 2007include $110.3 million relating to future rent escalation clauses andlease incentives under certain existing store operating lease arrangements.These rent expenses are recognized on a straight-line basis over the respectiveterms of the leases. Future minimum lease commitments due for retail andsupport 

C-13

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE FCommitments and Contingencies (Continued)**

facilities (including lease commitments for 126 retailstores not yet opened at February 3, 2007) and equipment leases under non-cancelableoperating leases are as follows (in thousands):

| **Fiscal Year:** | ** ** | ** ** | ** ** | **Total** | ** ** |
|-----------------------|------------|------------|------------|-----------|------------|
| 2007                  |       | $          | 676,655    |      |
| 2008                  |       | 664,597    |       |
| 2009                  |       | 630,715    |       |
| 2010                  |       | 586,672    |       |
| 2011                  |       | 544,873    |       |
| Thereafter            |       | 2,924,245  |       |
|                  |       | $          | 6,027,757  |      |

 

Future minimum lease commitments do not include $78.5million of minimum rentals due under non-cancelable subleases.

Rent expense approximated $612.8 million, $566.1million and $524.0 million for fiscal years 2006, 2005 and 2004, respectively.

As of February 3,2007, Staples had purchase obligations of $528.7 million. Many of the Company’spurchase commitments may be canceled by the Company without advance notice orpayment, and the Company has excluded such commitments, along with intercompanycommitments from the following schedule. Contracts that may be terminated bythe Company without cause or penalty, but that require advance notice fortermination are valued on the basis of an estimate of what the Company wouldowe under the contract upon providing notice of termination. Such purchaseobligations will arise as follows (in thousands):

| **Fiscal Year:** | ** ** | ** ** | ** ** | **Total** | ** ** |
|-----------------------|------------|------------|------------|-----------|------------|
| 2007                  |       | $          | 295,879    |      |
| 2008 through 2009     |       | 115,134    |       |
| 2010 through 2011     |       | 59,298     |       |
| Thereafter            |       | 58,398     |       |
|                  |       | $          | 528,709    |      |

 

Import letters of credit are issued by Staples duringthe ordinary course of business through major financial institutions asrequired by certain vendor contracts. As of February 3, 2007, Staples hadopen letters of credit totaling $57.3 million.

TheCompany is involved from time to time in litigation arising from the operationof its business. Various class action lawsuits have been brought againstus for alleged violations of what is known as California’s “wage and hour” law.The plaintiffs have alleged that we improperly classified store managers asexempt under the California wage and hour law, making such managers ineligiblefor overtime wages. Staples and the general manager class have reached atentative settlement. The settlement requires court approval. The caseinvolving assistant store managers is unaffected by the settlement. Theplaintiffs are seeking to require us to pay overtime wages to the putativeclass for the period from October 21, 1995 to the present. The court hasgranted class certification to the plaintiffs. The court’s ruling is proceduralonly and does not address the merits of the plaintiffs’ allegations. The trialdate for the case has been scheduled for November 2007. We believe we havemeritorious defenses in the litigation and expect to prevail. If, however,there is an adverse judgment from which there is no successful appeal, damagescould range from $10 million to $150 million, excluding interest and attorneys’fees.

C-14

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE G Income Taxes**

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The approximate tax effect of thesignificant components of Staples’ deferred tax assets and liabilities are asfollows (in thousands):

| ** **                           | ** ** | **February 3,** | ** ** | **January 28,** | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                           | ** ** | **2007**             | ** ** | **2006**             | ** ** |
| Deferred tax assets:                 |       |                 |       |                 |       |   |   |   |   |
| Deferred rent                        |       |                 | $          | 42,336               |       |   |   | $ | 39,062 |   |   |
| Capitalized vendor money             |       |                 | —     |                 |       |   | 26,855 |   |   |
| Foreign tax credit carryforwards     |       |                 | 62,473     |                 |       |   | — |   |   |
| Net operating loss carryforwards     |       |                 | 88,497     |                 |       |   | 47,447 |   |   |
| Insurance                            |       |                 | 12,362     |                 |       |   | 7,274 |   |   |
| Employee benefits                    |       |                 | 87,844     |                 |       |   | 80,365 |   |   |
| Merger related charges               |       |                 | 9,954      |                 |       |   | 11,008 |   |   |
| Store closure charge                 |       |                 | 7,295      |                 |       |   | 10,325 |   |   |
| Inventory                            |       |                 | 32,289     |                 |       |   | 40,715 |   |   |
| Unrealized loss on hedge instruments |       |                 | 22,083     |                 |       |   | 26,156 |   |   |
| Deferred revenue                     |       |                 | 22,724     |                 |       |   | 18,291 |   |   |
| Depreciation                         |       |                 | 53,273     |                 |       |   | 28,152 |   |   |
| Other—net                       |       |                 | 45,780     |                 |       |   | 50,940 |   |   |
| Total deferred tax assets            |       |                 | 486,910    |                 |       |   | 386,590 |   |   |
| Total valuation  allowance           |       |                 | (77,821    | )                    |       |   | (44,314 | ) |   |
| Net deferred tax assets              |       |                 | $          | 409,089              |       |   |   | $ | 342,276 |   |   |
| Deferred tax  liabilities:           |       |                 |       |                 |       |   |   |   |   |
| Intangibles                          |       |                 | $          | (90,455              | )          |   |   | $ | (90,205 | ) |   |
| Other—net                       |       |                 | (2,661     | )                    |       |   | (1,499 | ) |   |
| Total deferred tax liabilities       |       |                 | (93,116    | )                    |       |   | (91,704 | ) |   |
| Net deferred tax assets              |       |                 | $          | 315,973              |       |   |   | $ | 250,572 |   |   |

 

The gross deferred tax asset from tax losscarryforwards of $88.5 million represents approximately $280.9 million ofnet operating loss carryforwards, which have an indefinite carryforward period.The valuation allowance increased by $33.5 million during the year, dueprimarily to increased tax rates applied to the net operating losscarryforwards.

Forfinancial reporting purposes, income before income taxes includes the followingcomponents (in thousands):

| ** **     | ** ** | **Fiscal Year Ended** | ** ** |
|----------------|------------|---------------------------------|------------|
| ** **     | ** ** | **February 3,  2007**      | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| Pretax income: |       |                            |       |   |   |   |   |
| United States  |       | $                               | 1,173,804  |   | $ | 1,058,299 |   | $ | 862,231 |   |
| Foreign        |       | 297,524                         |       | 177,000 |   | 184,344 |   |
|           |       | $                               | 1,471,328  |   | $ | 1,235,299 |   | $ | 1,046,575 |   |

 

C-15

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE G IncomeTaxes (Continued)**

The provision for incometaxes consists of the following (in thousands):

| ** **                       | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **February 3,  2007**      | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| Current tax  expense:            |       |                            |       |   |   |   |   |   |   |   |   |
| Federal                          |       | $                               | 516,520    |   |   | $ | 484,326 |   |   |   | $ | 315,989 |   |   |
| State                            |       | 22,638                          |       |   | 19,027 |   |   |   | 19,899 |   |   |
| Foreign                          |       | 86,870                          |       |   | 75,990 |   |   |   | 69,701 |   |   |
| Deferred tax  (benefit) expense: |       |                            |       |   |   |   |   |   |   |   |   |
| Federal                          |       | (101,984                        | )          |   | (85,897 | ) |   |   | (11,971 | ) |   |
| State                            |       | (11,996                         | )          |   | (8,501 | ) |   |   | 1,441 |   |   |
| Foreign                          |       | (14,076                         | )          |   | (34,061 | ) |   |   | (13,059 | ) |   |
| Total income tax expense         |       | $                               | 497,972    |   |   | $ | 450,884 |   |   |   | $ | 382,000 |   |   |

 

Areconciliation of the federal statutory tax rate to Staples’ effective tax rateon historical net income is as follows:

| ** **                                    | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **February 3, 2007**  | ** ** | **January 28, 2006** | ** ** | **January 29, 2005** | ** ** |
| Federal statutory  rate                       |       |                            | 35.0       | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State effective  rate, net of federal benefit |       |                            | 1.9        |   |   |   | 1.7 |   |   |   | 2.3 |   |   |
| Effect of foreign  taxes                      |       |                            | (1.2       | ) |   |   | (0.6 | ) |   |   | (0.4 | ) |   |
| Tax credits                                   |       |                            | (0.6       | ) |   |   | (0.5 | ) |   |   | (0.6 | ) |   |
| Resolution of tax  matters                    |       |                            | (2.2       | ) |   |   | 0.0 |   |   |   | 0.0 |   |   |
| Other                                         |       |                            | 0.9        |   |   |   | 0.9 |   |   |   | 0.2 |   |   |
| Effective tax rate                            |       |                            | 33.8       | % |   |   | 36.5 | % |   |   | 36.5 | % |   |

 

Our effective tax rate for 2006 reflects an adjustmentfor a change in estimate regarding certain tax uncertainties as well as thefavorable resolution of certain foreign and domestic tax matters, which wererecorded as discrete items in the third quarter. Our effective tax rate for 2006, excluding the impact of discrete items, was36.0%. The effective tax rate in any year is impacted by the geographicmix of earnings.

