Significant Accounting Policies and Critical Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 Securities and Exchange Commission (“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, the Company has identified the following critical accounting policies and judgments. Although management believes that its 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

The Company recognizes revenue for the majority of its products upon shipment to the customer and the transfer of title and risk of loss. Contracts generally specify F.O.B. shipping point terms. Under agreements with certain customers, custom products may be stored by the Company for future delivery. In these situations, the Company receives a logistics and warehouse management fee for the services it provides. In certain cases, delivery and billing schedules are outlined within the customer agreement and product revenue is recognized when manufacturing is complete, title and risk of loss transfer to the customer, the order is received and there is a reasonable assurance as to collectability.collectibility. Because the majority of products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale. Billings for third-party shipping and handling costs are included in net sales.

Revenue from services is recognized as services are performed. Long-term product contract revenue is recognized based on the completed contract method or percentage of completion method. The percentage of completion method is used only for contracts that will take longer than three months to complete, where project stages are clearly defined and can be invoiced and where the contract contains enforceable rights by both parties. Revenue related to short-term service contracts and contracts that do not meet the percentage of completion criteria is recognized when the contract is completed.

Within the Company’s financial printglobal capital markets business, which serves the global financial services end market, the Company produces highly customized materials such as regulatory S-filings, initial public offerings and mutual fund compliance communications, as well as provides EDGAR-related services. Revenue is recognized for these services following final delivery of the printed product or upon completion of the service performed.

Revenues related to the Company’s premedia operations, which include digital content management, 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 the Company’s logistics operations, whose operations include the delivery of printed material, the Company recognizes revenue upon completion of the delivery of services.

The Company records deferred revenue in situations where amounts are invoiced but the revenue recognition criteria outlined above isare not met.

Such revenue is recognized when all criteria are subsequently met.

Accounts Receivable

The Company maintains an allowance for doubtful accounts, which is reviewed for estimated losses resulting from the inability of its customers to make required payments for productproducts and services. ProvisionsSpecific customer provisions are made based uponwhen a specific review of all significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends.trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. The Company’s estimates of the

recoverability of amounts due could change, and additional changes to the allowance could be necessary in the future if a major customer’s creditworthiness deteriorates, or if actual defaults are higher than the Company’s historical experience.

Inventories

The Company records inventories at the lower of cost or market values. Most of the Company’s inventories are valued under the last-in first-out (LIFO) basis. Changes in the inflation indices may cause an increase or decrease in the value of inventories accounted for under the LIFO costing method. The Company maintains inventory allowances based on excess and obsolete inventories determined primarilyin part by future demand forecasts. If there were to be a sudden and significant decrease in demand for its products, or if there were a higher incidence of inventory obsolescence because of changing technology and customer requirements, the Company could be required to increase its inventory allowances. Inventory management remains an area of focus as the Company strives to balance the need to maintain appropriate inventory levels to ensure competitive lead times versus the risk of inventory obsolescence.

Goodwill and Other Long-Lived Assets

The Company’s methodology for allocating the purchase price relating to acquisitions is based on established valuation techniques that reflect the consideration of a number of factors including valuations performed by third party appraisers. Goodwill is measured as the excess of the cost of an acquired entity over the net of the amountsfair value assigned to identifiable assets acquired and liabilities assumed. Based on its organization structure, the Company has identified 14 reporting units for which cash flows are determinable and to which goodwill is allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit. When the Company’s organization structure changes, new or revised reporting units may be identified, and goodwill is reallocated, if necessary, based on relative excess fair value.

The Company performs goodwill impairment tests on an annual basis or more frequently in certain circumstances, if necessary.circumstances. The Company compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of a reporting unit exceeds the fair value, the Company would performperforms an additional fair value measurement calculation to determine the impairment loss, which would beis charged to operations. In 2005, the Company recorded a non-cash charge of $362.3 million to reflect impairment of goodwill and identifiable intangible assets in the North American Forms and Labels reporting unit. As part of its annual impairment analysis for this reporting unit, the Company engaged a third-party appraisal firm to determine the fair value of the unit, in part based on estimates of future net sales, operating margin and cash flows developed by management. In order to determine the amount of goodwill impairment, the Company also used the third-party appraisal firm to value the significant tangible and intangible long-lived assets of the reporting unit.

The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs indefinite-lived impairment tests on an annual basis or more frequently in certain circumstances, if necessary.circumstances. Factors considered important which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, significant decrease in the market value of the assets and significant negative industry or economic trends. When the Company determines that the carrying amount of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value.

TheAll of the Company’s goodwill and long-lived asset impairment assessments are generally determined based on established fair value techniques, including determining the estimated future discounted cash flow analysis. These analyses require management to estimate both future cash flows over the remaining useful life of the asset using aand an appropriate discount rate determined by management to be commensurate withreflect the risk inherent in the current business model. The assumptions supporting the cash flows,valuation models, including discount rates, are determined using the best estimates as of the date of the impairment review. If these estimates or their related assumptions change in the future, the Company might be required to record impairment charges for the assets.

Certain investments in affordable housing, which are included in other noncurrent assets, are recorded at cost, as adjusted for the Company’s share of any declines in the fair value of the underlying properties that are deemed to be other than temporary. The Company’s basis for determining fair value of the underlying properties requires applying management’s judgment using a significant number of estimates. Management derives its estimates of fair value using remaining future tax credits and tax deductions to be realized and expected residual values upon

sale or disposition of the Company’s 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 levels and certain market data related to the properties such as assumed vacancy rates. Should these assumptions differ from actual results in the future, the Company might be required to further write down its carrying value of these investments.

Commitments and Contingencies

The Company is 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, the Company reviews the status of each significant matter and assesses potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues 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, the Company reassesses the potential liability related to pending claims and might revise its estimates.

The Company purchases third-party insurance for workers’ compensation, automobile and general liability claims that exceed a certain level. The Company is responsible for the payment of claims below these insured limits, and consulting actuaries are utilized to estimate the obligation associated with incurred losses, which is recorded in accrued liabilities. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claims experience and settlement. If actual experience of claims development is significantly different from these estimates, an adjustment in future periods may be required.

Restructuring

The Company records restructuring charges when liabilities are incurred as part of a plan approved by management, with the appropriate level of authority, commits and approvesfor the elimination of certain duplicative functions, and the closure of certain facilities, or the exit of a line of business, generally in order to reduce the Company’s overall cost structure. Certain

restructuring costs wereare recognized as a cost of acquisitions because the Acquisition because theyplans were contemplated at the time of the Acquisitionacquisition and were, therefore, included in the purchase price allocation. These restructuring charges and related liabilities are based on contractual obligations andor management’s best estimates at the time the charges are recorded.

The restructuring liabilities might change in future periods based on several factors that could differ from original estimates and assumptions. These include, but are not limited to: contract settlements on terms different than originally expected; ability to sublease properties based on market conditions at rates or on timelines different than originally estimated; breach of severance agreements; and changeor changes to original plans as a result of mergers or acquisitions. Such changes might result in a potential reversalreversals of or additionadditions to restructuring charges that could affect amounts reported in the consolidated statements of operations of future periods.

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, the Company’s tax returns are subject to audit by various domesticU.S. and foreign tax authorities. The Company accrues for uncertain tax contingencies,positions for which it believes area loss is probable and estimable. Although management believes that its estimates are reasonable, no assurance can be given that the final outcome of uncertain tax outcome will notpositions may be materially different from that which is reflected in the Company’s historical income tax provisions and accruals.

