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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-4694

R. R. DONNELLEY & SONS COMPANY

(Exact name of registrant as specified in its charter)

Registrant’s telephone number—(312) 326-8000

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes         ü                 No                    

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes         ü                 No                    

As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of common stock (based on the closing price of these shares on the New York Stock Exchange—Composite Transactions on June 30, 2003) held by nonaffiliates was $2,868,079,728.

As of February 4, 2004, 114,392,809 shares of common stock were outstanding.

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PART I

ITEM 1.    BUSINESS

Industry and Company Overview

RR Donnelley prepares, produces and delivers integrated communications services that efficiently and effectively produce, manage and deliver our customers’ content, regardless of the communications medium. While our print capabilities remain the foundation of the company, our recent focus on expanding our range of offerings with value-added services allows us to create additional value for our customers.

We provide solutions designed to enhance the effectiveness of our customers’ communications. Our services include:

Our 139-year history as a printing industry leader positions us well for the future. We expect print advertising to remain among the most cost-effective ways for our customers to deliver their messages and generate revenue as they use words and images to inform, educate, entertain and sell to their audiences.

We believe that print will remain integral to successful marketing given its unique capabilities, such as portability and high-quality graphics that cannot be duplicated by other communications methods. We also believe that the nature of print will continue to evolve. The ability of print to be targeted, timely, flexible and integrated with other communications media will become even more critical.

End Market Descriptions

We operate primarily in the commercial print portion of the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to targeted audiences. While our manufacturing plants, financial service centers and sales offices are located throughout the U.S. and selected international markets, the supporting technologies and knowledge base are common. Our locations have a range of production capabilities to serve our customers and end markets. We manufacture products with the operational goal of optimizing the efficiency of the common manufacturing and distribution platforms. As a result, most plants produce work for customers in two or three of our end markets.

The following describes the end markets we serve:

Magazines, Catalogs and Retail    RR Donnelley is a leader in the North American magazine, catalog and retail markets. These markets are characterized by demand for large, cost-effective print runs with opportunity for

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differentiation among competitors through services such as Premedia and Logistics. Our U.S. customers include the majority of the top 10 magazine titles and a majority of the largest consumer catalog companies and retailers. Contracts typically span from three to five years.

We are also a leader in providing short-run publishers, catalogers and associations with comprehensive communications solutions. We serve customers with highly targeted audiences and typical production runs of 15,000 to 200,000 copies. We offer full-service and cost-effective solutions for business-to-business and consumer magazine and catalog publishers, as well as journal, association and academic publishers.

Telecommunications    RR Donnelley is a worldwide leader in the telephone directory market. We serve the global directory needs of telecommunications providers, including three of the four U.S. Regional Bell Operating Companies (SBC, Verizon and Qwest), independent directory publishers such as Yellow Book, Feist, RH Donnelley and White Directories, and leading international directory publishers such as Yell and Shanghai Telephone. Directory contracts typically span five to 12 years, with our current major contracts expiring between 2006 and 2015.

Book    RR Donnelley, the leader in the North American book market, serves the consumer, religious, educational and specialty book segments. We are a key services provider for the majority of the top 10 U.S. book publishers and we typically print more than 50% of The New York Times’ adult best-seller titles. We also print approximately one-third of all textbooks used in U.S. classrooms.

Premedia    RR Donnelley’s Premedia business partners with customers to effectively create, manage, prepare and distribute customer content. We offer services in both conventional and digital photography, creative and color services, page production, ad management, facilities management and content management. Integrating these core competencies enables us to help customers efficiently, consistently and successfully deliver their messages across multiple channels, including print and the Internet. We leverage our experience in content production and workflow optimization to link customers’ creative processes with today’s technologies. Facilities located in key markets provide close customer contact with nationwide scale-up capabilities. Premedia’s services are used by leading-edge companies in the advertising, catalog, corporate, magazine, retail and telecommunications markets.

Financial    RR Donnelley’s financial business, a leader in the U.S. and international financial services markets, supports the communications needs of corporations, and their investment banks and law firms, as those corporations access the global capital markets. We also are a leading provider of customized communications solutions for investment management, banking, insurance, and managed care companies.

Our capital markets business is a global leader integral to the capital raising and regulatory process worldwide. Our global service network, manufacturing platform and distribution system give us unique advantages in servicing the capital raising industry, particularly for large financial transactions, including initial public offerings, mergers and acquisitions. We serve our corporate, legal and investment banking clients’ needs for responsiveness and reliability by providing EDGAR expertise, project and content management, virtual deal management and web-based solutions, and process insight. During 2003, our self-filing NET.filer solution was expanded to all Section 16 documents and client education programs were added to help our clients meet the accelerated and expanded filing requirements mandated by the U.S. Securities and Exchange Commission (SEC).

Our customized communications solutions business is a leader in the U.S. investment fund companies market, for which we manage and produce compliance and marketing communications more efficiently and effectively. We provide an integrated suite of content and information management, production and delivery solutions designed to help our clients meet U.S. disclosure requirements and to generate longer-lasting relationships with their customers. In 2003, we introduced Document Director^sm, our exclusive web-based technology platform that enables content to be shared across multiple communications, supporting enhanced workflow and process efficiency.

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Direct Mail    Direct Mail offers expertise in a wide range of direct marketing print and related services, to guide customers smoothly and cost-effectively through direct-marketing projects. Our full-service solutions include content creation, database management, premedia, printing, personalization, finishing and distribution. We produce highly personalized and sophisticated direct mail pieces that generate results for our customers.

International    We have extended our core competencies for high-quality print and related services into non-U.S. geographic markets. These markets tend to be emerging, with favorable demographic trends such as rising education levels and increasing disposable income. Our operations in Latin America, Poland and China, where we produce magazines, books, telephone directories and technology manuals, are reported as “International.” Financial’s international revenue is included in “Financial.” Directory revenues from England are included in “Telecommunications.”

Logistics    RR Donnelley is one of the largest users of the USPS, handling over 20 billion print and mail pieces and over 180 million packages each year. Distribution costs are a significant component of our customers’ cost structures, and our ability to deliver mail and packages more predictably and cost-effectively than competitors is a key differentiator. By leveraging our national network as well as the USPS infrastructure to make the final delivery to households and businesses, we provide more economical logistics services to both markets. Through “zone skipping,” greater postal discounts are obtained, and we provide more economical, reliable and easy-to-use delivery services for our customers.