The tax impact of the unrealized gain or loss oninstruments designated as hedges of net investments in foreign subsidiaries isreported in the cumulative translation adjustment line in stockholders’ equity.

The Company operates in multiple jurisdictions andcould be subject to audit in these jurisdictions. These audits can involvecomplex issues that may require an extended period of time to resolve and maycover multiple years. In the Company’s opinion, an adequate provision forincome taxes has been made for all years subject to audit.

Income tax payments were $596 million, $472 millionand $322 million during fiscal years 2006, 2005 and 2004, respectively.

Undistributedearnings of the Company’s foreign subsidiaries amounted to approximately $555million as of February 3, 2007. The Company has not provided anyadditional federal or state income taxes or foreign withholding taxes on theundistributed earnings as such earnings have been indefinitely reinvested inthe business.  The determination of theamount of the unrecognized deferred tax liability related to the undistributedearnings is not practicable because of the complexities associated with itshypothetical calculation.

C-16

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE H Employee BenefitPlans**

***Stock Option Review***

During the third quarter of 2006, the Company and itsAudit Committee, assisted by outside counsel, conducted a review of itshistorical stock option granting practices during the period from 1997 to thepresent. Based on the results of the review, the Company recorded a$10.8 million expense ($8.6 million net of taxes) to reflect thecumulative impact of accounting errors due to the use of incorrect measurementdates, without restating any historical financial statements. The Company has concludedthat the use of incorrect measurement dates was not the result of intentionalwrongdoing and has taken steps to improve the controls over its option grantingprocesses.

The amount of thiscorrection in any single year would have been no more than 0.6% of operatingincome for that year. The Company recorded the cumulative impact of theseerrors as a charge in 2006 without restating any historical financialstatements. This charge increased cost of goods sold and occupancy costs by$0.3 million, operating and selling expenses by $3.9 million, generaland administrative expenses by $6.6 million, and reduced income taxexpense by $2.2 million, resulting in an $8.6 million reduction innet income for 2006.

***Employee Stock Purchase Plans***

The Amended and Restated1998 Employee Stock Purchase Plan authorizes a total of up to 15.8 millionshares of common stock to be sold to participating employees and the Amendedand Restated International Employee Stock Purchase Plan authorizes a total ofup to 1.3 million shares of common stock to be sold to participating employeesof non-U.S. subsidiaries of the Company. Under both plans, participatingemployees may purchase shares of common stock at 85% of its fair market valueat the beginning or end of an offering period, whichever is lower, throughpayroll deductions in an amount not to exceed 10% of an employee’s annual basecompensation.

***Stock Award Plans***

The Amended and Restated2004 Stock Incentive Plan (the “2004 Plan”) was implemented in July 2004and replaces the amended and restated 1992 Equity Incentive Plan (the “1992Plan”) and the amended and restated 1990 Director Stock Option Plan (the “1990Plan”). Unexercised options under both the 1992 Plan and the 1990 Plan remainoutstanding. Under the 2004 Plan, Staples may issue up to 62.3 millionshares of common stock to management and employees using various forms ofawards, including nonqualified options and restricted stock, subject to certainrestrictions. As of February 27, 1997, Staples’ 1987 Stock Option Plan(the “1987 Plan”) expired; however, unexercised options under this plan remainoutstanding. Options outstanding under these plans have an exercise price equalto the fair market value of the common stock on the date of grant. Some optionsoutstanding are exercisable at various percentages of the total shares subjectto the option starting one year after the grant, while other options areexercisable in their entirety three to five years after the grant date. Alloptions expire ten years after the grant date, subject to earlier terminationin the event of employment termination.

C-17

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE HEmployee Benefit Plans (Continued)**

*Stock Options*

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

| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price  Per Share** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  January 31, 2004 |       | 74,943,866                 |       |                                                           | $          | 11.49                                                    |       |   |   |   |   |   |
| Granted                               |       | 15,553,603                 |       |                                                           | 19.10      |                                                     |       |   |   |   |   |
| Exercised                             |       | (18,963,776                | )          |                                                           | 9.82       |                                                     |       |   |   |   |   |
| Canceled                              |       | (2,645,105                 | )          |                                                           | 12.93      |                                                     |       |   |   |   |   |
| Outstanding at January 29, 2005  |       | 68,888,588                 |       |                                                           | $          | 13.61                                                    |       |   |   |   |   |   |
| Granted                               |       | 16,757,946                 |       |                                                           | 21.34      |                                                     |       |   |   |   |   |
| Exercised                             |       | (13,605,421                | )          |                                                           | 11.78      |                                                     |       |   |   |   |   |
| Canceled                              |       | (3,568,121                 | )          |                                                           | 17.08      |                                                     |       |   |   |   |   |
| Outstanding at January 28, 2006  |       | 68,472,992                 |       |                                                           | $          | 15.68                                                    |       |   |   |   |   |   |
| Granted                               |       | 4,539,002                  |       |                                                           | 24.55      |                                                     |       |   |   |   |   |
| Exercised                             |       | (12,617,602                | )          |                                                           | 13.18      |                                                     |       |   |   |   |   |
| Canceled                              |       | (2,738,475                 | )          |                                                           | 19.45      |                                                     |       |   |   |   |   |
| Outstanding at February 3, 2007  |       | 57,655,917                 |       |                                                           | $          | 16.75                                                    |       |   |   | $ | 559,170 |   |   |
| Exercisable at  February 3, 2007 |       | 35,236,218                 |       |                                                           | $          | 14.14                                                    |       |   |   | $ | 433,886 |   |   |

 

The weighted-average fair values of options grantedduring fiscal years 2006, 2005 and 2004 were $7.12, $6.32 and $7.25,respectively.

Thefollowing table summarizes information concerning currently outstanding andexercisable options for common stock:

| ** **                                              | ** ** | ** **              | ** ** | **Options Outstanding**                                     | ** ** | **Options Exercisable**               | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Range of  Exercise Prices**                 | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|  $    0.00 - $  9.00 |       | 1,357,695               |       |                                                             | 1.80       |                                       |       |   | $ | 6.96 |   |   | 1,356,627 |   |   | $ | 6.96 |   |   |
|  $  9.001 - $10.00                       |       | 5,114,151               |       |                                                             | 4.01       |                                       |       |   | 9.72 |   |   | 5,098,895 |   |   | 9.72 |   |   |
|  $10.001 - $11.00                                  |       | 5,848,299               |       |                                                             | 4.82       |                                       |       |   | 10.50 |   |   | 5,830,382 |   |   | 10.50 |   |   |
|  $11.001 - $13.00                                  |       | 8,002,656               |       |                                                             | 6.08       |                                       |       |   | 12.22 |   |   | 6,936,412 |   |   | 12.22 |   |   |
|  $13.001 - $14.00                                  |       | 3,296,552               |       |                                                             | 2.60       |                                       |       |   | 13.37 |   |   | 3,278,585 |   |   | 13.37 |   |   |
|  $14.001 - $19.00                                  |       | 2,327,536               |       |                                                             | 4.00       |                                       |       |   | 16.27 |   |   | 2,018,803 |   |   | 16.17 |   |   |
|  $19.001 - $20.00                                  |       | 10,649,060              |       |                                                             | 7.19       |                                       |       |   | 19.16 |   |   | 4,662,734 |   |   | 19.16 |   |   |
|  $20.001 - $21.00                                  |       | 3,600,448               |       |                                                             | 3.30       |                                       |       |   | 20.67 |   |   | 3,239,214 |   |   | 20.67 |   |   |
|  $21.001 - $22.00                                  |       | 12,390,164              |       |                                                             | 8.39       |                                       |       |   | 21.31 |   |   | 2,577,682 |   |   | 21.33 |   |   |
|  $22.001 - $28.00                                  |       | 5,069,356               |       |                                                             | 9.20       |                                       |       |   | 24.27 |   |   | 236,884 |   |   | 22.63 |   |   |
|  $    0.00  - $28.00           |       | 57,655,917              |       |                                                             | 6.19       |                                       |       |   | $ | 16.75 |   |   | 35,236,218 |   |   | $ | 14.14 |   |   |

 

 

C-18

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE HEmployee Benefit Plans (Continued)**

The number of exercisable shares was 35.2 million at February 3,2007, 36.8 million at January 28, 2006 and 40.3 million at January 29,2005.