The Company has recorded deferred tax assets related to domestic and foreign tax loss and credit carryforwards. Limitations on the utilization of these tax assets generally apply; accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets aswhen management has 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. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded.

The Company has reviewed the provision in the American Jobs Creation Act of 2004, relating to the repatriation of foreign earnings, and based on our analysis of our business needs and strategy the Company has not

determined at this time that any funds will be repatriated and accordingly no provision for unremitted earnings is provided.

Pension and Postretirement Benefit Plans

The Company records annual amounts relating to its pension and postretirement benefit plans based on calculations which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications is generally deferred and amortized over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries.actuaries and investment advisors. The pension and postretirement obligations are measured as of September 30 for all years presented.

The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of that date.

The Company employs a total return investment approach for its pension and postretirement benefit plans whereby a mix of equities and fixed income investments are used to maximize the long-term return of pension and postretirement plan assets. The intent of this strategy is to minimize plan expenses by outperforming the growth in plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolios contain a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across geography and market capitalization through investments in U.S. large-capitalization stocks, U.S. small-capitalization stocks and international securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.

The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions, risk and active management

premiums. The prospective target asset allocation percentage for both the pension and postretirement benefit plans is approximately 75% for equity securities and approximately 25% for fixed income and other securities.

The expected return on plan assets assumption at September 30, 2004 was2005 ranged from 8.0% to 8.5% for the Company’s major U.S and Canadian pension plans and was 8.0% for the Company’s funded U.S. postretirement medical benefit plan. The discount raterates used at September 30, 20042005 to measure both the pension and postretirement benefit obligations was 6.0%of the major U.S. and Canadian plans ranged from 5.0% to 5.8%. A one percentage point decrease in the discount raterates at September 30, 20042005 would increase the pension plan’splans’ accumulated benefit obligation by approximately $330.0$345.4 million.

The Company also maintains several pension plans in international locations. The assets, liabilities and expense associated with these plans are not material to the Company’s consolidated financial statements. The expected returns on plan assets and discount rates for these plans are determined based on each plan’s investment approach, local interest rates, and plan participant profiles.

The health care cost trend rates used in valuing the Company’s postretirement benefit obligationobligations are established based upon actual health care cost trends and consultation with our actuaries and benefit providers. At September 30, 2004,2005, the current weighted average healthcarehealth care trend rate assumption was 10.2% for pre-Agepre-age 65 participants and 11.9% for post-Agepost-age 65 participants. The current trend rate gradually decreases to an ultimate trend rate of 6.0%.

A one percentage point increase in the assumed health care cost trend rates would have the following effects (in millions):

Postretirement benefit obligation		$	22.7
Total postretirement benefit service and interest cost components			2.7

A one percentage point decrease in the assumed health care cost trend rates would have the following effects (in millions):

Other MattersOff Balance Sheet Arrangements

Other than non-cancelable operating lease commitments, the Company does not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities.” See Note 8,Investments, to the consolidated financial statements related to the Company’s investments in affordable housing properties. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries.

Financial Review

In the financial review that follows, the Company discusses its consolidated results of operations, financial position,condition, cash flows and certain other information. This discussion should be read in conjunction with the Company’s consolidated financial statements and related notes that begin on page F-1.

Non-GAAP Measures

The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful because they are appropriate measures for evaluating the Company’s operating performance. Internally, the Company uses non-GAAP information as an indicator of business performance, and evaluates management’s effectiveness with specific reference to these indicators. These measures should be considered in addition to, not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

Non-GAAP net earnings from continuing operations excludes restructuring, impairment and integration charges, gains or losses on the disposition of investments, the non-cash write-down of the Company’s investment in affordable housing, net income or loss from discontinued operations and the cumulative effect of a change in an accounting principle. The Company used an effective tax rate of 34.8% in 2005 and 38.3% in 2004, which it believes is its pro forma annual tax rate, in calculating non-GAAP net earnings. A reconciliation of GAAP net earnings to non-GAAP net earnings for the years ended December 31, 2005 and 2004 for these adjustments is presented in the following table:

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2004

The following table shows net sales and income (loss) from continuing operations for each of the Company’s reportable segments. A complete description of the Company’s reportable segments is included in Item 1, “Business.”

Consolidated

Net sales for the year ended December 31, 2005 increased $1,273.8 million, or 17.8%, to $8,430.2 million versus the prior year. Of this increase, $932.0 million was due to acquisitions, most significantly Moore Wallace and Astron. In addition, the increase was driven by volume growth across all businesses in the Publishing and Retail Services segment and in the Dynamic Communications Solutions and direct mail businesses within the Integrated Print Communications segment. Net sales also reflect the pass-through to customers of higher materials prices, offset by the continuing impact of competitive price pressures in most markets. The Forms and Labels segment’s net sales increased due to the impact of the Moore Wallace acquisition, offset by price and volume declines, reflecting the continuing downward trend in demand due to continued electronic substitution primarily in the Forms sector.

Income from continuing operations for the year ended December 31, 2005 was $450.4 million compared to $459.2 million for the year ended December 31, 2004. This decrease reflected restructuring and impairment charges of $419.8 million compared to $107.4 million in 2004. These charges include a non-cash charge of $362.3 million for impairment of goodwill and identifiable intangible assets in the Forms and Labels segment. The impact of these charges was mostly offset by increased earnings from acquisitions, growth in net sales, cost reductions achieved through restructuring actions, productivity efforts, procurement savings and lower acquisition-related costs (including fair-value adjustments for inventory) of $72.5 million.

Cost of sales (exclusive of depreciation and amortization) increased $820.7 million to $6,090.3 million for the year ended December 31, 2005 versus the prior year primarily due to acquisitions and the increased net sales volume. Cost of sales as a percentage of consolidated net sales decreased from 73.6% to 72.2% primarily due to cost reductions achieved through restructuring activities and incremental procurement savings, partially offset by the impact of higher paper prices which were largely passed through to customers and continuing price competition in most markets. Cost of sales for the year ended December 31, 2005 also included the fair value adjustments for inventory of acquired business of $4.1 million compared to $66.9 million of similar adjustments in the year ended December 31, 2004 due to the acquisition of Moore Wallace.

Selling, general and administrative expenses (exclusive of depreciation and amortization) increased $110.0 million to $1,044.7 million for the year ended December 31, 2005 versus the prior year primarily due to acquisitions

and other net sales increases. Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 12.4% in 2005 from 13.1% in 2004. This decrease was primarily due to benefits achieved from restructuring activities. Other items impacting this comparison include $7.8 million related to recovery of an international value-added tax refund and the collection of a bankruptcy receivable which was previously written-off, lower bad debt expense and provisions of $27.3 million recorded in the prior year related to litigation, insurance, termination benefits, and sales and use taxes.

For the year ended December 31, 2005, the Company recorded a net restructuring and impairment provision of $419.8 million, compared to $107.4 million in 2004. These charges include $362.3 million for the impairment of goodwill and identifiable intangible assets within the Forms and Labels segment; $15.7 million primarily related to the relocation of the Company’s global corporate headquarters within Chicago; $15.9 million related to workforce reductions of 500 employees (of whom 395 were terminated as of December 31, 2005); and other costs incurred to restructure operations within the business segments. For the year ended December 31, 2004, the charges reflected workforce reductions of 1,368 employees (all of whom were terminated as of December 31, 2005), primarily related to the elimination of duplicative administrative functions resulting from the acquisition of Moore Wallace. Management expects that restructuring activities will continue in 2006 as the Company continues to streamline its manufacturing, sales and administrative operations.

