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Form 10-K

R.R. DONNELLEY & SONS COMPANY - RRD

Filed: March 14, 2005 (period: December 31, 2004)

Annual report which provides a comprehensive overview of the company for the past year

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from                      to                     

Commission file number 1-4694

R. R. DONNELLEY & SONS COMPANY

(Exact name of registrant as specified in its charter)

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

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

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

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

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

The aggregate market value of the shares of common stock (based on the closing price of these shares on the New York Stock Exchange—Composite Transactions) on June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, held by nonaffiliates was $6,991,778,493.

As of February 28, 2005, 215,396,280 shares of common stock were outstanding.

Documents Incorporated By Reference

Portions of the Registrant’s proxy statement related to its annual meeting of stockholders scheduled to be held on May 26, 2005 are incorporated by reference into Part III of this Form 10-K.

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PART I

Company Overview

R.R. Donnelley & Sons Company (“RR Donnelley” or the “Company”) is the world’s premier full-service global print provider and the largest printing company in North America, serving customers in the publishing, healthcare, advertising, retail, telecommunications, technology, financial services, and many other industries. Founded more than 140 years ago, the Company provides solutions in commercial printing, forms and labels, direct mail, financial printing, print fulfillment, business communication outsourcing, logistics, online services, digital photography, color services and content and database management.

On November 8, 2003, the Company entered into an agreement to acquire Moore Wallace Incorporated (“Moore Wallace”) providing for each common share of Moore Wallace to be exchanged for 0.63 of a share of common stock of the Company (the “Acquisition”). The Acquisition was completed on February 27, 2004 (the “Acquisition Date”), and as such, the Company’s results of operations for the year ended December 31, 2004 include the results of Moore Wallace from the Acquisition Date. The strategy for the new organization is focused on reducing costs, increasing profitability, increasing cash flow and enhancing revenue opportunities. Management believes the Acquisition will continue to enhance the Company’s combined competitive position within the industry by enabling the Company to become a full-service global print provider with highly complementary products and services. Management also believes the Acquisition will enable the Company to improve profitability, achieve significant cost and procurement synergies and leverage complementary products and services through cross-selling opportunities; however, implementing reorganization activities, including the relocation of the global headquarters within the Chicago area, will likely result in future charges, which may be substantial.

During the second quarter of 2004, management changed the Company’s reportable segments to reflect the impact of the Acquisition. The segments were identified based on factors including the nature of products and services, the availability of discrete financial information, and the manner in which the chief operating decision maker regularly assesses information for decision-making purposes. During the third quarter of 2004, as a result of the then pending sale of the Company’s package logistics business and the shutdown of Momentum Logistics, Inc. (“MLI”), management revised the Company’s reportable segments to eliminate the previously reported Logistics segment and to combine the remaining logistics operations (primarily print logistics) with the Company’s Publishing and Retail Services segment. Due to a change in strategic focus subsequent to the Acquisition, in December 2004 the Company committed to sell its Peak Technologies business, which was acquired in the Acquisition and formerly reported in the Forms and Labels segment, and it is accordingly presented as a discontinued operation. Prior periods have been reclassified to conform to this reporting structure. The reported segment results reflect the results of Moore Wallace from the Acquisition Date. The current reportable segments are:

Publishing and Retail Services.    The Publishing and Retail Services segment consists of the following businesses:

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The Publishing and Retail Services segment accounted for 39.3% of the Company’s consolidated net sales in 2004.

Integrated Print Communications.    The Integrated Print Communications segment consists primarily of short-run and variable print operations in the following lines of business:

The Integrated Print Communications segment accounted for 40.2% of the Company’s consolidated net sales in 2004.

Forms and Labels.    The Forms and Labels segment designs and manufactures paper-based business forms, labels and printed office products, and provides print-related services, including print-on-demand services, from facilities located in North America and Latin America. The Latin American business also prints magazines, catalogs, books and directories.

The Forms and Labels segment accounted for 20.5% of the Company’s consolidated net sales in 2004.

Corporate.    The Corporate segment includes unallocated net earnings of benefit plans (excluding service costs) and unallocated general and administrative expenses including, in part, executive, legal, finance, information technology, human resources and certain facility costs.

Financial and other information relating to these segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Note 19, Industry Segment Information, to the consolidated financial statements. Information relating to the Company’s international operations is included in Note 20, Geographic Area Information, to the consolidated financial statements.

Seasonality

Demand in several of the end markets served by the Publishing and Retail Services segment is affected by advertising and consumer spending trends. Historically, the Company’s businesses which serve the magazine, catalog and retail and book businesses generate higher revenues in the second half of the year driven by increased advertising pages within magazines, and holiday catalog, retail and book volumes.

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Competition

The Company operates principally in the commercial print portion of the print industry, with related service offerings designed to provide customers complete solutions for communicating their messages to targeted audiences. 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. Therefore, competition is intense. In this competitive pricing environment, companies have focused on reducing costs in order to preserve operating margins. Management believes this environment will continue to lead to more consolidation within the commercial print industry as companies seek economies of scale, broader customer relationships, geographic coverage and product breadth to overcome or offset industry excess-capacity and pricing pressures.

Raw Materials

The primary raw materials the Company uses in its print businesses are paper and ink. The Company negotiates with leading suppliers to maximize its purchasing efficiencies, but it does not rely on any one supplier. The Company has existing paper supply contracts to cover substantially all of its requirements through 2005 and management believes extensions and renewals of these purchase contracts will provide adequate paper supplies in the future. Ink and related materials are currently available in sufficient amounts, and the Company believes that it will have adequate supplies in the future. The Company also coordinates purchasing activity at the local facility and corporate levels to increase economies of scale. Fluctuations in paper prices, however, can affect the Company’s operations. Prices for most paper grades increased in 2004. Although the pricing environment is difficult, the Company is continuing its efforts to raise its prices to cover a substantial portion of these increases, but there is no assurance that the Company will be successful in passing these increases to customers.