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

Thefair value of options granted in each year was estimated at the date of grantusing the following weighted average assumptions:

| ** **                 | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Risk free  interest rate   |       | 5.0%      |       | 3.8%      |       | 3.8%      |       |
| Expected dividend  yield   |       | 0.8%      |       | 0.8%      |       | 0.7%      |       |
| Expected stock  volatility |       | 31%       |       | 33%       |       | 41%       |       |
| Expected life of options   |       | 5.1 years |       | 5.0 years |       | 5.0 years |       |

 

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

The fair value of stockoptions is expensed over the applicable vesting period using the straight linemethod. In connection with the purchase of shares under the employee stockpurchase plan and the issuance of stock options, Staples recognized $95.8million in compensation expense for fiscal 2006, $79.2 million for fiscal 2005and $69.0 million for fiscal 2004, respectively. At February 3, 2007, theCompany had $123.4 million of stock options to be expensed over the periodthrough January 2011.

*Restricted Stock*

In2003 the Company began granting restricted shares in lieu of special grants ofstock options. All shares underlying awards of restricted stock are restrictedin that they are not transferable (i.e., they may not be sold) until they vest.Subject to limited exceptions, if the employees who received the restrictedstock leave Staples prior to the vesting date for any reason, the shares ofrestricted stock will be forfeited and returned to Staples. The following tablesummarizes the Company’s grants of restricted stock in fiscal 2006:

| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date  Fair Value  Per Share** | ** ** |
|---------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------------------|------------|
| Outstanding at  January 29, 2006 |       | 2,018,614                  |       |                                                                        | $          | 18.45 |   |   |
| Granted                               |       | 5,321,410                  |       |                                                                        | 24.63      |   |   |
| Released                              |       | (1,576,537                 | )          |                                                                        | 18.48      |   |   |
| Canceled                              |       | (427,822                   | )          |                                                                        | 22.02      |   |   |
| Outstanding at  February 3, 2007 |       | 5,335,665                  |       |                                                                        | $          | 24.32 |   |   |

 

C-19

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE HEmployee Benefit Plans (Continued)**

In connection with theissuance of restricted stock, Staples included $28.1 million, $15.1 million and$11.0 million in compensation expense for fiscal years 2006, 2005 and 2004,respectively.

*PerformanceAccelerated Restricted Stock (“PARS”)*

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

As of February 3, 2007, Staples had 944,670 PARSoutstanding that were issued during fiscal year 2005. PARS issued in fiscalyear 2005 have a weighted-average fair market value of $21.72 and will vest in March 2007as a result of Staples achieving its target earnings per share growth for thefiscal year ended February 3, 2007. PARS issued in fiscal year 2004 had aweighted-average fair market value of $19.79 and vested in March 2006 as aresult of Staples achieving its target earnings per share growth for the fiscalyear ended January 28, 2006. PARS issued in fiscal year 2003 had aweighted-average fair market value of $17.37 and vested on April 1, 2005.PARS issued in fiscal year 2000 have a weighted-average fair market value of$9.46 and vested on February 1, 2005.

In connection with theissuance of PARS, Staples included $23.6 million, $20.9 million and $21.7million in compensation expense for fiscal years 2006, 2005 and 2004,respectively.

*Performance Shares*

In fiscal 2006 the Company began issuing performanceshares. Performance shares are restricted stock awards that vest only if theCompany meets minimum performance targets. For the 2006 performance shareawards, the performance target has been established based on cumulative returnson net assets over a three year period. If, at the end of the 2008 fiscal year,the Company achieves 100% of the performance target, all of the 2006performance share awards will vest; if the Company achieves at least 90% of theperformance target or exceeds the performance target, then a percentage of theperformance shares, from 90% up to 200%, will vest. If the Company does notachieve at least 90% of the performance target, then none of the performanceshare awards will vest.

The fair value ofperformance shares is based upon the market price of the underlying commonstock as of the date of grant. As of February 3, 2007, Staples had 541,200performance shares that were issued during fiscal year 2006. The shares have aweighted-average fair market value of $23.43. In connection with the issuanceof performance shares, Staples recognized $6.3 million in compensation expensefor fiscal year 2006.

***Employees’ 401(k) Savings Plan***

Staples’ Employees’ 401(k) Savings Plan (the “401(k) Plan”)is available to all United States based employees of Staples who meet minimumage and length of service requirements. Company contributions are based upon amatching formula applied to employee contributions that are made in the form ofCompany common stock and vest ratably over a five year period. The SupplementalExecutive Retirement Plan (the “SERP Plan”), which is similar in many respectsto the 401(k) Plan, is available to certain Company executives and otherhighly compensated employees, whose contributions to the 401(k) Plan arelimited, and allows such individuals to supplement their contributions to the401(k) Plan by making pre-tax contributions to the SERP Plan. Companycontributions to the SERP Plan are based on a similar matching formula andvesting period; however, beginning in October 2004, such contributionswere made in cash rather than in Company common stock.

C-20

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE HEmployee Benefit Plans (Continued)**

In connection with theseplans, Staples included approximately $14.8 million, $14.6 million and $13.4million in expense for fiscal years 2006, 2005 and 2004.

**NOTE I Stockholders’Equity**

In 2006, the Company repurchased 30.3 million sharesof the Company’s common stock for a total purchase price (includingcommissions) of $749.9 million under the Company’s share repurchase program,which was announced in 2004 and amended in the third quarter of 2005. In 2005,the Company repurchased 30.1 million shares of the Company’s common stock for atotal purchase price (including commissions) of $649.6 million. Under theoriginal program, the Company was authorized to repurchase up to $1.0 billionof Staples common stock during fiscal years 2004 and 2005. Under the newprogram, the Board of Directors authorized the Company to repurchase up to anadditional $1.5 billion of Staples common stock through February 2, 2008following the completion of the Company’s $1.0 billion repurchase program. In2004, the Company repurchased 26.1 million shares of the Company’s common stockfor a total purchase price (including commissions) of $502.7 million.

At February 3, 2007,60.6 million shares of common stock were reserved for issuance underStaples’ 2004 Plan, 401(k) Plan and employee stock purchase plans.

**NOTE J Computation ofEarnings per Common Share**

Earningper share has been presented below for Staples common stock for fiscal years2006, 2005 and 2004 (amounts in thousands, except per share data):

| ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerator:                                  |       |     |       |     |       |     |       |
| Net income                                  |       | $        | 973,677    |     | $          | 784,117  |       | $ | 664,575 |   |
| Denominator:                                |       |     |       |     |       |     |       |
| Weighted-average common shares outstanding  |       | 720,528  |       | 731,622  |       | 741,878  |       |
| Effect of dilutive  securities:             |       |     |       |     |       |     |       |
| Employee stock options and restricted stock |       | 19,150   |       | 18,794   |       | 20,328   |       |
| Weighted-average  shares assuming dilution  |       | 739,678  |       | 750,416  |       | 762,206  |       |
| Basic earnings  per common share            |       | $        | 1.35       |     | $          | 1.07     |       | $ | 0.90 |   |
| Diluted earnings per  common share          |       | $        | 1.32       |     | $          | 1.04     |       | $ | 0.87 |   |

 

Options to purchase sharesof common stock are excluded from the calculation of diluted earnings per sharewhen their inclusion would have an anti-dilutive effect on the calculation.Options to purchase 0.1 million shares, 0.2 million shares and 0.4 millionshares of Staples common stock were excluded from the calculation of dilutedearnings per share for fiscal 2006, 2005 and 2004, respectively.

**NOTE K Segment Reporting**

Staples has three reportable segments: North AmericanRetail, North American Delivery and International Operations. Staples’ NorthAmerican Retail segment consists of the U.S and Canadian business units thatoperate office supply stores. The North American Delivery segment consists ofthe U.S. and Canadian business units that sell and deliver office products andservices directly to customers, and includes Staples Business Delivery, Quilland Staples’ Contract operations (Staples National Advantage and Staples BusinessAdvantage). The International Operations segment consists of operating unitsthat operate office supply stores and that sell and deliver office products andservices directly to customers in 19 countries in Europe, South America andAsia.

Staples evaluates performance and allocates resourcesbased on profit or loss from operations before interest and income taxes, theimpact of changes in accounting principles and non-recurring items (“businessunit income”). The 

C-21

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE KSegment Reporting (Continued)**

accounting policies of thereportable segments are the same as those described in the summary ofsignificant accounting policies in Note A. Intersegment sales and transfers andthe related intercompany profit or loss are excluded from reportable segmentamounts.

Staples’ North American Retail and North AmericanDelivery segments are managed separately because the way they market productsis different, the classes of customers they service may be different, and thedistribution methods used to deliver products to customers is different. TheInternational Operations are considered a separate reportable segment becauseof the significant difference in the operating environment from the NorthAmerican operations.

The following is a summaryof significant accounts and balances by reportable segment for fiscal years2006, 2005 and 2004 (in thousands): 

| ** **                                 | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Sales:**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North American Retail                      |       | $          | 9,938,885  |       | $          | 9,037,513  |       | $ | 8,324,299 |   |
| North American Delivery                    |       | 5,863,094  |       | 4,945,661  |       | 4,196,882  |       |
| International Operations                   |       | 2,358,810  |       | 2,095,678  |       | 1,927,197  |       |
| Consolidated                               |       | $          | 18,160,789 |       | $          | 16,078,852 |       | $ | 14,448,378 |   |
| **Business  Unit Income:**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North American Retail                      |       | $          | 956,565    |       | $          | 843,140    |       | $ | 706,419 |   |
| North American Delivery                    |       | 624,729    |       | 507,131    |       | 396,065    |       |
| International Operations                   |       | 50,511     |       | 13,616     |       | 69,253     |       |
| Business unit income                       |       | 1,631,805  |       | 1,363,887  |       | 1,171,737  |       |
| Stock-based compensation                   |       | (168,736   | )          | (129,806   | )          | (114,861   | )          |
| Consolidated                               |       | $          | 1,463,069  |       | $          | 1,234,081  |       | $ | 1,056,876 |   |
| **Depreciation &  Amortization:** |       |       |       |       |       |       |       |
| North American Retail                      |       | $          | 210,698    |       | $          | 192,112    |       | $ | 181,307 |   |
| North American Delivery                    |       | 74,027     |       | 60,103     |       | 51,909     |       |
| International Operations                   |       | 54,574     |       | 51,685     |       | 45,629     |       |
| Consolidated                               |       | $          | 339,299    |       | $          | 303,900    |       | $ | 278,845 |   |
| **Capital  Expenditures:**                 |       |       |       |       |       |       |       |
| North American Retail                      |       | $          | 320,633    |       | $          | 284,173    |       | $ | 209,190 |   |
| North American Delivery                    |       | 141,117    |       | 87,992     |       | 55,068     |       |
| International Operations                   |       | 66,725     |       | 83,938     |       | 71,177     |       |
| Consolidated                               |       | $          | 528,475    |       | $          | 456,103    |       | $ | 335,435 |   |

 

Thefollowing is a reconciliation of business unit income to income before incometaxes and minority interest for fiscal years 2006, 2005 and 2004 (inthousands):

| ** **                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Consolidated  business unit income                |       | $        | 1,463,069  |     | $          | 1,234,081 |       | $ | 1,056,876 |   |
| Other income (expense)                            |       | 8,259    |       | 1,218    |       | (10,301   | )          |
| Income before income  taxes and minority interest |       | $        | 1,471,328  |     | $          | 1,235,299 |       | $ | 1,046,575 |   |

** **

C-22

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE KSegment Reporting (Continued)**

 

| ** **                                   | ** ** | **February 3, 2007** | ** ** | **January 28, 2006** | ** ** | **January 29, 2005** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Assets:**                                  | ** ** |                           | ** ** | ** **                     |       |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |
| North American Retail                        |       |                           | $          | 3,430,529                      | ** ** |                           |       | $ | 3,472,130 |   |   |   | $ | 3,181,132 |   |   |
| North American Delivery                      |       |                           | 1,986,795  | ** **                     |       |                           | 2,042,065  |   |   |   | 1,784,662 |   |   |
| International Operations                     |       |                           | 2,486,950  | ** **                     |       |                           | 2,238,833  |   |   |   | 2,185,474 |   |   |
| Total                                        |       |                           | 7,904,274  | ** **                     |       |                           | 7,753,028  |   |   |   | 7,151,268 |   |   |
| Elimination of  net intercompany receivables |       |                           | 492,991    | ** **                     |       |                           | (20,308    | ) |   |   | (24,118 | ) |   |
| Total  consolidated assets                   |       |                           | $          | 8,397,265                      | ** ** |                           |       | $ | 7,732,720 |   |   |   | $ | 7,127,150 |   |   |

 

**Geographic Information:**

| ** **    | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|---------------|------------|-----------|------------|-----------|------------|------------|------------|
| **Sales:**    |       |      |       |      |       |       |       |
| United States |       | $         | 13,514,677 |      | $          | 11,967,718 |       | $ | 10,808,314 |   |
| Canada        |       | 2,287,302 |       | 2,015,456 |       | 1,712,867  |       |
| International |       | 2,358,810 |       | 2,095,678 |       | 1,927,197  |       |
| Consolidated  |       | $         | 18,160,789 |      | $          | 16,078,852 |       | $ | 14,448,378 |   |

 

| ** **                  | ** ** | **February 3, 2007** | ** ** | **January 28, 2006** | ** ** |
|-----------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Long-lived Assets:** |       |                           |       |                           |       |   |   |   |   |
| United States               |       |                           | $          | 1,857,093                      |       |   |   | $ | 1,667,475 |   |   |
| Canada                      |       |                           | 271,660    |                           |       |   | 275,672 |   |   |
| International               |       |                           | 1,566,443  |                           |       |   | 1,469,279 |   |   |
| Consolidated                |       |                           | $          | 3,695,196                      |       |   |   | $ | 3,412,426 |   |   |

 

**NOTE L Guarantor Subsidiaries**

Under the terms of the Company’s Notes and SeniorNotes, certain subsidiaries guarantee repayment of the debt. The Notes andSenior Notes are fully and unconditionally guaranteed on an unsecured, jointand several basis by Staples the Office Superstore,  LLC, Staples theOffice Superstore East, Inc., Staples Contract & Commercial, Inc.,and Staples the Office Superstore, Limited Partnership, all of which are whollyowned subsidiaries of Staples (the “Guarantor Subsidiaries”). The term ofguarantees is equivalent to the term of the related debt. The followingcondensed consolidating financial data is presented for the holders of theNotes and Senior Notes and illustrates the composition of Staples, Inc.(the “Parent Company”), Guarantor Subsidiaries, and non-guarantor subsidiariesas of February 3, 2007 and January 28, 2006 and for the fiscal yearsended February 3, 2007, January 28, 2006 and January 29, 2005. Thenon-guarantor subsidiaries represent more than an inconsequential portion ofthe consolidated assets and revenues of Staples.

Investments in subsidiaries are accounted for by theParent Company on the equity method for purposes of the supplementalconsolidating presentation. Earnings of subsidiaries are, therefore, reflectedin the Parent Company’s investment accounts and earnings. The principalelimination entries eliminate the Parent Company’s investment in subsidiariesand intercompany balances and transactions.