In addition to delivering packages and printed material, Logistics also provides expedited distribution of time-sensitive and secure material (expedited services). Together, these services help merchandisers and other businesses manage their supply chains more effectively and at a lower cost.

Beginning January 1, 2003, we revised our segment reporting to reflect Financial as a separate segment. Our Financial operations were previously reported within the Other business segment. As a result of these changes, we disclose the following three reportable segments: Print, Logistics and Financial.

Financial and other information relating to these business segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Note 18, Industry Segment Information, to the consolidated financial statements. Within the Print segment, our business is concentrated geographically in the U.S., and we have 31 operating facilities as of December 31, 2003 that generated $3.0 billion in net sales in 2003. Within the Logistics segment, we have 33 operating facilities within the U.S. as of December 31, 2003 that generated $913 million in net sales in 2003. Within the Financial segment, we have six operating facilities in the U.S. and two operating facilities outside the U.S. as of December 31, 2003 that generated $426 million in net sales in 2003. Direct Mail, included in the Other segment, has three operating facilities in the U.S. as of December 31, 2003 that generated $112 million in net sales in 2003. In addition to our U.S. facilities, we operate nine plants in Latin America, Europe and China. Information relating to our international operations is included in Note 19, Geographic Area Information, to the consolidated financial statements.

Commercial printing remains a competitive industry. Consolidation among our customers and in the printing industry, as well as over-capacity in the industry as a whole, has put pressure on prices and increased competition among printers. We compete by leveraging our position and size, generating continued productivity improvements and enhancing the value we deliver to our customers by offering them products and services that improve their effectiveness and reduce their total delivered cost. While we have contracts with many of our print customers as discussed below, there are many competing companies and renewal of these contracts is dependent, in part, on our ability to continue to differentiate ourself from the competition. While our manufacturing and distribution facilities are well located for the global, national or regional distribution of our products, competitors in some areas of the U.S. may have a competitive advantage in some instances due to such factors as freight rates, wage scales and customer preference for local services. In addition to location, other important competitive factors are price and quality, as well as the range of available services.

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Demand in several of the end markets served by Print and Logistics is affected by advertising and consumer spending trends. Historically, our businesses which serve the Magazines, Catalogs and Retail and Book end markets generate higher revenues in the second half of the year, driven by increased advertising pages within magazines, and holiday catalog, retail and book volumes. These same factors drive higher revenues in the second half of the year for both our print and package logistics businesses.

Approximately 60% of our total company sales are under term contracts with customers, with the remainder on a single-order basis. For some customers, we print and provide related services for different publications under different contracts. Contracts with our larger customers normally run for a period of years (usually three to five years, but longer in the case of contracts requiring significant capital investment) or for an indefinite period subject to termination on specified notice by either party. These sales contracts generally provide for price adjustments to reflect price changes for materials, wages and utilities. No single customer had a relationship with the company that accounted for 10% or more of our sales in 2003.

The primary raw materials we use in our print businesses are paper and ink. In 2003, we spent approximately $1.3 billion on raw materials. We are a large purchaser of paper and our focus is to improve materials performance and total cost management for our customers, which we believe is a competitive advantage. We negotiate with leading suppliers to maximize our purchasing efficiencies, but we do not rely on any one supplier. We have existing paper supply contracts (at prevailing market prices) to cover substantially all of our requirements through 2004 and management believes extensions and renewals of these purchase contracts will provide adequate paper supplies in the future. Ink and related materials are currently available in sufficient amounts, and we believe that we will have adequate supplies in the future. We also coordinate purchasing activity at the local facility and corporate levels to increase economies of scale.

Our Logistics segment is a large purchaser of transportation services. While there are currently sufficient sources of these services, the cost of such services has been affected by fuel prices as well as by changes in government regulations. We continually work to leverage the volume we give third-party transportation companies in order to minimize transportation costs.

Our overriding objectives in the environmental, health and safety areas are to create sustainable compliance and an injury-free workplace. We believe that estimated capital expenditures for environmental controls to comply with federal, state and local provisions, as well as expenditures, if any, for our share of costs to clean hazardous waste sites that have received our waste, will not have a material effect on our results of operations or our competitive position.

As of December 31, 2003, we had approximately 30,000 employees. Approximately 7,400 employees in our U.S. workforce have been our employees for 10 to 24 years, and more than 3,100 have been our employees for 25 years or longer. As of December 31, 2003, we employed approximately 24,000 people in the U.S., approximately 360, or 2%, of whom were covered by collective bargaining agreements. In addition, we employed approximately 6,000 people in our international operations, approximately 1,800, or 30%, of whom were covered by collective bargaining agreements.

On November 8, 2003, we entered into a combination agreement with Moore Wallace Incorporated (Moore Wallace), a leading provider of print management and outsourced communications. Based on the terms of the agreement, a direct, wholly-owned subsidiary of RR Donnelley will acquire each of the outstanding common shares of Moore Wallace for 0.63 of a share of common stock of RR Donnelley. We expect that, upon closing of the transaction, we will issue approximately 100 million shares of RR Donnelley common stock, as well as undertake the obligation for the indebtedness of Moore Wallace which was approximately $900 million as of December 31, 2003. The transaction was approved by the Boards of Directors of both RR Donnelley and Moore Wallace, but remains subject to certain closing conditions that include, among others, the receipt of required approval from both companies’ shareholders and Ontario Superior Court of Justice approval of a plan of arrangement. The transaction is expected to close on February 27, 2004. See related discussion under

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Expected Impact of Combination with Moore Wallace Incorporated under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

On March 6, 2003, we acquired certain net assets of Momentum Logistics, Inc. (MLI), a Florida-based provider of package distribution services, for approximately $17 million in cash. MLI operates sortation facilities and a dedicated fleet of vehicles to provide package distribution services. The purchase price has been allocated based on estimated fair values at the date of acquisition and resulted in $16 million of goodwill. Subsequently, we recorded an impairment charge of $4 million for goodwill as a result of our annual impairment review performed under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.