Proceeds from the sale of by-products, which are treated as a reduction of cost of goods sold, are directly affected by fluctuations in the price of paper. By-product recoveries in 2004 exceeded 2003 due to higher paper prices and volumes. The Company is assessing the continued impact of the rise in the price of crude oil on fuel costs. The Company believes it will be able to pass a substantial portion of the increase in fuel prices directly to its customers in order to offset the impact of these increases. The Company does not believe that the recent increase in crude oil prices has had a material impact on the Company’s consolidated annual results of operations, financial position or cash flows. However, the Company cannot predict the impact that price increases in crude oil will have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated annual results of operations, financial position or cash flows.

Customers

During the year ended December 31, 2004, no customer accounted for 10% or more of the Company’s net sales.

Research and Development

The Company has research facilities in Grand Island, New York and Downers Grove, Illinois. The Company does not engage in any material research and development activities.

Environmental Compliance

The Company’s overriding objectives in the environmental, health and safety areas are to create sustainable compliance and an injury-free workplace. The Company believes that estimated capital expenditures for environmental controls to comply with federal, state and local provisions, as well as expenditures, if any, for its share of costs to clean hazardous waste sites that have received the Company’s waste, will not have a material effect on its consolidated annual results of operations, financial position or cash flows.

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Employees

As of December 31, 2004, the Company had approximately 43,000 employees.

Developments

During September 2004, the Company completed the shutdown of MLI. On October 29, 2004, the Company completed the sale of its package logistics business. Due to a change in strategic focus subsequent to the Acquisition, in December 2004 the Company committed to sell its Peak Technologies business, which was acquired in the Acquisition and formerly reported in the Forms and Labels segment. For the year ended December 31, 2004, these three businesses have been presented as discontinued operations in the consolidated financial statements. All prior periods have been reclassified to conform to this presentation. See Note 3, Discontinued Operations and Divestitures, to the consolidated financial statements.

During 2004, the Company announced the closure of certain of its facilities to improve the effectiveness and efficiency of its overall print platform. Corporate and administrative facilities and personnel were also rationalized during 2004. The Company believes these restructuring actions will continue in 2005 in order to ensure that its cost structure and operations are aligned. See Note 4, Restructuring and Impairment, to the consolidated financial statements for more details.

Due to a recent reorganization of managerial responsibilities, the Company will change its reportable segments as of January 1, 2005. Effective January 1, 2005, the European, Asian and book businesses will move from the Integrated Print Communications segment to the Publishing and Retail Services segment. The Company will report financial information with respect to the new segments in its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005 and will reclassify the corresponding items of segment information for earlier periods.

Available Information

We maintain an Internet website at www.rrdonnelley.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with or furnished to the SEC. The Corporate Governance Principles of the Company’s Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility & Governance Committees of the Board of Directors and the Company’s Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.rrdonnelley.com, and will be provided, free of charge, to any shareholder who requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document. In May 2004, the Company submitted to the New York Stock Exchange a certificate of the Chief Executive Officer of the Company certifying that he is not aware of any violation by the Company of New York Stock Exchange corporate governance listing standards. The Company also filed as exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 certificates of the Chief Executive Officer and Chief Financial Officer as required under Section 302 of the Sarbanes-Oxley Act.

Special Note Regarding Forward-Looking Statements

We have made forward-looking statements in this Annual Report on Form 10-K that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.

These statements may include, or be preceded or followed by, the words “may,” “will,” “should,” “potential,” “possible,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “hope” or similar expressions. The Company claims the protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

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Forward-looking statements are not guarantees of performance. The following important factors, in addition to those discussed elsewhere in this Form 10-K, could affect the future results of the Company and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

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Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.

Consequently, readers of this Annual Report should consider these forward-looking statements only as our current plans, estimates and beliefs. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We undertake no obligation to update or revise any forward-looking statements in this Annual Report to reflect any new events or any change in conditions or circumstances. Even if these plans, estimates or beliefs change because of future events or circumstances after the date of these statements, or because anticipated or unanticipated events occur, we decline and cannot be required to accept an obligation to publicly release the results of revisions to these forward-looking statements.

Our corporate office is located in leased office space in Chicago, Illinois. In addition, as of December 31, 2004, the Company leases or owns 410 U.S. facilities, some of which have multiple buildings and warehouses and these U.S. facilities encompass approximately 29.9 million square feet. We lease or own 152 international facilities encompassing approximately 6.5 million square feet in Canada, Latin America, Europe and Asia. Of the U.S. and international manufacturing and warehouse facilities, approximately 25.5 million square feet of space is owned, while the remaining 10.9 million square feet of space is leased.

As reported in the Company’s Annual Report on Form 10-K for 2003, a class action lawsuit Jones, et al. v. R.R. Donnelley & Sons Co. was filed against the Company in 1996. The district court in the case certified three plaintiff classes.

Following a fairness hearing held on November 30, 2004, the district court approved a settlement resolving all of the issues in the Jones case without any admission of wrongdoing by the Company and including the release of the Company from all discrimination claims by the plaintiffs. The total amount paid by the Company in connection with the settlement was $15.0 million, which amount was paid in early 2005. The total pretax charge during 2004 related to this settlement was $14.8 million and was recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.

The Company is subject to laws and regulations relating to the protection of the environment. We provide for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are not discounted. We have been designated as a potentially responsible party in 12 federal and state Superfund sites. In addition to the Superfund sites, the Company may also have the obligation to remediate five other previously owned facilities and ten other currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs. Our understanding of the financial strength of other potentially responsible parties at the Superfund sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. We have established reserves that are believed to be adequate to cover our share of the potential costs of remediation at each of the Superfund sites and the previously and currently owned facilities. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future, in the opinion of management, compliance with the present environmental

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protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on the Company’s consolidated annual results of operations, financial position or cash flows.

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

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

No matters were submitted to a vote of security holders during the three months ended December 31, 2004.

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EXECUTIVE OFFICERS OF R.R. DONNELLEY & SONS COMPANY

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PART II

RR Donnelley’s common stock is listed and traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Exchange and Toronto Stock Exchange.

As of February 28, 2005, there were approximately 10,058 stockholders of record. Quarterly prices of the Company’s common stock, as reported on the New York Stock Exchange-Composite Transactions, and dividends paid per share during the years ended December 31, 2004 and 2003, are contained in the chart below:

The Company did not purchase any shares of its common stock in the three months ended December 31, 2004.

SELECTED FINANCIAL DATA

(in millions, except per-share data)

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

Overview

R.R. Donnelley & Sons Company (“RR Donnelley” or the “Company”) is the world’s premier full-service global print provider and the largest printing company in North America, serving customers in the publishing, healthcare, advertising, retail, telecommunications, technology, financial services, and many other industries. Founded more than 140 years ago, the Company provides solutions in commercial printing, forms and labels, direct mail, financial printing, print fulfillment, business communication outsourcing, logistics, online services, digital photography, color services and content and database management. On November 8, 2003, the Company entered into a combination agreement with Moore Wallace Incorporated (“Moore Wallace”) providing for each common share of Moore Wallace to be exchanged for 0.63 of a share of common stock of the Company (the “Acquisition”). The Acquisition was completed on February 27, 2004 (the “Acquisition Date”), and as such, the Company’s results of operations for the year ended December 31, 2004 include the results of Moore Wallace from the Acquisition Date.

During the second quarter of 2004, management changed the Company’s reportable segments to reflect the impact of the Acquisition. The segments were identified based on factors including the nature of products and services, the availability of discrete financial information, and the manner in which the chief operating decision maker regularly assesses information for decision-making purposes. During the third quarter of 2004, as a result of the then pending sale of the Company’s package logistics business and the shutdown of Momentum Logistics, Inc. (“MLI”), management revised the Company’s reportable segments to eliminate the previously reported Logistics segment and to combine the remaining logistics operations (primarily print logistics) with the Company’s Publishing and Retail Services segment. Due to a change in strategic focus subsequent to the Acquisition, in December 2004 the Company committed to sell its Peak Technologies business, which was acquired in the Acquisition and formerly reported in the Forms and Labels segment, and it is accordingly presented as a discontinued operation. Prior periods have been reclassified to conform to this reporting structure. The reported segment results reflect the results of Moore Wallace from the Acquisition Date. The current reportable segments are:

Publishing and Retail Services.    The Publishing and Retail Services segment consists of the following businesses:

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Integrated Print Communications.    The Integrated Print Communications segment consists primarily of short-run and variable print operations in the following lines of business:

Forms and Labels.    The Forms and Labels segment designs and manufactures paper-based business forms, labels and printed office products, and provides print-related services, including print-on-demand services, from facilities located in North America and Latin America. The Latin American business also prints magazines, catalogs, books and directories.

Corporate.    The Corporate segment includes unallocated net earnings of benefit plans (excluding service costs) and unallocated general and administrative expenses including, in part, executive, legal, finance, information technology, human resources and certain facility costs.

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. Therefore, competition is intense.

RR Donnelley is a large user of paper, supplied to it by its customers or bought by the Company. The cost and supply of certain paper grades used in the manufacturing process will continue to affect the Company’s consolidated financial results. Prices for most paper grades increased in 2004. Although the pricing environment

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is difficult, the Company is continuing its efforts to raise prices to cover a substantial portion of these increases, but there is no assurance that the Company will be successful in passing these increases to customers. Paper prices are expected to increase again in 2005; however, management does not foresee any supply problems. Price increases in 2005 are not expected to have a significant impact on the Company’s consolidated annual results of operations, financial position or cash flows.

Postal costs are a significant component of our customers’ cost structures and postal rate changes can influence the number of pieces that the Company’s customers are willing to mail. Any resulting decline in print volumes mailed could have an effect on the Company’s financial results. The Company does not expect postal rate increases in the United States to occur until 2006. Postal rate increases can enhance the value of the Company’s logistics business to its customers, as the Company is able to improve the cost efficiency of mail processing and distribution.

The Company is assessing the continued impact of the rise in the price of crude oil on fuel costs. The Company believes it will be able to pass a substantial portion of the increase in fuel prices directly to our customers in order to offset the impact of these increases. We do not believe that the recent increase in crude oil prices has had a material impact on our consolidated annual results of operations, financial condition or cash flows for the year ended 2004. However, the Company cannot predict the impact that price increases in crude oil will have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated results of operations, financial position or cash flows.

Technological changes, including the electronic distribution of documents and data and the on-line distribution and hosting of media content, present both risks and opportunities for us. The Company’s businesses seek to leverage distinctive capabilities to participate in the rapid growth in electronic communications. The Company’s goal remains to help its customers succeed by delivering effective and targeted communications in the right format to the right audiences at the right time. Management believes that with the Company’s competitive strengths, including its comprehensive service offerings, technology leadership, depth of management experience, customer relationships and economies of scale, the Company can develop the most valuable solutions for its customers.

The Company seeks to countervail these trends by leveraging its position and size, generating continued productivity improvements and enhancing the value the Company delivers to its customers by offering products and services to improve effectiveness and reduce total delivered cost. In addition, the Company implemented a number of strategic initiatives including the restructuring and integration of operations, the expansion of internal cross-selling, cost containment and reduction efforts and the disposal of non-core businesses.

The Company will continue to evaluate ways to reduce its cost structure and improve the productivity of its operations. Future cost reduction initiatives could include the reorganization of operations and the consolidation of facilities. Implementing such initiatives may result in future charges, which may be substantial. Management also reviews its portfolio of businesses on a regular basis to balance appropriate risks and opportunities, to maximize efficiencies and to support the Company’s long-term strategic growth goals.

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Significant Accounting Policies and Critical Estimates

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

Revenue Recognition

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

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

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

Revenues related to the Company’s premedia operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. With respect to the Company’s logistics operations, whose operations include the delivery of printed material, the Company recognizes revenue upon completion of the delivery of services.

The Company records deferred revenue in situations where the revenue recognition criteria outlined above is not met.

Accounts Receivable

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

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

Inventories

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

Goodwill and Other Long-Lived Assets

The Company’s methodology for allocating the purchase price relating to acquisitions is based on established valuation techniques that reflect the consideration of a number of factors including valuations performed by third party appraisers. Goodwill is measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. The Company performs goodwill impairment tests on an annual basis or more frequently in certain circumstances, if necessary. The Company compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of a reporting unit exceeds the fair value, the Company would perform an additional fair value measurement calculation to determine the impairment loss, which would be charged to operations.