C-23

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE L GuarantorSubsidiaries (Continued)**

**CondensedConsolidating Balance SheetAs of February 3, 2007(in thousands)**

| ** **                                       | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                       | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash and cash  equivalents                       |       | $                      | 476,549    |             | $          | 49,687           |       | $                | 491,435    |             | $          | — |   |   | 1,017,671 |   |   |
| Short-term  investments                          |       | 457,759                |       | —           |       | —           |       | —           |       |             | 457,759    |   |   |
| Merchandise  inventories                         |       | —                 |       | 1,203,498        |       | 716,216          |       | —           |       |             | 1,919,714  |   |   |
| Other current  assets                            |       | 122,172                |       | 457,068          |       | 456,979          |       | —           |       |             | 1,036,219  |   |   |
| Total current assets                             |       | 1,056,480              |       | 1,710,253        |       | 1,664,630        |       | —           |       |             | 4,431,363  |   |   |
| Net property,  equipment and other assets        |       | 460,678                |       | 1,156,073        |       | 894,038          |       | —           |       |             | 2,510,789  |   |   |
| Goodwill, net of  amortization                   |       | 175,625                |       | 110,140          |       | 1,169,348        |       | —           |       |             | 1,455,113  |   |   |
| Investment in  affiliates and intercompany, net  |       | (892,119               | )          | 3,067,979        |       | 2,822,520        |       | (4,998,380       | )          |             | —     |   |   |
| Total assets                                     |       | 800,664                |       | 6,044,445        |       | 6,550,536        |       | (4,998,380       | )          |             | 8,397,265  |   |   |
| Total current  liabilities                       |       | 416,459                |       | 1,378,130        |       | 993,794          |       | —           |       |             | 2,788,383  |   |   |
| Total long-term  liabilities                     |       | 34,412                 |       | 416,607          |       | 127,089          |       | —           |       |             | 578,108    |   |   |
| Minority interest                                |       | —                 |       | —           |       | 9,109            |       | —           |       |             | 9,109      |   |   |
| Total  stockholders’ equity                 |       | 349,793                |       | 4,249,708        |       | 5,420,544        |       | (4,998,380       | )          |             | 5,021,665  |   |   |
| Total liabilities  and stockholders’ equity |       | 800,664                |       | 6,044,445        |       | 6,550,536        |       | (4,998,380       | )          |             | 8,397,265  |   |   |
|                                                  |            |                        |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |  |  |

 

**CondensedConsolidating Balance SheetAs of January 28, 2006(in thousands)**

| ** **                                       | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                       | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash and cash  equivalents                       |       | $                      | 479,704    |             | $          | 49,390           |       | $                | 448,728    |             | $          | — |   |   | $ | 977,822 |   |   |
| Short-term  investments                          |       | 593,082                |       | —           |       | —           |       | —           |       |             | 593,082    |   |   |
| Merchandise  inventories                         |       | —                 |       | 1,048,654        |       | 657,718          |       | —           |       |             | 1,706,372  |   |   |
| Other current  assets                            |       | 138,792                |       | 325,075          |       | 403,401          |       | —           |       |             | 867,268    |   |   |
| Total current assets                             |       | 1,211,578              |       | 1,423,119        |       | 1,509,847        |       | —           |       |             | 4,144,544  |   |   |
| Net property,  equipment and other assets        |       | 353,275                |       | 989,490          |       | 866,659          |       | —           |       |             | 2,209,424  |   |   |
| Goodwill, net of  amortization                   |       | 173,029                |       | 96,737           |       | 1,108,986        |       | —           |       |             | 1,378,752  |   |   |
| Investment in  affiliates and intercompany, net  |       | (356,423               | )          | 2,678,919        |       | 1,445,313        |       | (3,767,809       | )          |             | —     |   |   |
| Total assets                                     |       | $                      | 1,381,459  |             | $          | 5,188,265        |       | $                | 4,930,805  |             | $          | (3,767,809 | ) |   | $ | 7,732,720 |   |   |
| Total current  liabilities                       |       | $                      | 280,730    |             | $          | 1,266,571        |       | $                | 932,606    |             | —     |   |   | $ | 2,479,907 |   |   |
| Total long-term  liabilities                     |       | 30,781                 |       | 608,371          |       | 127,725          |       | —           |       |             | 766,877    |   |   |
| Minority interest                                |       | —                 |       | —           |       | 4,335            |       | —           |       |             | 4,335      |   |   |
| Total  stockholders’ equity                 |       | 1,069,948              |       | 3,313,323        |       | 3,866,139        |       | (3,767,809       | )          |             | 4,481,601  |   |   |
| Total liabilities  and stockholders’ equity |       | $                      | 1,381,459  |             | $          | 5,188,265        |       | $                | 4,930,805  |             | $          | (3,767,809 | ) |   | $ | 7,732,720 |   |   |

 

C-24

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**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE LGuarantor Subsidiaries (Continued)**

**CondensedConsolidating Statement of IncomeFor the year ended February 3, 2007(in thousands)**

| ** **                                               | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
| ** **                                               | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
| Sales                                                    |       |                   | $          | —           |       |             | $          | 12,069,327       |       | $ | 6,091,462 |   | $ | 18,160,789 |   |
| Cost of goods  sold and occupancy costs                  |       |                   | 8,459      |             |       | 8,665,100        |       | 4,293,229        |       | 12,966,788 |   |
| Gross profit (loss)                                      |       |                   | (8,459     | )                |       | 3,404,227        |       | 1,798,233        |       | 5,194,001 |   |
| Operating and  other expenses                            |       |                   | 344,519    |             |       | 2,283,044        |       | 1,095,110        |       | 3,722,673 |   |
| Income (loss)  before income taxes and minority interest |       |                   | (352,978   | )                |       | 1,121,183        |       | 703,123          |       | 1,471,328 |   |
| Income tax  expense                                      |       |                   | —     |             |       | 396,884          |       | 101,088          |       | 497,972 |   |
| Income (loss)  before minority interest                  |       |                   | (352,978   | )                |       | 724,299          |       | 602,035          |       | 973,356 |   |
| Minority interest  income                                |       |                   | —     |             |       | —           |       | (321             | )          | (321 | ) |
| Net income (loss)                                        |       |                   | $          | (352,978         | )          |             | $          | 724,299          |       | $ | 602,356 |   | $ | 973,677 |   |

 

**CondensedConsolidating Statement of IncomeFor the year ended January 28, 2006(in thousands)**

| ** **                                               | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
| ** **                                               | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
| Sales                                                    |       |                   | $          | —           |       |             | $          | 10,649,559       |       | $ | 5,429,293 |   | $ | 16,078,852 |   |
| Cost of goods  sold and occupancy costs                  |       |                   | 3,957      |             |       | 7,646,490        |       | 3,845,787        |       | 11,496,234 |   |
| Gross profit  (loss)                                     |       |                   | (3,957     | )                |       | 3,003,069        |       | 1,583,506        |       | 4,582,618 |   |
| Operating and  other expenses                            |       |                   | 76,844     |             |       | 1,983,815        |       | 1,286,660        |       | 3,347,319 |   |
| Income (loss)  before income taxes and minority interest |       |                   | (80,801    | )                |       | 1,019,254        |       | 296,846          |       | 1,235,299 |   |
| Income tax  expense                                      |       |                   | —     |             |       | 337,635          |       | 113,249          |       | 450,884 |   |
| Income (loss)  before minority interest                  |       |                   | (80,801    | )                |       | 681,619          |       | 183,597          |       | 784,415 |   |
| Minority interest                                        |       |                   | —     |             |       | —           |       | 298              |       | 298 |   |
| Net income (loss)                                        |       |                   | $          | (80,801          | )          |             | $          | 681,619          |       | $ | 183,299 |   | $ | 784,117 |   |

 

**CondensedConsolidating Statement of IncomeFor the year ended January 29, 2005(in thousands)**

| ** **                              | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                              | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
| ** **                              | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
| Sales                                   |       |                   | $          | —           |       |             | $          | 9,608,652        |       | $ | 4,839,726 |   | $ | 14,448,378 |   |
| Cost of goods  sold and occupancy costs |       |                   | 6,019      |             |       | 6,929,519        |       | 3,410,518        |       | 10,346,056 |   |
| Gross profit  (loss)                    |       |                   | (6,019     | )                |       | 2,679,133        |       | 1,429,208        |       | 4,102,322 |   |
| Operating and  other expenses           |       |                   | 95,231     |             |       | 1,889,944        |       | 1,070,572        |       | 3,055,747 |   |
| Income (loss)  before income taxes      |       |                   | (101,250   | )                |       | 789,189          |       | 358,636          |       | 1,046,575 |   |
| Income tax  expense                     |       |                   | —     |             |       | 256,635          |       | 125,365          |       | 382,000 |   |
| Net income (loss)                       |       |                   | $          | (101,250         | )          |             | $          | 532,554          |       | $ | 233,271 |   | $ | 664,575 |   |

 

C-25

----

**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE L GuarantorSubsidiaries (Continued)**

**CondensedConsolidating Statement of Cash FlowsFor the year ended February 3, 2007(in thousands)**

| ** **                                                      | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
| ** **                                                      | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
| Net cash provided by  operating activities                      |       | $                      | 677,664    |             |       | $                | 387,110    |             |       |   | $ | 100,215 |   |   | $ | 1,164,989 |   |
| Investing activities:                                           |       |                   |       |             |       |             |       |             |       |   |   |   |   |
| Acquisition of property,  equipment and lease rights            |       | (72,465                | )          |             | (387,127   | )                |       |             | (68,883    | ) |   | (528,475 | ) |
| Acquisition of  businesses, net of cash acquired                |       | —                 |       |             | (29,654    | )                |       |             | —     |   |   | (29,654 | ) |
| Investment in joint  venture                                    |       | —                 |       |             | —     |             |       |             | (2,096     | ) |   | (2,096 | ) |
| Purchase of short-term  investments                             |       | (8,223,063             | )          |             | —     |             |       |             | —     |   |   | (8,223,063 | ) |
| Proceeds from the sale of  short-term investments               |       | 8,358,384              |       |             | —     |             |       |             | —     |   |   | 8,358,384 |   |
| Cash provided by (used  in) investing activities                |       | 62,856                 |       |             | (416,781   | )                |       |             | (70,979    | ) |   | (424,904 | ) |
| Financing activities:                                           |       |                   |       |             |       |             |       |             |       |   |   |   |   |
| Payments on borrowings                                          |       | (5,191                 | )          |             | —     |             |       |             | —     |   |   | (5,191 | ) |
| Purchase of treasury  shares                                    |       | (775,822               | )          |             |       |             |       |             |       |   |   | (775,822 | ) |
| Excess tax benefits from  stock-based compensation arrangements |       | 2,958                  |       |             | 29,968     |             |       |             | 3,143      |   |   | 36,069 |   |
| Cash dividends paid                                             |       | (160,883               | )          |             | —     |             |       |             | —     |   |   | (160,883 | ) |
| Other                                                           |       | 195,263                |       |             | —     |             |       |             | —     |   |   | 195,263 |   |
| Cash (used in) provided  by financing activities                |       | (743,675               | )          |             | 29,968     |             |       |             | 3,143      |   |   | (710,564 | ) |
| Effect of exchange rate  changes on cash                        |       | —                 |       |             | —     |             |       |             | 10,328     |   |   | 10,328 |   |
| Net increase (decrease)  in cash                                |       | (3,155                 | )          |             | 297        |             |       |             | 42,707     |   |   | 39,849 |   |
| Cash and cash  equivalents at beginning of period               |       | 479,704                |       |             | 49,390     |             |       |             | 448,728    |   |   | 977,822 |   |
| Cash and cash equivalents at end of period                      |       | $                      | 476,549    |             |       | $                | 49,687     |             |       |   | $ | 491,435 |   |   | $ | 1,017,671 |   |

 

**CondensedConsolidating Statement of Cash FlowsFor the year ended January 28, 2006(in thousands)**

| ** **                                                      | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
| ** **                                                      | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
| Net cash provided by  operating activities                      |       | $                      | 800,962    |             |       | $                | 227,372    |             |       |   | $ | 170,287 |   |   | $ | 1,198,621 |   |
| Investing activities:                                           |       |                   |       |             |       |             |       |             |       |   |   |   |   |
| Acquisition of property,  equipment and lease rights            |       | (95,311                | )          |             | (212,254   | )                |       |             | (148,538   | ) |   | (456,103 | ) |
| Acquisition of  businesses, net of cash acquired                |       | —                 |       |             | (40,560    | )                |       |             | —     |   |   | (40,560 | ) |
| Investment in joint  venture                                    |       | (16,636                | )          |             | —     |             |       |             | —     |   |   | (16,636 | ) |
| Purchase of short-term  investments                             |       | (8,218,049             | )          |             | —     |             |       |             | —     |   |   | (8,218,049 | ) |
| Proceeds from the sale  of short-term investments               |       | 8,097,199              |       |             | —     |             |       |             | —     |   |   | 8,097,199 |   |
| Cash used in investing  activities                              |       | (232,797               | )          |             | (252,814   | )                |       |             | (148,538   | ) |   | (634,149 | ) |
| Financing activities:                                           |       |                   |       |             |       |             |       |             |       |   |   |   |   |
| Payments on borrowings                                          |       | (16,735                | )          |             | —     |             |       |             | —     |   |   | (16,735 | ) |
| Purchase of treasury  shares                                    |       | (663,145               | )          |             | —     |             |       |             | —     |   |   | (663,145 | ) |
| Excess tax benefits from  stock-based compensation arrangements |       | 3,014                  |       |             | 30,532     |             |       |             | 3,202      |   |   | 36,748 |   |
| Cash dividends paid                                             |       | (123,402               | )          |             | —     |             |       |             | —     |   |   | (123,402 | ) |
| Other                                                           |       | 182,532                |       |             | —     |             |       |             | —     |   |   | 182,532 |   |
| Cash (used in) provided  by financing activities                |       | (617,736               | )          |             | 30,532     |             |       |             | 3,202      |   |   | (584,002 | ) |
| Effect of exchange rate  changes on cash                        |       | —                 |       |             | —     |             |       |             | 42         |   |   | 42 |   |
| Net increase (decrease)  in cash                                |       | (49,571                | )          |             | 5,090      |             |       |             | 24,993     |   |   | (19,488 | ) |
| Cash and cash  equivalents at beginning of period               |       | 529,275                |       |             | 44,300     |             |       |             | 423,735    |   |   | 997,310 |   |
| Cash and cash equivalents at end of period                      |       | $                      | 479,704    |             |       | $                | 49,390     |             |       |   | $ | 448,728 |   |   | $ | 977,822 |   |

 

C-26

----

**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE LGuarantor Subsidiaries (Continued)**

**ConsolidatingStatement of Cash FlowsFor the year ended January 29, 2005(in thousands)**

| ** **                                                      | ** ** | ** **             | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **Staples, Inc.** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
| ** **                                                      | ** ** | **(Parent Co.)**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
| Net cash provided  by operating activities                      |       | $                      | 694,499    |             |       | $                | 129,133    |             |       |   | $ | 314,371 |   |   | $ | 1,138,003 |   |
| Investing activities:                                           |       |                   |       |             |       |             |       |             |       |   |   |   |   |
| Acquisition of property, equipment and lease rights             |       | (62,647                | )          |             | (169,674   | )                |       |             | (103,114   | ) |   | (335,435 | ) |
| Acquisition of businesses, net of cash acquired                 |       | —                 |       |             | (4,901     | )                |       |             | (106,756   | ) |   | (111,657 | ) |
| Investment in joint venture                                     |       | (29,330                | )          |             | —     |             |       |             | —     |   |   | (29,330 | ) |
| Purchase of short-term investments                              |       | (10,246,652            | )          |             | —     |             |       |             | —     |   |   | (10,246,652 | ) |
| Proceeds from the sale of short-term investments                |       | 10,698,696             |       |             | —     |             |       |             | 10,000     |   |   | 10,708,696 |   |
| Cash provided by  (used in) investing activities                |       | 360,067                |       |             | (174,575   | )                |       |             | (199,870   | ) |   | (14,378 | ) |
| Financing activities:                                           |       |                   |       |             |       |             |       |             |       |   |   |   |   |
| Payments on borrowings                                          |       | (235,081               | )          |             | —     |             |       |             | —     |   |   | (235,081 | ) |
| Purchase of treasury shares                                     |       | (511,730               | )          |             | —     |             |       |             | —     |   |   | (511,730 | ) |
| Excess tax benefits from stock-based compensation  arrangements |       | 3,379                  |       |             | 34,235     |             |       |             | 3,591      |   |   | 41,205 |   |
| Cash dividends paid                                             |       | (99,527                | )          |             | —     |             |       |             | —     |   |   | (99,527 | ) |
| Other                                                           |       | 206,394                |       |             | —     |             |       |             | —     |   |   | 206,394 |   |
| Cash (used in)  provided by financing activities                |       | (636,565               | )          |             | 34,235     |             |       |             | 3,591      |   |   | (598,739 | ) |
| Effect of  exchange rate changes on cash                        |       | —                 |       |             | —     |             |       |             | 14,959     |   |   | 14,959 |   |
| Net increase  (decrease) in cash                                |       | 418,001                |       |             | (11,207    | )                |       |             | 133,051    |   |   | 539,845 |   |
| Cash and cash  equivalents at beginning of period               |       | 111,274                |       |             | 55,507     |             |       |             | 290,684    |   |   | 457,465 |   |
| Cash and cash  equivalents at end of period                     |       | $                      | 529,275    |             |       | $                | 44,300     |             |       |   | $ | 423,735 |   |   | $ | 997,310 |   |