We did not make any business acquisitions during 2002 or 2001.

In December 2003, we sold our investment in MultiMedia Live to an unrelated third-party purchaser for $2 million in cash.

In July 2003, we sold our 25% equity investment in Global Directory Services Company to an unrelated third-party purchaser for $23 million in cash.

In November 2001, we sold our remaining investment in the common stock of Stream International Inc. (Stream) for $10 million in cash.

See Note 2, Divestitures, and Note 3, Acquisitions and Investments, to the consolidated financial statements for additional information.

During 2003, 2002 and 2001, we announced the closure of several of our facilities within the Print segment, Financial segment and International operations to improve the effectiveness and efficiency of our overall print platform. During 2001, we also closed several start-up operations, including Red Rover Digital, that were included in the Other operating segment. See Note 4, Restructuring and Impairment, to the consolidated financial statements for more details.

Available Information    We maintain an Internet website at www.rrdonnelley.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with or furnished to the SEC.

Special Note Regarding Forward-Looking Statements    Our Annual Report to Shareholders, including this Form 10-K, are among certain communications that contain forward-looking statements, including statements regarding our financial position, results of operations, market position, product development and regulatory matters. When used in such communications, the words “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our estimates, assumptions, projections and current expectations and are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statements as a result of many factors outside our control, including war or acts of terrorism affecting the overall business climate; competition with other communications services providers based on pricing and other factors; fluctuations in the cost of paper, fuel and other raw materials we use; changes in postal rates and postal regulations; seasonal fluctuations in overall demand for services; changes in customer demand; changes in the advertising and printing markets; changes in the capital markets that affect demand for financial printing; the financial condition of our customers; our ability to continue to obtain improved operating efficiencies; our ability to continue to develop new solutions for our customers; the general condition of the U.S. economy and the economies of other countries in which we operate; changes in the rules and regulations to which we are subject and the cost of complying with these rules and regulations, including environmental and health and welfare benefit regulations; changes in the costs of healthcare and other benefits provided to our employees; changes in

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the rules and regulations to which our customers are subject, particularly those affecting privacy or the printing requirements of Financial or Telecommunications customers; our ability to complete acquisitions, including the combination with Moore Wallace, and to integrate the operations of the acquired businesses; and other factors set forth in this Form 10-K and other company communications generally. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

ITEM 2.    PROPERTIES

Our corporate office is located in leased office space in a building in Chicago, Illinois. In addition, as of December 31, 2003, we lease or own 73 U.S. facilities, some of which have multiple buildings and warehouses. The U.S. facilities encompass approximately 18.8 million square feet. We lease or own 11 international facilities encompassing approximately 2.3 million square feet in Latin America, Europe and Asia. Of the U.S. and international manufacturing and warehouse facilities, approximately 17.2 million square feet of space is owned, while the remaining 3.9 million square feet of space is leased. In addition, we have sales offices and financial services centers across the U.S., Latin America, Europe and Asia.

ITEM 3.    LEGAL PROCEEDINGS

On December 18, 1995, a class action was filed against us in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleged that we violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable under its Retirement Benefit and Separation Pay Plans to retiring or terminated employees.

On November 25, 1996, a class action was brought against us in federal district court in Chicago, Illinois, on behalf of current and former African-American employees, alleging that we racially discriminated against them in violation of Section 1981 of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million.

On June 30, 1998, a class action was filed against us in federal district court in Chicago on behalf of current and former African-American employees, alleging that we racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs also claimed retaliation by us for the filing of discrimination charges or otherwise complaining of race discrimination.

On December 28, 2000, a purported class action was brought against us and certain of our benefit plans in federal district court in Chicago on behalf of certain former employees of the Chicago catalog operations (Jefferson, et al. v. R.R. Donnelley & Sons Co., et al.). The suit alleged that enhanced pension benefits were not paid to plaintiffs and that plaintiffs are being required to contribute to the costs of retiree medical coverage, both allegedly in violation of plan documents and ERISA.

On April 6, 2001, in an amended opinion, the district court judge in the Jones and Adams cases certified three plaintiff classes in the actions: a class consisting of African-American employees discharged in connection with the shutdown of the Chicago catalog operations; a class consisting of African-American employees of the Chicago catalog operations after November 1992 who were other than permanent employees; and a class consisting of African-Americans subjected to an allegedly hostile working environment at the Chicago catalog operations, the Chicago Financial, Pontiac or Dwight, Illinois, manufacturing operations.

Following fairness hearings held in March and April, 2003, the district court approved settlements resolving all of the issues in the Adams, Gerlib and Jefferson cases and the issues in Jones which related to claims arising

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in locations other than the Chicago catalog operations without any admission of wrongdoing by us. The total amount paid in connection with the settlements was $21 million, of which $9 million was paid by our Retirement Benefit Plan. The total pretax charge during 2002 related to these settlements was $16 million and was recorded in cost of sales in the consolidated statements of income on page F-2.

In a decision issued September 16, 2002, the Seventh Circuit Court of Appeals overturned a ruling by the trial court and held that a two-year statute of limitations applies to the claims in Jones filed under Section 1981 of the Civil Rights Act. The court of appeals remanded the case for further proceedings consistent with its opinion, and on November 21, 2002, the court of appeals denied plaintiffs’ petition for rehearing. On May 19, 2003, the United States Supreme Court agreed to review the issue of the appropriate statute of limitations to apply and has the matter scheduled for argument on February 24, 2004.

While the settlements described dispose of the Adams, Gerlib and Jefferson cases, and a portion of the Jones litigation, the issue relating to the application of the statute of limitations to certain of the discrimination claims in the Jones case has not been finally decided. Management is unable to make a meaningful estimate of the overall loss, if any, that could result from an unfavorable final determination of this matter.

We have been designated as a potentially responsible party in 13 federal and state Superfund sites. In addition to the Superfund sites, we may also have the obligation to remediate five other previously-owned facilities; our share of these remediation costs is estimated to be less than $1 million. We have established reserves that are believed to be adequate to cover our share of the potential costs of remediating each of the Superfund sites and the previously-owned facilities. Although management believes its estimates are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information about the extent of the remediation required becomes available. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay an amount in excess of our proportionate share of the remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund sites and of other liable parties at the previously-owned facilities has been considered, where appropriate, in the determination of our estimated liability. Management believes that any Superfund costs associated with our current status as a potentially responsible party in the Superfund sites or as a liable party at the previously-owned facilities will not be material to our financial position, results of operations or cash flows.