Payments on certain lease obligations associated with various restructuring plans are scheduled to continue until 2011. The Company anticipates that payments associated with employee terminations relating to restructuring actions will be substantially completed by the end of 2006.

Depreciation and amortization increased $39.5 million to $425.0 million for the year ended December 31, 2005 compared to 2004, primarily due to acquisitions. Depreciation and amortization included $58.3 million and $37.1 million of amortization of purchased intangibles related to customer relationships, patents and non-compete covenants for the year ended December 31, 2005 and 2004, respectively.

Net interest expense increased by $24.8 million to $110.7 million for the year ended December 31, 2005 versus 2004 primarily reflecting interest expense related to the issuance of approximately $1.0 billion of debt in March 2004 and $1.0 billion of debt in May 2005 due to the acquisitions of Moore Wallace and Astron, respectively.

Net investment and other expense for the year ended December 31, 2005 was $7.9 million versus $16.5 million in 2004. Included in investment and other expense, net, were charges of $8.1 million and $34.6 million for the year ended December 31, 2005 and 2004, respectively, reflecting declines in the underlying estimated fair market values of the Company’s affordable housing investments. During the year ended December 31, 2004, the Company recorded a gain of $14.3 million on the sale of certain investments in Latin America.

The effective income tax rate for the year ended December 31, 2005 was 71.5%, primarily reflecting the charge for impairment of goodwill of $353.6 million, for which the Company did not record any tax benefit. For the year ended December 31, 2004, the effective income tax rate was 25.9%. In addition to the impact of the goodwill impairment charge, the higher effective rate in 2005 reflects lower reversals of state tax contingencies upon the expiration of certain state statutory limitations ($6.7 million in 2005 compared to $30.5 million in 2004), lower affordable housing credits ($2.7 million and $8.8 million in 2005 and 2004, respectively) and the impact of the 2004 sale of an investment in Latin America. These impacts were partially offset by the reduction of $13.5 million in non-U.S. valuation allowances compared to total reductions of non-U.S. valuation allowances of $7.1 million in 2004.

Earnings from continuing operations before cumulative effect of change in accounting principle for the year ended December 31, 2005 was $95.6 million, or $0.44 per diluted share, compared to $264.9, million or $1.30 per diluted share, for the year ended December 31, 2004. In addition to the factors discussed above, the per-share results reflect an increase in weighted average diluted shares outstanding of 12.5 million shares primarily due to the acquisition of Moore Wallace, partially offset by share repurchases.

Income from discontinued operations, net of tax, for the year ended December 31, 2005 was $41.5 million and was primarily related to Peak. The loss from discontinued operations, net of tax, for the year ended December 31, 2004 was $80.0 million, and included the results of Momentum Logistics, Inc. (“MLI”) and package logistics prior to their dispositions. A net gain on the sale of Peak of $55.2 million, including pre-tax impairment charges of $36.6 million and tax benefits of $93.5 million, is included in the income from discontinued operations, net of tax, compared to $118.3 million ($59.6 million after-tax) in impairment charges and loss on sale for MLI and the Company’s package logistics business included in the 2004 loss from discontinued operations, net of tax.

For the year ended December 31, 2004, the Company recorded a cumulative effect of a change in accounting principle of $6.6 million, net of taxes of $4.3 million, reflecting the adoption of the Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities.” The charge reflects the difference between the carrying amount of the Company’s investments in certain partnerships related to affordable housing and the underlying carrying values of the partnerships upon consolidating these entities into the Company’s financial statements. Management does not believe that the consolidation of these partnerships will have an ongoing material effect on the Company’s consolidated annual results of operations, cash flows or financial condition.

Publishing and Retail Services

The following table summarizes net sales, income from continuing operations and non-GAAP adjustments within the Publishing and Retail Services segment:

Net sales for the Publishing and Retail Services segment for the year ended December 31, 2005 were $4,269.8 million, an increase of $448.1 million, or 11.7%, compared to 2004. Of this increase, $125.9 million was due to the Moore Wallace, Asia Printers, Charlestown, Poligrafia and Spencer acquisitions. The remaining increase resulted from strong volume increases across all businesses in the segment and higher paper prices passed on to customers, partially offset by downward price pressures. Net sales increases in the magazine, catalog and retail business were driven by volume increases from new customer contracts, increased business with existing customers and higher paper prices that were passed on to customers, partially offset by lower prices associated with major contract renewals. In the book business, the increased net sales reflected higher consumer, education, and juvenile book volume. Consumer and juvenile volume was driven by strong performance of customers’ titles, and education volume reflected the impact of increased elementary and high school textbook volume driven by state adoption cycles. Net sales in the book business also reflected gains in the telecommunications and technology market and the impact of higher paper prices, partially offset by lower prices on major customer contract renewals. Net sales for the directories business also increased, primarily reflecting higher volume from most major customers and the impact of higher paper prices passed on to customers. Logistics net sales increased due to the Moore Wallace acquisition, strong volumes in the domestic print platform, growth in third party sales and higher fuel prices passed on to customers. Premedia net sales increased, also driven by higher print volumes, as well as work for new customers, offset by continuing price pressures in

this market. Net sales in Europe and Asia increased sharply from 2004. In Europe, this increase reflected higher telecommunication and technology, directory, magazine and retail volume, reflecting further penetration in these markets and the acquisition of Poligrafia. In Asia, the Company’s net sales improvement was driven by strong gains in book production for the U.S. market, both from the Asia Printers acquisition and organic growth. Asian volume increases also reflected strong growth with telecommunications and technology customers.

On a GAAP basis, Publishing and Retail Services’ income from continuing operations increased $155.5 million, including the impact of lower restructuring and impairment charges, and integration charges of $30.5 million. Non-GAAP income from continuing operations for the Publishing and Retail Services segment for the year ended December 31, 2005 of $629.6 million increased $125.0 million, or 24.8%, compared to the prior year. In addition to the net sales increase, the increase in GAAP and non-GAAP income from continuing operations included the benefits of cost reduction actions and procurement savings, partially offset by inflationary increases in wages, benefits and energy costs. The significant growth in operating income was achieved across all of the segment’s businesses. Non-GAAP operating margins in Publishing and Retail Services increased to 14.7% in 2005 from 13.2% in 2004.

Integrated Print Communications

The following table summarizes net sales, income from continuing operations and non-GAAP adjustments within the Integrated Print Communications segment:

Net sales for the Integrated Print Communications segment for the year ended December 31, 2005 were $2,491.5 million, an increase of $610.8 million, or 32.5%, compared to 2004. Of this increase $577.1 million was due to the acquisitions of Moore Wallace, Astron and Asia Printers. The remaining increase in net sales was primarily driven by the Dynamic Communications Solutions and direct mail businesses. Dynamic Communications Solutions experienced a strong increase in net sales compared to 2004, primarily driven by volume in services to the mutual fund industry. Net sales in the direct mail business grew as increased long run marketing programs for financial and not-for-profit markets more than offset revenue decreases related to prior year facility closures and customer losses. In addition to the impact of the Moore Wallace acquisition, short-run commercial print net sales were up slightly from 2004 as pricing pressures nearly offset volume growth. Global capital markets net sales decreased from 2004 as transactional volume declines were only partially offset by an increase in compliance volume.

On a GAAP basis, income from continuing operations increased $100.0 million. Fair market value adjustments of inventory acquired in the Moore Wallace acquisition resulted in charges of $17.5 million in 2004 and net restructuring, impairment and integration charges declined $8.7 million from 2004. Non-GAAP income from continuing operations for the Integrated Print Communications segment for the year ended December 31, 2005 increased $73.8 million to $291.1 million due to acquisitions, Dynamic Communications Solutions and direct mail volume growth, benefits achieved from restructuring actions, including plant consolidations and other cost reduction initiatives. Non-GAAP operating margins increased to 11.7% in 2005 from 11.6% in 2004.

Forms and Labels

The following table summarizes net sales, income (loss) from continuing operations and non-GAAP adjustments within the Forms and Labels segment:

Net sales for the Forms and Labels segment increased $214.9 million, or 14.8%, to $1,668.9 million due to the Moore Wallace acquisition. Overall, the forms and labels industry is in secular decline due to electronic substitution, with the pace of the decline difficult to predict. Excluding the impact of the Moore Wallace acquisition, both the U.S. and Canada forms and labels businesses experienced a continuing decline in net sales as this industry continues to be adversely affected by electronic substitution and intense price competition related to excess industry capacity. Net sales in Latin America, including the commercial print and catalog, magazine and book businesses, increased due to higher volume and favorable foreign currency exchange rates.

On a GAAP basis, income from continuing operations decreased $287.2 million from 2004, primarily reflecting the non-cash charge for impairment of goodwill and identifiable intangible assets of $362.3 million in 2005. Other net restructuring and impairment charges decreased $19.0 million. In addition, 2004 results include $49.4 million in charges related to the fair market value adjustment of inventory and backlog due to the Moore Wallace acquisition. Non-GAAP income from continuing operations for the year ended December 31, 2005 was $129.9 million, an increase of $4.4 million from 2004. This increase was due to the Moore Wallace acquisition and significant improvements in the Latin American operating results. Non-GAAP operating margins in Forms and Labels declined to 7.8% from 8.6% in the prior year, reflecting price pressures and volume declines, partially offset by cost savings from restructuring actions.

Corporate

The following table summarizes operating expenses and non-GAAP adjustments within the Corporate segment:

On a GAAP basis, corporate operating expenses decreased $22.9 million despite an increase in restructuring, impairment and integration charges of $5.0 million. In 2005, $15.7 million of the net restructuring and impairment charges are related to the consolidation and relocation of the global headquarters within Chicago. Corporate non-GAAP operating expenses decreased $27.9 million to $172.1 million for the year ended December 31, 2005. The current year corporate expenses reflect the inclusion of Moore Wallace for a full year compared to the prior year’s corporate expense that only included corporate expense attributable to Moore Wallace after the acquisition date. The decrease in corporate expense reflects the benefits achieved through restructuring actions and cost containment initiatives, partially offset by increased incentive compensation expenses.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2003

The following table shows net sales and income (loss) from continuing operations for each of the Company’s reportable segments:

Consolidated

Net sales for 2004 increased $2,973.8 million, or 71.1% to $7,156.4 million versus the prior year. The increase was primarily due to the AcquisitionMoore Wallace acquisition ($2,669.6 million), and increased volumes in the Integrated Print Communications and Publishing and Retail Services segments. Net sales increases in the Publishing and Retail Services segment reflected volume increases across all business as well as favorable foreign currency exchange in international operations. Improved volumes in the Integrated Print Communications segment were attributable to the financial printGlobal Capital Markets business, which benefited from improved capital market transaction levels in the U.S. and international markets,markets.

Income from continuing operations for 2004 increased $166.5 million, or 56.9%, versus the prior year to $459.2 million. The increase was primarily due to the Moore Wallace acquisition and improved salesoperating results in 2004, which more than offset a $66.9 million adjustment for the education book market. While management believes that internal cross-selling efforts will resultfair value of inventory and backlog from the Moore Wallace acquisition, $107.4 million of net restructuring and impairment charges ($12.5 million in increased volume within current markets as the Company leverages its expanded product portfolio following the Acquisition, printing industry excess capacity, pricing pressures2003), higher pension and electronic substitution will continue to adversely impact salespost retirement expenses and $13.9 million of certain products and services of the Company.

total integration related charges in 2004.

Cost of sales increased $2,184.0 million to $5,269.6 million for 2004 versus the prior year, primarily due to the AcquisitionMoore Wallace acquisition ($1,957.4 million). Acquisition and integration costs included in cost of sales related to a charge associated with fair value adjustments for inventory and backlog ($66.9 million) and $5.3 million primarily related to equipment transfers and facility reconfigurations. These increases were partially offset by benefits achieved through restructuring and cost reduction initiatives, incremental procurement savings, and higher by-product recoveries of $13.3 million, that are recognized as a reduction of cost of sales.

Selling, general and administrative expenses increased $413.2 million versus the prior year, to $934.7 million for 2004, primarily due to the AcquisitionMoore Wallace acquisition ($437.9 million). Selling, general and administrative expenses as a percentage of consolidated net sales increased to 13.1% in 2004 from 12.5% in 2003. This increase was primarily due to provisions of $27.3 million related to litigation, insurance, termination benefits and sales and use taxes, as well as a $31.3 million increase in certain employee incentive related costs for 2004 versus the prior year. The Company incurred $7.5 million in third party costs in 2004 associated with Sarbanes-Oxley Act compliance for auditor attestation and Company readiness. Also included in 2004 were $8.6 million of integration charges related to the Acquisition.Moore Wallace acquisition. In addition, the Company recognized $34.2 million of pension and postretirement expense in 2004 versus $4.2 million of expense in 2003 due to changes in actuarial benefit assumptions and the inclusion of benefit obligations acquired in the Acquisition. Pension and postretirement expense is expected to decrease in 2005 primarily as a result of plan amendments and increased plan assets. Management anticipates that savings from restructuring activities related to the Acquisition and other cost containment efforts will favorably impact the selling, general and administrative expense margin in 2005. These savings will likely be partially offset by future integration related expenses.Moore Wallace acquisition.

During 2004, the Company recorded net restructuring and impairment charges of $107.4 million. These charges included $85.0$85.1 million for workforce reduction costs (approximately 2,1741,368 positions) primarily related to the elimination of duplicative administrative functions resulting from the AcquisitionMoore Wallace acquisition and the reorganization of certain operating activities, as well as lease exit costs. For 2004, the Company recorded impairment charges of $22.4$22.3 million. The impairment charges primarily included $13.1$14.0 million for the abandonment of certain Publishing and Retail Services related enterprise software projects and other assets, $2.1 million for the write-down of a Publishing and Retail Services customer contract and $7.2$6.2 million related to software and other assets in the Forms and Labels and Integrated Print Communications segments. Additional restructuring charges are likely in 2005, as the Company eliminates duplicative functions, relocates the global headquarters within the Chicago area and continues to rationalize its manufacturing, sales and administrative platforms as a result of the Acquisition and other initiatives. During 2003, the Company recorded $12.5 million of net restructuring and impairment charges, primarily related to workforce reductions (approximately 279 positions), the relocation of employees and equipment from closed facilities and the curtailment of the Company’s postretirement benefit plan.

Depreciation and amortization increased $115.2 million to $385.5 million for 2004 compared to 2003, which was more than accounted for by the Acquisition.Moore Wallace acquisition. Acquisition related depreciation and amortization included $36.7 million of amortization of purchased intangibles related to customer relationships, patents and covenants not to compete.

Income from continuing operations for 2004 increased $166.5 million, or 56.9%, versus the prior year to $459.2 million. The increase was primarily due to the Acquisition and improved operating results in 2004, which more than offset a $66.9 million adjustment for the fair value of inventory and backlog from the Acquisition, $107.4 million of net restructuring and impairment charges ($12.5 million in 2003), higher pension and post retirement expenses and $13.9 million of total integration related charges in 2004.

Interest expense, net, increased by $34.5 million for 2004 versus 2003, primarily due to the $1.0 billion of debt assumedissued in conjunction with the Acquisition.

Moore Wallace acquisition.

Investment and other income (expense),expense, net, for 2004 was $16.5 million of expense versus $12.9 million of expense for 2003. The change was due to a higher write-down of affordable housing investments ($29.334.6 million in 2004 versus $23.3 million in 2003) that was partially offset by higher net gains on the disposals of investments in 2004 (which included a $14.3 million gain on an investmentsale of certain investments in Latin America). The write-downs of affordable housing investments in 2004 and 2003 reflected declines in the estimated fair market values of the Company’s affordable housing investments.

For 2004, the difference between the effective tax rate and the statutory tax rate primarily relates to the benefit associated with the reversal of tax contingencies upon the expiration of certain state statutory limitations ($30.5 million), the reversal of a non-U.S. valuation allowance ($7.1 million) and affordable housing credits ($8.8 million).

Net earningsEarnings from continuing operations for 2004 increased by $76.4 million versus the prior year to $264.9 million, or $1.30 per diluted share. For 2003, net earnings from continuing operations were $188.5 million, or $1.65 per diluted share. Net earnings per share in 2004 reflect the impact of the 102.1 million shares issued in conjunction with the Acquisition.Moore Wallace acquisition. Net earnings for 2004 also reflect the incremental results of the AcquisitionMoore Wallace acquisition and improved operating results, which more than offset the unfavorable impact of the fair value adjustment of inventory and backlog and net restructuring and impairment and integration charges.

Net loss from discontinued operations was $80.0 million for 2004 compared to a net loss of $12.0 million in 2003. The net loss for 2004 was primarily due to net restructuring and impairment charges of $109.1 million. During the first quarter of 2004, the Company recorded an impairment charge of $13.9 million for the goodwill,

intangibles and fixed assets of MLI,momentum Logistics, Inc. (MLI), as the carrying value of the assets exceeded the future cash flows expected to

be generated by the assets. During the second quarter of 2004, the Company recorded an impairment charge of $89.1 million in conjunction with the then pending disposition of its package logistics business, as the fair value was less than the carrying amount of the net assets. Fair value was determined by using management’s best estimate of the amounts for which the net assets could be sold in the marketplace. The results of discontinued operations for 2004 reflected restructuring charges of $0.5 million recorded prior to the decision to dispose of the package logistics business and $4.7 million for the shutdown of MLI. These restructuring charges included workforce reduction (750 employees) and lease exit costs. Also included in the net loss from discontinued operations was a net loss of $10.1 million related to the Company’s Peak, Technologies business, which included restructuring charges of $0.9 million for workforce reductions (57 employees).

For 2004, the Company recorded a cumulative effect of a change in accounting principle of $6.6 million, net of taxes of $4.3 million, reflecting the adoption of the Financial Accounting Standards Board Interpretation No. 46,46R, Consolidation of Variable Interest Entities. The charge reflects the difference between the carrying amount of the Company’s investments in certain partnerships related to affordable housing and the underlying carrying values of the partnerships upon consolidating these entities into the Company’s financial statements. Management does not believe that the consolidation of these partnerships will have an ongoing material effect on the Company’s consolidated results of operations or financial position.

Publishing and Retail Services

The following table summarizes net sales, income from continuing operations and significant items affecting comparabilitynon-GAAP adjustments within the Publishing and Retail Services segment:

Net sales for the Publishing and Retail Services segment for 2004 were $2,811.8$3,821.7 million, an increase of $203.0$312.9 million, or 7.8%8.9%, compared to 2003, primarily due to the AcquisitionMoore Wallace acquisition ($75.2 million) and volume increases across all businesses in the segment. Net sales in the magazine, catalog and retail business increased in 2004 versus the prior year due to volume increases related to major customers and increased paper prices that were partially offset by industry pricing pressures. Net sales in the directories business for 2004 increased versus the prior year due to volume improvements that more than offset pricing pressures. The net sales for the premedia business benefited from higher volumes from both existing Publishing and Retail Services and third-party customers. Net sales for the logistics business reflected increased print logistics and expedited service volumes due to growth in volume from existing Publishing and Retail Services and third-party customers. The book business benefited from improved sales in the educational book market in the second half of 2004. The international operations in this segment, which benefited from improved volumes and favorable foreign currency exchange, also contributed to the sales increases.

IncomeOn a GAAP basis, income from continuing operations for the Publishing and Retail Services segment for 2004 declined $4.7increased $37.5 million, or 1.5%, to $306.7 million compared to the prior year due to increased restructuring and impairment charges and increased employee related incentive costs. Netreflecting net restructuring charges of $25.1$30.2 million and impairment charges of $15.2$16.1 million in 2004 compared to total restructuring and impairment charges of $2.8 million in 2003. The 2004 restructuring charges primarily related to employee terminations as the Company continued to focus on reducing its operating cost structure. The 2004 impairment

charge primarily included $13.1$14.0 million for the abandonment of certain enterprise software projects and other assets and $2.1 million for the write-down of a customer contract. These charges were partially offset byNon-GAAP income from continuing operations for the improved results ofPublishing and Retail Services segment for 2004 increased $81.4 million, or 19.2%, to $504.6 million compared to 2003 due to the logistics business, which benefited from the AcquisitionMoore Wallace acquisition ($19.3 million); and improved operating results across all businesses within the Publishing and Retail Services segment generated from improved volumes, productivity, by-product recoveries, cost containment and incremental procurement savings. Operating results for 2005 are expected to further benefit from the restructuring actionssavings offset by and cost reduction initiatives implemented during 2004.

increased employee related incentive costs.

Integrated Print Communications

The following table summarizes net sales, income from continuing operations and significant items affecting comparabilitynon-GAAP adjustments within the Integrated Print Communications segment:

		Years Ended December 31,
		2004				2003
		(in millions)
Net sales		$	1,880.7			$	540.9
Income from continuing operations			179.8				11.4
Operating margin			9.6	%			2.1	%
Non-GAAP adjustments:
Restructuring and impairment charges—net			16.4				5.3
Fair market value adjustment for inventory and backlog related to the Moore Wallace acquisition			17.5				—
Integration charges			3.6				—
Non-GAAP income from continuing operations		$	217.3			$	16.7
Non-GAAP operating margin			11.6	%			3.1	%

Net sales for the Integrated Print Communications segment increased by $1,437.3$1,339.8 million to $2,878.3$1,880.7 million in 2004 compared to the prior year primarily due to the AcquisitionMoore Wallace acquisition ($1,273.41,285.7 million) and increased financial printglobal capital markets sales resulting from improved global capital marketsincreased volume and stable customized communications solutions business activity. The international operationsincreased volume in the segment, which benefited from improved volumes and favorable currency variances also contributedservices to the sales increase. The book business benefited from improved sales in the educational book market in the second half of 2004 that are expected to continue to favorably impact results in 2005.

mutual fund industry.

Because the Integrated Print Communications segment’s results only reflect the acquired operations of Moore Wallace subsequent to the Acquisitionacquisition Date, management believes that the following comments related to the revenue trends affecting the acquired operations in the segment for 2004 versus the results for 2003 are relevant. Short-run commercial print results reflected the continued pressures from price erosion related to excess capacity in the industry. Increased volumes reflected increased cross-selling activities into the commercial print facilities. Growth in the outsourcingDynamic Communications Solutions business was attributable to new customer volumes and increased activity across most industry sectors served. These increases more than offset pricing pressure and a slowdown in the mortgage refinancing market. Declines in the integrated direct mail businesses related to facility closures and pricing and volume pressures at existing customers that were partially offset by new customer and new program growth.

Income from continuing operations for the Integrated Print Communications segment for 2004 increased $206.2 million to $326.8 million versus 2003, due to the Acquisition ($131.9 million), volume increases, improved by-product recoveries and benefits achieved from prior year restructuring actions and other cost reduction efforts. IncomeOn a GAAP basis, income from continuing operations for 2004 included $22.3$16.4 million of net restructuring and impairment charges across the book, financial print and direct mail businesses, $17.5 million of charges for the fair market value adjustment for inventory and backlog, $19.3 million of amortization of purchased intangibles and $3.6 million of integration costs related to the Acquisition.Moore Wallace acquisition. The 2003 income from continuing operations included $5.3 million of restructuring and impairment chargescharges. Non-GAAP income from continuing operations for the Integrated Print Communications segment for 2004 increased $200.6 million to $217.3 million versus 2003, due to the Moore Wallace acquisition ($136.2 million), volume increases and a $2.0 million insurance recovery related to September 11, 2001. Operating results for 2005 are expected to benefitbenefits achieved from theprior year restructuring actions and other cost reduction initiatives implemented during 2004.efforts.

Forms and Labels

The following table summarizes net sales, income (loss) from continuing operations and significant items affecting comparabilitynon-GAAP adjustments within the Forms and Labels segment:

Net sales for 2004 increased $1,333.5$1,321.1 million to $1,466.3$1,454.0 million primarily due to the AcquisitionMoore Wallace acquisition ($1,321.01,308.6 million). Because the Forms and Labels segment results primarily reflect the acquired operations of Moore Wallace subsequent to the Acquisition Date,acquisition date, management believes that the following comments in relation to the revenue trends affecting net sales in the Forms and Labels segment for 2004 versus 2003 are relevant. The forms and labels industry is in secular decline, but the pace of this decline remains difficult to predict. The business

continued to be adversely affected by volume declines attributable to continuing industry-wide trends of electronic substitution for higher margin multi-part and other long-run forms products and price competition related to excess capacity in the industry. In response to these trends, the Company has continued to focus on lowering its manufacturing and selling costs, while exploring new market opportunities. Paper prices increased in 2004 and further increases are expected in 2005. Although the pricing environment is difficult, the Company is continuing its efforts to raise prices to cover a substantial portion of any increases, but there is no assurance that the Company will be successful.

Income from continuing operations for 2004 of $52.1$47.9 million included $49.4 million of charges for the fair market value adjustment for inventory and backlog, $17.4 million of amortization of purchased intangibles and $3.1$3.2 million of integration costs related to the Acquisition.Moore Wallace acquisition. In addition, the 2004 operating results included $25.1$25.0 million of net restructuring and impairment charges related to the reorganization of the segment subsequent to the Acquisition.Moore Wallace acquisition. In addition to $4.2 million of restructuring and impairment charges, the 2003 results include a provision for bad debtsdoubtful accounts receivable of $6.3 million. Management believes that due to continued volume declines, price and margin erosion at existing customers and excess capacity in the industry, future restructuring initiatives might continue to result in charges which might be significant and might unfavorably impact the financial results of the Forms and Labels segment in 2005.

Corporate

Corporate operating expenses for 2004 increased $108.8$109.0 million to $226.4 million versus the same period in 2003. The increase is primarily due to the Acquisition,Moore Wallace acquisition, restructuring charges of $19.7 million primarily for workforce reductions, integration charges of $6.8 million, provisions for litigation, insurance, termination benefits and sales and use taxes of $27.3 million and lower benefit plan earnings. In addition, 2004 included increased employee related incentive costs ($20.1 million) and incremental third party costs associated with Sarbanes-Oxley Act compliance ($7.5 million). These increases were partially offset by benefits achieved through restructuring actions and cost containment initiatives taken during the year. Management expects to incur future restructuring charges as

RESTRUCTURING, IMPAIRMENT, AND ACQUISITION-RELATED CHARGES

During 2005, the Company continues to eliminate duplicative functions and to consolidate its corporate administrative facilities, including the relocation of the global headquarters within the Chicago area, pursuant to the Acquisition. These charges might be significant and might unfavorably impact the financial results during the next several quarters while the Company continues to lower its underlying administrative cost structure.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002

The following table shows net sales and income (loss) from continuing operations for each of the Company’s segments:

Consolidated

Consolidated net sales decreased $64.6 million, or 1.5%, to $4,182.6 million in 2003, primarily due to a $58.2 million decline in net sales in the Publishing and Retail Services segment. Additional declines in both the book and direct mail businesses in the Integrated Print Communications segment were offset by significant sales increases in the European and Asian operations, which benefited from volume growth and favorable foreign currency exchange rate variances.

Cost of sales decreased $45.5 million to $3,085.6 million for 2003 versus the prior year, which was primarily due to lower Publishing and Retail Services sales. In 2003, the Company recognized a reduction in cost of materials of $47.8 million from by-product recoveries, compared with a reduction of $46.1 million in 2002. Cost of sales as a percentage of net sales was 73.8% in 2003, compared with 73.7% in 2002. The Publishing and Retail Services segment’s cost of sales was negatively impacted in 2003 primarily by unfavorable work mix, partially offset by higher volume and the impact of restructuring savings and productivity initiatives.

Selling and administrative expenses increased $24.5 million to $521.5 million in 2003. Compared with 2002, a higher provision for doubtful accounts ($7.7 million, of which $5.2 million related to Latin America), increased costs to support sales growth in Europe ($7.3 million), lower benefit plan earnings ($3.5 million), and higher volume-based sales incentives (commissions) were partially offset by lower management incentive compensation ($1.0 million) and restructuring-related savings and cost reduction initiatives. Selling and administrative expenses as a percentage of net sales was 12.5% in 2003, compared with 11.7% in 2002.

During 2003, the Company recorded net restructuring and impairment charges of $12.5$419.8 million, which compared to $87.4including $362.3 million in 2002. Restructuringnon-cash charges for the impairment of $8.8 million included workforce reduction costs (approximately 279 positions)goodwill and otheridentifiable intangible assets within the Forms and Labels segment. This impairment charge was the result of the Company’s annual goodwill impairment analysis and relates to the North American Forms and Labels reporting unit within the Forms and Labels segment. As part of its annual impairment analysis for this reporting unit, the Company engaged a third-

party appraisal firm to determine the fair value of the unit, in part based on estimates of future cash flows developed by management. In order to determine the amount of goodwill impairment, the Company also used the outside appraisal firm to value the significant tangible and intangible long-lived assets of the reporting unit. The impairment analysis reflected that the estimated fair value of the North American Forms and Labels reporting unit had declined since the Company previously performed this annual test in 2004. The decline in estimated value of the reporting unit was primarily attributable to changes in estimated future revenues and cash flows for the business. In 2005, the business was impacted by larger-than-expected price and volume declines driven by the ongoing drop in market demand. The Company has incorporated these changes in market trends into its estimates of future revenues and cash flows, resulting in the lower estimated fair value.

Also reflected in 2005 restructuring and impairment charges related to exit activities. Impairment charges of $3.7was $15.7 million primarily related to the closurerelocation of a directory plantthe Company’s global corporate headquarters within Chicago, $15.9 million related to workforce reductions of 500 employees (of whom 395 were terminated as of December 31, 2005) and $18.1 million in Chileother costs incurred to restructure operations within the Forms and Labels segment.

Depreciation and amortization decreased $16.2 million to $270.3 million for 2003 compared to the prior year due primarily to prior year asset impairments and lower capital expenditures.

Income from continuing operations for 2003 increased $47.5 million versus the prior year to $292.7 million. The increase was primarily due to the lower net restructuring and impairment charges and benefits achieved from the prior year restructuring actions that offset price deterioration and unfavorable work mix.

Interest expense, net, decreased by $11.3 million in 2003, primarily due to lower effective interest rates and lower average borrowings as compared with the prior year.

Investment and other income (expense), net, for 2003 was $12.9 million of expense, which compared to $15.1 million of expense in 2002. The primary components of investment and other income (expense), net, in 2003 were affordable housing write-downs ($23.3 million), partially offset by gain on sale of businesses and investments ($5.5 million) and other miscellaneous income ($4.9 million). The primary components of investment and other income (expense), net, in 2002 were as follows: affordable housing write-downs ($26.0 million), partially offset by gains on sales of businesses and investments ($6.4 million) and other miscellaneous income ($4.5 million).

The lower 2003 effective tax rate in 2003 reflected a tax benefit of $45.8 million, including a non-cash benefit of $39.9 million due to favorable resolution of IRS audits for 1996 through 1999. In addition, the Company recorded a $5.9 million receivable for refundable income taxes in Latin America due to the utilization of tax loss carrybacks. The 2002 effective tax rate included a $30.0 million tax benefit related to our settlement with the IRS surrounding our COLI program.

Net earnings from continuing operations for 2003 increased by $51.7 million versus the same period in the prior year to $188.5 million, or $1.65 per diluted share. For 2002, net earnings from continuing operations were $136.8 million, or $1.19 per diluted share.

Net loss from discontinued operations was $12.0 million in 2003, compared to income from discontinued operations of $5.4 million in 2002. The net loss from discontinued operations in 2003 included restructuring and impairment charges of $4.2 million.

Publishing and Retail Services

The following table summarizes net sales, income from continuing operations and significant items affecting comparability within the Publishing and Retail Services segment:

Net sales for 2003 for the Publishing and Retail Services segment decreased $58.2 million, or 2.2%, to $2,608.8 million. Decreased net sales for the magazine, catalog and retail business primarily reflected price deterioration and a mix shift to work with a lower price per unit, partially offset by higher volume and improved print logistics sales. 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 continued to cycle through the 2003 results. The net sales decline in the premedia business was driven by these same factors. Net sales for the directories business decreased primarily due to an increase in customer-furnished paper and lower average prices, partially offset by higher volume. The net sales increase in the logistics business was driven by higher volumes from both print related operations in the segment and from third parties for which the Company does not provide printing services.

Income from continuing operations for 2003 for the Publishing and Retail Services segment increased $39.2 million, or 14.4%, from 2002, due primarily to reduced net restructuring and impairment charges for 2003 of $2.8 million, compared to $53.3 million in 2002. 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.

Integrated Print Communications

The following table summarizes net sales, income from continuing operations and significant items affecting comparability within the Integrated Print Communications segment:

Net sales for 2003 in the Integrated Print Communications segment increased $3.2 million, or 0.2%, compared to the prior year due to stronger results in the European and Asian operations that offset declines in the book and direct mail businesses. International net sales in the segment were up $69.4 million, or 39.8%, 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. Net sales of the book business were down 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. The 2003 net sales for direct mail were down significantly from the prior year, due to lower volume. The 2003 net sales for the financial print businesses were flat due to a decrease in customized communications solutions results that was mostly offset by an increase in capital markets net sales. 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 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, 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).

Income from continuing operations for 2003 in the Integrated Print Communications segment increased $6.4 million, or 5.6%, compared to the prior year due to lower restructuring and impairment charges and improved results in the European and financial businesses that more than offset declines in Asia and the book business. Included in 2003 income from continuing operations were net restructuring and impairment charges of $5.3 million, compared to $14.5 million in 2002. Income from continuing operations for the financial print business in 2003 increased significantly from a loss in 2002 that included restructuring actions related to the closure of several print facilities and service centers, and related workforce reductions. Income from continuing operations in the financial print business benefited from these restructuring actions and other cost reduction initiatives that included savings from the outsourcing of certain composition-related services offshore. In 2003, the financial print business’ operating margins 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. The European operations benefited from higher volumes and favorable foreign currency exchange rates. The loss from the Asian operations was higher than the prior year primarily due to additional start-up costs of a plant in Shanghai, China. 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.

Forms and Labels

The following table summarizes net sales, income (loss) from continuing operations and significant items affecting comparability within the Forms and Labels segment:

The net sales for 2003 in the Forms and Labels segment decreased $9.6 million, or 6.7% compared to the prior year primarily due to lower volumes. The loss from the Latin American operations in 2003 of $21.7 million was $12.5 million greater than the prior year loss and related primarily to lower volume and an incremental $5.2 million provision for doubtful accounts.

Corporate

Corporate operating expenses decreased $14.4 million, or 10.9%, to $117.6 million in 2003. The decrease is primarily due to lower restructuring and impairment charges ($16.0 million); lower provision for litigation ($16.0 million); lower management incentive compensation ($9.1 million); partially offset by lower benefit plan earnings (excluding service costs allocated to the segments) ($17.5 million); a higher LIFO provision ($5.6 million); and higher miscellaneous expenses ($3.6 million).

Restructuring, Acquisition and Other Charges

segments.

Throughout 2004, management approved and initiated various plans to restructure the operations of the Company predominantly in connection with the Acquisition.Moore Wallace acquisition. These included plans to eliminate certain duplicative functions and vacate redundant facilities in order to reduce the Company’s combined cost structure. As a result, the Company recorded $85.0$85.1 million of net restructuring charges that are included in the 2004 results of operations. Additionally, for 2004, the Company recorded $24.7 million of restructuring costs to exit certain operations and activities of Moore Wallace, which were contemplated at the time of the Acquisitionacquisition and therefore the related restructuring costs were capitalized as a cost of the Acquisition.

acquisition.

For 2004, the Company recorded impairment charges of $22.4$22.3 million. The impairment charges included $13.1$14.0 million for the abandonment of certain Publishing and Retail Services related enterprise software projects and other assets and $2.1 million for the write-down of a Publishing and Retail Services customer contract. Additional impairment charges related to software and other assets in the Forms and Labels ($4.44.3 million) and Integrated Print Communications ($2.81.9 million) segments.

During 2003, the Company recorded net restructuring and impairment charges of $12.5 million. The 2003 charges included costs associated with workforce reductions, as well as period costs associated with defined exit activities from previously announced restructuring plans. Included were impairment charges of $3.7 million primarily related to the closure of a directory plant in Chile ($3.2 million).

During 2002, the Company recorded net restructuring and impairment charges of $87.4 million. The 2002 charge included $15.4 million related to the shutdown of a Berea, Ohio plant which produced short-run specialty magazines and was included within the Publishing and Retail Services segment. The total 2002 charge was comprised of the following: employee termination benefits related to additional workforce reductions ($36.1 million); a curtailment loss related to postretirement benefit plans ($8.4 million); exit costs related to closed facilities ($5.2 million); relocation costs for defined exit activities which were expensed as incurred ($22.3 million) and asset impairments to reduce the carrying values of assets held for disposal to fair value ($15.4 million).