 

**NOTEM Quarterly Summary (Unaudited)**

| ** **                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **First  Quarter**                                                    | ** ** | **Second  Quarter** | ** ** | **Third  Quarter (3)** | ** ** | **Fourth  Quarter (4)** | ** ** |
| Fiscal Year Ended  February 3, 2007(1) |       |                                                                  |       |   |   |   |   |   |   |
| Sales                                       |       | $                                                                     | 4,237,646  |   | $ | 3,880,674 |   | $ | 4,756,550 |   | $ | 5,285,919 |   |
| Gross profit                                |       | 1,188,997                                                             |       | 1,096,604 |   | 1,362,458 |   | 1,545,942 |   |
| Net income                                  |       | 186,074                                                               |       | 161,177 |   | 289,928 |   | 336,498 |   |
| Basic earnings per common share(2)          |       | $                                                                     | 0.26       |   | $ | 0.22 |   | $ | 0.40 |   | $ | 0.47 |   |
| Diluted earnings  per share(2)              |       | $                                                                     | 0.25       |   | $ | 0.22 |   | $ | 0.39 |   | $ | 0.46 |   |

 

| ** **                                  | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|---------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Fiscal Year Ended  January 28, 2006(1) |       |               |       |                |       |               |       |                |       |
| Sales                                       |       | $                  | 3,899,052  |                | $          | 3,471,964          |       | $                   | 4,245,519  |   | $ | 4,462,317 |   |
| Gross profit                                |       | 1,061,852          |       | 989,386             |       | 1,220,698          |       | 1,310,682           |       |
| Net income                                  |       | 147,742            |       | 135,177             |       | 224,486            |       | 276,712             |       |
| Basic earnings per common share(2)          |       | $                  | 0.20       |                | $          | 0.18               |       | $                   | 0.31       |   | $ | 0.38 |   |
| Diluted earnings  per share (2)             |       | $                  | 0.20       |                | $          | 0.18               |       | $                   | 0.30       |   | $ | 0.37 |   |

----

(1)          Results of operationsfor this period include the results of acquisitions since their acquisitiondates (see Note B).

C-27

----

**STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE MQuarterly Summary (Unaudited) (Continued)**

(2)          All share and per share amounts reflect, orhave been restated to reflect, the three-for-two common stock split that waseffected in the form of a common stock dividend distributed on April 15,2005.

(3)          Results ofoperations for this period include a $33.3 million ($0.04 per diluted share)reduction in income taxes related to the favorable resolution of certainforeign and domestic tax matters and an $8.6 million charge, net of taxes($0.01 per diluted share) to correct the measurement dates used to calculateprior years’ stock-based compensation (see Note H).

(4)          Fiscal year 2006 includes 53 weeks inaccordance with our 52- week, 53-week retail calendar; accordingly,the fourth quarter includes 14 weeks.

C-28

----

**Item**                      15(a) 2

**Staples, Inc.**

**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS**

**Accounts ReceivableAllowance for Doubtful Accounts**

Valuationand qualifying account information related to operations is as follows (inthousands):

| ** **             | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions Charged  to Expense** | ** ** | **Additions from  Acquisition** | ** ** | **Deductions—  Write-offs, Payments  and Other Adjustments** | ** ** | **Balance at  End of Period** | ** ** |
|------------------------|------------|------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| Fiscal year ended:     |       |                                           |       |                                        |       |                                 |       |                                                                             |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| January 29,  2005 |       |                                           | $          | 14,039                                      |       |                                 |       | $                                                                                | 11,149     |                                         |       |   | $ | 503 |   |   |   | $ | 9,178 |   |   |   | $ | 16,513 |   |   |
| January 28,  2006 |       |                                           | 16,513     |                                        |       |                                 | 13,732     |                                                                             |       |                                         | 185        |   |   |   | 14,078 |   |   |   | 16,352 |   |   |
| February 3, 2007  |       |                                           | 16,352     |                                        |       |                                 | 15,106     |                                                                             |       |                                         | 153        |   |   |   | 12,793 |   |   |   | 18,818 |   |   |
|                        |            |                                                |            |                                             |            |                                      |            |                                                                                  |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

C-29

----

**EXHIBITINDEX**
| EXHIBIT NO.       | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **DESCRIPTION   OF EXHIBIT** | ** ** |
|-------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------|------------|
|   3.1 ^ |       | —     |       | Second Restated  Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the  Company’s Form 10-K for the fiscal year ended February 1,  2003.                                                                                                                                                                                                                                                                                                                                                                                             |
|   3.2 ^ |       | —     |       | Amended and Restated By-laws  of the Company. Filed as Exhibit 3.1 to the Company’s Form 10-Q  for the quarter ended July 29, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   4.1 ^ |       | —     |       | Indenture, dated as of  August 12, 1997, for the $200,000,000 7.125% Senior Notes due August 15,  2007, between the Company and The Chase Manhattan Bank. Filed as part of  Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended  August 2, 1997.                                                                                                                                                                                                                                                                                    |
|   4.2 ^ |       | —     |       | First Supplemental  Indenture (7.125% Senior Notes), entered into as of January 15, 1998, to  Indenture, dated as of August 12, 1997, by and among the Company, the  Guarantor Subsidiaries and the Chase Manhattan Bank. Filed as  Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended  May 2, 1998.                                                                                                                                                                                                                               |
|   4.3 ^ |       | —     |       | Second Supplemental  Indenture (7.125% Senior Notes), entered into as of October 27, 2000, to  Indenture, dated as of August 12, 1997, by and among the Company, the  Guarantor Subsidiaries, the Initial Guarantor Subsidiaries and the Chase  Manhattan Bank. Filed as Exhibit 4.3 to the Company’s Form 10-K  for the fiscal year ended January 31, 2004.                                                                                                                                                                                  |
|   4.4 ^ |       | —     |       | Third Supplemental  Indenture (7.125% Senior Notes), entered into as of February 1, 2004, to  Indenture, dated as of August 12, 1997, by and among the Company, the  Subsidiary Guarantors, the Initial Subsidiary Guarantors and JPMorgan Chase  Bank. Filed as Exhibit 4.3 to the Company’s Form 10-Q for the  quarter ended May 1, 2004.                                                                                                                                                                                                   |
|   4.5 ^ |       | —     |       | Indenture, dated  September 30, 2002, for the 7.375% Senior Notes due 2012, by and among  the Company, the Guarantor Subsidiaries and HSBC Bank USA. Filed as  Exhibit 4.1 to the Company’s Form 8-K filed on  October 8, 2002.                                                                                                                                                                                                                                                                                                                    |
|   4.6 ^ |       | —     |       | First Supplemental  Indenture (7.375% Senior Notes), entered into as of February 1, 2004, to  Indenture, dated as of September 30, 2002, by and among the Company, the  Subsidiary Guarantors, the Initial Subsidiary Guarantors and HSBC Bank USA.  Filed as Exhibit 4.1 to the Company’s Form 10-Q for the  quarter ended May 1, 2004.                                                                                                                                                                                                      |
| 10.1 ^            |       | —     |       | Amended and Restated  Revolving Credit Agreement, dated as of October 13, 2006, by and among  the Company, the lenders named therein, Bank of America, N.A., as  Administrative Agent, Citibank N.A., as Syndication Agent, and HSBC Bank USA,  National Association, JPMorgan Chase Bank, N.A., and Wachovia Bank, National  Association, as Co-Documentation Agents, with Banc of America Securities LLC  having acted as sole Lead Arranger and sole Book Manager. Filed as  Exhibit 10.1 to the Company’s Form 8-K filed on  October 19, 2006. |
| 10.2 * ^          |       | —     |       | Employment Agreement,  dated as of February 3, 2002, by and between the Company and Thomas G.  Stemberg. Filed as Exhibit 10.7 to the Company’s Form 10-K  for the fiscal year ended February 1, 2003.                                                                                                                                                                                                                                                                                                                                             |
| 10.3 * ^          |       | —     |       | First Amendment to  Employment Agreement, dated January 26, 2004, by and between the Company  and Thomas G. Stemberg. Filed as Exhibit 10.8 to the Company’s  Form 10-K for the fiscal year ended January 31, 2004.                                                                                                                                                                                                                                                                                                                                |
| 10.4 * ^          |       | —     |       | Offer Letter, dated  August 13, 2001, by and between the Company and Basil L. Anderson. Filed  as Exhibit 10.8 to the Company’s Form 10-K for the fiscal  year ended February 1, 2003.                                                                                                                                                                                                                                                                                                                                                             |
| 10.5 * ^          |       | —     |       | Offer Letter, dated  July 30, 2003, by and between the Company and Michael A. Miles. Filed as  Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended  November 1, 2003.                                                                                                                                                                                                                                                                                                                                                                    |
| 10.6 * ^          |       | —     |       | Second Amended and  Restated Severance Benefits Agreement, dated March 10, 2006, by and  between the Company and Ronald L. Sargent. Filed as Exhibit 10.1 to the  Company’s Form 10-Q for the quarter ended April 29, 2006.                                                                                                                                                                                                                                                                                                                        |
| 10.7 * ^          |       | —     |       | Amended and Restated  Severance Benefits Agreement, dated March 13, 2006, by and between the  Company and John J. Mahoney. Filed as  Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended  April 29, 2006.                                                                                                                                                                                                                                                                                                                                |
| 10.8 * ^          |       | —     |       | Amended and Restated  Severance Benefits Agreement, dated March 13, 2006, by and between the  Company and Michael A. Miles. Filed as Exhibit 10.3 to the Company’s  Form 10-Q for the quarter ended April 29, 2006.                                                                                                                                                                                                                                                                                                                                |