From time to time, our customers file voluntary petitions for reorganization under U.S. bankruptcy laws. In such cases, certain pre-petition payments received by us could be considered preference items and subject to return to the bankruptcy administrator. Management believes that the final resolution of these preference items will not have a material adverse effect on our financial position, results of operations or cash flows.

In addition, we are a party to certain litigation arising in the ordinary course of business which, in the opinion of management, will not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

On January 20, 2004, we mailed a joint management information circular and proxy statement to all RR Donnelley stockholders of record as of January 15, 2004, in connection with a special meeting of RR Donnelley stockholders to be held on February 23, 2004. The purposes of the meeting are to vote on a proposal to approve the issuance of shares of RR Donnelley common stock as contemplated by the combination agreement dated November 8, 2003, between RR Donnelley and Moore Wallace, and to vote on the adoption of a new performance incentive plan.

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EXECUTIVE OFFICERS OF R.R. DONNELLEY & SONS COMPANY

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PART II

ITEM 5.     MARKET FOR R.R. DONNELLEY & SONS COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed and traded on the New York Stock Exchange, Chicago Stock Exchange and Pacific Exchange, Inc.

As of February 4, 2004, there were 8,260 stockholders of record. Quarterly prices of our common stock, as reported on the New York Stock Exchange-Composite Transactions, and dividends paid per share during the two years ended December 31, 2003, are contained in the chart below:

ITEM 6.    SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

(Thousands of dollars, except per-share data)

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to those statements included in Item 15 of Part IV of this Form 10-K.

Overview

We operate principally in the commercial print portion of the print industry, with related service offerings designed to offer customers complete solutions for communicating their messages to targeted audiences. The dominant macro-economic and industry-wide trend for the past three years has been weaker demand during a slow economy that has generated excess industry capacity resulting in increased competition and downward pricing pressures. In this intensified competitive pricing environment, companies have focused on reducing costs in order to preserve operating margins. We believe this environment has led to more consolidation within the commercial print industry as companies seek economies of scale, broader customer relationships, geographic coverage and product breadth to overcome/offset industry over-capacity and pricing pressures.

Beginning January 1, 2003, we revised our segment reporting to reflect Financial as a separate segment. Our Financial operations were previously reported within the Other segment. As a result of these changes, we disclose three reportable segments: Print, Logistics and Financial.

The primary drivers affecting our business differ by segment. In our Print segment, consumer confidence and economic growth rates are key drivers of demand for commercial print, as these factors affect the level of advertising and merchandising activity. While general economic trends have recently begun to improve, we have not yet begun to see the positive effects of an economic recovery within our Print segment. Historical trends indicate that magazine advertising pages, a key indicator of demand for printing products and services, recover more slowly after a recession than other sectors of the economy.

Our Financial segment’s results are driven by the level of deal activity in the capital markets, as well as regulatory compliance requirements and our ability to capture market share. During the second half of 2003, we benefited from increased capital markets activity following a three-year period of economic slowdown, as well as from our ability to gain market share through our focus on customer service. Continued increases in capital markets activity are likely to positively affect demand for services within our Financial segment. However, volatility in the global capital markets makes it difficult to predict the future level of demand.

Our Logistics segment serves our customers by consolidating and delivering printed products (print logistics) and packages (package logistics) to the U.S. Postal Service closer to the final destination, resulting in reduced postage costs and improved delivery performance. As postal costs are a significant component of our customers’ cost structures, our Logistics segment is focused on providing services that enhance value to customers by improving the cost efficiency of mail processing and distribution. Our print logistics business is subject to many of the same macro-economic drivers as our print businesses. However, we have partially overcome negative market demand trends of recent years by growing our volume with products printed by other printers, but delivered by us (third-party volume), due to our scale and performance levels. Print logistics is profitable and strategically important to our print customers.

During 2003, operating results of our package logistics business were negatively impacted by start-up problems at a new consolidation facility, as well as operational issues from a recent acquisition. In addition, we identified weaknesses in our transactional processing systems for packages as we increased our scale of operations and entered into more complex customer and carrier arrangements. Our ability to improve the profitability of our package operations is contingent upon our ability to fully address these operational and transactional processing issues as discussed on pages 23 and 44, as well as to sustain and grow our customer base.

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In response to the above trends, we have regularly assessed our manufacturing platforms and logistics network to assure that they are efficient, flexible and aligned with customer needs. To meet this objective, we have closed several facilities that lacked the necessary scale and geographic location to remain competitive, and invested in expansions of other more scaleable operations. In addition, we have continued to execute other cost reduction initiatives across all of our operations. We have also implemented strategic initiatives, including productivity programs such as six sigma and process variability reduction, as well as business process redesign, which have positively impacted our financial results and helped to mitigate the effects of price erosion. Likewise, we have focused on creating new revenue opportunities for value-added services such as premedia and logistics. As a result, we have created a broader platform to sell more products and services as well as improve incremental revenue and profit growth within our current customer base.

In November 2003, we announced that we had entered into a definitive combination agreement (the Combination) with Moore Wallace Incorporated (Moore Wallace). The transaction is anticipated to bring together two print industry leaders with highly complementary products and services to create the world’s premier full-service global provider and the largest printing company in North America. The strategy for the combined company will focus on improved returns, lower costs and increased profitability; increased financial strength; and enhanced revenue opportunities. While the detailed plans have not yet been finalized, management believes that the Combination will impact operating results in future periods through improved cross-selling efforts by providing a “total management solution”; leveraging product and distribution strengths; aggressive cost reduction efforts, including headcount and facility rationalization; and increased purchasing power with suppliers to reduce costs and increase efficiencies.

Unless indicated otherwise, the discussion and financial results disclosed in this Annual Report on Form 10-K relate to RR Donnelley as a stand-alone entity, and do not reflect the impact of the pending Combination with Moore Wallace Incorporated. See Expected Impact of Combination with Moore Wallace Incorporated for further discussion of the transaction.

