To Our Shareholders:

hen I accepted leadership of Office Depot 20 months ago, our Company faced significant challenges. Growth in the U.S. office supply superstore industry was beginning to mature and we had not responded effectively to the changing competitive environment. We had lost sight of some of our core competencies and competitive advantages, and we had allowed parts of our business to become too complex and inefficient. We had been slow to address issues in underperforming businesses and assets. Worst of all, our Company and our management team had lost the loyalty of our shareholders and the confidence of our employees, who viewed our direction as unclear and our future as uncertain. • These challenges became even more daunting in 2001, as we faced a weak U.S. economy; softness in the computer hardware, software and furniture sectors; unfavorable foreign currency translation; and declining consumer confidence. As our delicate economy teetered on the brink of recession, the tragic events of September 11th gave the final push that sent it over the edge, creating a difficult, stormy and uncertain economic environment.

Turning the Tide

Our efforts to strengthen Office Depot started in early fall of 2000, when our new leadership team conducted a critical assessment of Office Depot that redefined our destination and plotted a strategic course to get there. Throughout 2001, we continued this process, driving operating improvements that we expect to yield tangible results in the years ahead. • Our initiatives were careful and thorough. We sharpened our focus on our core competencies. We improved efficiencies and instituted disciplined capital spending. We introduced dramatic improvements in the management of our supply chain, our inventory, and our warehouse operations. We closed stores, cut costs in underperforming regions in North America and redeployed capital to our highly profitable and fast-growing international markets. We elevated the delivery of “fanatical” customer service to our first priority, and we established quality indices and ambitious new performance benchmarks. We fostered a management culture that gives our leaders and managers greater responsibility and makes them accountable for results. And we established new corporate values that form the basis for the way we do business and serve as a foundation for our future. • We also devoted significant energy and resources to making Office Depot a more compelling place to work and shop. We improved opportunities across the Company for our employees, and we tied recognition and reward directly to performance. We renewed our commitment to diversity, which appropriately reflects our diverse customers, suppliers and communities in which we live and work. We undertook new measures in our North American Retail stores to make shopping at Office Depot a more informative and customer-friendly experience by remerchandising, upgrading and resigning all 859 of our retail superstores. • These collective management and operating initiatives enabled Office Depot to perform well in light of the difficult economic environment. Total sales declined four percent to $11.2 billion, compared with $11.6 billion in 2000. Comparable worldwide sales in the 849 stores and 39 delivery centers that have been open for more than one year declined two percent, compared with an increase of seven percent in 2000. At the same time, however, our highly profitable International business delivered to record sales and profits, despite negative foreign currency translation. International now accounts for 27 percent of our Company’s total segment operating income. Driven by a dramatic improvement in gross margins across our business segments, earnings per share (excluding charges and credits discussed in management’s discussion and analysis), rose to $0.79, an increase of 13 percent, compared with $0.70 in 2000. Free cash flow rose to $540 million, a substantial improvement from $49 million in 2000. Stronger cash flow and an emphasis on better cash management enabled us to repay short-term debt, fund working capital needs and build our financial flexibility. • We also achieved marked progress in other vitally important areas of the Company. Employee turnover, a key measure of employee satisfaction, declined 29 percent from a year ago. Our quality and customer satisfaction measurements rose and our retail and warehouse Customer Service Indices hit all-time highs. Our instock positions, order-fill rates, line-fill rates and on-time deliveries also improved. In addition, inventory turns rose, accounts receivables declined and North American warehouse operating costs as a percentage of sales decreased to the lowest level in five years. • We are highly encouraged by Office Depot’s progress in 2001, and we firmly believe it demonstrates the strength of our Company’s true earnings potential once the U.S. and world economies regain stability and return to growth. But Office Depot’s story in 2001 is about far more than financial results and operating improvements. It is about a company that has a crystal-clear vision of where it is going and how it is going to get there. It is about a new management team with the experience, skills and financial acumen to help the Company to achieve its goals. It is about our customers who reward us through their loyalty and our shareholders who once again have confidence that we can drive shareholder value. Moreover, it is about our approximately 45,000 worldwide employees, who have regained their trust in Office Depot and reaffirmed their conviction that we can become one of the world’s great companies.