D-1

----

 
| 10.9 * ^    |   | — |   | Form of Severance  Benefits Agreement signed by executive officers of the Company. Filed as  Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended  April 29, 2006.                               |
|-------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10 * ^   |   | — |   | Form of Non-Compete  and Non-Solicitation Agreement signed by executive officers of the Company.  Filed as Exhibit 10.6 to the Company’s Form 10-K for the  fiscal year ended January 29, 2000.           |
| 10.11 * ^   |   | — |   | Form of Proprietary  and Confidential Information Agreement signed by executive officers of the  Company. Filed as Exhibit 10.30 to the Company’s Form 10-K  for the fiscal year ended January 29, 2005.  |
| 10.12 * ^   |   | — |   | Executive Officer  Incentive Plan. Filed as Exhibit 10.4 to the Company’s Form 10-K  for the fiscal year ended February 1, 2003.                                                                               |
| 10.13 * ^   |   | — |   | Non-Management Director  Compensation Summary. Filed as Exhibit 10.2 to the Company’s Form 10-Q  for the quarter ended October 29, 2005.                                                                       |
| 10.14 * ^   |   | — |   | Amended and Restated  2004 Stock Incentive Plan. Filed as Exhibit 10.1 to the Company’s  Form 10-Q for the quarter ended October 29, 2005.                                                                     |
| 10.15 * ^ + |   | — |   | Form of  Non-Qualified Stock Option Agreement under the Amended and Restated 2004  Stock Incentive Plan.                                                                                                                      |
| 10.16 * ^ + |   | — |   | Form of Restricted  Stock Award Agreement under the Amended and Restated 2004 Stock Incentive  Plan.                                                                                                                          |
| 10.17 * ^   |   | — |   | Form of Performance  Accelerated Restricted Stock Award Agreement under the Amended and Restated  2004 Stock Incentive Plan. Filed as Exhibit 10.4 to the Company’s  Form 8-K filed on September 8, 2004. |
| 10.18 * ^ + |   | — |   | Form of Performance  Share Award Agreement.                                                                                                                                                                                   |
| 10.19 * ^ + |   | — |   | Form of  Non-Employee Director Stock Option Agreement under the Amended and Restated  2004 Stock Incentive Plan.                                                                                                              |
| 10.20 * ^ + |   | — |   | Form of  Non-Employee Director Restricted Stock Award Agreement under the Amended and  Restated 2004 Stock Incentive Plan.                                                                                                    |
| 10.21 * ^   |   | — |   | Amended and Restated  1992 Equity Incentive Plan. Filed as part of the Company’s Schedule 14A filed  on April 6, 2001.                                                                                                   |
| 10.22 * ^   |   | — |   | Amended and Restated  1990 Director Stock Option Plan. Filed as Exhibit 10.1 to the Company’s  Form 10-K for the fiscal year ended February 1, 2003.                                                           |
| 10.23 * ^   |   | — |   | 1997 United Kingdom  Company Share Option Scheme. Filed as Exhibit 10.3 to the Company’s  Form 10-K for the fiscal year ended January 31, 1998.                                                                |
| 10.24 * ^   |   | — |   | 1997 UK Savings Related  Share Option Scheme. Filed as Exhibit 10.5 to the Company’s Form 10-K  for the fiscal year ended February 1, 2003.                                                                    |
| 10.25 * ^   |   | — |   | Amended and Restated  1998 Employee Stock Purchase Plan. Filed as Exhibit 10.13 to the  Company’s Form 10-K for the fiscal year ended January 29,  2005.                                                       |
| 10.26 * ^   |   | — |   | Amended and Restated  International Employee Stock Purchase Plan. Filed as Exhibit 10.14 to  the Company’s Form 10-K for the fiscal year ended January 29,  2005.                                              |
| 10.27 * ^   |   | — |   | Long Term Care Insurance  Plan Summary. Filed as Exhibit 10.23 to the Company’s Form 10-K  for the fiscal year ended January 29, 2005.                                                                         |
| 10.28 * ^   |   | — |   | Survivor Benefit Plan.  Filed as Exhibit 10.24 to the Company’s Form 10-K for the  fiscal year ended January 29, 2005.                                                                                         |
| 10.29 * ^   |   | — |   | Executive Life Insurance  Program Summary. Filed as Exhibit 10.25 to the Company’s Form 10-K  for the fiscal year ended January 29, 2005.                                                                      |
| 10.30 * ^   |   | — |   | Supplemental Executive  Retirement Plan. Filed as Exhibit 10.26 to the Company’s Form 10-K  for the fiscal year ended January 29, 2005.                                                                        |
| 10.31 * ^   |   | — |   | Policy on Personal Use  of Corporate Aircraft. Filed as Exhibit 10.28 to the Company’s  Form 10-K for the fiscal year ended January 29, 2005.                                                                  |
| 10.32 * ^   |   | — |   | Senior Executive Long  Term Disability Supplemental Coverage Reimbursement Policy. Filed as  Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended  July 30, 2005.                                     |
| 10.33 * ^   |   | — |   | Tax Services  Reimbursement Program. Filed as Exhibit 10.2 to the Company’s  Form 10-Q for the quarter ended April 30, 2005.                                                                                   |
| 14.1+       |   | — |   | Code of Ethics.                                                                                                                                                                                                                    |
| 21.1+       |   | — |   | Subsidiaries of the  Company.                                                                                                                                                                                                      |

D-2

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| 23.1+  |   | — |   | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm.                           |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------|
| 31.1+  |   | — |   | Principal Executive  Officer—Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
| 31.2+  |   | — |   | Principal Financial  Officer—Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
| 32.1++ |   | — |   | Principal Executive  Officer—Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |
| 32.2++ |   | — |   | Principal Financial Officer—Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.  |

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*                    A managementcontract or compensatory plan or arrangement required to be filed as an exhibitto this annual report pursuant to Item 15(b) of Form 10-K.

^              An exhibitpreviously filed with the Securities and Exchange Commission and incorporatedherein by reference. Unless otherwise indicated, such exhibit was filed underCommission File Number 0-17586.

+                Filed herewith.

++     Furnished herewith.

D-3

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