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

The goodwill and long-lived asset impairment assessments are generally determined based on fair value techniques, including determining the estimated future discounted cash flows over the remaining useful life of the asset using a discount rate determined by management to be commensurate with the risk inherent in the current business model. The assumptions supporting the cash flows, including discount rates, are determined using the best estimates as of the date of the impairment review. If these estimates or their related assumptions change in the future, the Company might be required to record impairment charges for the assets.

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

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sale or disposition of the Company’s ownership interests. Expected residual values are developed from industry assumptions and cash flow projections provided by the underlying partnerships and include certain assumptions with respect to operating costs, debt levels and certain market data related to the properties such as assumed vacancy rates. Should these assumptions differ from actual results in the future, the Company might be required to further write down its carrying value of these investments.

Commitments and Contingencies

The Company is subject to lawsuits, investigations and other claims related to environmental, employment and other matters, as well as preference claims related to amounts received from customers prior to their seeking bankruptcy protection. Periodically, the Company reviews the status of each significant matter and assesses potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and might revise its estimates.

Restructuring

The Company records restructuring charges when management, with the appropriate level of authority, commits and approves the elimination of certain duplicative functions and the closure of certain facilities in order to reduce the Company’s overall cost structure. Certain restructuring costs were recognized as a cost of the Acquisition because they were contemplated at the time of the Acquisition and were, therefore, included in the purchase price allocation. These restructuring charges and related liabilities are based on contractual obligations and management’s best estimates at the time the charges are recorded.

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

Accounting for Income Taxes

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

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

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

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

Pension and Postretirement Plans

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

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

The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions, risk and active management premiums. The prospective target asset allocation percentage for both the pension and postretirement plans is approximately 75% for equity securities and approximately 25% for fixed income and other securities.

The expected return on plan assets assumption at September 30, 2004 was 8.5% for the Company’s pension plans and 8.0% for the Company’s funded postretirement plan. The discount rate used at September 30, 2004 to measure both the pension and postretirement benefit obligations was 6.0%. A one percentage point decrease in the discount rate at September 30, 2004 would increase the pension plan’s accumulated benefit obligation by approximately $330.0 million.

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

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

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

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.” See Note 8, Investments, to the consolidated financial statements related to the Company’s investments in affordable housing properties. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries.

Financial Review

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

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

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

Consolidated

Net sales for 2004 increased $2,973.8 million, or 71.1% to $7,156.4 million versus the prior year. The increase was primarily due to the Acquisition ($2,669.6 million), and increased volumes in the Integrated Print Communications and Publishing and Retail Services segments. Improved volumes in the Integrated Print Communications segment were attributable to the financial print business, which benefited from improved capital market transaction levels in the U.S. and international markets, and improved sales in the education book market. While management believes that internal cross-selling efforts will result in increased volume within current markets as the Company leverages its expanded product portfolio following the Acquisition, printing industry excess capacity, pricing pressures and electronic substitution will continue to adversely impact sales of certain products and services of the Company.

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

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

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During 2004, the Company recorded net restructuring and impairment charges of $107.4 million. These charges included $85.0 million for workforce reduction costs (approximately 2,174 positions) primarily related to the elimination of duplicative administrative functions resulting from the Acquisition and the reorganization of certain operating activities, as well as lease exit costs. For 2004, the Company recorded impairment charges of $22.4 million. The impairment charges primarily included $13.1 million for the abandonment of certain Publishing and Retail Services related enterprise software projects and other assets, $2.1 million for the write-down of a Publishing and Retail Services customer contract and $7.2 million related to software and other assets in the Forms and Labels and Integrated Print Communications segments. Additional restructuring charges are likely in 2005, as the Company eliminates duplicative functions, relocates the global headquarters within the Chicago area and continues to rationalize its manufacturing, sales and administrative platforms as a result of the Acquisition and other initiatives. During 2003, the Company recorded $12.5 million of net restructuring and impairment charges, primarily related to workforce reductions (approximately 279 positions), the relocation of employees and equipment from closed facilities and the curtailment of the Company’s postretirement benefit plan.

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

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

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

Investment and other income (expense), net, for 2004 was $16.5 million of expense versus $12.9 million of expense for 2003. The change was due to a higher write-down of affordable housing investments ($29.3 million in 2004 versus $23.3 million in 2003) that was partially offset by higher net gains on the disposals of investments in 2004 (which included a $14.3 million gain on an investment in Latin America). The write-downs of affordable housing investments in 2004 and 2003 reflected declines in the estimated fair market values of the Company’s affordable housing investments.

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

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

Net loss from discontinued operations was $80.0 million for 2004 compared to a net loss of $12.0 million in 2003. The net loss for 2004 was primarily due to net restructuring and impairment charges of $109.1 million. During the first quarter of 2004, the Company recorded an impairment charge of $13.9 million for the goodwill, intangibles and fixed assets of MLI, as the carrying value of the assets exceeded the future cash flows expected to

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

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

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Publishing and Retail Services

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

Net sales for the Publishing and Retail Services segment for 2004 were $2,811.8 million, an increase of $203.0 million, or 7.8%, compared to 2003, primarily due to the Acquisition ($75.2 million) and volume increases across all businesses in the segment. Net sales in the magazine, catalog and retail business increased in 2004 versus the prior year due to volume increases related to major customers and increased paper prices that were partially offset by industry pricing pressures. Net sales in the directories business for 2004 increased versus the prior year due to volume improvements that more than offset pricing pressures. The net sales for the premedia business benefited from higher volumes from both existing Publishing and Retail Services and third-party customers. Net sales for the logistics business reflected increased print logistics and expedited service volumes due to growth in volume from existing Publishing and Retail Services and third-party customers.

Income from continuing operations for the Publishing and Retail Services segment for 2004 declined $4.7 million, or 1.5%, to $306.7 million compared to the prior year due to increased restructuring and impairment charges and increased employee related incentive costs. Net restructuring charges of $25.1 million and impairment charges of $15.2 million in 2004 compared to total restructuring and impairment charges of $2.8 million in 2003. The 2004 restructuring charges primarily related to employee terminations as the Company continued to focus on reducing its operating cost structure. The 2004 impairment charge primarily included $13.1 million for the abandonment of certain enterprise software projects and other assets and $2.1 million for the write-down of a customer contract. These charges were partially offset by the improved results of the logistics business, which benefited from the Acquisition ($19.3 million); and improved volumes, productivity, by-product recoveries, cost containment and incremental procurement savings. Operating results for 2005 are expected to further benefit from the restructuring actions and cost reduction initiatives implemented during 2004.

Integrated Print Communications

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

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Net sales for the Integrated Print Communications segment increased by $1,437.3 million to $2,878.3 million in 2004 compared to the prior year primarily due to the Acquisition ($1,273.4 million) and increased financial print sales resulting from improved global capital markets and stable customized communications solutions business activity. The international operations in the segment, which benefited from improved volumes and favorable currency variances also contributed to the sales increase. The book business benefited from improved sales in the educational book market in the second half of 2004 that are expected to continue to favorably impact results in 2005.

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

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

Forms and Labels

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

Net sales for 2004 increased $1,333.5 million to $1,466.3 million primarily due to the Acquisition ($1,321.0 million). Because the Forms and Labels segment results primarily reflect the acquired operations of Moore Wallace subsequent to the Acquisition Date, management believes that the following comments in relation to the revenue trends affecting net sales in the Forms and Labels segment for 2004 versus 2003 are relevant. The forms and labels industry is in secular decline, but the pace of this decline remains difficult to predict. The business

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

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

Corporate

Corporate operating expenses for 2004 increased $108.8 million to $226.4 million versus the same period in 2003. The increase is primarily due to the Acquisition, restructuring charges of $19.7 million primarily for workforce reductions, integration charges of $6.8 million, provisions for litigation, insurance, termination benefits and sales and use taxes of $27.3 million and lower benefit plan earnings. In addition, 2004 included increased employee related incentive costs ($20.1 million) and incremental third party costs associated with Sarbanes-Oxley Act compliance ($7.5 million). These increases were partially offset by benefits achieved through restructuring actions and cost containment initiatives taken during the year. Management expects to incur future restructuring charges as the Company continues to eliminate duplicative functions and to consolidate its corporate administrative facilities, including the relocation of the global headquarters within the Chicago area, pursuant to the Acquisition. These charges might be significant and might unfavorably impact the financial results during the next several quarters while the Company continues to lower its underlying administrative cost structure.

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

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

Consolidated

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

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

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

During 2003, the Company recorded net restructuring and impairment charges of $12.5 million, which compared to $87.4 million in 2002. Restructuring charges of $8.8 million included workforce reduction costs (approximately 279 positions) and other charges, related to exit activities. Impairment charges of $3.7 million primarily related to the closure of a directory plant in Chile within the Forms and Labels segment.

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

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

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

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

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

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

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

Publishing and Retail Services

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

Net sales for 2003 for the Publishing and Retail Services segment decreased $58.2 million, or 2.2%, to $2,608.8 million. Decreased net sales for the magazine, catalog and retail business primarily reflected price deterioration and a mix shift to work with a lower price per unit, partially offset by higher volume and improved print logistics sales. The economic slowdown that began in 2000 generated excess industry capacity from reduced demand levels and higher customer bankruptcies resulting in increased competition and pricing pressures. Lower contract prices on renewals continued to cycle through the 2003 results. The net sales decline in the premedia business was driven by these same factors. Net sales for the directories business decreased primarily due to an increase in customer-furnished paper and lower average prices, partially offset by higher volume. The net sales increase in the logistics business was driven by higher volumes from both print related operations in the segment and from third parties for which the Company does not provide printing services.

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

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deterioration and a mix shift to lower margin work as noted above was only partially offset by higher volumes in 2003 and the impact of productivity initiatives and savings related to restructuring actions.

Integrated Print Communications

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

Net sales for 2003 in the Integrated Print Communications segment increased $3.2 million, or 0.2%, compared to the prior year due to stronger results in the European and Asian operations that offset declines in the book and direct mail businesses. International net sales in the segment were up $69.4 million, or 39.8%, from the prior year, driven by increases in Europe due to volume growth and favorable foreign currency exchange rates, as well as volume growth in Asia. Net sales of the book business were down due to lower volumes including fewer reprint orders, lower average prices and a less favorable mix of more soft-cover books with a lower price per unit and fewer case-bound books. The 2003 net sales for direct mail were down significantly from the prior year, due to lower volume. The 2003 net sales for the financial print businesses were flat due to a decrease in customized communications solutions results that was mostly offset by an increase in capital markets net sales. The 2003 decline in net sales from customized communication solutions was primarily due to lower net sales from investor communications (e.g., prospectuses, annual and semi-annual mutual funds statements), which reflected contraction in the mutual fund market and one large non-recurring deal in 2002. The increase in capital markets net sales between years was driven by a rebound within the domestic capital markets in the second half of 2003 following a period of economic slowdown, and higher fourth quarter 2003 international net sales. Domestic capital markets net sales in 2003 were essentially flat, which reflected higher compliance filings (e.g., SEC periodic reports and annual meeting proxy statements), mostly offset by lower transactional activity in the first half of the year (e.g., S-filings, including initial public offerings, secondary offerings and mergers and acquisitions).

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

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Forms and Labels

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

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

Corporate

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

Restructuring, Acquisition and Other Charges

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

For 2004, the Company recorded impairment charges of $22.4 million. The impairment charges included $13.1 million for the abandonment of certain Publishing and Retail Services related enterprise software projects and other assets and $2.1 million for the write-down of a Publishing and Retail Services customer contract. Additional impairment charges related to software and other assets in the Forms and Labels ($4.4 million) and Integrated Print Communications ($2.8 million) segments.

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

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

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

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million) as well as to equipment transfers from vacated facilities, facility reconfiguration due to consolidations, training and travel, in the Forms and Labels ($1.6 million), Integrated Print Communications ($3.5 million), and Publishing and Retail Services ($0.2 million) segments. Selling, general and administrative expenses included acquisition and integration costs of $8.6 million for consulting expenses associated with system integration and facility reconfiguration expenses due to office consolidations, in the Forms and Labels ($1.5 million), Integrated Print Communications ($0.1 million), Publishing and Retail Services ($0.2 million) and Corporate ($6.8 million) segments.

In 2005, the Company expects to realize the cost savings associated with the aforementioned restructuring plans primarily through reduced employee and facility costs. The Company anticipates that payments associated with employee terminations ($35.1 million) related to its various restructuring programs will be substantially complete by the second quarter of 2005. The Company anticipates that payments associated with lease exit costs ($11.6 million) will be substantially complete by 2011. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charge and cash payments related to these lease obligations.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

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

Cash Flows From Operating Activities

Net cash provided by operating activities from continuing operations for 2004 was $759.4 million, compared to net cash provided by operating activities from continuing operations of $375.7 million for 2003. The change was primarily due to the inclusion of the Moore Wallace operations from the Acquisition Date and the benefits achieved as a result of the Company’s restructuring programs.

Cash Flows From Investing Activities

Net cash used for investing activities from continuing operations for 2004 was $119.5 million versus a use of cash of $158.6 million in 2003. The improvement was primarily due to net cash acquired from the Acquisition of $66.1 million, proceeds of $79.6 million from sales of investments in Latin America and assets held for sale, partially offset by an increase in capital expenditures of $72.4 million. The increase in capital spending in 2004 was primarily due to investments made to create a more efficient print platform to serve magazine, catalog and retail customers. Total capital expenditures in 2005 are expected to be approximately $450.0 million and will primarily focus on increasing capacity for the Publishing and Retail Services segment largely in response to new customer contracts and contract renewals.

Cash Flows From Financing Activities

Net cash used for financing activities from continuing operations for 2004 was $191.8 million compared to $170.3 million for the prior year. This increase primarily relates to the cash dividends paid on the incremental shares issued in conjunction with the Acquisition and the repayment of short-term debt, partially offset by the cash proceeds received from the exercise of stock options.

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

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As previously disclosed in the Company’s Current Report on Form 8-K filed on January 6, 2005, under this share repurchase program, the Company repurchased approximately 6.0 million shares of its common stock from affiliates of GSC Partners for $200.0 million, which represented a 5% discount to the NYSE closing price of the Company’s common stock on December 31, 2004.

Cash Flows From Discontinued Operations

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

Other

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

Dividends

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

Contractual Cash Obligations and Other Commitments and Contingencies

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

Based on interest rates and debt outstanding at December 31, 2004, the Company expects to pay approximately $90.4 million in interest in 2005, which is not reflected above. In addition, the Company expects to make cash contributions of approximately $15.0 million to its pension plans and approximately $18.0 million to its postretirement plans in 2005, which are not reflected above.

CAPITAL RESOURCES

On February 27, 2004, the Company issued 102.1 million shares of common stock to acquire all of the outstanding shares of Moore Wallace (See Note 2, Acquisitions, to the consolidated financial statements). In March 2004, the Company issued $400.0 million of 3.75% notes due in 2009 and $600.0 million of 4.95% notes due in 2014 (collectively, the “Senior Notes”) at a combined $3.0 million discount to the principal amount. Interest on the Senior Notes is payable semi-annually on April 1 and October 1 of each year, commencing

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October 1, 2004. The Company has the option to redeem the Senior Notes at any time subject to a make-whole premium that is based upon a spread over the applicable market interest rate at the time of the redemption. The proceeds from the issuance of the Senior Notes were used to fund the redemption of Moore Wallace debt assumed in connection with the Acquisition that included $497.5 million outstanding under the Moore Wallace senior secured credit facility and $403.0 million of the Moore Wallace 7.875% senior unsecured notes. The senior secured credit facility was repaid on the Acquisition Date, and on March 29, 2004, the Company redeemed the 7.875% senior unsecured notes at a price that included a $57.5 million premium. Additionally, during the first quarter of 2004, the Company’s commercial paper program was increased from $350.0 million to $1.0 billion. As of December 31, 2004, there were no borrowings under the commercial paper program.

In connection with the Acquisition, the Company entered into a $1.0 billion five-year unsecured revolving credit facility (the “Facility”) in February 2004, which bears interest at variable interest rates plus a basis point spread. The Facility, which replaced the Company’s previous $350.0 million bank credit facilities, reduced the Company’s liquidity risk due to increased availability and the extended maturity versus the prior facilities. The Facility will be used for general corporate purposes, including letters of credit and as a backstop for the Company’s commercial paper program. The Facility is subject to a number of restrictive and financial covenants that, in part, limit the use of proceeds, and limit the ability of the Company to create liens on assets, engage in mergers and consolidations, or dispose of assets. The financial covenants require a minimum interest coverage ratio. As of December 31, 2004, there were no borrowings under the Facility. The Company pays an annual commitment fee of 0.09% on the total unused portion of the Facility. The Company also has $191.1 million in credit facilities outside of the U.S., most of which are uncommitted. As of December 31, 2004, total borrowings under these facilities were $35.5 million. As of December 31, 2004, the Company had $53.4 million in outstanding letters of credit, of which $33.9 million reduced availability under the Company’s credit facilities. At December 31, 2004, approximately $1.1 billion was available under the Company’s credit facilities.

As a result of the Acquisition, the Company’s senior debt and commercial paper program credit ratings were downgraded. Neither downgrade is expected to impact the Company’s access to liquidity and is expected to have only a modest impact on pricing. The senior debt rating remains investment grade.

The Company was in compliance with its debt covenants as of December 31, 2004.

As of December 31, 2004, $500.0 million of debt securities were available for issuance by the Company under a registration statement on Form S-3 filed by the Company with the SEC.

Risk Management

The Company addresses certain financial exposures through limited use of derivative financial instruments. The Company does not use derivatives for trading or speculative purposes and it is not a party to leveraged derivatives.

The Company enters into interest rate swaps to manage its interest costs and exposure to changes in interest rates. At December 31, 2004, the Company had $200.0 million notional amount interest rate swaps that exchange a fixed rate interest to floating rate LIBOR plus a basis point spread. These floating rate swaps are designated as a fair value hedge against $200.0 million of principal on the 5.0% debentures due November 2006. At December 31, 2004, these swaps had a fair value of $2.8 million.

Additionally, the Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. However, to the extent borrowings, sales, purchases, expenses or other transactions are not in the local currency of the operating unit, the Company may enter into foreign currency forward contracts to hedge the currency risk. As of December 31, 2004, the aggregate notional amount of outstanding forward contracts was approximately $14.8 million. Unrealized gains and losses from these foreign currency forward contracts were not significant at December 31, 2004.

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OTHER INFORMATION

Environmental, Health and Safety

For a discussion of certain environmental, health and safety issues involving the Company, see Note 10, Commitments and Contingencies, to the consolidated financial statements.

Litigation and Contingent Liabilities

For a discussion of certain litigation involving the Company, see Note 10, Commitments and Contingencies, to the consolidated financial statements.

New Accounting Pronouncements and Pending Accounting Standards

During 2004, 2003 and 2002, the Company adopted various accounting standards as described in Note 21, New Accounting Pronouncements, to the consolidated financial statements, none of which had a material effect on the consolidated financial statements.

Pending standards and their estimated effect on the Company’s consolidated financial statements are described in Note 21, New Accounting Pronouncements, to the consolidated financial statements.

The Company is exposed to interest rate risk on its variable rate debt and price risk on its fixed rate debt. As such, the Company monitors the interest rate environment and uses interest rate swap agreements to manage its interest rate risk and price risk by balancing its exposure to fixed and variable interest rates while attempting to minimize interest costs. As of December 31, 2004, all of the Company’s outstanding term debt is comprised of fixed-rate debt, with the exception of $200.0 million fixed-rate debt, which was swapped to floating rates. The Company’s exposure to interest rate risk is mitigated by its investment in short-term marketable securities. As of December 31, 2004, the Company has short-term investments of $500.2 million consisting primarily of short-term deposits and money market funds. The interest rates on these investments are generally tied to market rates.

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent revenues, expenses and other transactions are not in the local currency of the operating unit, the Company selectively enters into foreign currency forward contracts to hedge the currency risk. As of December 31, 2004, the aggregate notional amount of outstanding forward contracts was $14.8 million.

The Company assessed market risk based on changes in interest rates and foreign currency rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest and foreign currency rates. Using this sensitivity analysis, such changes would not have a material effect on interest income/expense, foreign currency gains and losses, and cash flows; and would change the fair values of fixed rate debt by approximately $58.0 million.

Credit Risk

The Company is exposed to credit risk on accounts receivable balances. This risk is limited due to the Company’s large, diverse customer base, dispersed over various geographic regions and industrial sectors. No single customer comprised more than 10% of the Company’s consolidated net sales in 2004, 2003 and 2002. The Company maintains provisions for potential credit losses and any such losses to date have been within the Company’s expectations.

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Commodities

The primary raw materials used by the Company are paper and ink. To reduce price risk caused by market fluctuations, the Company has incorporated price adjustment clauses in certain sales contracts. Management believes a hypothetical 10% change in the price of paper and other raw materials on its earnings and cash flows would not have a significant effect on the Company because these costs are generally passed through to its customers.

The financial information required by Item 8 is contained in Item 15 of Part IV.

None.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as of the end of the last fiscal quarter. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2004, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, the Company’s management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”).

Management has not evaluated the internal control over financial reporting related to its ownership interest in certain investment partnerships, all of which were in existence prior to December 31, 2003 (see Note 8, Investments, to the consolidated financial statements). These investment partnerships have been consolidated in the Company’s financial statements in accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” and would not have been consolidated in the absence of this guidance. The Company does not have the ability to dictate or modify the controls of these investment partnerships and does not have the ability, in practice, to assess those controls. Therefore, management’s conclusion regarding the effectiveness of its internal controls over financial reporting set forth below does not extend to these investment partnerships. The consolidated financial statements as of and for the year ended December 31, 2004 include assets of $12.9 million, which represent less than one percent of consolidated assets, and net losses pertaining to these investment partnerships of $0.7 million, which are included in consolidated net earnings of $178.3 million.

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Based upon the evaluation described above under the framework contained in the COSO Report, management concluded that our internal control over financial reporting was effective as of December 31, 2004, except that management’s conclusion does not extend to the investment partnerships described in Note 8, Investments, to the consolidated financial statements.

Deloitte & Touche LLP, the Company’s auditors, have issued an attestation report on our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004. This attestation report is included below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of R.R. Donnelley & Sons Company

Chicago, IL

We have audited management’s assessment, included in the accompanying “Item 9A. Control and Procedures (b) Internal Control Over Financial Reporting,” that R.R. Donnelley & Sons Company and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in “Item 9A. Control and Procedures (b) Internal Control Over Financial Reporting,” management excluded from their assessment the internal control over financial reporting related to the Company’s ownership interest in certain investment partnerships, all of which were in existence prior to December 31, 2003, were consolidated in the Company’s financial statements in accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” and would not have been consolidated in absence of this guidance, as the Company does not have the ability to dictate or modify the controls of these investment partnerships, and does not have the ability, in practice, to assess those controls. The consolidated financial statements as of and for the year ended December 31, 2004 include assets of $12.9 million, which represent less than one percent of consolidated assets, and net losses pertaining to these investment partnerships of $0.7 million, which are included in consolidated net earnings of $178.3 million. Accordingly, our audit did not include the internal control over financial reporting at these investment partnerships. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,

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accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated March 14, 2005 expressed an unqualified opinion on those financial statements (which report includes an explanatory paragraph concerning the Company’s acquisition on February 27, 2004 of all the outstanding shares of Moore Wallace Incorporated).

DELOITTE & TOUCHE LLP

Stamford, Connecticut

March 14, 2005

In connection with the Company’s decision to transition the Controller’s function to the Company’s headquarters in Chicago during 2005, on March 10, 2005, the Company and Richard T. Sansone, Senior Vice President, Controller of the Company, agreed that Mr. Sansone will be relieved of the title and duties of Controller upon notice from the Company but will remain as an employee and cooperate in the transition of his duties until February 28, 2006.

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PART III

Information regarding directors and executive officers of the Company is incorporated herein by reference to the descriptions under “Proposal 1: Election of Directors,” “About the Current Directors,” “The Board’s Committees and their Functions” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 26, 2005 (the “2005 Proxy Statement”). See also the information with respect to our executive officers at the end of Part I of this Report under the caption “Executive Officers of R.R. Donnelley & Sons Company.”

The Company has adopted a policy statement entitled Code of Ethics that applies to our chief executive officer and our senior financial officers. In the event that an amendment to, or a waiver from, a provision of the Code of Ethics is necessary, the Company intends to post such information on its web site. A copy of our Code of Ethics has been filed as Exhibit 14 to our Report on Form 10-K for the fiscal year ended December 31, 2003.

Information regarding executive compensation is incorporated by reference to the material under the captions “Director Compensation,” “Executive Compensation,” “Retirement Benefits,” and “Executive Agreements” of the 2005 Proxy Statement.

Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the heading “Stock Ownership” of the 2005 Proxy Statement.

Equity Compensation Plan Information

Information as of December 31, 2004 concerning compensation plans under which RR Donnelley’s equity securities are authorized for issuance is as follows:

Equity Compensation Plan Information

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Moore Wallace 2003 Long-Term Incentive Plan

On the Acquisition Date, the Company acquired Moore Wallace and assumed the Moore Wallace 2003 Long-Term Incentive Plan (2003 LTIP) pursuant to which subsequent awards can be made. The shareholders of Moore Wallace previously had approved the 2003 LTIP. Under the 2003 LTIP, all employees of Moore Wallace and its subsidiaries who have demonstrated significant management potential or who have the capacity for contributing in a substantial measure to the successful performance of Moore Wallace are eligible to participate in the plan. Awards under the 2003 LTIP may consist of restricted stock or restricted stock units and also pursuant to the plan a one time grant of 85,000 options to purchase common shares of Moore Wallace was issued to a particular employee. The 2003 LTIP is administered by the board of directors of the Company which may delegate any or all of its responsibilities to the human resources committee of the board of directors.

There are 6,300,000 shares of common stock of the Company reserved and authorized for issuance under the 2003 LTIP (as adjusted to reflect the conversion ratio used in the Acquisition). As of December 31, 2004, there were 900,711 restricted stock units outstanding and 5,219,430 shares available for future issuance under the 2003 LTIP. The time period during which these shares will be available for issuance will not be extended beyond the period when they would have been available under the plan absent the Acquisition. The restricted stock units generally vest equally over a period of four years and are forfeited upon termination of employment prior to vesting (subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a “change in control”). No awards will be granted under the 2003 LTIP to any legacy RR Donnelley or RR Donnelley subsidiary employees

2000 Broad-Based Stock Incentive Plan

In 2000, the board of directors approved the adoption of the 2000 Broad-Based Stock Incentive Plan (2000 Broad-Based Plan) to provide incentives to key employees of the Company and its subsidiaries. Awards under the 2000 Broad-Based Plan were generally not restricted to any specific form or structure and could include, without limitation, stock options, stock units, restricted stock awards, cash or stock bonuses and stock appreciation rights. The 2000 Broad-Based Plan is administered by the human resources committee of the board of directors, which may delegate its responsibilities to the chief executive officer or another executive officer. The 2000 Broad-Based Plan was terminated in February 2004 and no new awards may be made under the plan.

Originally, 2,000,000 shares of RR Donnelley common stock were reserved and authorized for issuance under the 2000 Broad-Based Plan. An additional 3,000,000 shares (for an aggregate of 5,000,000 shares) were subsequently reserved and authorized for issuance under the 2000 Broad-Based Plan. As of December 31, 2004, options to purchase 2,365,797 shares of common stock were outstanding under the 2000 Broad-Based Plan. These options have a purchase price equal to the fair market value of a share of common stock at the time of the grant. All of the outstanding options generally vest over a period of three years, are not exercisable unless vested

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(subject in some cases to early vesting and exercisability upon specified events, including the death or permanent disability of the optionee, termination of the optionee’s employment under specified circumstances or a “change in control”) and generally expire 10 years after the date of grant. No awards other than options were made under the 2000 Broad-Based Plan.

Donnelley Shares Stock Option Plan

In 1994, the board of directors approved the adoption of the Donnelley Shares Stock Option Plan (Donnelley Shares Plan). All employees (other than officers) were eligible to receive options under the plan. The Donnelley Shares Plan was administered by the human resources committee of the board of directors, which had full authority to grant options under the plan and to determine the terms and conditions of all options granted under the plan. The Company last granted options under the Donnelley Shares Plan in 1996, and the plan expired in 1999.

There were 6,000,000 shares of common stock reserved and authorized for issuance under the Donnelley Shares Plan. As of December 31, 2004, options to purchase 1,636,850 shares of common stock were outstanding under the Donnelley Shares Plan. The purchase price for options granted under the Donnelley Shares Plan was the fair market value of a share of RR Donnelley common stock at the time of the grant. All of the outstanding options generally vested over a period of three years, were not exercisable unless vested (subject in some cases to early vesting and exercisability in certain events, including the death or permanent disability of the optionee, termination of the optionee’s employment under certain circumstances or a “change in control” (as defined in the Donnelley Shares Plan)) and generally expire 10 years after the date of grant.

Information regarding certain relationships and related transactions is incorporated herein by reference to the material under the heading “Certain Transactions” of the 2005 Proxy Statement.

Information regarding principal accounting fees and services is incorporated herein by reference to the material under the heading “The Company’s Independent Registered Public Accounting Firm” of the 2005 Proxy Statement.

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PART IV

The financial statements listed in the accompanying index (page F-1) to the financial statements are filed as part of this Annual Report on Form 10-K.

2. Financial Statement Schedule

The financial statement schedule listed in the accompanying index (page F-1) to the financial statements is filed as part of this Annual Report on Form 10-K.

3. Exhibits

The exhibits listed on the accompanying index to exhibits (pages E-1 through E-3) are filed as part of this Annual Report on Form 10-K.

The exhibits listed on the accompanying index (pages E-1 through E-3) are filed as part of this Annual Report on Form 10-K.

Certain schedules have been omitted because the required information is included in the consolidated financial statements and notes thereto or because they are not applicable or not required.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March 2005.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 14th day of March 2005.

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F-1

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R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)