Every journey must have a beginning, but never an end. A year ago at this time, Office Depot clearly stood at the beginning of its journey to greatness. We clarified our fundamental corporate values and affirmed our commitment to making Office Depot a compelling place to work, shop and invest. Clear goals were identified, and in spite of a difficult economic environment, we generated outstanding overall results.

In fact, 2002 was a year of enormous achievement at Office Depot. We relentlessly pursued our objective of profitably growing our business, with a keen eye on driving shareholder value across all of our business segments. We focused on providing fanatical customer service, while managing costs and investing a disproportionate amount of our capital to grow in Europe-our fastest growing, most profitable business segment. We reaped the rewards of a relentless focus on continuous improvement and achieved a 48% increase in earnings per share, following a strong performance in 2001.

Our operating performance resulted in a 24% increase in our return on net assets (RONA), reaching 10.5% in 2002 versus 8.5% in 2001. Our strong balance sheet and free cash flow provide security and flexibility for future growth. Our cash position reached almost $900 million at the end of the year, despite the redemption during the third quarter of over $240 million in long-term debt (LYONs^®).

Consistent execution in our North American retail stores resulted in a strong operating performance in 2002 despite negative comparable sales. Our results were driven by solid gross margin gains throughout the year from tight inventory management, increased global sourcing and private label initiatives, as well as continued product mix shifts away from lower margin technology products. The vast majority of our customer satisfaction and service indices rose to all time high levels. Employee retention increased dramatically, as we focused on earning the trust and loyalty of our people. These improvements, coupled with tight cost controls and numerous other operational changes, have positioned us to significantly benefit when the current economic climate improves, as it will.

One of the key operating highlights of 2002 was the significant profit improvement in our North American Business Services Group. Our BSG warehouse operations achieved the highest service levels in Office Depot's history, and at the same time significantly reduced operating and selling costs. In addition, given our steady sales growth and sustainable improvement in gross margins, this business reported a 25% increase in segment operating profit to a record 9% of sales for the full year, compared to 8% in 2001.

This year was also marked with success in our International business. In 2002, we successfully opened direct mail operations in three new countries (Switzerland, Spain and Portugal), supported growth in four new contract businesses, while adding two new sales forces in Italy and Germany. We added a net of seven new stores in France, made several changes to our Japanese operations and launched nine new European web sites for our Office Depot contract and Viking Direct sales channels. We accomplished all of this with only a small reduction in our segment operating profit. This business now accounts for over 14% of consolidated worldwide revenues, and represents 21% of consolidated segment operating profit. Our International business has enormous growth potential across all brands and channels, and we plan to continue to allocate a disproportionate share of our capital to accelerate our growth potential outside of North America, especially in Europe.

Throughout 2002, we consistently delivered on our promises. As our journey continues, we are making further progress toward our goal of becoming the destination of choice for office products and solutions for all segments of the market. We see opportunities to grow our business across all of our channels worldwide. We plan to leverage our market leadership position in order to capture increased market share and build consumer preference with our superior combination of value, convenience, assortment, information and experience. We will continue to integrate and align a wide range of activities in order to offer our customers the "right" office solutions to meet their needs.

We will gauge our success by our ability to gain and defend leadership in individual markets, to manage our markets across our full range of integrated channels, to tailor offerings to distinct customer segments, to compete in specific product categories and to align the organization with clear mandates.

None of our accomplishments would have been possible, nor would our goals for the future be within reach, without the tireless efforts of the more than 43,000 members of our Office Depot family, the dedication of our management team and the confidence of our shareholders. Thank you all for your contributions. I can assure you that, while so far on our journey we have accomplished much, it is far from over, and all of us are more committed than ever to making Office Depot the most compelling place to work, shop and invest.

Bruce Nelson
Chairman and Chief Executive Officer
March 2003