Significant Accounting Policies and Critical Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The SEC has defined a company’s most critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies and judgments. Although we believe that our estimates and assumptions are reasonable, they are based upon information available when they are made. Actual results may differ significantly from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize print revenue when title and risk of loss transfers to the customer and the earnings process is complete. Approximately 60% of our business is under contract. Contracts typically specify F.O.B. shipping point terms. We generally recognize revenue upon final shipment for a print job and not on a partial shipment basis. For most print jobs, it is common for customers to inspect the quality of the product at our facilities up to and including at the time of shipment. Our products are not shipped subject to any contractual right of return provisions. Absent specific contract terms, we recognize revenue upon final delivery of the product or upon completion of the service performed.

Within our Financial segment, which serves the global financial services end market, we produce highly customized materials such as regulatory S-filings, initial public offerings and mutual fund compliance

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communications, as well as provide EDGAR-related services. Revenue is recognized for these customers following final delivery of the printed product or upon completion of the service performed.

Revenues related to our Premedia operations, which include digital content management such as photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. With respect to Logistics, whose operations include the delivery of packages and printed material, we recognize revenue upon completion of the delivery services we provide.

Accounting for Goodwill and Certain Other Intangibles

In assessing the recoverability of goodwill and other intangible assets with indefinite lives, management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates and related assumptions change in the future, we may be required to record impairment charges not previously recorded. On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, and are required to assess goodwill and intangible assets with indefinite lives for impairment at a minimum annually, using a two-step process that begins with an estimation of the fair value of the reporting unit. The first step is a screen for impairment, and the second step measures the amount of any impairment. These tests utilize fair value amounts that are determined by discounting estimated future cash flows developed by management. See Note 5, Goodwill and Other Intangible Assets, to the consolidated financial statements for additional information.

Commitments and Contingencies

We are subject to lawsuits, investigations and other claims related to environmental, employment and other matters, as well as preference claims related to amounts received from customers prior to their seeking bankruptcy protection. Periodically, we review the status of each significant matter and assess potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and may revise our estimates. See Note 8, Commitments and Contingencies, to the consolidated financial statements for a description of certain legal proceedings.

Long-lived Assets

We are required to assess potential impairments of long-lived assets in accordance with SFAS No. 144, Accounting for Impairment of Long-Lived Assets, if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows developed by management. Long-lived assets that are held for disposal are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell. Our long-lived assets primarily include property, plant and equipment and other noncurrent assets (primarily the costs of acquiring print contracts and volume guarantees that are amortized to net sales over the periods in which benefits will be realized).

Investments in affordable housing, which are included in other noncurrent assets, are recorded at cost, as adjusted for our share of any declines in the fair value of the underlying properties that are deemed to be other than temporary. Our basis for determining fair value of the underlying properties requires applying management’s judgment using a significant number of estimates. We derive our estimates of fair value using remaining future tax credits to be received and expected residual values upon sale or disposition of our ownership interests. Expected residual values are developed from industry assumptions and cash flow projections provided by the underlying partnerships and include certain assumptions with respect to operating costs, debt

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levels and certain market data related to the properties such as assumed vacancy rates. Should these assumptions differ from actual results in the future, we may be required to further write down our carrying value of these investments. See Note 1, Summary of Significant Accounting Policies, and Note 3, Acquisitions and Investments, to the consolidated financial statements for additional information.

Accounting for Income Taxes

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities, and any valuation allowance recorded against the deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various domestic and foreign tax authorities. Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different from that which is reflected in our historical income tax provisions and accruals.

We have recorded deferred tax assets related to domestic and foreign tax loss carryforwards. Limitations on the utilization of these tax assets may apply; accordingly, we have provided a valuation allowance to reduce certain of these deferred tax assets as we have concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. In the event that actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance may need to be recorded.

It is the company’s policy to not record a tax benefit for net operating losses in countries with a limited net operating loss carry-forward period. Additionally, no provision has been recorded on unremitted earnings which are considered to be indefinitely invested in non-U.S. subsidiaries.

Defined Benefit Retirement Plans

We present the status of our defined benefit obligations and related plan assets in Note 9, Retirement Plans, to the consolidated financial statements. Plan assets, which consist primarily of marketable equity securities and corporate and government fixed income securities, are valued using market quotations. Plan obligations and annual pension and postretirement benefit income are determined by actuaries using a number of key assumptions. Key assumptions include the discount rate, the estimated future return on plan assets, and the anticipated rate of future salary increases. We determine the discount rate to be used for purposes of computing annual income or expense as of the beginning of the year (using a measurement date of September 30), based on an index of high-quality corporate bond yields as of that date. The weighted average discount rates assumed for determining annual pension and postretirement income (expense) in 2003 were 6.7% and 6.8%, respectively. We expect to lower the discount rates for purposes of determining both pension and postretirement income (expense) to 6.0% in 2004 due to a decline in high-quality corporate bond yields as of September 30, 2003.

We determine the estimated return on plan assets primarily based on long-term historical returns of equity and fixed income markets according to our respective plan allocations. The weighted average expected asset return for our pension plans as of the end of 2003 was 8.9%. Plan assets for our pension plans are generally allocated as follows: domestic equity (70%); non-U.S. equity (20%) and fixed income securities (10%). By assuming historic returns of 10% for equity and 6% for fixed income securities as a benchmark, the weighted average expected return based on our pension plan asset allocation would be 9.6% compared with our assumed rate of 8.9%. While we have assumed no change in targeted asset allocation percentages for 2004, we intend to lower our expected long-term rate of return to 8.5% based on declines in equity market performance, primarily over the last three years, versus long-term historical averages.

The weighted average expected asset return for our postretirement benefit plans as of the end of 2003 was 8.5%. Plan assets for our postretirement benefit plans are generally allocated as follows: domestic equity (55%), non-U.S. equity (20%) and fixed income securities (25%). By assuming historic returns of 10% for equity and

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6% for fixed income securities, the weighted average expected return based on our postretirement benefit plan allocation would be 9.0%, compared with our assumed rate of 8.5%. While we have assumed no change in asset allocation percentages for 2004, we intend to lower our expected long-term rate of return to 8.0% based on declines in equity market performance, primarily over the last three years, versus long-term historical averages.

As a result of the expected assumption changes for 2004 as noted above, we anticipate pension and postretirement income to be reduced by approximately $22 million in 2004. We expect to make approximately $17 million in cash contributions to our pension plans during 2004.

Other Matters

Other than non-cancelable operating lease commitments, we do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities.” The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. Minority interests in the income or loss of consolidated subsidiaries are included in other income (expense) in the consolidated income statement. Intercompany items and transactions are eliminated in consolidation.

Financial Review

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements and related notes that begin on page F-1.

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Items Affecting Comparability of 2003 with 2002

The following significant items affect comparability of the consolidated statements of income and segment operating results for 2003 and 2002:

Restructuring and impairment: Operating results for 2003 and 2002 were affected by the following restructuring and impairment charges:

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For a further description of restructuring activities and cumulative activity since inception of the restructuring plans, see Note 4, Restructuring and Impairment, to the consolidated financial statements.

By-product revenues: 2003 included pretax income of $48 million for by-product revenues compared with $46 million in 2002. By-product revenues are recorded as a reduction in our cost of materials, the majority of which relates to the Print segment.

Gain on sale of assets: 2003 included a $2 million pretax gain on the sale of our Casa Grande, Arizona manufacturing facility, and a $2 million pretax gain on the sale of land in the U.K., both included in the Print segment. 2002 included a $7 million pretax gain on the sale of our York, England manufacturing facility following the opening of our newly-constructed plant in Flaxby, England, included in the Print segment.

Insurance recovery related to 9/11: 2003 and 2002 both included a $2 million pretax gain from the collection of insurance proceeds from claims related to September 11th, included in the Financial segment and recorded as a reduction in our cost of sales.

Provision for litigation: 2002 included a $16 million pretax provision for the settlement of certain litigation, included in the Corporate segment. See Note 8, Commitments and Contingencies, to the consolidated financial statements for further information.

Pension and postretirement income: 2003 included less than $1 million of pretax pension and postretirement income compared with $20 million of pretax income in 2002, primarily in the Corporate segment. The decline between years is primarily a result of changes in our assumptions for expected returns on plan assets and our discount rate.

Affordable housing write-downs: 2003 included a pretax charge of $23 million to write down the carrying value of our investments in affordable housing compared with a pretax charge of $26 million in 2002. The write-downs reflected declines in the underlying estimated fair value of our affordable housing investments and were included in the Corporate segment.

Gain on sale of businesses and investments: 2003 included a $4 million pretax gain related to the sale of our 25% equity investment in Global Directory Services Company included in the Print segment and a $2 million pretax gain related to the sale of our cost basis investment in MultiMedia Live included in the Corporate segment. 2002 included a $6 million pretax gain from the collection of a note receivable that had been previously reserved in connection with the sale of our investment in Modus Media International (MMI) in 1999, included in the Corporate segment.

COLI-related expenses upon policy surrender: 2002 included a $5 million pretax charge for expenses related to the surrender of certain corporate-owned life insurance (COLI) policies in conjunction with our settlement with the Internal Revenue Service (IRS) for disputed COLI deductions; see Note 10, Income Taxes, to the consolidated financial statements for further information.

Tax benefit: 2003 included a tax benefit of $46 million, the largest component of which was a non-cash benefit of $40 million due to the favorable resolution of IRS audits for 1996 through 1999. In addition, we recorded a $6 million receivable related to refundable income taxes in Latin America due to the utilization of tax loss carrybacks. 2002 included a non-cash benefit of $30 million related to our settlement with the IRS for disputed COLI deductions; see Note 10, Income Taxes, to the consolidated financial statements for further information.

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Results of Operations—2003 compared with 2002

Consolidated net sales increased $32 million, or 0.7%, between years to $4.8 billion in 2003, driven by an increase in net sales of our Logistics segment of 16.5% and International of 20.1% included within our Other segment, partially offset by a decline in net sales of our Print segment of 4.4%. Net sales of our Logistics segment increased $129 million between years, which reflected higher net sales across both our print and package logistics businesses. The acquisition of MLI in March 2003 within the package logistics business contributed an incremental $49 million in net sales between years.

For our print-related businesses, value-added revenue represents net sales less the cost of materials. For some customers, we purchase paper used in the printing process and pass through this cost (referred to as “pass through material sales”) at a margin that is lower than print and related services; other customers furnish their own paper. The value of customer-furnished paper is not reflected in our financial results. For our Logistics segment, value-added revenue represents net sales less the cost of transportation and postage. By measuring value-added revenue, we eliminate the effects of material prices and transportation and postage cost, as well as mix issues related to customer-furnished versus RR Donnelley-furnished paper. Management, therefore, views value-added revenue as a preferable performance measure of its own value-added products and services. Other companies may use a measure which is calculated in a similar manner, but which may not be comparable.

Consolidated value-added revenue increased $14 million, or 0.5%, to $2.8 billion in 2003, driven by an increase in value-added revenue of our Logistics segment of 27.6% and International of 21.6% included within our Other segment, partially offset by a decline in value-added revenue of our Print segment of 2.9%. Value-added revenue of our Logistics segment increased $52 million between years, primarily due to an incremental $43 million in value-added revenue from our acquisition of MLI. The Print segment’s decline in value-added revenue of 2.9% was less than the decline in net sales primarily due to higher customer-furnished paper and improved material yield in 2003.

Value-added revenue is also affected by the price of by-product paper we sell. Income from the sale of by-products is recorded as a reduction in our cost of materials. In 2003, we recognized a reduction in cost of materials of $48 million from by-product revenues, compared with a reduction of $46 million a year ago.

Gross profit as a percentage of net sales (gross margin) was 17.5% in 2003 compared with 18.2% in 2002, primarily due to declines in gross margin of our Logistics and Print segments, partially offset by a higher gross margin at our Financial segment. The Logistics segment has a lower gross margin than the Print segment and represented a higher proportion of our net sales in 2003 (19.1% in 2003 versus 16.5% in 2002). The Logistics segment’s gross margin decreased between years, primarily due to start-up costs associated with a new consolidation facility in the Northeast ($9 million), the impact of the MLI acquisition ($8 million) and a product mix shift to lighter-weight packages. The Print segment’s gross margin was negatively impacted in 2003 primarily by price deterioration and unfavorable work mix, as well as lower gains on asset sales ($3 million), partially offset by higher volume and the impact of restructuring savings and productivity initiatives. The Financial segment’s gross margin increased between years, due to a mix shift toward higher margin capital markets work and the impact of restructuring savings and cost reduction initiatives.

Selling and administrative expenses increased $15 million between years, or 2.8%, to $548 million in 2003. Compared with 2002, a higher provision for doubtful accounts ($7 million, of which $5 million related to Latin America), increased costs to support sales growth in Europe ($7 million), lower benefit plan earnings ($4 million), incremental selling and administrative expenses related to the MLI acquisition ($2 million), and higher volume-based sales incentives (commissions) were partially offset by lower management incentive compensation ($1 million) and restructuring-related savings and cost reduction initiatives. Selling and administrative expenses as a percentage of net sales was 11.5% in 2003, compared with 11.2% in 2002.

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Net interest expense decreased $12 million, or 19.8%, in 2003, primarily due to lower effective interest rates and lower average borrowings as compared with the prior year. Other expense, net, was $12 million in 2003 compared with $6 million in 2002. The primary components of other expense, net, in 2003 were as follows: affordable housing write-downs ($23 million) and foreign currency transaction losses, net ($1 million), partially offset by earnings from investments ($3 million), gain on sale of businesses and investments ($6 million) and other miscellaneous income ($3 million). The primary components of other expense, net, in 2002 were as follows: affordable housing write-downs ($26 million) and foreign currency transaction losses, net ($3 million), partially offset by earnings from investments ($6 million), gain on sale of businesses and investments ($6 million) and other miscellaneous income ($11 million).

Earnings before income taxes in 2003 were $208 million compared with $176 million in 2002. Earnings before income taxes included $16 million and $89 million in restructuring and impairment charges for 2003 and 2002, respectively, and the other significant items affecting comparability as noted above. The effective tax rate in 2003 was 15.3% compared with 19.1% in 2002. The lower 2003 effective tax rate reflected a tax benefit of $46 million, including a non-cash benefit of $40 million due to favorable resolution of IRS audits for 1996 through 1999. In addition, we recorded a $6 million receivable for refundable income taxes in Latin America due to the utilization of tax loss carrybacks. The 2002 effective tax rate included a $30 million tax benefit related to our settlement with the IRS surrounding our COLI program (see Note 10, Income Taxes, to the consolidated financial statements). Net income was $177 million, up $35 million from $142 million in 2002. Diluted earnings per share of $1.54 increased $0.30 from $1.24 in 2002.

A summary analysis of expense trends is presented below:

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Operating Results by Business Segment—2003 compared with 2002

As discussed more fully in Note 18, Industry Segment Information, to the consolidated financial statements, we have three reportable segments: Print, Logistics and Financial.

The following table shows the trends in net sales and value-added revenue by end market for each of our segments:

(1) Includes International (Latin America, Europe and Asia) and Other. Other international locations are included within the respective end markets.

Operating results by business segment for 2003 compared with 2002 are as follows:

Print Segment

The following table summarizes significant items affecting comparability within the Print segment:

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Net sales for our Print segment decreased $135 million in 2003, or 4.4%, from 2002. Net sales for Magazines, Catalogs and Retail decreased $42 million, or 2.7%, between years, primarily reflecting price deterioration and a mix shift to work with a lower price per unit, partially offset by higher volume. The economic slowdown that began in 2000 generated excess industry capacity from reduced demand levels and higher customer bankruptcies resulting in increased competition and pricing pressures. Lower contract prices on renewals have continued to cycle through our 2003 results. The net sales decline of 2.5% in Premedia was driven by these same factors. Net sales of our Book business were down $42 million, or 6.0%, between years, due to lower volumes including fewer reprint orders, lower average prices and a less favorable mix of more soft-cover books with a lower price per unit and fewer case-bound books. Net sales for Telecommunications were down $47 million, or 7.0%, between years, primarily due to more customer-furnished paper and lower average prices, partially offset by higher volume.

Value-added revenue for our Print segment decreased $57 million, or 2.9%, from 2002, primarily due to the net sales declines noted above, partially offset by improved material yield which lowered material costs. Value-added revenue for Telecommunications increased 0.7% between years because of higher volume, as noted above, and favorable foreign currency exchange rates on U.K. directory work that more than offset price declines. This occurred despite a 7.0% decrease in net sales because the portion of the decline in net sales due to more customer-furnished paper had no significant impact on value-added revenue.

Earnings from operations in 2003 for our Print segment increased $3 million, or 1.0%, from 2002. Earnings from operations included $3 million in restructuring and impairment charges for 2003 compared with $55 million in 2002. Our Print segment has not yet begun to see the positive effects of an economic recovery. The negative impact on earnings due to price deterioration and a mix shift to lower margin work as noted above was only partially offset by higher volumes in 2003 and the impact of productivity initiatives and savings related to restructuring actions.

Logistics Segment

The following table summarizes significant items affecting comparability within the Logistics segment:

Net sales for our Logistics segment increased $129 million, or 16.5%, from a year ago. Net sales of package logistics were up $97 million, or 19.0%, between years. The acquisition of MLI in March 2003 contributed an incremental $49 million in net sales for package logistics between years. Net sales for package logistics excluding MLI were up 9.3% for 2003 due to higher volumes and postal rate increases which were passed through to customers, partially offset by a mix change toward lighter-weight, lower-priced packages. Net sales of print logistics were up 15.1% for 2003, driven by higher volumes from both our Print segment and from third parties for which we do not provide printing services.

Value-added revenue for our Logistics segment increased $52 million, or 27.6%, between years, of which $43 million related to the acquisition of MLI. Excluding the acquisition of MLI, value-added revenue for our package logistics business was flat between years, despite a 9.3% increase in net sales. In addition to the factors affecting net sales noted above, value-added revenue of our package logistics business was negatively impacted

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in 2003 by higher transportation costs, partially offset by higher postage discounts due to deeper penetration of the postal system. Higher transportation costs between years were driven by transportation rate increases and higher fuel costs. In addition, higher costs in 2003 resulted from start-up problems at a consolidation facility in the Northeast, which led to the re-routing of packages to other company facilities. These start-up problems were not fully resolved by the fourth quarter of 2003, which is the peak time for package delivery. The company has taken actions to address these start-up problems, and expects to see significant improvements in operational efficiencies at this facility beginning in early 2004. Value-added revenue for our print logistics business increased 11.0% between years, driven by higher net sales, partially offset by higher per-unit transportation costs.

Excluding the impact of the MLI acquisition, the percentage of value-added revenue to net sales for our Logistics segment was 22.7% in 2003, down from 23.9% in 2002. MLI had a significantly higher value-added revenue to net sales percentage (86.2%) in 2003. Unlike the rest of our Logistics segment, MLI owns and operates a dedicated fleet of vehicles to provide package distribution services. MLI’s value-added revenue was a higher percentage of its net sales because these internal operating and distribution costs are included in total cost of sales rather than cost of transportation (which consists of third-party freight costs).

In 2003, our Logistics segment incurred a loss from operations of $11 million, compared with earnings from operations of $11 million in 2002. The loss from operations in 2003 included a $13 million loss from MLI since its acquisition date of March 2003. The MLI loss included a pretax impairment charge of $4 million to write down goodwill, as the estimated future cash flows for this business were not expected to be sufficient to fully recover its carrying value. In early February 2004, we closed MLI’s business-to-business package delivery operations due to poor performance and significant operating losses incurred, while retaining the business-to-consumer operations that complement our base package logistics business. Of the total $13 million operating loss in 2003 from MLI, approximately $7 million related to the business-to-business package delivery operations.

Excluding MLI, the loss from operations for our Logistics segment in 2003 was attributable to operational issues within our package logistics business, partially offset by the improved performance of print logistics. Our package logistics business was hurt in 2003 by start-up costs of approximately $9 million related to our new consolidation facility in the Northeast. In addition to higher transportation costs to re-route packages noted above, we operated a second nearby facility longer than originally anticipated as an operational contingency for the start-up problems. This second facility was closed in January 2004.

Financial Segment

The following table summarizes significant items affecting comparability within the Financial segment:

2003 net sales for our Financial segment decreased $1 million, or 0.3%, from a year ago. Net sales from customized communications solutions decreased 5.9% between years, mostly offset by an increase in capital markets net sales of 3.8%. The 2003 decline in net sales from customized communication solutions was primarily due to lower net sales from investor communications (e.g., prospectuses, annual and semi-annual mutual funds

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statements), which reflected contraction in the mutual fund market and one large non-recurring deal in 2002. The increase in capital markets net sales between years was driven by a rebound within the domestic capital markets in the second half of 2003 following a period of economic slowdown, and higher fourth quarter 2003 international net sales. Domestic capital markets net sales in 2003 were essentially flat between years, which reflected higher compliance filings (e.g., SEC periodic reports and annual meeting proxy statements), mostly offset by lower transactional activity in the first half of the year (e.g., S-filings, including initial public offerings, secondary offerings and mergers and acquisitions).

Value-added revenue for our Financial segment in 2003 decreased $1 million, or 0.3%, from the prior year, consistent with the decline in net sales.

Earnings from operations for our Financial segment in 2003 were $4 million compared with a loss from operations in 2002 of $33 million. Included in 2003 earnings from operations were restructuring and impairment charges of $3 million consisting primarily of workforce reductions, down $8 million from the prior year. Prior-year restructuring actions included the closing of several print facilities and service centers, and related workforce reductions. Earnings from operations in 2003 were also impacted favorably by restructuring savings of approximately $16 million between years, of which $13 million related to workforce reductions and $3 million to lower depreciation. In addition, earnings from operations in 2003 benefited from cost reduction initiatives of approximately $10 million, including savings from the outsourcing of certain composition-related services offshore. Operating margins in 2003 also reflected a favorable mix change between years due to increased capital markets activity in 2003, which carries higher operating margins than customized communications solutions.

Other and Corporate Segments

The following table summarizes significant items affecting comparability within the Other and Corporate segments:

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2003 net sales for the Other segment increased $39 million, or 8.6%, from a year ago. International net sales in 2003 were up $63 million, or 20.1%, from the prior year, driven by increases in Europe due to volume growth and favorable foreign currency exchange rates, as well as volume growth in Asia, partially offset by lower net sales in Latin America. 2003 net sales for Direct Mail were down $26 million, or 19.0%, from the prior year, driven by lower volume. Included in net sales within the Other segment were $2 million from a start-up operation which was shut-down during the fourth quarter of 2003.

Value-added revenue for the Other segment increased $21 million, or 8.4%, from a year ago, consistent with the increase in net sales.

The 2003 loss from operations for the Other segment was $38 million compared with a loss from operations of $27 million in 2002. The loss from operations for International in 2003 was higher than the prior year, primarily due to lower volume and an additional $5 million provision for doubtful accounts in Latin America; additional start-up costs of a plant in Shanghai, China; and higher restructuring costs of $1 million, partially offset by higher volumes and favorable foreign currency exchange rates in Europe. The loss from operations for Direct Mail in 2003 was higher than the prior year, primarily due to lower volume, partially offset by savings from restructuring actions.

Earnings from operations for the Corporate segment were $8 million in 2003 compared with a loss from operations of $10 million in 2002. Higher earnings from operations of $18 million in the Corporate segment between years were due to the following: lower restructuring and impairment charges ($15 million); lower provision for litigation ($16 million); lower management incentive compensation ($9 million); and lower miscellaneous expenses ($2 million), partially offset by lower benefit plan earnings (excluding service costs allocated to the segments) ($18 million); and a higher LIFO provision ($6 million).

For a reconciliation of earnings from operations to earnings before income taxes by segment, see Note 18, Industry Segment Information, to the consolidated financial statements.

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Items Affecting Comparability of 2002 with 2001

The following significant items affect comparability of the consolidated statements of income and segment operating results for 2002 and 2001: