During the first quarter of ~~2002,~~2003, the company recognized a pretax restructuring and impairment charge of ~~$27~~$2.6 million, and reduced earnings from operations in the company’s business segments as follows: Donnelley Print ~~Solutions—$23~~Solutions: $0.2 million; ~~Corporate—$1~~Financial Services: $0.6 million; Corporate: $1.1 million and ~~Other—$3~~Other: $0.7 million. ~~This charge included $5 million in expensed as incurred charges for defined exit activities that related to 2001 announced plans (the 2001 plans).~~ The first quarter ~~2002 restructuring plan (the first quarter plan)~~2003 charges consisted of workforce reductions and continued consolidations at several of the company’s facilities. The first quarter 2003 pretax charge consisted of the following:

$1 million of employee termination benefits, including severance and outplacement services. The actions approved during the first quarter will result in the termination of 110 employees, 57 of whom were terminated in the first quarter. The remaining employees are expected to be terminated in the second quarter.

$15 million of employee termination benefits, including severance, early retirement benefit costs and outplacement costs associated with planned personnel reductions. Of this charge, $11 million represented early retirement benefit costs to be financed by the company’s various benefit plans. The actions approved under the first quarter plan will result in the termination of 692 employees, the majority of whom were terminated in the first half of 2002.

$3 million of exit costs which consist of $2 million of costs to maintain closed facilities until the estimated dates of sale and $1 million related to the termination of non-cancelable lease obligations and other contractual obligations.

$5 million of relocation costs incurred for employees transferred from closed facilities, as well as equipment transfers, both of which are being expensed on an as incurred basis. These costs relate primarily to plant closures announced in 2001.

$4 million for anticipated losses on the disposal of property and equipment, primarily in connection with the shutdown of the company’s operations in Berea, Ohio. The asset impairment loss recognized was based on the difference between the estimated selling prices of the assets to be sold and the related carrying values. Selling prices were estimated based on the company’s prior experience with comparable property and equipment disposals.

A $1 million curtailment loss related to the company’s postretirement benefit plan. This charge was recorded in the Corporate segment. The recognized curtailment loss represents an increase in the accumulated postretirement benefit obligation and the recognition of prior service costs due to workforce reductions in 2002, subsequent to the September 30, 2002 measurement date for the postretirement benefit plan.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

~~Second quarter 2002 restructuring and impairment:~~

~~During the second quarter~~$0.4 million of ~~2002, the company recognized~~income related to a ~~pretax restructuring and impairment charge of $16 million, and reduced earnings from operations~~reduction in the ~~company’s business segments as follows: Donnelley Print Solutions—$14 million; and Other—$2 million. This charge included $6 million in expensed as incurred charges~~reserve for ~~defined~~ exit ~~activities that related to 2001 plans. The second quarter 2002 restructuring plan (the second quarter plan) consisted of workforce reductions and consolidations at several of~~costs for projected lease payments, resulting from the company’s ~~facilities. The second quarter pretax charge consisted~~ability to sublease certain leased property.

$1 million of ~~the following:~~

$3 million of employee termination benefits, including severance, early retirement benefit costs and outplacement costs associated with planned personnel reductions. Of this charge, $1 million represented early retirement benefit costs to be financed by the company’s various benefit plans. The actions approved under the second quarter plan will result in the termination of 249 employees, the majority of whom were terminated in the second quarter of 2002.

~~$7 million of~~ relocation costs incurred for employees transferred from closed facilities, as well as equipment transfers, both ~~of which are being expensed on an as incurred basis. These costs relate primarily to plant closures announced in 2001.~~

$6 million as an adjustment for additional anticipated losses on the disposal of property and equipment, primarily related to buildings that are held for disposal, based on current market conditions. The majority of the adjustment relates to plant closures announced in 2001.

~~Third quarter 2002 restructuring and impairment:~~

~~During the third quarter~~ of 2002, the company recognized a pretax restructuring and impairment charge of $23 million, and reduced earnings from operations in the company’s business segments as follows: Donnelley Print Solutions—$7 million; Corporate—$13 million; and Other—$3 million. The third quarter 2002 restructuring plan (the third quarter plan) consisted of workforce reductions and consolidations at several of the company’s facilities. The third quarter pretax charge consisted of the following:which are being expensed on an as-incurred basis.

$8 million of employee termination benefits, including severance, early retirement benefit costs and outplacement costs associated with planned personnel reductions. Included in this amount is an increase of $4 million in costs for employees previously terminated who subsequently elected to receive enhanced early retirement benefits in lieu of severance. The actions approved under the third quarter plan will result in the termination of 181 employees, the majority of whom were terminated in the third quarter of 2002.

~~$8 million in non-cash curtailment losses related to the company’s postretirement benefit plan recorded in the Corporate segment.~~

~~$1 million of exit costs to maintain closed facilities until the estimated dates of sale.~~

$7 million of relocation costs incurred for employees transferred from closed facilities, as well as equipment transfers, both of which are being expensed on an as incurred basis. These costs relate primarily to plant closures announced in 2001.

~~R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)~~

~~$1 million reduction in the reserve for asset impairment due to the company’s decision not to sell certain equipment previously held for disposal.~~

The following summarizes the restructuring activities from January 1, 2003 to March 31, 2003:

Thousands of dollars	Reserve balance at January 1, 2003		First quarter 2003 charges			Cash payments			Pension and postretirement benefits plan adjustment			Non-cash items			Reserve balance at March 31, 2003
Employee termination benefits	$	14,475	$	1,167		$	(4,004	)	$	(4,037	)	$	(271	)	$	7,330
Postretirement plan curtailment		—		1,152			—			(1,152	)		—			—
Exit costs		5,532		(350	)		(2,081	)		—			—			3,101
Relocation costs		—		716			(716	)		—			—			—
Asset impairment		—		(76	)		—			—			76			—

Total	$	20,007	$	2,609		$	(6,801	)	$	(5,189	)		$(195)		$	10,431

Additional charges related to the 2003 announced actions are expected to be approximately $1 million.

In connection with the plans announced in 2002, the company has ceased print production at its Berea, Ohio facility, and all continuing customer work has been transferred to ~~September 30, 2002:~~

Thousands
of dollars

Reserve balance at January 1, 2002

First quarter
2002 charges

Second quarter
2002
charges

Third quarter 2002 charges

Cash payments

Pension and post-retirement benefits plan adjustment

Non-cash items

Reserve balance at September 30, 2002
Employee termination benefits    $ 25,291 $ 14,808 $ 3,389 $ 7,917 $ (18,024 )    $ (20,714 ) $ —      $ 12,667
Postretirement plan curtailment    —   —   —   8,320 —      (8,320 ) —      —
Exit costs    8,638 2,545 76 739 (5,846 )    —   —      6,152
Relocation costs    —   5,035 7,087 6,477 (18,599 )    —   —      —
Asset impairment    —   4,304 5,473 (744 ) —      —   (9,033 )    —





Total    $ 33,929 $ 26,692 $ 16,025 $ 22,709 $ (42,469 )    $ (29,034 ) $ (9,033 )    $ 18,819

~~Status~~other company facilities. The Berea, Ohio facility was considered held for disposal as of March 31, 2003. Additional charges related to all 2002 announced actions are expected to be approximately $3 million, which are anticipated to be recognized primarily in the second and third quarters of 2003, and relate primarily to employee and equipment relocation. Of a total of 1,798 planned employee terminations related to the 2002 plans, 1,685 have been completed. The remaining terminations, primarily related to workforce reductions announced in the fourth quarter of 2002, are expected to be completed by the end of the ~~restructuring plans:~~

second quarter of 2003.

In connection with the 2001 plans, the company has ceased print production at its St. Petersburg and South Daytona, Florida, ~~Houston, Texas,~~ Des Moines, Iowa, ~~and~~ Old Saybrook, Connecticut and Hamburg Gráfica Editora (Brazil) facilities, and all continuing customer work has been transferred to other company facilities. Additional charges related to the 2001 plans are expected to be ~~minimal, and will primarily relate to relocation costs for employees transferred from closed facilities and equipment transfers.~~minimal. Of a total of ~~2,869~~2,850 planned employee terminations, ~~2,806~~all have been completed. ~~The Houston, Texas facility remains open as a sales and service center.~~ The St. Petersburg and South Daytona, Florida, Des Moines, Iowa, ~~and~~ Old Saybrook, Connecticut and Brazilian facilities ~~are currently being~~were considered held for ~~disposal.~~

In connection with the plans announced in 2002, the company has ceased print production at its Berea, Ohio facility, and customer work has been transferred to other company facilities. The Berea, Ohio facility is currently being held for disposal. Additional charges related to the 2002 plans are expected to be approximately $4 million, which are anticipated to be recognized during the fourth quarterdisposal as of 2002, and relate primarily to employee and equipment relocation. Of a total of 1,123 planned employee terminations related to the 2002 plans, 1,010 have been completed. Substantially all terminations are expected to be completed by DecemberMarch 31, ~~2002.~~

In the third quarter of 2002, the company recognized an $8 million non-cash curtailment loss related to the company’s postretirement benefit plans. The curtailment loss recognized represents the increase in the accumulated postretirement benefit obligation and the recognition of prior service costs related to the reduction in the number of employees due to restructuring.

2003.

As a result of restructuring actions, the company will reduce its workforce by ~~3,992~~4,758 employees, or approximately ~~12.1%~~14% of its workforce, since 2000. As of ~~September 30, 2002,~~March 31, 2003, a total of 4,592 terminations have been completed under the restructuring ~~plans, a total of 3,816 terminations have been completed.~~

plans.

The net book value of assets to be disposed of under the restructuring plans as of ~~September 30, 2002 was $19~~March 31, 2003 of $15 million ~~all of which relate~~related primarily to the Donnelley Print ~~Solutions. Annual depreciation on these assets would have been approximately $4 million.~~Solutions segment. The assets are comprised primarily of land, plant facilities ~~printing presses~~ and related equipment.

These assets have been reviewed under SFAS

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” and reflect the estimated fair value, less costs to sell.

NOTE 11. During the third quarter of 2001, as a result of deteriorating market conditions, the company determined that the carrying value of long-lived assets at one of its subsidiaries in Mexico, Ediciones Eclipse S.A. de C.V. (Eclipse), was impaired based on estimated future undiscounted cash flows. Accordingly, the company recorded a non-cash pretax impairment charge of $12 million ($7 million after-tax, or $0.06 per diluted share) in the third quarter of 2001 to writedown the carrying value of Eclipse’s long-lived assets to fair value. Of the total pretax charge, $10 million related to the writedown of goodwill and $2 million to the writedown of property, plant and equipment.

In the first quarter of 2001, the company recorded a non-cash pretax impairment charge of $2 million in other income (expense) to writedown the carrying values of two Internet-related technology investments recorded using the cost method of accounting. Both investments related to entities that experienced significant solvency issues during the first quarter of 2001, such that the company believed it was probable that the carrying values would not be recovered.

N~~OTE~~ ~~12.~~~~In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,~~~~Business Combinations~~~~, and SFAS No. 142,~~~~Goodwill and Other Intangible Assets.~~SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill not be amortized over an estimated useful life. Instead, goodwill must be assessed for impairment at least annually by applying a fair-value-based test.

Under SFAS No. 142, the company is required to perform transitional impairment tests for its goodwill. During the second quarter of 2002, the company completed the first step of the transitional goodwill impairment test, as required by SFAS No. 142. This test required the company to compare the carrying value of its reporting units to the fair value of these units. If the reporting unit’s fair value is below its carrying value, a potential goodwill impairment exists and the company is required to complete the second step of the transitional impairment test to quantify the amount of the potential goodwill impairment charge. Based on the results of the first step of the transitional impairment test, no impairment losses were identified. Accordingly, the company is not required to complete the second step of the transitional impairment test. The annual test of goodwill and intangible assets for impairment will be performed during the fourth quarter of 2002.

~~R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)~~

In accordance with SFAS No. 142, effective January 1, 2002, the company discontinued its amortization of goodwill. The impact of discontinuing amortization of goodwill on net income and basic and diluted earnings per share for the three and nine months ended September 30, 2002 and 2001 was as follows:

Three Months Ended September 30

Nine Months Ended
September 30
Thousands of dollars, except per share data

2002

2001

2002

2001
Net Income:
Reported net income    $ 47,742    $ 42,042    $ 94,178    $ 62,694
Goodwill amortization, net of tax    —      3,294    —      10,193




Adjusted net income    $ 47,742    $ 45,336    $ 94,178    $ 72,887




Basic Earnings Per Share:
Reported basic earnings    $ 0.42    $ 0.36    $ 0.83    $ 0.53
Goodwill amortization, net of tax    —      0.03    —      0.09




Adjusted basic earnings    $ 0.42    $ 0.39    $ 0.83    $ 0.62




Diluted Earnings Per Share:
Reported diluted earnings    $ 0.42    $ 0.36    $ 0.82    $ 0.53
Goodwill amortization, net of tax    —      0.03    —      0.09




Adjusted diluted earnings    $ 0.42    $ 0.39    $ 0.82    $ 0.62

Goodwill associated with each of the company’s business segments and changes in those amounts during the period were as follows:

Thousands of dollars

Net Book Value at January 1, 2002

Foreign Exchange/Other

Disposition

Net Book Value
at September 30, 2002
Donnelley Print Solutions      $ 80,552      $ —      $ —        $ 80,552
Logistics Services      150,344      —      —        150,344
Other(1)      81,717      (3,787 )    (1,800 )      76,130




     $ 312,613      $ (3,787 )    $ (1,800 )      $ 307,026

Thousands of dollars	Net Book Value at January 1, 2003		Foreign Exchange/Other			Net Book Value at March 31, 2003
Donnelley Print Solutions	$	80,552	$	—		$	80,552
Logistics Services		149,312		27			149,339
Financial Services		23,495		—			23,495
Other(1)		54,815		(1,286	)		53,529

	$	308,174	$	(1,259	)	$	306,915

(1)

Represents other operating segments of the company, including ~~Financial Services,~~ RRD Direct, International and Other.

Other intangible assets primarily ~~consists~~consist of the costs of acquiring print contracts and volume guarantees that are amortized ~~primarily~~ as a reduction to net sales over the periods in which benefits will be realized.

The ~~aggregate~~ amortization expense for intangible assets subject to amortization was $6$5 million and $7 million for the three months ended ~~September 30,~~March 31, 2003 and 2002, respectively.

NOTE 12. On March 6, 2003, the company 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 ~~2001, respectively,~~a dedicated fleet of vehicles to provide business-to-business and ~~$20 million~~business-to-consumer package distribution services. The allocation of the purchase price is preliminary pending completion of valuations of the assets acquired by independent valuation firms and ~~$23 million for~~final determination of the ~~nine months ended September 30, 2002 and 2001, respectively.~~

acquired liabilities.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

NOTE 13. As permitted under SFAS No. 123,Accounting for Stock-Based Compensation, the company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations. Stock options granted during the three months ended March 31, 2003 and 2002 were exercisable at prices equal to the fair market value of the company’s common stock on the dates the options were granted; accordingly, no compensation expense has been recognized for the stock options granted. Had compensation cost been determined using the fair value recognition provisions of SFAS No. 123 and related amendments, the company’s net income and basic and diluted earnings per share would have been as follows:

	Three Months Ended March 31,
Thousands of dollars, except per share data	2003			2002
Net income, as reported	$	5,702		$	22,659
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,622	)		(2,609	)

Pro forma net income	$	3,080		$	20,050

Earnings per share:
Basic—as reported	$	0.05		$	0.20
Basic—pro forma		0.03			0.18
Diluted—as reported		0.05			0.20
Diluted—pro forma		0.03			0.17

The fair value of each option granted in the respective period is estimated at the date of grant using the Black-Scholes option-pricing model.

NOTE 14.Effective January 1, ~~2002,~~2003, the company adopted SFAS No. ~~144,~~146,Accounting for ~~Impairment of Long-Lived Assets~~Costs Associated with Exit or Disposal Activities, which ~~replaces SFAS~~rescinds Emerging Issues Task Force (EITF) Issue No. ~~121,~~94-3,~~Accounting~~“Liability Recognition for ~~the Impairment of Long-Lived Assets~~Certain Employee Termination Benefits and Other Costs to ~~be Disposed Of.~~Exit an Activity (Including Certain Costs Incurred in a Restructuring).” SFAS No. ~~144 establishes~~146 requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a ~~single accounting model for the~~commitment to an exit or disposal plan. Examples of ~~long-lived assets~~costs covered by ~~sale~~this statement include lease termination costs and ~~resolves significant implementation issues related to SFAS No. 121, including defining when an asset can be considered held-for-sale and the measurement of future cash flows. The adoption~~certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Adoption of this ~~standard~~statement did not have a material impact on the company’s financial position, results of operations or cash ~~flows for the three or nine months ended September 30, 2002.~~flows.

N~~OTE~~ ~~14.~~In ~~June 2002,~~January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 46“Consolidation of Variable Interest Entities, An Interpretation of APB No. 51.” FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights (variable interest entities or VIE) and how to determine when and which business enterprises should consolidate the VIE. This new model for consolidation applies to entities (1) where the equity investors (if any) do not have a controlling financial interest or (2) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

applies immediately to VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. The company is required to adopt FIN 46 in the third quarter of 2003 for arrangements entered into prior to January 31, 2003. The company’s risk of loss related to equity investments, including investments in affordable housing, is generally limited to the carrying value of these investments, which was approximately $120 million at March 31, 2003. The company is evaluating its investments to determine which investment, if any, would be impacted by the adoption of FIN 46.

As of December 31, 2002, the company adopted the disclosure requirement of SFAS No. ~~146,~~148,Accounting for ~~Costs Associated with Exit or Disposal Activities~~Stock Based Compensation—Transition and Disclosure.. This statement ~~requires~~amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As of March 31, 2003, the company has elected not to change to the fair value based method of accounting for stock-based employee compensation. The company accounts for employee stock options under APB No. 25, under which the company did not recognize any compensation cost for the three months ended March 31, 2003 and 2002. See Note 13 to the condensed consolidated financial statements for the related disclosures required under SFAS No. 148.

In November 2002, the EITF reached a consensus on EITF 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables.” EITF 00-21 establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the right of return for the delivered item. EITF 00-21 is effective for revenue agreements entered into for fiscal periods beginning after June 15, 2003 with early adoption permitted. The company is currently evaluating the impact of EITF 00-21 on its financial position, results of operations and cash flows.

In November 2002, the FASB issued FIN 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for ~~costs associated with an exit or disposal activity shall be recognized and measured initially at~~the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in ~~the period in which the liability is incurred, rather than at the date of~~its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a ~~commitment~~prospective basis to ~~the exit~~guarantees issued or ~~disposal plan. This statement will be applied prospectively to exit or disposal activities that are initiated by the company~~modified after December 31, 2002.

N~~OTE~~ ~~15.~~In February 2002, the company filed a Form S-3 Registration Statement with the Securities and Exchange Commission under which it may offer, on a delayed basis, up to $425 million of debt securities. As of September 30, 2002, $500 million of debt securities remained available for issuance by the company under effective Form S-3 registration statements.

N~~OTE~~ ~~16.~~In October 2002, the company replaced its revolving credit facilities with two new revolving credit facilities. The new facilities consist of a short-term facility that matures in October 2003 and provides for borrowings of up to $175 million and a long-term facility that matures in October 2007 and also provides for borrowings of up to $175 million. The company pays an annual commitment fee on the total unused portion of the credit facilities of 0.07% for the short-term facility and 0.09% for the long-term facility. The credit facilities bear interest at variable rates based on the current LIBOR rate and the company’s credit rating. As of November 12, 2002 there have been no borrowings under these credit facilities.

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

~~R.R.~~

RR Donnelley ~~& Sons Company~~ (NYSE:DNY) ~~provides comprehensive,~~prepares, produces and delivers integrated communications services ~~that efficiently~~across multiple channels for content owners such as publishers, merchandisers and ~~effectively produce, manage~~telecommunications companies, as well as capital markets and ~~deliver our customers’ content, regardless of the communications medium.~~diversified financial services companies. While our print capabilities remain the foundation of the company, our recent focus on expanding ~~the~~our range of offerings with value-added services allows us to create additional value.

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

Content creation—to provide creative design services to maximize the impact of communications and improve response rates. In addition to in-house capabilities, alliances with best-in-class providers complement our service offerings.

Digital asset management—to help our customers leverage their content to reach end-users through multiple marketing channels. Through our premedia ~~technology~~technologies services, we digitally capture content, convert it to the appropriate format and channel it to multiple communications media, including print and the Internet.

Production—to drive results for our customers cost-effectively through print or the Internet. Our manufacturing operations around the world offer a full range of capabilities and are networked to quickly produce large printing jobs with identical specifications. We also are able to version printed content to reach targeted audiences.

Distribution—to deliver our customers’ words and images efficiently and reliably through print or the Internet. ~~R.R.~~RR Donnelley Logistics (Donnelley Logistics) delivers printed products and packages primarily to the U.S. Postal Service (USPS), saving our customers significant time and money. We also offer a full range of services to deliver value, maximize content effectiveness, enhance our clients’ businesses and build their customer relationships via the Internet.

Our ~~138-year~~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~~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.~~end markets. We manufacture products with the operational goal of optimizing the efficiency of the common manufacturing and distribution ~~platform.~~platforms. As a result, most plants produce work for customers in two or three of our ~~end-markets.~~

end markets.

The following describes the ~~end-markets~~end markets we serve:

Magazines, Catalogs and Retail ~~R.R.~~RR Donnelley is a leader in the North American magazine, catalog and retail ~~advertising insert~~ markets. These markets are characterized by demand for large, cost-effective print runs with opportunity for differentiation among competitors throughservices such as Premedia Technologies and Donnelley Logistics. Our U.S. customers include the majority of the top ~~10magazine~~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 from 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 ~~R.R.~~RR Donnelley is the worldwide leader in the directory market. We serve the global directory needs of telecommunications providers, including three of the four U.S. Regional Bell Operating Companies ~~independent telephone companies such as Sprint,~~(SBC, Verizon and Qwest), independent directory publishers such as ~~Yellow Book,~~Feist, RHD, White Directories and Yell USA and leading international telecommunications providers such as Yell ~~KPN~~ and Shanghai Telephone. Directory contracts typically span five to 12 years, with our current major contracts expiring between ~~2004~~2006 and ~~2013.~~2015.

Book Publishing Services ~~R.R.~~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% ofThe New York Times’adult best-seller titles. We also print approximately one-third of all textbooks used in classrooms in the U.S.

PremediaTechnologies ~~R.R.~~RR Donnelley’s Premedia Technologies 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 ~~our~~ customers’ creative processes with today’s technologies. Facilities located in key markets provide close customer contact with nationwide scaleup capabilities. Premedia Technologies’ services are used by leading-edge companies in the advertising, ~~agency,~~ catalog, corporate, magazine, retail and telecommunications markets.

~~R.R. Donnelley Logistics~~ R.R. Donnelley is one of the largest users of the USPS, handling approximately 19 billion print and mail pieces, and over 140 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.

In February 2000, Donnelley Logistics extended its services by adding package delivery (package logistics) to its established business of delivering printed material (print logistics). By leveraging the USPS infrastructure to make the final delivery to households and businesses, the company provides more economical logistics services. Through “zone skipping,” greater postal discounts are obtained, and we provide more timely, reliable delivery for customers.

In addition to delivering packages and printed material, Donnelley Logistics also provides package return services and 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.~~

Financial Services ~~R.R.~~RR Donnelley Financial, 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 ~~and pharmaceutical~~ companies.

Our global service network, manufacturing platform and distribution system give us unique advantages in servicing the capital markets, particularly for large financial ~~deals. For example, we produced 40% of the top 25~~deals, including initial public offerings ~~in 2001, as well as three of the top five insurance demutualizations since 2000, including the largest in 2001. Additionally, we are a leading provider of mutual fund compliance communications.~~and mergers. To meet our clients’ needs for accuracy, speed, confidentiality and convenience, we have developed technology for virtual deal management and ~~Internet-enabled inventory management,~~ are experts in EDGAR HTML ~~filings~~filings. In addition, in 2002, we introduced NET.Filer, an online self-service application designed to help clients meet the accelerated Form 4 filing requirements mandated by the U.S. Securities and ~~have integrated database management with content assembly, digital output and multiple-media delivery.~~

Exchange Commission.

Our customized communications solutions business enables investment management, banking, insurance and managed care clients to manage and produce their stakeholder communications, from compliance documents to marketing materials, more efficiently. We provide an integrated suite of information management, content assembly and delivery solutions designed to give our clients closer and longer-lasting relationships with their customers. These include services which help our customers leverage the power of the Internet in communicating with their audiences. In markets that increasingly see demand for more precise communication with individuals, we believe customized communications solutions are, and will continue to be, a significant growth opportunity for the company.

RRD Direct RRD Direct offers expertise in a wide range of direct marketing print and related ~~services.~~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 ~~international~~ operations in Latin America, ~~Poland~~Europe and ~~China,~~Asia, where we produce magazines,books and telephone directories, are reported as ~~“International.”~~Other. Financial Services’ international revenue is included in ~~“Financial~~Financial Services.” Directory revenues from England are included in ~~“Telecommunications.”~~Telecommunications.

~~Critical Accounting Policies~~

~~The preparation~~RR Donnelley Logistics RR Donnelley is one of ~~financial statements in conformity with generally accepted accounting principles requires~~ the ~~company’s management~~largest users of the USPS, handling over 20 billion print and mail pieces, and over 160 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.

Donnelley Logistics continues to focus on growing the package delivery part of its operation, which complements its long-standing core competency of print logistics. We leverage our national network as well as the USPS infrastructure 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 U.S. Securities and Exchange Commission has defined a company’s most critical accounting policies as the ones 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 critical accounting policies and judgments addressed below. For information on accounting policies, refer to the “Summary of Significant Accounting Policies” footnote on page F-6 in the 2001 Annual Report on Form 10-K. 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~~

The company recognizes print revenue when title and risk of loss transfers to the customer. Approximately 70% of the company’s business is under contract. Contracts typically specify F.O.B. shipping point terms. The company recognizes revenue upon final shipment for a print job and not on a partial shipment basis or percentage-of-completion 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, the company recognizes revenue upon final delivery ~~of the product or upon completion of the service performed.~~

~~Revenues related~~ to ~~the company’s Premedia Technologies operations, which include digital content management such as photography, color~~households and businesses. Through “zone skipping,” greater postal discounts are obtained, and we provide more economical, reliable and easy-to-use delivery services and page production, are recognized in accordance with the terms of the contract, typically upon shipment of the completed product if sold as part of a final printed product, or once the service has been performed and accepted by the customer if sold separately (e.g., digital photography). With respectfor our customers.

In addition to ~~Donnelley Logistics, which includes delivery of~~delivering packages and printed material, ~~the company recognizes revenue upon completion~~Donnelley Logistics also provides package returns services and expedited distribution of ~~the delivery~~time-sensitive and secure material (expedited services). Together, these services ~~it provides.~~

~~Accounting for Goodwill and Certain Other Intangibles~~

~~In assessing the recoverability of the company’s goodwill~~help merchandisers 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, the company may be required to record impairment charges not previously recorded. On January 1, 2002, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142,~~Goodwill and Other Intangible Assets,~~~~and was required to assess its goodwill and intangible assets with indefinite lives for impairment upon adoption, on an interim basis if conditions require,~~businesses manage their supply chains more effectively and at a minimum, annually using a two-step process that begins with an estimation of the fair value of the reporting unit. The first test is a screen for the potential impairments, and the second step measures the amount of any impairment. These tests utilize fair value amounts that are developed by discounting estimated future cash flows developed by the company’s management. We completed the transitional test in the second quarter of 2002. The annual test of goodwill and intangible assets for impairment will be performed during the fourth quarter of 2002.

~~Commitments and Contingencies~~

The company is subject to lawsuits, investigations and other claims related to environmental, employment and other matters. 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 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 4 to the condensed consolidated financial statements for a description of certain legal proceedings.

~~Long-lived Assets~~

~~The company is required to assess potential impairments to its 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

lower cost.

value is generally measured by discounting estimated future cash flows developed by the company’s 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. The company’s long-lived assets primarily include property, plant and equipment, investments in affordable housing, goodwill and other intangible assets (primarily the costs of acquiring print contracts and volume guarantees that are amortized over the periods in which benefits will be realized).

~~Allowance for Doubtful Accounts~~

The company makes judgments regarding collectibility of outstanding receivables and provides appropriate allowances when collection becomes doubtful. Provisions are made based upon a review of specific customers. Provisions are applied at differing rates taking into consideration the age of the receivable, the creditworthiness and liquidity of the customer, historical collection experience and current economic trends.

~~Accounting for Income Taxes~~

Significant judgment is required in determining the effective tax rate used by the company. 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. As part of these audits, the company’s tax positions can be questioned. Although the company believes that its estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in its historical income tax provision and accruals.

~~Other Matters~~

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.” 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.

Results of Operations

The following is a discussion of the results of operations for the ~~third~~first quarter ~~and first nine months~~ of ~~2002~~2003 compared with the ~~third~~first quarter ~~and first nine months~~ of ~~2001,~~2002, and a discussion of the changes in financial condition during the first ~~nine~~three months of ~~2002.~~

2003.

Beginning January 1, 2003, the company revised its segment reporting to reflect RR Donnelley Financial (Financial Services) as a separate business segment. The company’s Financial Services operations were previously reported within the Other business segment.

Items Affecting Comparability of ~~the Third Quarter of~~2003 with 2002 ~~with the Third Quarter of 2001~~

The following table summarizes significant items ~~affect~~affecting comparability of the ~~condensed~~ consolidated statements of income and segment operating ~~results:~~

results for the first three months of 2003 and 2002.

	Three Months Ended March 31
	2003									2002
	Earnings before Income Taxes			Net Income			Per Diluted Share			Earnings before Income Taxes			Net Income			Per Diluted Share
	Dollars in thousands, except per-share data
As reported	$	9,273		$	5,702		$	0.05		$	(11,653	)	$	22,659		$	0.20


Included in earnings from operations:
Restructuring and impairment charges	$	(2,609	)	$	(1,618	)	$	(0.01	)	$	(26,692	)	$	(16,816	)	$	(0.14	)
By-product revenues		10,962			6,796			0.06			8,714			5,490			0.05
Gain on sale of assets		1,945			1,206			0.01			—			—			—
Insurance recovery related to 9/11		2,047			1,269			0.01			—			—			—
Provision for doubtful accounts		(9,928	)		(6,155	)		(0.05	)		(2,959	)		(1,864	)		(0.02	)
Pension and postretirement benefit income		1,260			781			—			5,718			3,602			0.03

		3,677			2,279			0.02			(15,219	)		(9,588	)		(0.08	)
Included in other income (expense):
Affordable housing amortization		(4,000	)		(2,480	)		(0.02	)		(2,700	)		(1,701	)		(0.01	)
COLI-related expenses upon policy surrender		—			—			—			(4,883	)		(3,076	)		(0.03	)

Included in tax benefit (provision):
Reversal of excess COLI tax reserves		—			—			—			—			30,000			0.26

Total items affecting comparability	$	(323	)	$	(201	)	$	—		$	(22,802	)	$	15,635		$	0.14

~~Unusual items~~~~—restructuring~~Restructuring and impairment: ~~Third~~Operating results for the first quarter of 2003 and 2002 ~~included pretax~~were affected by the following restructuring and impairment charges of $23 million ($14 million after-tax, or $0.12 per diluted share). During the third quarter of 2002, we incurred certain costs associated with defined exit activities from previously announced restructuring plans, as well as several additional workforce reductions. Included initems:

2003 included pretax restructuring and impairment charges of $2.6 million ($1.6 million after-tax, or $0.01 per diluted share). The 2003 pretax charge included a $1 million curtailment loss on our postretirement benefit plans, costs associated with newly-announced consolidations and workforce reductions, and costs associated with defined exit activities from previously announced restructuring plans. Restructuring and impairment charges for 2003 by segment were as follows: Donnelley Print Solutions: $0.2 million; Financial Services: $0.6 million; Corporate: $1.1 million and Other: $0.7 million.

2002 included pretax restructuring and impairment charges of $27 million ($17 million after-tax, or $0.14 per diluted share). The 2002 pretax charge included $15 million to close our Berea, Ohio facility as well as additional workforce reductions at several other facilities. Restructuring and impairment charges for 2002 by segment were as follows: Donnelley Print Solutions: $23 million; Corporate: $1 million and Other: $3 million.

By-product revenues: 2003 included pretax income of $11 million for by-product revenues compared with $9 million in 2002. By-product revenues are recorded as a reduction in our cost of materials, the majority of which relates to the Donnelley Print Solutions segment.

Gain on sale of assets: 2003 included a $2 million pretax gain from the sale of our Casa Grande, Arizona manufacturing facility, included in the ~~third quarter was an $8 million non-cash provision~~Donnelley Print Solutions segment.

Insurance recovery related to 9/11:2003 included a $2 million pretax gain from the ~~curtailment loss on our~~collection of insurance proceeds from claims related to September 11th, included in the Financial Services segment.

Provision for doubtful accounts:2003 included a $10 million pretax provision for bad debt compared with a $3 million provision in 2002. The increase between years was driven by the bankruptcy filing of a major domestic catalog customer and a financially insolvent directory publishing customer in Latin America.

Pension and postretirement benefit ~~plans. Third quarter 2002 pretax restructuring and impairment charges by segment were as follows: Donnelley Print Solutions: $7 million; Corporate: $13 million and Other: $3 million.~~

~~Third quarter 2001~~income: 2003 included pretax ~~restructuring~~income of $1 million compared with $6 million in 2002. The decline between years is primarily a result of changes in our assumptions for expected returns on plan assets and ~~impairment charges~~our discount rate.

Affordable housing write-downs: 2003 included a pretax charge of ~~$20~~$4 million ~~($12 million after-tax, or $0.10 per diluted share). The costs include a reduction in~~to write down the carrying value of ~~long-lived assets at one~~our investments in affordable housing compared with a pretax charge of $3 million in 2002. The write-downs reflected declines in the underlying estimated fair value of our ~~subsidiaries~~affordable housing investments and were included in ~~Mexico, Ediciones Eclipse S.A. de C.V. (Eclipse). The non-cash pretax impairment charge was $12~~the Corporate segment.

COLI-related expenses upon policy surrender: 2002 included a $5 million ~~($7 million after-tax, or $0.06 per diluted share) to writedown the carrying value of Eclipse’s long-lived assets to fair value. Of the total~~ pretax charge ~~$10 million~~for expenses related to the ~~writedown~~surrender of ~~goodwill and $2 million to~~certain corporate-owned life insurance (COLI) policies in conjunction with our settlement with the writedown of property, plant and equipment. The remaining charges in the quarter related to certain costs associated with defined exit activities from previously announced restructuring plans, as well as additional workforce reductions. Third quarter 2001 pretax restructuring and impairment charges by segment were as follows: Donnelley Print Solutions: $8 million and Other: $12 million.

~~For a further description of restructuring and impairment activities~~Internal Revenue Service (IRS) for ~~the third quarter of 2002 and cumulative activity since the initiation of the restructuring plans,~~disputed COLI deductions; see Note 107 to the condensed consolidated financial ~~statements and~~statements.

Reversal of excess COLI tax reserves: 2002 included an after-tax benefit of $30 million from the ~~“Restructuring and Impairment” footnote on page F-9 in~~reversal of excess tax reserves related to our settlement with the ~~2001 Annual Report on Form 10-K.~~

~~Adoption of New Accounting Standards:~~~~As discussed in~~IRS for disputed COLI deductions; see Note 127 to the condensed consolidated financial ~~statements, the company adopted SFAS No. 142,~~~~Goodwill and Other Intangible Assets~~ as of January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized after the date of adoption. SFAS No. 142 does not permit the restatement of previously issued financial statements, but does require the disclosure of prior results adjusted to exclude amortization expense related to goodwill and intangible assets which are no longer being amortized. Third quarter 2001 earnings (loss) from operations included $4 million ($3 million after-tax, or $0.03 per diluted share) of goodwill amortization expense no longer being recorded under SFAS No. 142. Goodwill amortization expense by segmentstatements.

Consolidated Results—First Quarter 2003 Compared with First Quarter 2002

Net sales for the ~~third~~first quarter of ~~2001 was as follows: Donnelley Print Solutions: $1 million; Logistics Services: $2 million and Other: $1 million.~~

~~The following table summarizes income (expense) items affecting comparability:~~

Three Months Ended September 30

Thousands of dollars, except per share data

2002

2001

Earnings before Income Taxes

Net Income

Per Diluted Share

Earnings before Income Taxes

Net Income

Per Diluted Share

Restructuring and impairment charges $ (22,709 ) $ (13,627 ) $ (0.12 )    $ (19,860 ) $ (12,214 ) $ (0.10 )
Impact of prior year goodwill amortization —   —   —      (4,350 ) (3,294 ) (0.03 )



Total $ (22,709 ) $ (13,627 ) $ (0.12 )    $ (24,210 ) $ (15,508 ) $ (0.13 )

~~Consolidated Results—Third Quarter 2002 Compared with Third Quarter 2001~~

~~Consolidated net sales~~2003 decreased ~~$111~~$20 million, or ~~8.6%~~1.8%, to ~~$1,177~~$1,074 million compared with ~~$1,288~~$1,094 million in the ~~third~~first quarter of ~~2001,~~2002, driven by the decline in net sales of our Donnelley Print Solutions segment of ~~10.0%.~~6.6%, partially offset by increased net sales within Logistics Services. Net sales of our Logistics Services segment were up ~~1.5%~~21.9% between years, ~~with an 8.4%~~which included a 31.9% increase in net sales for the package logistics business ~~partially offset by~~and a ~~decrease of 8.8%~~7.0% increase in net sales from print logistics.

An acquisition contributed an incremental $5 million in net sales for Logistics Services 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 Services segment, value-added revenue represents

net sales less the cost of transportation and postage. By measuring value-added revenue, we eliminate the ~~effect~~effects of material prices and transportation costs, as well as mix issues related to customer-furnished versus Donnelley-furnished paper.

Management, therefore, views value-added revenue as a better 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 decreased ~~$55~~$14 million, or ~~7.5%~~2.1%, to ~~$684~~$618 million compared with ~~$740~~$632 million in the ~~third~~first quarter of ~~2001,~~2002, primarily driven by the decline in value-added revenue of ~~the~~ Donnelley Print Solutions ~~segment of 6.6%.~~and Financial Services. Donnelley Print Solutions’ percentage decline in value-added revenue was less than the decline in net sales, primarily due to higher customer-furnished paper ~~during 2002.~~and higher by-product revenues and purchase discounts in 2003. Value-added revenue of our Financial Services segment declined 13.4% between years, primarily due to a decline in domestic capital markets activity and lower volumes from customized communications solutions. Value-added revenue of our Logistics Services segment increased ~~6.6%~~17.2% between years, primarily due to a ~~16.7%~~26.2% increase in value-added revenue for package ~~logistics driven by higher postage discounts due to deeper penetration of the postal system, partially offset by a 5.4% decrease within the print logistics business. In addition,~~logistics. An acquisition contributed an incremental $3 million in value-added revenue for package logistics between years.

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 cost of materials. During the ~~third~~first quarter of ~~2002,~~2003, we recognized a reduction in cost of materials of ~~$14~~$11 million from by-product revenues, compared with ~~$10~~$9 million a year ago.

Gross profit as a percentage of net sales was ~~20.6%~~15.7% in the ~~third~~first quarter of ~~2002~~2003 compared with ~~18.4%~~15.4% in the ~~third~~first quarter of ~~2001. Gross profit for our~~2002. The improvement was driven primarily by higher margins within Donnelley Print Solutions ~~segment~~and Financial Services. Donnelley Print Solutions’ gross profit margin was ~~favorable to~~affected positively in the ~~prior year due to~~first quarter of 2003 by higher by-product revenues and purchase discounts, the impact of restructuring savings and productivity initiatives ~~as well as gains~~and a $2 million gain on ~~the~~ sale of a ~~facility in York, England ($6 million)~~closed facility. Despite lower net sales between years, Financial Services’ gross profit margin increased for the first quarter of 2003, as a result of cost reduction initiatives, restructuring savings and ~~miscellaneous equipment ($1 million). Gross~~a $2 million gain from an insurance settlement related to September 11th. Logistics Services’ gross profit ~~for our Logistics Services segment was basically flat as compared~~margin decreased between years, primarily due to ~~the prior year quarter after excluding the impact of the elimination of goodwill amortization in 2002.~~

lower margins within package logistics, partially offset by higher margins within print logistics.

Selling and administrative expenses ~~decreased $1~~increased $8 million, or ~~0.9%~~6.3%, to ~~$134~~$139 million compared with ~~$135~~$131 million in the ~~third~~first quarter of ~~2001.~~2002. This ~~decrease~~increase was driven by ~~reductions~~an additional $7 million provision for doubtful accounts, of which $5 million related to a 2003 bankruptcy filing by a major domestic catalog customer, and $2 million for a financially insolvent directory publishing customer in volume-based incentives (sales commissions), savings from restructuring actions and lower spending on complementary businesses, partially offset by higher management incentive compensation expense and lower benefit plan earnings.Latin America. Selling and administrative expenses as a percentage of net sales was ~~11.4%~~12.9% in the ~~third~~first quarter of ~~2002~~2003 compared with ~~10.5%~~11.9% in the ~~third~~first quarter of ~~2001.~~

2002.

Net interest expense decreased ~~10.1%~~17.8% to ~~$17~~$13 million in the ~~third~~first quarter of ~~2002,~~2003, compared with ~~$19~~$15 million in the ~~third~~first quarter of ~~2001,~~2002, primarily due to lower effective interest rates on outstanding ~~debt.~~debt and lower average outstanding debt levels. Other ~~income,~~expense, net, in the ~~third~~first quarter of ~~2002~~2003 was $6$5 million compared with $5$7 million in the ~~third~~first quarter of ~~2001. Third~~2002. First quarter ~~2002~~2003 other ~~income,~~expense, net, included ~~an increase of $4 million in earnings from equity-based investments between years,~~lower COLI expenses ($5 million) (see Note 7 to the condensed consolidated financial statements for additional information) and lower foreign currency transaction losses ($2 million), partially offset by ~~$3 million of~~higher affordable housing amortization ($1 million) and lower miscellaneous ~~income.~~

income ($4 million).

On April 1, 2002, we reached a settlement agreement with the IRS regarding our deductions for interest on loans borrowed against COLI programs (see Note 7 to the condensed consolidated financial statements for additional information). We had previously established reserves for the COLI-related

exposure, and as the settlement was less than the established reserves, we recorded a one-time tax benefit ($30 million after-tax; $0.26 per diluted share) during the first quarter of 2002.

Earnings before income taxes in the ~~third~~first quarter of ~~2002~~2003 were ~~$75~~$9 million compared with ~~$68~~a loss of $12 million in ~~2001.~~2002. Earnings before income taxes included ~~$23~~$3 million and ~~$20~~$27 million in restructuring and impairment charges for the three months ended ~~September 30,~~March 31, 2003 and 2002, ~~and 2001,~~ respectively. Net income was ~~$48 million, up~~ $6 million, down $17 million from ~~$42~~$23 million in ~~2001. Diluted earnings~~2002. 2002 included a one-time tax benefit ($30 million after-tax; $0.26 per ~~share~~diluted share) for the reversal of ~~$0.42 increased $0.06 from $0.36 in 2001.~~COLI-related tax reserves. The effective tax rate for the ~~third~~first quarter of ~~2002~~2003 was ~~36.1%~~38.5% compared with ~~38.5%~~37.0% in ~~2001.~~2002, excluding the one-time tax benefit described above. The ~~2002~~2003 effective tax rate is ~~lower~~higher than ~~2001~~2002 primarily due to the ~~company’s~~ settlement with the IRS surrounding the ~~company’s~~ COLI ~~program (see Note 7 to the condensed consolidated financial statements).~~

program. Diluted earnings per share of $0.05 decreased $0.15 from $0.20 in 2002.

~~The following table shows the trends in net sales and value-added revenue by end-market:~~

~~Third Quarter Ended September 30~~

Net Sales

Value-Added Revenue

Thousands of dollars

2002

2001

% Change

2002

2001

% Change

Magazines, Catalogs and Retail $ 387,643 $ 446,579    (13.2% )    $ 245,113 $ 276,686    (11.4% )
Book Publishing Services 193,882 199,505    (2.8% )    137,003 136,909    0.1%
Telecommunications 158,756 174,162    (8.8% )    81,158 79,116    2.6%
Premedia Technologies 31,010 36,339    (14.7% )    31,016 36,339    (14.6% )





Donnelley Print Solutions
$ 771,291 $ 856,585    (10.0% )    $ 494,290 $ 529,050    (6.6% )
Logistics Services
192,896 190,059    1.5%    45,089 42,307    6.6%
Financial Services 93,482 117,233    (20.3% )    78,393 98,819    (20.7% )
RRD Direct 33,828 46,148    (26.7% )    20,586 25,355    (18.8% )
International(1) 85,783 77,101    11.3%    45,983 40,569    13.3%
Other —   1,111    N/M    —   3,400    N/M





Total Other
213,093 241,593    (11.8% )    144,962 168,143    (13.8% )





Total
$ 1,177,280 $ 1,288,237    (8.6% )    $ 684,341 $ 739,500    (7.5% )

~~(1)~~

~~Includes Latin America, Poland and China. Other international locations are included within the respective end-market.~~

Operating Results by Business Segment—~~Third~~First Quarter ~~2002~~2003 Compared with ~~Third~~First Quarter ~~2001~~2002

As discussed more fully in Note 6 to the condensed consolidated financial statements, we have ~~two~~three reportable segments: Donnelley Print Solutions, Logistics Services and ~~Logistics~~Financial Services.

Operating results by business segment in the first quarter of 2003 compared with the first quarter of 2002 are as follows:

Three months Ended March 31

	Net Sales						Value-Added Revenue
Thousands of dollars	2003		2002		% Change		2003		2002		% Change
Magazines, Catalogs and Retail	$	362,535	$	386,667	(6.2	%)	$	229,583	$	241,128	(4.8	%)
Book Publishing Services		153,066		154,670	(1.0	%)		110,861		111,534	(0.6	%)
Telecommunications		124,101		143,261	(13.4	%)		64,257		64,107	0.2	%
Premedia Technologies		27,271		29,736	(8.3	%)		27,272		29,736	(8.3	%)

Donnelley Print Solutions		666,973		714,334	(6.6	%)		431,973		446,505	(3.3	%)

Logistics Services		209,808		172,079	21.9	%		51,556		43,984	17.2	%

Financial Services		90,255		102,875	(12.3	%)		75,277		86,960	(13.4	%)

RRD Direct		29,146		33,978	(14.2	%)		17,782		18,824	(5.5	%)
Other(1)		77,635		70,384	10.3	%		41,482		35,272	17.6	%

Total Other		106,781		104,362	2.3	%		59,264		54,096	9.6	%

Total	$	1,073,817	$	1,093,650	(1.8	%)	$	618,070	$	631,545	(2.1	%)

Cost of materials and transportation		455,747		462,105

Value-added revenue	$	618,070	$	631,545

(1)

Includes International (Latin America, Europe and Asia) and Other.

~~Net Sales~~Donnelley Print Solutions

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

	Quarter Ended March 31
	2003			2002
	Earnings before Income Taxes
Thousands of dollars
As reported	$	45,707		$	27,109


Included in earnings from operations:
Restructuring and impairment charges	$	(169	)	$	(23,122	)
By-product revenues		9,502			7,487
Gain on sale of assets		1,800			—

Total items affecting comparability	$	11,133		$	(15,635	)

Net sales for the Donnelley Print Solutions segment decreased ~~$85~~$47 million in the ~~third~~first quarter of ~~2002,~~2003, or ~~10.0%~~6.6%, from a year ago. ~~Third~~The economic slowdown since 2000 has generated excess industry capacity from reduced volume levels and higher customer bankruptcies resulting in increased competition and pricing pressures. First quarter 2003 net sales for Magazines, Catalogs and Retail decreased ~~13.2%~~6.2% between years, which reflected ~~volume decreases and~~primarily price deterioration ~~across all major markets. The continued economic slowdown during 2002 has~~and a mix shift to lower-priced work. Pricing pressures continue to impact the industry and have resulted in lower ~~volume and more customer bankruptcies within our Catalog and Retail markets, and lower advertising pages in both trade and consumer magazines.~~contract prices that continue to cycle through. The net sales decline between years in Premedia Technologies is driven by these same factors. Depressed volumes in these markets are driving increased competition and pricing pressures, and certain customer work which has been lost due to bankruptcy or other factors has been replaced with lower priced work. Book Publishing Services’ ~~third~~first quarter net sales decreased ~~2.8%~~1.0% between years primarily due to ~~decreases~~a shift in timing of work for the education ~~religious, and specialty markets and more customer-furnished paper, partially offset by increases in~~market to the ~~consumer market. Third~~second quarter ~~2002~~of 2003. First quarter 2003 net sales for Telecommunications were down ~~8.8% between years due to a shift to more customer-furnished paper.~~

Third quarter net sales for the Logistics Services segment increased $3 million, or 1.5%, from a year ago. Third quarter net sales for the package logistics business were up 8.4% between years. Unit volumes for package logistics were up 27.3%, which were partially offset by a mix change towards lighter weight, lower priced packages. Third quarter net sales for the print logistics business were down 8.8% between years consistent with the sales declines in our other print-related businesses.

~~Financial Services’ third quarter net sales decreased $24 million, or 20.3%, from a year ago, driven by volume decreases in both the U.S. and international capital markets, as well as customized~~

communications solutions. We derived 19.4% and 14.3% of our capital markets net sales from international in the third quarter of 2002 and 2001, respectively. For the third quarter of 2002, U.S. capital markets and international capital markets net sales were down 33.9% and 4.5%, respectively. Within Financial Services, third quarter net sales from customized communications solutions decreased 12.9% between years. Third quarter net sales for RRD Direct were down 26.7%13.4% between years primarily due to ~~lower volumes, price declines and~~ more customer-furnished paper. ~~Third quarter net sales for International increased 11.3% between years, due to growth in Europe and China, partially offset by declines in Latin America.~~

~~Value-Added Revenue~~

~~Third~~

First quarter value-added revenue for the Donnelley Print Solutions segment decreased ~~$35~~$15 million, or ~~6.6%~~3.3%, from a year ago ~~primarily~~ due to the ~~volume~~sales declines noted above, partially offset by higher by-product revenues, higher purchase discounts and ~~price deterioration noted above.~~improved material yield. Value-added revenue for Magazines, Catalogs and Retail ~~and Premedia Technologies~~ declined ~~11.4% and 14.6%, respectively,~~4.8% between years, ~~consistent with~~due to the declines in net sales partially offset by higher by-product revenues and purchase discounts. Value-added revenue for Book Publishing Services declined 0.6% from 2002, driven by the decline in net sales. Value-added revenue for ~~Book Publishing Services was flat compared to 2001. Value-added revenue for~~ Telecommunications increased ~~2.6%~~0.2% between years because of improved material yield. This increase occurred despite ~~an 8.8%~~a 13.4% decline in net sales, ~~primarily due to higher volumes and more customer-furnished paper.~~

~~Third quarter value-added revenue for~~because the Logistics Services segment increased $3 million, or 6.6% from a year ago, compared with a 1.5% increase in net sales. Value-added revenue for package logistics increased 16.7% between years, driven by higher postage discounts due to deeper penetrationportion of the ~~postal system. Value-added revenue for print logistics was down 5.4% between years, due to the volume declines noted above.~~

~~Declines in value-added revenue for Financial Services and RRD Direct between years were attributable to the declines~~decline in net sales ~~noted above.~~

~~Earnings from Operations~~

~~Third~~due to more customer-furnished paper had no impact on value-added revenue. Higher by-product revenues increased value-added revenue by $2 million between years.

First quarter earnings from operations for the Donnelley Print Solutions segment increased ~~$10~~$22 million, or ~~10.2% between years.~~91.7%, to $46 million in 2003. Earnings from operations for the three months ended March 31, 2002 included ~~$7 million and $8~~$23 million in restructuring and impairment ~~charges~~charges. Earnings from operations for the three months ended ~~September 30, 2002 and 2001, respectively. In addition, earnings from operations~~March 31, 2003 included a $2 million gain on the sale of a closed facility in ~~York, England of $6 million in the third quarter of 2002.~~Casa Grande, Arizona. Net sales continue to be negatively affected by the slowdown in the U.S. economy, particularly in Magazines, Catalogs and Retail. The portion of the net sales decline driven by the mix change did not impact overall profitability due to lower manufacturing costs per unit. The impact of our productivity initiatives, as well as savings from actions we have taken to restructure our operations, have largely offset the effects of volume declines and price erosion on earnings from operations.

~~Third quarter 2002 earnings from operations~~

Logistics Services

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

	Quarter Ended March 31
	2003			2002
	Earnings before Income Taxes
Thousands of dollars
As reported	$	3,517		$	2,981

Included in earnings from operations:
Restructuring and impairment charges	$	—		$	(24	)
Acquisitions		(246	)		—

Total items affecting comparability	$	(246	)	$	(24	)

Net sales for the Logistics Services segment increased $38 million, or 21.9% from a year ago. First quarter net sales for the package logistics business were $2up 31.9% between years. The acquisition of Momentum Logistics, Inc. (MLI) in March 2003 contributed an incremental $5 million in net sales for package logistics between years. Excluding the acquisition of MLI, net sales of package logistics rose 27.3% between years, which included a mix change toward lighter weight, lower priced packages and postal rate increases, which were passed on to customers. First quarter net sales for the print logistics business were up 7.0% between years, driven by increased volumes from third parties.

First quarter value-added revenue for the Logistics Services segment increased $8 million, or 17.2%, compared with a 21.9% increase in net sales. Value-added revenue for package logistics increased 26.2% between years. The acquisition of MLI contributed an incremental $3 million in value-added revenue for package logistics between years. Excluding the acquisition of MLI, value-added revenue for package logistics rose 13.8% between years. The change from 2002 was driven by volume increases and higher postage discounts due to deeper penetration of the postal system, which were partially offset by higher per unit transportation costs due to price increases from regional carriers and higher fuel costs. Value-added revenue for print logistics was up 3.9% between years, due to the volume increases noted above.

First quarter 2003 earnings from operations were $4 million, an increase of ~~$2 million~~16.4% from ~~2001.~~2002. The increase between years was driven by higher value-added revenues from both our package and print logistics ~~business~~businesses, partially offset by start-up costs associated with a new facility in the northeast and a loss from operations of MLI.

Financial Services

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

	Quarter Ended March 31
	2003			2002
	Earnings before Income Taxes
Thousands of dollars
As reported	$	(6,522	)	$	(12,074	)

Included in earnings from operations:
Restructuring and impairment charges	$	(573	)	$	(21	)
By-product revenues		232			335
Insurance recovery related to 9/11		2,047			—

Total items affecting comparability	$	1,706		$	314

Net sales for the Financial Services segment decreased $13 million, or 12.3%, from a year ago. Financial Services’ net sales are comprised primarily of capital markets and customized communications solutions. First quarter 2003 capital markets net sales decreased 18.1% between years, as domestic capital markets net sales were down 22.1%, partially offset by an increase of 4.9% in international capital markets net sales. Declines in net sales from domestic capital markets transactions (e.g., S-filings, including initial public offerings, secondary offerings and mergers and acquisitions) caused by the slowed economy more than offset increased net sales from compliance filings (e.g., SEC periodic reports and annual meeting proxy statements). First quarter 2003 net sales from customized communications solutions decreased 13.0% between years, due to declines from investor communications (e.g., prospectuses, Form N, annual and quarterly mutual funds statements), which reflected contraction in the mutual fund market and one large non-recurring deal from 2002.

First quarter value-added revenue for the Financial Services segment decreased $12 million, or 13.4%, between years consistent with the decline in net sales. The percentage decrease in value-added revenue was higher than the decrease in net sales due to a mix shift toward more compliance work.

First quarter 2003 loss from operations was $6 million, an improvement from $12 million for the year ago period. Included in the 2003 first quarter loss from operations was a $2 million gain on an insurance recovery related to September 11th that reduced cost of sales. Improved operating margins in the first quarter of 2003 also reflect savings from productivity initiatives, as well as prior restructuring actions which included the closing of several print facilities and service centers, and related workforce reductions. First quarter 2003 operating margins were negatively impacted by the lower ~~goodwill amortization,~~level of capital markets activity between years, because of the disproportionately higher margins that capital markets work generates.

Other and Corporate

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

	Quarter Ended March 31
	2003			2002
	Earnings before Income Taxes
Thousands of dollars
As reported	$	(33,429	)	$	(29,669	)

Included in earnings from operations:
Restructuring and impairment charges	$	(1,867	)	$	(3,525	)
By-product revenues		1,227			893
Gain on sale of assets		357			—
Provision for doubtful accounts		(9,966	)		(3,223	)
Pension and postretirement benefit income(1)		15,855			21,021

		5,606			15,166
Included in other income (expense):
Affordable housing amortization		(4,000	)		(2,700	)
COLI-related expenses upon policy surrender		—			(4,883	)

		(4,000	)		(7,583	)

Total items affecting comparability	$	1,606		$	7,583

(1)

Excludes service costs, which is recorded primarily in Donnelley Print Solutions, Logistics Services and Financial Services.

Net sales for RRD Direct were down 14.2% between years, primarily due to lower volumes, partially offset by higher prices. First quarter net sales for International were up 10.2% between years, driven by volume growth in Europe and Asia, partially offset by declines in Latin America.

First quarter value-added revenue ~~from print logistics~~for RRD Direct decreased $1 million or 5.5%, compared with a 14.2% decline in net sales, driven by higher customer-furnished paper in 2003. Value-added revenue for International was up $7 million between years, due to increases in Asia and ~~higher processing costs, including increased overtime, related to higher package volume.~~

Europe, offset by a decline in Latin America.

The loss from operations for the ~~“Other”~~Other business segment was ~~$12~~$9 million for the ~~third~~first quarter of ~~2002,~~2003, compared with a loss of ~~$27~~$15 million for the year ago period. Of$2 million of the ~~$15~~$6 million improvement ~~in operating results between years, $9 million~~is related to lower restructuring ~~charges~~ and $3 million to lower spending for complementary businesses. The third quarter loss from operations for Financial Services worsened between years driven primarily by the continued slowdown in capital markets.impairment charges. RRD Direct’s loss from operations improved between years, driven by restructuring savings and ~~increased productivity.~~productivity improvements. Earnings from operations for International in the ~~third~~first quarter of ~~2002~~2003 benefited from

improved volumes in Europe and lower ~~restructuring charges and improved productivity between years,~~foreign currency devaluation in Latin America, partially offset by a higher ~~start-up costs~~provision for doubtful accounts in ~~2002 for a new plant in Shanghai, China.~~

Latin America ($2 million).

The loss from operations for the Corporate segment was ~~$12~~$7 million in the ~~third~~first quarter of ~~2002~~2003 compared with earnings of ~~$12~~$10 million in the ~~third~~first quarter of ~~2001.~~2002. The ~~third quarter of 2002 included $13~~$17 million ~~in restructuring and impairment charges, $8 million of which related to the curtailment charge for the company’s postretirement benefit plans. The~~ decrease in operating earnings between years was ~~also~~ driven by an additional provision for doubtful accounts ($5 million), lower benefit plan earnings ($35 million), higher affordable housing amortization ($1 million), higher management incentive compensation and gainsharing ($4 million) and higher unallocated corporate administrative and other ~~expenses.~~

~~A summary analysis of expense trends is presented below:~~

~~Third Quarter Ended September 30~~

Thousands of dollars

2002

% of Sales

2001

% of Sales

% Change

Cost of materials    $ 344,596      29.3 %    $ 400,985      31.1 %    (14.1 %)
Cost of transportation    148,343      12.6 %    147,752      11.5 %    0.4 %
Cost of manufacturing*    372,891      31.7 %    423,631      32.9 %    (12.0 %)
Depreciation    71,692      6.1 %    77,042      6.0 %    (6.9 %)
Amortization    8,651      0.7 %    14,013      1.1 %    (38.3 %)
Selling and administrative expenses*    131,740      11.2 %    132,429      10.3 %    (0.5 %)
Restructuring and impairment charges    22,709      1.9 %    19,860      1.5 %    14.3 %
Net interest expense    16,937      1.4 %    18,831      1.5 %    (10.1 %)

~~Excludes depreciation and amortization, which are shown separately.~~

~~Items Affecting Comparability of the First Nine Months of 2002 with the First Nine Months of 2001~~

~~The following items affect comparability of the condensed consolidated statements of income and segment operating results:~~

~~Unusual items:~~

~~Restructuring and impairment:~~ The first nine months of 2002 included pretax restructuring and impairment charges of $65 million ($40 million after-tax, or $0.35 per diluted share). During the first nine months of 2002, we announced the closure of our Berea, Ohio facility, along with further workforce reductions, primarily within the Donnelley Print Solutions segment and Financial Services. In addition, we incurred certain costs associated with defined exit activities from previously announced restructuring plans. We had announced the closures of our Des Moines, Iowa and Old Saybrook, Connecticut facilities in the first half of 2001. During the first half of 2002, we ceased production at each of these facilities, and all three facilities were considered held for disposal at September 30, 2002. We also recorded an $8 million non-cash charge in the third quarter of 2002 related to a curtailment loss on our postretirement benefit plans. Restructuring and impairment charges for the first nine months of 2002 by segment were as follows: Donnelley Print Solutions: $44 million; Corporate: $14 million and Other: $7 million.

The first nine months of 2001 included pretax restructuring and impairment charges of $92 million ($57 million after-tax, or $0.47 per diluted share). During the first nine months of 2001, we announced the closing of the following facilities: St. Petersburg, Florida; South Daytona, Florida; a financial-printing facility in Houston, Texas; Des Moines, Iowa; and Old Saybrook, Connecticut; as well as plans to exit a leased facility, and a company-wide workforce reduction

of approximately 250 general and administrative personnel. We also incurred employee termination and relocation costs during the first nine months of 2001 in connection with a move to a newly constructed directory plant in Flaxby, England. Impairment charges in 2001 also included a reduction in the carrying value of long-lived assets at one of our subsidiaries in Mexico, Ediciones Eclipse S.A. de C.V. (Eclipse). The non-cash pretax impairment charge was $12 millionexpenses ($7 ~~million after-tax, or $0.06 per diluted share) to writedown the carrying value of Eclipse’s long-lived assets to fair value. Of the total pretax charge, $10 million~~million), partially offset by lower COLI expenses related to the ~~writedown~~surrender of goodwill and $2 million to the writedown of property, plant and equipment. Restructuring and impairment charges for the first nine months of 2001 by segment were as follows: Donnelley Print Solutions: $70 million; Corporate: $4 million and Other: $18 million.

For a further description of restructuring and impairment activities for the first nine months of 2002 and cumulative activity since the initiation of the plans, see Note 10 to the condensed consolidated financial statements and the “Restructuring and Impairment” footnote on page F-9policies in ~~the 2001 Annual Report on Form 10-K.~~

~~Income Taxes:~~ ~~Provision for income taxes for the first nine months of 2002 included a tax benefit of $30 million from the reversal of excess tax reserves related to the company’s settlement~~conjunction with the ~~IRS for disputed COLI deductions ($30 million after-tax, or $0.26 per diluted share). See Note 7 to the condensed consolidated financial statements.~~

~~Other Income (Expense):~~ ~~Other income (expense) for the first nine months of 2001 included a loss on the writedown of two Internet-related investments ($2 million pretax and $1 million after-tax or $0.01 per diluted share).~~

~~Adoption of New Accounting Standards:~~ ~~As discussed in Note 12 to the condensed consolidated financial statements, we adopted SFAS No. 142,~~~~Goodwill and Other Intangible Assets~~ as of January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized after the date of adoption. SFAS No. 142 does not permit the restatement of previously issued financial statements, but does require the disclosure of prior results adjusted to exclude amortization expense related to goodwill and intangible assets which are no longer being amortized. Earnings (loss) from operations for the first nine months of 2001 included $13 million ($10 million after-tax, or $0.09 per diluted share) of goodwill amortization expense no longer being recorded under SFAS No. 142. Goodwill amortization expense by segment for the first nine months of 2001 was as follows: Donnelley Print Solutions: $3 million; Logistics Services: $6 million and Other: $4 million.

~~The following table summarizes income (expense) items affecting comparability:~~

Nine Months Ended September 30

Thousands of dollars, except per share data

2002

2001

Earnings before Income Taxes

Net Income

Per Diluted Share

Earnings before Income Taxes

Net Income

Per Diluted Share

Restructuring and impairment charges $ (65,426 ) $ (40,111 ) $ (0.35 ) $ (91,895 ) $ (56,515 ) $ (0.47 )
Reversal of excess COLI tax reserves —   30,000 0.26 —   —   —
Other investment write-downs —   —   —   (2,040 ) (1,255 ) (0.01 )
Impact of prior year goodwill amortization —   —   —   (13,352 ) (10,193 ) (0.09 )

Total $ (65,426 ) $ (10,111 ) $ (0.09 ) $ (107,287 ) $ (67,963 ) $ (0.57 )

~~Consolidated Results—First Nine Months of 2002 Compared with First Nine Months of 2001~~

Consolidated net sales decreased $463 million, or 11.9%, to $3,420 million compared with $3,883 million in the first nine months of 2001, driven primarily by declines in net sales of our Donnelley Print

Solutions segment of 13.3%. Net sales of our Logistics Services segment were down 3.7% between years, with a 12.8% decrease in net sales for print logistics partially offset by a 2.6% increase in net sales from package logistics.

Consolidated value-added revenue decreased $218 million, or 9.8%, to $1,998 million compared with $2,216 million in the first nine months of 2001, driven by the decline in value-added revenue of the Donnelley Print Solutions segment of 10.7%. The decline in value-added revenue for the Donnelley Print Solutions segment was less than the decline in net sales of 13.3%, primarily due to higher customer-furnished paper during 2002 and improved material yield from productivity initiatives. Value-added revenue of the Logistics Services segment increased 11.1% between years, despite a decrease in net sales of 3.7%, due to a 21.0% increase in value-added revenue for package logistics driven by favorable postage and per unit transportation costs. Value-added revenue is affected by the price of scrap (by-product) paper we sell. Income from the sale of by-products is recorded as a reduction in cost of materials. During the first nine months of 2002, we recognized a reduction in cost of materials of $33 million from the sale of by-products, compared with $32 million for the year ago period.

Gross profit as a percentage of net sales was 17.7% in the first nine months of 2002 compared with 17.0% in the first nine months of 2001. Gross profit for our Donnelley Print Solutions segment was favorable to the prior year due to the impact of restructuring savings and productivity initiatives, as well as gains on the sale of a facility in York, England ($6 million) and miscellaneous equipment ($1 million). Gross profit for our Logistics Services segment also increased between years due to the improved operating performance of the print and package logistics businesses and lower goodwill amortization in 2002. Negatively impacting gross profit in 2002 was a $9 million provision for litigation, in the Corporate segment, related to the closing of the company’s Chicago catalog operations in 1993 (see Note 4 to the condensed consolidated financial statements).

Selling and administrative expense decreased $16 million, or 3.9%, to $402 million compared with $418 million in the first nine months of 2001. This decrease was driven by reductions in volume-based incentives (sales commissions), restructuring savings as a result of administrative workforce reductions and lower spending on complementary businesses, partially offset by higher management incentive compensation expense and lower benefit plan earnings. Selling and administrative expenses as a percentage of net sales was 11.7% in the first nine months of 2002 compared with 10.8% in the first nine months of 2001.

Net interest expense decreased 9.9% to $50 million in the first nine months of 2002, primarily due to lower effective interest rates on outstanding debt. Other income, net, for the first nine months of 2002 was $12 million compared with $7 million in 2001. Other income, net, for the first nine months of 2002 included a $6 million gain on the collection of a previously reserved note receivable and higher earnings from equity-based investments of $6 million, partially offset by additional COLI expense of $3 million and lower miscellaneous income of $4 million.

Earnings before income taxes in the first nine months of 2002 were $100 million compared with $102 million in 2001. Earnings before income taxes included $65 million and $92 million in restructuring and impairment charges for the nine months ended September 30, 2002 and 2001, respectively. Net income was $94 million, up $31 million from $63 million in 2001. Diluted earnings per share of $0.82 increased $0.29 from $0.53 in 2001. The effective tax rate for the first nine months of 2002 was 5.9% compared with 38.5% in 2001. The 2002 effective tax rate is lower than 2001 due to the reversal of excess tax reserves related to the company’s settlement with the IRS ~~surrounding the company’s COLI program~~($5 million) (see Note 7 to the condensed consolidated financial statements).

~~The following table shows the trends in net sales and value-added revenue by end-market:~~

~~Nine Months Ended September 30~~

Net Sales

Value-Added Revenue

Thousands of dollars

2002

2001

% Change

2002

2001

% Change

Magazines, Catalogs and
Retail    $ 1,127,493    $ 1,363,801    (17.3 %)    $ 709,271    $ 846,676    (16.2 %)
Book Publishing Services    526,349    542,220    (2.9 %)    377,524    379,997    (0.7 %)
Telecommunications    459,374    527,731    (13.0 %)    224,238    234,781    (4.5 %)
Premedia Technologies    88,813    106,807    (16.8 %)    88,819    106,807    (16.8 %)





Donnelley Print Solutions
   2,202,029    2,540,559    (13.3 %)    1,399,852    1,568,261    (10.7 %)
Logistics Services
   541,565    562,395    (3.7 %)    131,158    118,078    11.1 %
Financial Services    340,949    391,635    (12.9 %)    288,440    327,415    (11.9 )%
RRD Direct    104,752    132,394    (20.9 %)    61,321    72,074    (14.9 )%
International (1)    230,527    252,599    (8.7 %)    116,730    123,163    (5.2 %)
Other    —      3,355    N/M    —    6,718    N/M





Total Other
   676,228    779,983    (13.3 %)    466,491    529,370    (11.9 %)





Total
   $ 3,419,822    $ 3,882,937    (11.9 %)    $ 1,997,501    $ 2,215,709    (9.8 %)

~~(1)~~

~~Includes Latin America, Poland and China. Other international locations are included within the respective end-market.~~

~~Operating Results by Business Segment—First Nine Months of 2002 Compared with First Nine Months of 2001~~

~~Net Sales~~

Net sales for the Donnelley Print Solutions segment decreased $339 million in the first nine months of 2002, or 13.3%, from a year ago. Net sales for the first nine months for Magazines, Catalogs and Retail decreased 17.3% between years, which primarily reflected volume decreases and price deterioration across all major markets. The continued economic slowdown during 2002 has resulted in lower volumes and more customer bankruptcies within the Catalogs and Retail markets, and lower advertising pages for both trade and consumer magazines. The net sales decline in Premedia Technologies is driven by these same factors. Depressed volumes in these markets are driving increased competition and pricing pressures, and certain customer work which has been lost due to bankruptcy or other factors has been replaced with lower priced work. Book Publishing Services’ net sales decreased 2.9% for the first nine months of 2002 due to volume decreases in the religious and specialty markets and more customer-furnished paper, partially offset by volume increases in the consumer and education markets. First nine months net sales for Telecommunications were down 13.0% between years, primarily due to lower volumes and a shift to more customer-furnished paper.

First nine months net sales of the Logistics Services segment decreased $21 million, or 3.7%, from a year ago. Net sales of print logistics were down 12.8% for the first nine months of 2002, driven by lower volumes from a continued slow economy. Net sales of package logistics were up 2.6% between years. Unit volumes for package logistics were up 20.0% between years, which were partially offset by a mix change towards lighter weight, lower priced packages. Net sales for the first nine months of 2002 for package logistics were also impacted by our decision to cease serving several large mailers during 2001 because of price levels that proved unprofitable.

Financial Services’ first nine months net sales decreased 12.9% from a year ago, driven by lower net sales from both U.S. and international capital markets, primarily during the second and third quarters.

We derived 7.5% and 8.6% of our capital markets net sales from international during the first nine months of 2002 and 2001, respectively. For the first nine months of 2002, U.S. capital markets and international capital markets net sales were down 17.1% and 23.9%, respectively. Within Financial Services, net sales for the first nine months from customized communications solutions decreased 5.8% between years. First nine months net sales for RRD Direct were down 20.9% between years, due to lower prices, unfavorable work mix and more customer-furnished paper. First nine months net sales for International were down $22 million between years due to declines in Latin America, partially offset by increases in Europe and China.

~~Value-Added Revenue~~Expense Comparison

First nine months value-added revenue for the Donnelley Print Solutions segment decreased $168 million, or 10.7%, from a year ago, primarily due to volume declines and price deterioration across all major markets. Value-added revenue for Magazines, Catalogs and Retail and Premedia Technologies declined 16.2% and 16.8%, respectively, between years, consistent with the declines in net sales. Value-added revenue for Book Publishing Services decreased 0.7% compared with 2001 due to declines in the religious and specialty markets, partially offset by increases in the consumer and educational markets. Value-added revenue for Telecommunications decreased 4.5% between years, which was less than the percentage decline in net sales, primarily due to higher customer-furnished paper during 2002, as well as improved material yield.

First nine months value-added revenue for the Logistics Services segment increased $13 million, or 11.1%, from a year ago despite a 3.7% drop in net sales. Value-added revenue for package logistics increased 21.0% between years, driven by lower per unit transportation costs, increased postage discounts due to deeper penetration of the postal system (closer to the final destination) and improved mix. Results for package logistics for the first nine months of 2001 were hurt by a higher relative level of large mailers at price levels that proved to be unprofitable. Actions taken throughout 2001 to raise prices and adjust work mix have had a positive impact on package logistics’ value-added revenue. Value-added revenue for print logistics was flat between years, primarily due to a reduction in per unit transportation costs driven by operational efficiencies and improved vendor management, offset by volume declines.

Value-added revenue for Financial Services decreased 11.9% from 2001, driven by lower net sales from capital markets primarily during the second and third quarters of 2002. The decrease in value-added revenue for the first nine months for both RRD Direct and International was attributable to the declines in net sales noted above.

~~Earnings from Operations~~

First nine months earnings from operations for the Donnelley Print Solutions segment increased $1 million, or 0.7%, between years. Earnings from operations included $44 million and $70 million in restructuring and impairment charges for the nine months ended September 30, 2002 and 2001, respectively. Earnings from operations continue to be negatively affected by the slowdown in the U.S. economy, particularly in Magazines, Catalogs and Retail. During 2001, we announced actions to better align our cost structure that included the closing of four print facilities within Donnelley Print Solutions. All four of these print facilities, along with the Berea, Ohio printing facility, were closed by the end of the second quarter of 2002.

Earnings from operations for the first nine months of 2002 for the Logistics Services segment were $7 million, compared with a loss from operations of $8 million a year ago. This improved performance was due to higher value-added revenue from the package logistics business due to the factors noted above, along with lower goodwill amortization of $6 million. Earnings from operations in 2002 also benefited from the shutdown of package logistics’ former headquarters in Minneapolis, Minnesota in mid-2001.

The loss from operations for the “Other” business segment was $36 million for the first nine months of 2002, compared with a loss of $64 million for the year ago period. Of the $28 million improvement in operating results between years, $11 million related to lower restructuring charges and $16 million to lower spending for complementary businesses. For the first nine months, the loss from operations for Financial Services worsened between years, driven primarily by the continued slowdown in capital markets, particularly since the second quarter of 2002. RRD Direct’s loss from operations improved between years, driven by restructuring savings and increased productivity. International’s loss from operations improved between years, driven primarily by lower restructuring charges.

Loss from operations for the Corporate segment was $12 million in the first nine months of 2002 compared with earnings of $45 million in the first nine months of 2001. The decrease between years was driven by additional restructuring and impairment charges ($10 million); an additional provision for litigation ($9 million) (see Note 4 to the condensed consolidated financial statements); higher management incentive compensation ($9 million); lower benefit plan earnings ($5 million); higher workers’ compensation expenses ($2 million); higher bad debt expense ($2 million); higher unallocated administrative and other expenses ($14 million); and higher corporate administrative expenses ($6 million).

A summary analysis of ~~expense trends~~expenses is presented below:

~~Nine Months~~First Quarter Ended ~~September 30~~March 31

Thousands of dollars

2002

% of Sales

2001

% of Sales

% Change

Cost of materials    $ 1,010,031      29.5 %    $ 1,222,912      31.5 %    (17.4 %)
Cost of transportation    412,290      12.1 %    444,316      11.4 %    (7.2 %)
Cost of manufacturing*    1,183,159      34.6 %    1,313,423      33.8 %    (9.9 %)
Depreciation    217,503      6.4 %    239,319      6.2 %    (9.1 %)
Amortization    29,139      0.9 %    43,097      1.1 %    (32.4 %)
Selling and administrative expenses*    393,641      11.5 %    408,366      10.5 %    (3.6 %)
Restructuring and impairment charges    65,426      1.9 %    91,895      2.4 %    (28.8 %)
Net interest expense    49,683      1.5 %    55,132      1.4 %    (9.9 %)

Thousands of dollars	2003		% of Sales		2002		% of Sales		% Change
Cost of materials	$	296,984	27.7	%	$	333,905	30.5	%	(11.1	%)
Cost of transportation		158,763	14.8	%		128,200	11.7	%	23.8	%
Cost of manufacturing*		383,552	35.7	%		393,984	36.0	%	(2.6	%)
Depreciation		68,236	6.4	%		72,120	6.6	%	(5.4	%)
Amortization		9,038	0.8	%		9,747	0.9	%	(7.3	%)
Selling and administrative expenses*		136,749	12.7	%		127,877	11.7	%	6.9	%
Restructuring and impairment charges		2,609	0.2	%		26,692	2.4	%	(90.2	%)
Net interest expense		12,707	1.2	%		15,453	1.4	%	(17.8	%)

*Excludes

~~Excludes~~ depreciation and amortization, which are shown separately.

Restructuring and Impairment: The following discussion should be read in conjunction with Note 4, “Restructuring and Impairment,” in the 2002 Annual Report on Form 10-K, and Note 10 to the condensed consolidated financial statements.

During the first quarter of 2003, we recorded pretax restructuring and impairment charges of $2.6 million ($1.6 million after-tax, or $0.01 per diluted share). The total pretax restructuring and impairment charges by business segment were: Donnelley Print Solutions: $0.2 million; Financial Services: $0.6 million; Other: $0.7 million; and Corporate: $1.1 million. Restructuring charges include employee termination benefits, including severance, early retirement benefit costs and outplacement costs associated with planned personnel reductions and employee and asset relocation costs.

During the first quarter of 2002, we recorded pretax restructuring and impairment charges of $27 million ($17 million after-tax, or $0.14 per diluted share). The total pretax restructuring and impairment charges related to restructuring actions announced during 2002 by business segment were: Donnelley Print Solutions: $23 million; Other: $3 million; and Corporate: $1 million.

We regularly assess our manufacturing platforms to assure that they are efficient, flexible and aligned properly with our customers’ needs. In March 2001, we announced a $300 million upgrade in our print platform, approximately one-third of which related to restructuring costs. ~~We intend to create a more efficient, flexible and integrated print platform to better serve our magazine, catalog and retail customers within the Donnelley Print Solutions segment.~~ This upgrade program includes the purchase of seven new presses and ~~associated~~two binding lines, ~~four~~ of which ~~have been~~four presses and two binding lines were placed ininto service as of March 31, 2003. As of March 31, 2003, cumulative capital expenditures related to ~~date. As we~~this upgrade ~~facilities, certain existing equipment with minimal book value is being either retired or sold. Capital expenditures for this~~ program ~~through September 30, 2002~~ were ~~$157~~$199 million, ~~$61~~$20 million of which ~~was spent in~~occurred during the first ~~nine months~~quarter of ~~2002.~~2003. We ~~plan~~expect to spend an additional $23 million in 2003 to complete the ~~upgrade program by mid-2003. We expect total capital spending for the full year 2002, including the upgrade program, to be less than $280 million.~~

program.

As part of our ~~effort~~efforts to build a more effective print platform, we continually assess each plant’s scale of operations and geographic location relative to our entire print platform. During the first quarter of 2002, we announced the closure of ~~the~~our Berea, Ohio manufacturing facility. We completed the closures of the Berea, Ohio ~~as well as~~plant, and the Des Moines, Iowa and ~~the~~ Old Saybrook, Connecticut plants, which were announced in 2001, during the second quarter of 2002.

All continuing customer work produced at these facilities was transferred to other company facilities once necessary expansions to accommodate the work were complete. The net book value of assets held for disposal at March 31, 2003 was $15 million, and included the following breakdown by segment: Donnelley Print Solutions: $14 million and Other: $1 million.

As we complete our upgrade program and fully transition ~~all~~continuing customer work from closed facilities, we expect to improve the overall performance of our print platform. This ~~should~~will include improvements in cycle times and ~~less~~reduced waste through the addition of faster, more efficient equipment to our networked platform and greater economies of scale.

The two largest plant closures announced in 2001 (Old Saybrook, Connecticut and Des Moines, Iowa) did not cease operations until the second quarter of 2002. Accordingly, the first quarter of 2003 reflects the benefits as a result of ~~all~~these plant closures as compared to the first quarter of 2002. Additionally, other restructuring actions ~~net~~announced subsequent to the first quarter of ~~the incremental costs associated with the print platform upgrade, we expect to realize cost~~2002 also impact 2003 savings ~~in 2002 of approximately $124 million, of which approximately $120 million is the cash component and approximately $4 million is non-cash, related to lower depreciation expense.~~from restructuring activities. During the first ~~nine months~~quarter of ~~2002,~~2003 we realized ~~approximately $82 million in~~ cost savings ~~from the restructuring actions taken. Of this amount,~~of approximately ~~$79~~$20 million, ~~was the cash component,~~consisting primarily of lower salary expense and ~~approximately $3 million was non-cash,~~ related ~~to lower depreciation expense.~~employee benefit costs. These ~~savings, however,~~reductions in our cost structure in 2003 were largely offset by the impact of volume ~~reductions~~ and pricing ~~pressures that continued~~reductions during the quarter. We expect to ~~affect the company during 2002.~~

drive gains in throughput, productivity and capacity utilization once volume activity levels recover.

Liquidity and Changes in Financial Condition

Cash Flows ~~from~~From Operating Activities

Cash ~~flow from~~provided by operating activities ~~was $245~~totaled $68 million ~~for~~in the ~~nine months ended September 30, 2002, a decrease~~first quarter of ~~$76~~2003, compared with cash provided by operating activities of $73 million ~~from~~in the same period of ~~2001.~~2002. The decrease between years was primarily due to ~~the payment of approximately $130 million related to the COLI settlement (see Note 7 to the condensed consolidated financial statements) and~~ lower ~~net~~ income excluding non-cash charges and an increase in ~~2002,~~other assets partially offset by a ~~2001 payment of $62 million related to COLI (see Note 7~~lower investment in working capital, driven by lower contributions to the ~~condensed consolidated financial statements).~~

company’s employee benefit trust and higher accounts payable, partially offset by increased inventories.

Our cash conversion cycle (days’ sales outstanding plus days’ inventory on hand minus days’ payable outstanding) improved to 4338 days as compared with 4947 days a year ago. The ratio of operating working capital* to sales ~~excluding restructuring and impairment reserves,~~ also improved to ~~3.4%~~1.6% in ~~2002~~2003 from ~~6.0%~~4.7% in ~~2001.~~

2002.

~~Operating working capital is defined as current assets (including cash) less current liabilities (excluding debt, taxes and restructuring reserves).~~

* The operating working capital to sales ratio is defined as a 13-month average of net receivables, net inventories and prepaid expenses minus accounts payable, accrued compensation and other accrued liabilities, divided by 12-month rolling net sales.

Cash Flows ~~from~~From Investing Activities

Our principal recurring investing activities are capital expenditures to improve ~~the productivity of~~our operations. In the first ~~nine months~~quarter of ~~2002,~~2003, capital expenditures and investments totaled ~~$182~~$67 million, a ~~$19~~$1 million increase from a year ago. 2003 included the acquisition of a package logistics business within Donnelley Logistics for approximately $17 million in cash. We expect full year capital spending, excluding acquisitions, to be below ~~$280~~$250 million compared with capital spending of ~~$273~~$242 million in ~~2001. This planned level~~2002.

Acquisitions

On March 6, 2003, the company acquired certain net assets of ~~spending in 2002 is driven by investments to create~~Momentum Logistics, Inc. (MLI), a ~~more efficient print platform to serve our magazine, catalog and retail customers. Through 2003, we expect to invest up to $300~~Florida-based provider of package distribution services, for approximately $17 million in ~~this print platform, approximately~~cash. MLI operates sortation facilities and a ~~third~~dedicated fleet of ~~which relates~~vehicles to ~~restructuring activities, to create fewer, larger~~provide business-to-business and ~~more efficient facilities focused~~business-to-consumer package distribution services. The purchase price has been allocated based on ~~specific capabilities.~~

~~Acquisitions~~

estimated fair values at date of acquisition, pending final determination of the acquired balances and purchase price.

We made no business acquisitions in ~~2002 or 2001.~~

2002.

Cash Flows ~~from~~From Financing Activities

Financing activities include net borrowings, dividend payments and share repurchases. ~~As of September 30, 2002,~~At March 31, 2003, our net ~~short-term and long-term~~ borrowings increased ~~$28~~by $4 million from December 31, ~~2001,~~2002, compared with an increase of ~~$97~~$34 million for the same period of ~~2001. This~~2002. The lower ~~level of incremental~~increase in net borrowings ~~in 2002~~ ($6930 million) is primarily due to the expiration of the company’s share repurchase program on January 31, ~~2002, partially offset by the company’s payment of approximately $130 million related to the COLI settlement (see Note 7 to the condensed consolidated financial statements).~~2002. During the first ~~nine months~~quarter of 2002, cash used for share repurchases, net of proceeds from stock option exercises, was ~~$6 million compared with $197 million in 2001.~~

$14 million.

Liquidity

The working capital deficiency of $190 million at September 30, 2002, did not affect the company’s ability to operate its business or to meet any of its obligations. From time to time we may operate with a

~~working capital deficiency, but without negative impact on the business due to the timing and availability of other sources of funds.~~

Commercial paper is our primary source of short-term financing. On ~~September 30, 2002,~~March 31, 2003, we had ~~$107~~$134 million outstanding in domestic commercial paper borrowings. In addition, at ~~September 30, 2002,~~March 31, 2003, we had ~~$431~~$350 million of unused revolving credit facilities with a number of banks. These facilities ~~provided~~provide support for issuing commercial paper and other credit needs. In October 2002, we replaced our existing revolving credit facilities with two new revolving credit facilities. The new facilities consist of a short-term facility that matures in October 2003 and provides for borrowings of up to $175 million and a ~~long-term~~long- term facility that matures in October 2007 and also provides for borrowings of up to $175 million. The company pays an annual commitment fee on the total unused portion of the credit facilities of 0.07% for the short-term facility and 0.09% for the long-term facility. The facilities bear interest at variable rates based on the current LIBOR rate and the company’s credit rating. As of ~~November 12, 2002,~~May 13, 2003, there have been no borrowings under these credit facilities. Management believes that cash flow and borrowing

capability are sufficient to fund operations and planned capital expenditures of the company for the forseeable future.

~~Share Repurchase~~

In January 2001, the board of directors authorized a share repurchase program for up to $300 million of the company’s common stock in privately negotiated or open-market transactions through January 31, 2002. Under this program we purchased approximately 8.1 million shares at an aggregate cost of approximately $229 million.

The authorization under the share repurchase program expired on January 31, 2002. Accordingly, we did not purchase common stock shares in the second or third quarters of 2002. We purchased 1.6 million shares of common stock in the third quarter of 2001 for $46 million in privately negotiated or open-market transactions. For the nine months ended September 30, we purchased 0.5 million and 6.7 million shares of our stock in 2002 and 2001, respectively, for $15 million and $188 million, respectively.

Net cash used to repurchase common stock, defined as cash used for share repurchases net of proceeds from stock options exercised, was $6 million and $197 million for the nine months ended September 30, 2002 and 2001, respectively. The decline from 2001 was a result of the expiration of the share repurchase program discussed above.

Other Information

~~Technology~~—We remain a technology leader and hold 180 patents in print-related technology, including 20 patents in the emerging area of digital printing. We are a leader in technologies such as computer-to-plate, customer connectivity and digital imaging capabilities.

~~Public recognition of our company’s technology efforts include the following rankings among all U.S. companies:~~

~~#3 of the most innovative media and entertainment company users of information technology (~~~~Information Week,~~ ~~September 23, 2002); and~~

~~#143 of the top 500 leading IT innovators (~~~~Information Week,~~ ~~September 23, 2002).~~

Environmental Health and Safety—Our business is subject to various laws and regulations governing employee health and safety and environmental protection. Our policy is to comply with ~~all~~

~~laws~~alllaws and regulations, and our objective is to create an injury-free workplace. We strive to achieve the highest performance standards of environmental performance and employee health and safety within both the printing industry and the manufacturing community. Since 1987,we have reduced releases and off-site transfers reported under the U.S. Environmental Protection Agency’s Toxic Release Inventory by 80%. In addition, we have reduced the generation of hazardous waste by more than 49% since 1988 by applying various techniques.

In the area of employee health and safety, we have reduced our Occupational Health and Safety Administration (OSHA) recordable injury and illness and our days away from work rates consistently over the past five years. Since 1994, our OSHA recordable rate has decreased by more than 46% and our days away rate has declined more than 73%.

We do not anticipate that compliance with laws and regulations in these areas will have a material adverse effect on our competitive or consolidated financial position.

Litigation—For a discussion of certain litigation involving the company, see Note 4 to the condensed consolidated financial statements.

Outlook—The environment is highly competitive in most of our product categories and geographic regions. Competition is based largely on price, quality and servicing the special needs of customers. Industry analysts believe that there is overcapacity in most commercial printing ~~markets.~~markets exacerbated by recent drops in market demand. Therefore,competition is intense. Our intent is to differentiate our service offerings so ~~thatwe~~that we are viewed by our customers as a partner ~~that~~who can help them deliver effective and targeted communications in the right format to the right audience at the right time.

We are a large user of paper, supplied to us by our customers or ~~purchased~~bought by us. The cost and supply of certain paper grades used in the manufacturing process will continue to affect our financial results. However, management currently does not ~~anticipate~~see any disruptive conditions affecting prices ~~and~~or supply of paper in ~~2002.~~

2003.

Postal costs are a significant component of our customers’ cost structures and postal rate changes can influence the number of pieces that our customers are willing to mail. Any resulting decline in print volumes ~~mailed~~ could have an effect on our financial results. Postal rates increased in January ~~and~~2001, July 2001 and ~~an additional increase was effective beginning in~~ July 2002. Postal rate increases are not expected to occur again until 2006. Postal rate increases can enhance the value of ~~Donnelley~~ Logistics Services to our customers, as we are able to improve the cost efficiency of mail processing and distribution. This ability to deliver mail on a more precise schedule and at a lower relative cost should enhance our position in the marketplace.

The cost of energy affects ~~the~~ operating costs ~~of our print-related businesses~~in the Donnelley Print Solutions and Financial Services segments and transportation costs in ~~Donnelley Logistics.~~the Logistics Services segment. In ~~Donnelley~~ Logistics Services, increases in fuel costs can be offset by fuel surcharges passed on to ~~customers, but continuing increases~~customers. Increases in ~~other~~ energy costs beyond those planned could affect ~~the~~our consolidated financial results.

~~In addition, consumer~~

Consumer confidence and economic growth are key drivers of demand for our services. The slowdown experienced in the U.S. and international economies is ~~continuing to affect~~affecting demand across most of our businesses. Uncertainty in the economy has led ~~certain of~~customers across our ~~customers~~end-markets to indicate that they anticipate flat ~~or falling~~ demand ~~in their end markets for the remainder of 2002.~~

throughout 2003.

In the longer term, technological changes, including the electronic distribution of information, present both risks and opportunities for ~~the company.~~us. Many of ~~the company’s~~our businesses leverage our distinctive capabilities to participate in the rapid growth in electronic communications. Our goal remains to help our customers succeed by delivering effective and targeted communications in the right format to the right audience at the right time. We believe that with our competitive strengths, including our comprehensive service

offerings, technology leadership, depth of management experience, customer relationships and economies of scale, we can develop the most valuable solutions for our customers, which should result in increased shareholder value.

~~Litigation and Contingent Liabilities~~

The company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty (see Note 4 to the condensed consolidated financial statements). SFAS No. 5,~~Accounting for Contingencies~~, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. The company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact the company’s financial position or its results of operations.

Item 3

Quantitative and Qualitative Disclosures About Market Risk

The company is exposed to market risk from changes in interest rates and foreign currency exchange rates. As such, the company monitors the interest rate environment and modifies the components of its debt portfolio as necessary to manage funding ~~cost~~costs and interest rate risks. Generally, the company maintains at least half of its debt at fixed rates (approximately ~~50.4%~~54.3% at ~~September 30, 2002)~~March 31, 2003). ~~Included in floating~~Excluded from the calculation of fixed rate debt at March 31, 2003 is $200 million in fixed rate debt that was swapped to floating rates ~~in order~~ to take advantage of lower interest rates on floating rate debt. The swap was executed in two transactions that mature in November 2006. To reduce its exposure to future increases in floating interest rates, the company entered into additional floating to fixed swap agreements, effectively fixing the interest rates for the May 15, 2002, November 15, 2002, May 15, 2003 and November 15, ~~2002~~2003 interest rate resets on the original ~~swaps (see Note 9 to the condensed consolidated financial statements).~~swaps. The company’s exposure to adverse changes in foreign exchange rates is immaterial to the consolidated financial statements of the ~~company as a whole.~~company. The company occasionally uses other financial instruments to hedge exposures to interest rate and foreign exchange rate changes. The company ~~does not use~~uses derivative financial instruments as a risk management tool, and not for trading ~~purposes and is not a party to any leveraged derivatives.~~or speculative purposes. For further discussion relating to financial instruments, see ~~the “Debt Financing and Interest Expense” footnote~~Note 9 to the condensed consolidated financial ~~statements included in the company’s 2001 Annual Report on Form 10-K.~~

statements.

Item 4

Controls and Procedures

The Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the company have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this quarterly report on Form 10-Q, that the company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and include controls and procedures designed to ensure that information required to be disclosed by the company in such reports is accumulated and communicated to the company’s management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

There have not been any significant changes in the company’s internal controls or in other factors that could significantly affect such controls subsequent to the date of such evaluation.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

~~On each~~

The company previously reported the settlement of November 25, 1996, and June 30, 1998, class actions were brought against the company alleging racial discrimination and seeking actual, compensatory, consequential and punitive damages in an amount not less than $500 million. On December 18, 1995, athree class action ~~was brought~~cases filed against it, as well as settlement of a portion of a fourth class action. The settlement and the ~~company alleging age discrimination in connection with the 1993 closing~~portion of the company’s Chicago catalog operations, and violation of the Employee Retirement Income Security Act (ERISA). On December 28, 2000, a purported class action was brought against the company alleging failure to calculate pension benefits for former employees of the company’s Chicago catalog operations in accordance with plan documents and ERISA. These actionscase remaining are described in ~~Note 4 to the condensed consolidated financial statements contained in~~ Part ~~I, Item~~ I of this quarterly report on Form ~~10-Q.~~

10-Q and the company’s Annual Report on Form 10-K for 2002.

Item 4. Submission of Matters to a Vote of Security Holders

(a)

The company held its Annual Meeting of Stockholders on March 27, 2003.

(b)

The following matters were voted upon at the Annual Meeting of Stockholders.

The election of the nominees for Directors of Class 3, who will serve for a term to expire at the Annual Meeting of Stockholders to be held in 2006, was voted on by the Stockholders. The nominees, all of whom were elected, were Gregory Q. Brown, James R. Donnelley, Thomas S. Johnson and Norman H. Wesley. The Inspectors of Election certified the following vote tabulations:

	For	Withhold Authority
Gregory Q. Brown	95,135,180	4,108,993
James R. Donnelley	95,686,650	3,557,523
Thomas S. Johnson	93,410,150	5,834,023
Norman H. Wesley	93,452,944	5,791,229

A stockholder proposal regarding a sustainability report was rejected by the Stockholders. The Inspectors of Election certified the following vote tabulations:

For		%		Against		%		Abstain		%		Non-Vote		%
4,313,980		4%		81,035,276		82%		2,658,431		3%		11,236,506		11%

A stockholder proposal regarding expensing the costs of options was rejected by the Stockholders. The Inspectors of Election certified the following vote tabulations:

For		%		Against		%		Abstain		%		Non-Vote		%
35,335,690		36%		50,553,447		51%		2,118,500		2%		11,236,506		11%

Item 5. Other Information

Certain statements in this filing, including the discussions of management expectations for ~~2002,~~2003, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from the future results expressed or implied by those statements. Refer to Part I, Item 1 of the company’s ~~2001~~2002 Annual Report on Form 10-K for a description of such factors.

Item 6. Exhibits and Reports on Form 8-K.

(a)Exhibits

~~(a)~~

10.1

~~Exhibits~~

~~4(a)~~		~~Five Year Credit Agreement dated October 10, 2002 among~~ Amended and Restated R.R. Donnelley & Sons Company ~~the banks named therein and Bank One, N.A., as Administrative Agent~~Unfunded Supplemental Benefit Plan
~~(b)~~
10.2		~~364-Day Credit Agreement dated October 10, 2002 among~~ Amendment No. 1 to the Amended and Restated R.R. Donnelley & Sons Company ~~the banks named therein and Bank One, N.A., as Administrative Agent~~Unfunded Supplemental Benefit Plan
12
10.3		Amendment No. 2 to the Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan

12		Ratio of Earnings to Fixed Charges

99.1		Certification pursuant to Section 1350, Chapter 63 of Title 18 of the United States Code

99.2		Certification pursuant to Section 1350, Chapter 63 of Title 18 of the United States Code

~~(b)~~

~~A current report on Form 8-K was filed on August 14, 2002 and included Item 5 “Other Events” and Item 7 “Financial Statements and Exhibits”.~~

(b) No current report on Form 8-K was filed during the first quarter of 2003.

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

R.R. DONNELLEY & SONS COMPANY

/S/ VIRGINIA L. SEGGERMAN

Corporate Controller

(Authorized Officer and

Chief Accounting Officer)

~~November 12, 2002~~

~~Date~~


Date:		May 14, 2003

Certification Pursuant to Rule 13a-14 and Rule 15d-14

of the Securities Exchange Act of 1934

I, William L. Davis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of R.R. Donnelley & Sons Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: ~~November 12, 2002~~

May 14, 2003

/S/ WILLIAM L. DAVIS

William L. Davis

Chairman, President and Chief Executive Officer

Certification Pursuant to Rule 13a-14 and Rule 15d-14

of the Securities Exchange Act of 1934

I, Gregory A. Stoklosa, certify that:

1. I have reviewed this quarterly report on Form 10-Q of R.R. Donnelley & Sons Company;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: ~~November 12, 2002~~

May 14, 2003

/S/ GREGORY A. STOKLOSA

Gregory A. Stoklosa

Executive Vice President and Chief Financial Officer

Delaware (State or other jurisdiction of incorporation or organization)		36-1004130 (I.R.S. Employer Identification No.)

77 West Wacker Drive, Chicago, Illinois (Address of principal executive offices)		60601 (Zip Code)

Index		Page Number(s)
Condensed Consolidated Statements of Income (Unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~		3
Condensed Consolidated Balance Sheets (Unaudited) as of ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001~~2002		4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~		5
Notes to Condensed Consolidated Financial Statements (Unaudited)		6 - 1816

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview		19 17 - 2119
~~Critical Accounting Policies~~		~~21 - 23~~
~~Results of Operations—Third Quarter 2002 Compared with~~ ~~Third Quarter 2001~~		~~24 - 29~~
Results of Operations—First ~~Nine Months of 2002~~Quarter 2003 Compared with First ~~Nine Months of 2001~~ Quarter 2002		29 20 - 3428
Liquidity and Changes in Financial Condition		35 28 - 3629
Other Information		~~36 - 38~~ 30

Item 3. Quantitative and Qualitative Disclosures About Market Risk		38 31

Item 4. Controls and Procedures		38 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings		39 32

Item 4. Submission of Matters to a Vote of Security Holders		32

Item 5. Other Information		39 32

Item 6. Exhibits and Reports on Form 8-K		39 33

	Three Months Ended September 30						Nine Months Ended September 30
	2002			2001			2002			2001
Net sales	$	1,177,280		$	1,288,237		$	3,419,822		$	3,882,937
Cost of sales		935,101			1,050,616			2,815,484			3,223,461

Gross profit		242,179			237,621			604,338			659,476
Selling and administrative expenses		134,223			135,438			401,564			417,827
Restructuring and impairment charges		22,709			19,860			65,426			91,895

Earnings from operations		85,247			82,323			137,348			149,754
Other income (expense):
Interest expense		(16,937	)		(18,831	)		(49,683	)		(55,132	)
Other, net		6,391			4,870			12,447			7,320

Earnings before income taxes		74,701			68,362			100,112			101,942
Provision for income taxes		26,959			26,320			5,934			39,248

Net income	$	47,742		$	42,042		$	94,178		$	62,694

Net income per share of common stock
Basic	$	0.42		$	0.36		$	0.83		$	0.53
Diluted		0.42			0.36			0.82			0.53

ASSETS
	2002			2001
Cash and equivalents	$	72,148		$	48,615
Receivables, less allowance for doubtful accounts of $21,503 in 2002 and $22,571 in 2001		647,739			681,459
Inventories		132,418			126,718
Prepaid expenses		60,328			83,402

Total current assets		912,633			940,194

Net property, plant and equipment, at cost, less accumulated depreciation of $3,213,946 in 2002 and $3,148,018 in 2001		1,428,298			1,490,118
Goodwill, net of accumulated amortization of $57,655 in 2002 and $70,017 in 2001		307,026			312,613
Other intangible assets, net of accumulated amortization of $245,271 in 2002 and $243,405 in 2001		108,257			127,936
Other noncurrent assets		513,128			514,756

Total assets	$	3,269,342		$	3,385,617


LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	265,786		$	295,444
Accrued compensation		166,453			162,573
Short-term debt		310,410			168,497
Current and deferred income taxes		20,560			46,849
Other accrued liabilities		339,836			310,927

Total current liabilities		1,103,045			984,290

Long-term debt		775,296			881,318
Deferred income taxes		228,445			212,099
Other noncurrent liabilities		312,988			419,503

Total noncurrent liabilities		1,316,729			1,512,920

Shareholders’ equity:
Common stock at stated value ($1.25 par value)
Authorized shares: 500,000,000; Issued 140,889,050 in 2002 and 2001		308,462			308,462
Retained earnings		1,543,281			1,569,596
Accumulated other comprehensive loss		(129,486	)		(109,002	)
Unearned compensation		(5,765	)		(6,998	)
Reacquired common stock, at cost, 27,570,701 shares in 2002 and 27,439,636 shares in 2001		(866,924	)		(873,651	)

Total shareholders’ equity		849,568			888,407

Total liabilities and shareholders’ equity	$	3,269,342		$	3,385,617

ASSETS
	2003			2002
Cash and equivalents	$	40,483		$	60,543
Receivables, less allowance for doubtful accounts of $25,770 in 2003 and $19,250 in 2002		567,471			601,184
Inventories		147,264			116,191
Prepaid expenses		69,604			88,521

Total current assets		824,822			866,439

Net property, plant and equipment, at cost, less accumulated depreciation of $3,159,559 in 2003 and $3,206,942 in 2002		1,390,222			1,411,016
Goodwill		306,915			308,174
Other intangible assets, net of accumulated amortization of $264,007 in 2003 and $259,477 in 2002		92,651			96,662
Other noncurrent assets		492,733			469,481

Total assets	$	3,107,343		$	3,151,772


LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	252,397		$	267,690
Accrued compensation		145,527			157,070
Short-term debt		246,151			245,782
Current and deferred income taxes		2,587			1,397
Other accrued liabilities		312,326			282,791

Total current liabilities		958,988			954,730

Long-term debt		757,994			752,870
Deferred income taxes		214,068			214,112
Other noncurrent liabilities		313,921			315,466

Total noncurrent liabilities		1,285,983			1,282,448

Shareholders’ equity:
Common stock at stated value ($1.25 par value)
Authorized shares: 500,000,000; Issued 140,889,050 in 2003 and 2002		308,462			308,462
Retained earnings		1,540,268			1,593,107
Accumulated other comprehensive loss		(116,927	)		(115,456	)
Unearned compensation		(5,928	)		(5,177	)
Reacquired common stock at cost, 27,795,679 and 27,764,983 at 2003 and 2002, respectively		(863,503	)		(866,342	)

Total shareholders’ equity		862,372			914,594

Total liabilities and shareholders’ equity	$	3,107,343		$	3,151,772

Number of shares of common stock
outstanding as of ~~October 31, 2002~~April 30, 2003		~~113,328,348~~113,299,795

	Three Months Ended March 31
	2003			2002
Net sales	$	1,073,817		$	1,093,650
Cost of sales		905,507			925,745

Gross profit		168,310			167,905
Selling and administrative expenses		138,778			130,522
Restructuring and impairment charges		2,609			26,692

Earnings from operations		26,923			10,691

Interest expense, net		(12,707	)		(15,453	)
Other income (expense), net		(4,943	)		(6,891	)

Earnings (loss) before income taxes		9,273			(11,653	)
Provision (benefit) for income taxes		3,571			(34,312	)

Net income	$	5,702		$	22,659

Net income per share of common stock
Basic	$	0.05		$	0.20
Diluted		0.05			0.20
Weighted average number of common shares outstanding
Basic		113,101			112,894
Diluted		113,696			114,824

	2002			2001
Cash flows provided by (used for) operating activities:
Net income	$	94,178		$	62,694
Restructuring and impairment charges		65,426			91,895
Gain from reversal of excess tax reserves		(30,000	)		—
Loss on write-down of investments		—			2,040
Depreciation		217,503			239,319
Amortization		29,139			43,097
Gain on sale of assets and investments		(13,785	)		(6,637	)
Net change in operating working capital		865			(77,409	)
Net change in other assets and liabilities		(118,593	)		(42,513	)
Other		263			8,342

Net cash provided by operating activities		244,996			320,828

Cash flows provided by (used for) investing activities:
Capital expenditures		(182,269	)		(162,806	)
Other investments including acquisitions		182			(2,326	)
Dispositions of assets and investments		24,459			7,611

Net cash used for investing activities		(157,628	)		(157,521	)

Cash flows provided by (used for) financing activities:
Repayments of long-term debt		(75,083	)		(4,428	)
Short-term borrowings, net		103,056			101,118
Disposition of reacquired common stock		13,011			18,179
Acquisition of common stock		(19,356	)		(215,282	)
Cash dividends paid		(82,633	)		(82,505	)

Net cash used for financing activities		(61,005	)		(182,918	)

Effect of exchange rate changes on cash and equivalents		(2,830	)		(555	)
Net change in cash and equivalents		23,533			(20,166	)
Cash and equivalents at beginning of period		48,615			60,873

Cash and equivalents at end of period	$	72,148		$	40,707

Changes in operating working capital:
Decrease (increase) in assets:
Receivables—net	$	33,787		$	36,252
Inventories—net		(10,641	)		15,145
Prepaid expenses		22,488			6,391
Increase (decrease) in liabilities:
Accounts payable		(31,257	)		(91,818	)
Accrued compensation		4,669			(16,108	)
Other accrued liabilities		(18,181	)		(27,271	)

Net change in operating working capital	$	865		$	(77,409	)

	2003			2002
Cash flows from operating activities:
Net income	$	5,702		$	22,659
Restructuring and impairment charges		2,609			26,692
Gain from reversal of excess tax reserves		—			(30,000	)
Depreciation		68,236			72,120
Amortization		9,038			9,747
Gain on sale of assets		(1,945	)		(888	)
Net change in operating working capital, net of acquisition		(6,812	)		(29,230	)
Net change in other assets and liabilities, net of acquisition		(12,851	)		7,206
Other		4,459			(5,510	)

Net cash flows from operating activities		68,436			72,796

Cash flows from investing activities:
Capital expenditures		(50,022	)		(65,818	)
Other investments including acquisition, net of cash acquired		(17,000	)		87
Dispositions of assets		3,096			957

Net cash flows from investing activities		(63,926	)		(64,774	)

Cash flows from financing activities:
Repayments of long-term debt		(110,110	)		(728	)
Long-term borrowings		566			1,592
Net proceeds from short-term borrowings		113,280			32,782
Disposition of reacquired common stock		896			4,107
Acquisition of common stock		(693	)		(17,693	)
Cash dividends paid		(28,326	)		(27,108	)

Net cash flows from financing activities		(24,387	)		(7,048	)

Effect of exchange rate changes on cash and equivalents		(183	)		(359	)
Net change in cash and equivalents		(20,060	)		615
Cash and equivalents at beginning of period		60,543			48,615

Cash and equivalents at end of period	$	40,483		$	49,230

	Three Months Ended September 30						Nine Months Ended September 30
Thousands of dollars	2002			2001			2002			2001
Net income	$	47,742		$	42,042		$	94,178		$	62,694
Unrealized foreign currency loss		(7,202	)		(9,144	)		(20,484	)		(17,199	)

Comprehensive income	$	40,540		$	32,898		$	73,694		$	45,495

Thousands of dollars	Donnelley Print Solutions		Logistics Services			Other (1)			Corporate			Consolidated Total
Three Months Ended September 30, 2002
Net sales	$	771,291	$	192,896		$	213,093		$	—		$	1,177,280
Restructuring and impairment charges		6,562		286			3,088			12,773			22,709
Earnings (loss) from operations		106,890		2,159			(12,104	)		(11,698	)		85,247
Earnings (loss) before income taxes		110,131		2,160			(8,049	)		(29,541	)		74,701

Three Months Ended September 30, 2001
Net sales	$	856,585	$	190,059		$	241,593		$	—		$	1,288,237
Restructuring and impairment charges		7,928		190			11,742			—			19,860
Earnings (loss) from operations		96,966		236			(26,892	)		12,013			82,323
Earnings (loss) before income taxes		100,239		353			(26,458	)		(5,772	)		68,362

Nine Months Ended September 30, 2002
Net sales	$	2,202,029	$	541,565		$	676,228		$	—		$	3,419,822
Restructuring and impairment charges		43,716		408			7,120			14,182			65,426
Earnings (loss) from operations		178,134		7,216			(36,211	)		(11,791	)		137,348
Earnings (loss) before income taxes		188,933		7,174			(38,159	)		(57,836	)		100,112
Assets		1,701,900		233,646			659,351			674,445			3,269,342

Nine Months Ended September 30, 2001
Net sales	$	2,540,559	$	562,395		$	779,983		$	—		$	3,882,937
Restructuring and impairment charges		69,666		281			18,252			3,696			91,895
Earnings (loss) from operations		176,958		(7,566	)		(64,200	)		44,562			149,754
Earnings (loss) before income taxes		186,502		(7,478	)		(62,307	)		(14,775	)		101,942
Assets		1,964,942		245,255			800,497			628,109			3,638,803

	Net Sales
	Three Months Ended September 30,						Nine Months Ended September 30,
Thousands of dollars	2002		2001		% Change		2002		2001		% Change
Magazines, Catalogs and Retail	$	387,643	$	446,579	(13.2	)%	$	1,127,493	$	1,363,801	(17.3	)%
Book Publishing Services		193,882		199,505	(2.8	)%		526,349		542,220	(2.9	)%
Telecommunications		158,756		174,162	(8.8	)%		459,374		527,731	(13.0	)%
Premedia Technologies		31,010		36,339	(14.7	)%		88,813		106,807	(16.8	)%

Donnelley Print Solutions		771,291		856,585	(10.0	)%		2,202,029		2,540,559	(13.3	)%
Logistics Services		192,896		190,059	1.5	%		541,565		562,395	(3.7	)%
Financial Services		93,482		117,233	(20.3	)%		340,949		391,635	(12.9	)%
RRD Direct		33,828		46,148	(26.7	)%		104,752		132,394	(20.9	)%
International (2)		85,783		77,101	11.3	%		230,527		252,599	(8.7	)%
Other		—		1,111	N/M			—		3,355	N/M

Total Other		213,093		241,593	(11.8	)%		676,228		779,983	(13.3	)%

Total	$	1,177,280	$	1,288,237	(8.6	)%	$	3,419,822	$	3,882,937	(11.9	)%

Thousands of dollars
Three Months Ended March 31, 2003	Donnelley Print Solutions			Logistics Services			Financial Services			Other (1)			Corporate			Consolidated
Earnings (loss) from operations	$	45,682		$	3,543		$	(6,362	)	$	(9,045	)	$	(6,895	)	$	26,923
Net interest expense		(148	)		(26	)		—			(2,436	)		(10,097	)		(12,707	)
Other income (expense):
Earnings (loss) from investments		(220	)		—			—			(159	)		11			(368	)
Foreign currency transaction loss		(19	)		—			—			(476	)		(782	)		(1,277	)
Affordable housing write-downs		—			—			—			—			(4,000	)		(4,000	)
Other income (expense), net		412			—			(160	)		1,258			(808	)		702

Total other income (expense)		173			—			(160	)		623			(5,579	)		(4,943	)

Earnings (loss) before income taxes	$	45,707		$	3,517		$	(6,522	)	$	(10,858	)	$	(22,571	)	$	9,273

Thousands of dollars
Three Months Ended March 31, 2002	Donnelley Print Solutions			Logistics Services			Financial Services			Other (1)			Corporate			Consolidated
Earnings (loss) from operations	$	23,978		$	3,043		$	(12,262	)	$	(14,494	)	$	10,426		$	10,691
Net interest expense		(64	)		(1	)		(3	)		(2,747	)		(12,638	)		(15,453	)
Other income (expense):
Loss from investments		(456	)		—			—			(377	)		(39	)		(872	)
Foreign currency transaction loss		(9	)		—			—			(2,786	)		—			(2,795	)
Affordable housing write-downs		—			—			—			—			(2,700	)		(2,700	)
Corporate-owned life insurance		—			—			—			—			(5,377	)		(5,377	)
Other income (expense), net		3,660			(61	)		191			1,007			56			4,853

Total other income (expense)		3,195			(61	)		191			(2,156	)		(8,060	)		(6,891	)

Earnings (loss) before income taxes	$	27,109		$	2,981		$	(12,074	)	$	(19,397	)	$	(10,272	)	$	(11,653	)

In thousands	Three Months Ended September 30		Nine Months Ended September 30
In thousands	2002	2001	2002	2001
Average shares outstanding—basic	113,143	115,831	113,039	117,610
Effect of dilutive securities	1,156	1,935	1,631	1,767

Average shares outstanding—diluted	114,299	117,766	114,670	119,377

Thousands of dollars		Notional Principal(1)			Interest Rates			Fair Values
Effective Date	Maturity Date	Notional Principal(1)			Receive		Pay	Fair Values
November 14, 2001	November 15, 2006	$	100,000	(4)	5.0	%	LIBOR + 0.863%	$	5,170	(2)
November 14, 2001	November 15, 2006		100,000	(4)	5.0	%	LIBOR + 0.863%		5,170	(2)
November 15, 2002	May 15, 2003		100,000	(5)	LIBOR		2.000%		(301	)(3)
November 15, 2002	May 15, 2003		100,000	(5)	LIBOR		1.965%		(283	)(3)
May 15, 2003	November 17, 2003		100,000	(5)	LIBOR		1.590%		(212	)(3)
May 15, 2003	November 17, 2003		100,000	(5)	LIBOR		1.650%		(235	)(3)
November 17, 2003	May 17, 2004		100,000	(5)	LIBOR		1.590%		(84	)(3)
November 17, 2003	May 17, 2004		100,000	(5)	LIBOR		1.540%		(38	)(3)

In thousands, except per share data	Three Months Ended March 31
In thousands, except per share data	2003		2002
Average shares outstanding—basic		113,101		112,894
Effect of dilutive securities		595		1,930

Average shares outstanding—diluted		113,696		114,824

Net income	$	5,702	$	22,659
Basic EPS	$	0.05	$	0.20
Diluted EPS		0.05		0.20

Thousands of dollars	Reserve balance at January 1, 2002		First quarter 2002 charges		Second quarter 2002 charges		Third quarter 2002 charges			Cash payments			Pension and post-retirement benefits plan adjustment			Non-cash items			Reserve balance at September 30, 2002
Employee termination benefits	$	25,291	$	14,808	$	3,389	$	7,917		$	(18,024	)	$	(20,714	)	$	—		$	12,667
Postretirement plan curtailment		—		—		—		8,320			—			(8,320	)		—			—
Exit costs		8,638		2,545		76		739			(5,846	)		—			—			6,152
Relocation costs		—		5,035		7,087		6,477			(18,599	)		—			—			—
Asset impairment		—		4,304		5,473		(744	)		—			—			(9,033	)		—

Total	$	33,929	$	26,692	$	16,025	$	22,709		$	(42,469	)	$	(29,034	)	$	(9,033	)	$	18,819

	Three Months Ended September 30				Nine Months Ended September 30
Thousands of dollars, except per share data	2002		2001		2002		2001
Net Income:
Reported net income	$	47,742	$	42,042	$	94,178	$	62,694
Goodwill amortization, net of tax		—		3,294		—		10,193

Adjusted net income	$	47,742	$	45,336	$	94,178	$	72,887

Basic Earnings Per Share:
Reported basic earnings	$	0.42	$	0.36	$	0.83	$	0.53
Goodwill amortization, net of tax		—		0.03		—		0.09

Adjusted basic earnings	$	0.42	$	0.39	$	0.83	$	0.62

Diluted Earnings Per Share:
Reported diluted earnings	$	0.42	$	0.36	$	0.82	$	0.53
Goodwill amortization, net of tax		—		0.03		—		0.09

Adjusted diluted earnings	$	0.42	$	0.39	$	0.82	$	0.62

Thousands of dollars	Net Book Value at January 1, 2002		Foreign Exchange/Other			Disposition			Net Book Value at September 30, 2002
Donnelley Print Solutions	$	80,552	$	—		$	—		$	80,552
Logistics Services		150,344		—			—			150,344
Other(1)		81,717		(3,787	)		(1,800	)		76,130

	$	312,613	$	(3,787	)	$	(1,800	)	$	307,026

	Nine Months Ended September 30
Thousands of dollars, except per share data	2002									2001
Thousands of dollars, except per share data	Earnings before Income Taxes			Net Income			Per Diluted Share			Earnings before Income Taxes			Net Income			Per Diluted Share
Restructuring and impairment charges	$	(65,426	)	$	(40,111	)	$	(0.35	)	$	(91,895	)	$	(56,515	)	$	(0.47	)
Reversal of excess COLI tax reserves		—			30,000			0.26			—			—			—
Other investment write-downs		—			—			—			(2,040	)		(1,255	)		(0.01	)
Impact of prior year goodwill amortization		—			—			—			(13,352	)		(10,193	)		(0.09	)

Total	$	(65,426	)	$	(10,111	)	$	(0.09	)	$	(107,287	)	$	(67,963	)	$	(0.57	)