Acquisition and integration costs of $80.8 million were recorded in 2004. The acquisition and integration costs recorded in cost of sales of $72.2 million related to fair value adjustments for inventory and backlog ($66.9

million) as well as to equipment transfers from vacated facilities, facility reconfiguration due to consolidations, training and travel in the Forms and Labels ($1.6 million), Integrated Print Communications ($3.5 million), and Publishing and Retail Services ($0.2 million) segments. Selling, general and administrative expenses included acquisition and integration costs of $8.6 million for consulting expenses associated with system integration and facility reconfiguration expenses due to office consolidations, in the Forms and Labels ($1.51.6 million), Integrated Print Communications ($0.1 million), Publishing and Retail Services ($0.2 million) and Corporate ($6.86.7 million) segments.

In 2005,2006, the Company expects to realize the cost savings associated with the aforementioned restructuring plansactions taken in 2005, primarily through reduced employee and facility costs. The Company anticipates that payments associated with employee terminations ($35.114.6 million) related to its various restructuring programs will be substantially complete by the secondfourth quarter of 2005.2006. The Company anticipates that payments associated with lease exit costs ($11.621.2 million) will be substantially complete by 2011. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charge and cash payments related to these lease obligations. The Company expects to identify further cost reduction opportunities which may result in additional restructuring charges.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

The Company generated increased cash flows from operating activities due to the Acquisition and the benefits resulting from restructuring programs. Additional liquidity was also due to improved control over discretionary capital spending and other costs. The Company believes it has sufficient liquidity to support the ongoing activities of the businesses and to invest in future growth to create value for its shareholders. This includes,Operating cash flows are the Company’s primary source of liquidity and are expected to be used for, among other things, upgrading the long-run print platform to enable the Company to better serve customers in a more cost-effective manner, making other capital expenditures as necessary to support growth and advisable, payingproductivity improvement, interest and principal on the Company’s debt obligations, makingadditional acquisitions, completing itsfuture common stock repurchases based upon market conditions, completion of restructuring programs, and funding future dividend payments that may be approved by the board of directors.

Additional sources of liquidity include a commercial paper program and credit facilities described under “Capital Resources” below.

Cash Flows From Operating Activities

Net cash provided by operating activities fromof continuing operations was $971.5 million for 2004 was $759.4 million,the year ended December 31, 2005, compared to net cash provided by operating activities fromof continuing operations of $375.7$759.4 million for 2003.the same period last year. The change was primarily due toincrease reflects the inclusionimpact of the Moore Wallace operations from the Acquisition Dateacquisitions and the benefits achieved as a result of the Company’s restructuring programs.

improved operating results driven by volume growth and cost reduction actions.

Cash Flows From Investing Activities

Net cash used forin investing activities fromof continuing operations for 2004the year ended December 31, 2005 was $1,621.9 million versus net cash used in investing activities of continuing operations of $119.5 million versus a use of cash of $158.6 million in 2003. The improvement was primarily due to net cash acquired fromfor the Acquisition of $66.1 million, proceeds of $79.6 million from sales of investments in Latin America and assets held for sale, partially offset by an increase inyear ended December 31, 2004. For the year ended December 31, 2005, capital expenditures of $72.4 million.were $471.0 million versus $265.2 million for the year ended December 31, 2004. The increase in capital spending in 2004 was driven primarily dueby investments to investments made to create a more efficient print platform to serve magazine, catalog and retail customers. Total capital expenditures in 2005 are expected to be approximately $450.0 million and will primarily focus on increasing capacity forupdate the Publishing and Retail Services segment largelymanufacturing platform and support new businesses. The Company continues to fund capital expenditures primarily through cash provided by operations. The Company expects that capital expenditures for 2006 will be between $350 and $370 million. Cash used in responseacquisitions of businesses, net of cash acquired, includes the acquisitions of Astron, Asia Printers, Charlestown, Poligrafia, Spencer and CMCS in 2005 compared to new customer contractsthe net cash acquired in the 2004 all-stock acquisition of Moore Wallace. During the year ended December 31, 2005, the Company received $43.4 million in proceeds from the sale of various assets. During the year ended December 31, 2004, the Company received $37.5 million on the sale of an investment in Latin America, $36.8 million on the sale of miscellaneous assets, and contract renewals.

$5.3 million from an eminent domain settlement with the state of Georgia.

Cash Flows From Financing Activities

Net cash used forprovided by financing activities fromof continuing operations for 2004the year ended December 31, 2005 was $191.8$378.5 million compared to $170.3net cash used in financing activities of continuing operations of $191.8 million for the prior year. This increasein 2004. The change primarily relatesrelated to the issuance of $1.0 billion of debt related to the acquisition of Astron, offset by purchases of Company shares pursuant to the Company’s share repurchase program and the increase in cash dividends paid in the current year on the incremental shares issued in conjunction with the Acquisition andMoore Wallace acquisition. During the repayment of short-term debt, partially offset by the cash proceeds received from the exercise of stock options.

Onyear ended December 16, 2004,31, 2005, the Company announced that its board of directors authorized a share repurchase plan of up to $300.0 million of the Company’s common stock based on market conditions through a variety of methods, including open market purchases, block transactions, accelerated repurchase arrangements or private transactions. Repurchases under this program may be made at any time prior to December 31, 2006 and might be discontinued at any time.

As previously disclosed in the Company’s Current Report on Form 8-K filed on January 6, 2005, under this share repurchase program, the Company repurchasedpurchased approximately 6.08.5 million shares of its common stock at a total cash cost of $270.4 million, of which 6.0 million of these shares were purchased from affiliates of GSC Partners forin a privately negotiated transaction at a purchase price of approximately $200.0 million, which represented a 5% discount tomillion. At the NYSE closing pricetime of the repurchase, two of the Company’s commonthen directors were affiliated with GSC. Both directors recused themselves from deliberations related to the repurchase. The remaining stock on December 31, 2004.

purchases during the year were made in the open market.

Cash Flows From Discontinued Operations

Net cash used by discontinued operations for 2005 was $4.6 million including the proceeds from the sale of Peak compared to net cash provided by discontinued operations for 2004 wasof $115.6 million versus cash used of $48.6 million in 2003. The increase primarily related to2004, including the sale of the package logistics business, decreases in the operating assets and liabilities of the discontinued operations in 2004 and decrease in cash paid for capital expenditures in 2004 and the acquisition of MLI in 2003.business.

Other

An additional source of liquidity at year-end was the Company’s short-term investments in the amount of $500.2$230.1 million, which primarily consists of certificate and short-term deposits and money market funds. These investments are with institutions of sound credit rating, are highly liquid and are classified as “cash and cash equivalents.”

Dividends

Cash dividends paid to shareholders totaled $223.4 million, $200.8 million and $115.7 million in 2005, 2004 and $111.0 million in 2004, 2003, and 2002, respectively. The Company has consistently paid a dividend since becoming a public company in 1956 and currently has no plans to cease or reduce its dividend payments in 2005. Based on the current dividend per share, dividends declared by the Company subsequent to the Acquisition will result in larger cash outflows than prior years due to the increased number of common shares outstanding from the Acquisition.2006. The Company believes it will continue to generate sufficient cash flows from operations to pay future dividends that may be approved by the Company’s board of directors. On January 27, 2005,5, 2006, the board of directors of the Company announceddeclared a regular quarterly cash dividend of 26 cents$0.26 per common share, or approximately $56.0 million.

payable on March 1, 2006 to shareholders of record on February 10, 2006.

Contractual Cash Obligations and Other Commitments and Contingencies

The following table quantifies our future contractual obligations as of December 31, 2004:2005: