Strategic Direction Our strategies focus on transforming our core print and bind business while also expanding services that provide strong additional value for our customers.
    The objective in our print business is to create a platform that can sustain returns above the cost of capital. Commercial print by its nature is asset intensive, and successful companies will be those that most effectively optimize and leverage their assets. At RR Donnelley, we are working to set new standards for asset effectiveness in our industry. That effort requires marketing expertise, and we have strengthened our marketing capabilities to ensure we are providing solutions that meet the needs of customers in the markets we serve. We have also made strategic equipment investments and instilled a very strong culture of continuous improvement.
    The other key strategy for our company is to expand our suite of services and content management capabilities that are closely aligned with the value chain needs of our customers. Our value-added products and services cover everything from photography and digital asset management to the distribution of printed materials and merchandise.
    Our customers are at the heart of our operation, and we are working to give existing customers more reasons to stay with RR Donnelley and new customers more reasons to work with us. I believe RR Donnelley employees are the best in the industry. Their knowledge and experience provide insight into every step of the communication process, and we share that insight with our customers to help them sell more and save more.

Maintaining Our Focus Our strategies are straightforward, and we have maintained our focus despite an economic downturn that has masked our progress. Many of our key markets have been adversely affected by the economy for the past two years.

• In the magazine market, advertising pages were down 17 percent over the past two years in consumer magazines, and 33 percent in business-to-business magazines.
• In the catalog/retail market, most catalogs are distributed through the U.S. Postal Service (USPS) via Standard A mail, which has declined 7 percent.
• In our financial business, the best measure of activity in U.S. capital markets is S-filings with the Securities and Exchange Commission. S-filings in 2002 were down 38 percent from 2000.

Significant Cost Reductions Prior to the economic downturn, we began a major restructuring impacting many of our businesses as part of our transformation strategy. Since then, we have permanently reduced our cost structure by $175 million, most of it in our core print business. Unfortunately, the value created by the restructuring has not translated into improved earnings per share; it has been offset by the economy and pricing pressures. Even so, restructuring is a key step in our effort to solidify our ability to earn excellent returns. The investments we've made are on target, and the results can best be seen in the substantial 100 basis point improvement in gross profit margin in 2002–even though sales were down 10 percent.
    Overall, RR Donnelley has remained in excellent financial condition throughout the difficult economic environment of the past two years. We have a strong balance sheet, and we anticipate that cash flow from operations will continue to be more than sufficient to fund capital expenditures and dividend payments.

Progress in Printing and Premedia The improvement in our gross margins is gratifying, and I am also excited about a number of other developments:

• We have substantially upgraded our print equipment base since 2001, retiring 21 older presses and closing five plants while investing in new presses and the expansion of four other plants. Reorganizing into larger, strategically positioned plants makes us more efficient in meeting customer needs.
• We accelerated the use of continuous improvement tools in our manufacturing operations to enhance quality and standardize processes. We did not invent these tools, but we were the first to bring them to the commercial print industry.
• We have significantly expanded our premedia product and service offerings. No one else can match the integrated suite of premedia services we offer. I am particularly pleased with the number of new customers who have come to us for content management services even though we do not currently do printing for them. Another exciting development in 2002 was the opening of our first Digital Solutions Center.
• We are providing telecommunications and technology customers with a solution to meet their needs for flexible, just-in-time production of manuals for cellular phones and other electronic devices. This is a relatively new market for us, and already we are serving large customers at locations around the world.

Transforming Financial Services In 2002, we began the transformation of our financial services business. Activity in capital markets has been at its lowest level since the early 1990s, and we have taken this opportunity to analyze this business and assess the role of the financial printer. We already provide exceptional customer service. Our transformation will provide us with a more flexible and lower cost structure, as well as the ability to provide customers with solutions that more clearly differentiate RR Donnelley from competitors.

International Opportunities In our international business, we are well positioned to serve customers whose worldwide reach requires a global partner that can ensure high quality and timely production. We focus on emerging markets where our experience and expertise in commercial printing can have a significant impact on the way commerce is conducted. I am particularly excited about our growth in Eastern Europe and China, two of our key international markets.
    We opened a second printing plant in Poland in mid-2001. That plant operated at full capacity in 2002, and our operating earnings increased by 180 percent in Poland. In 2002, we opened a second plant in China, and we are very excited about the growth potential of that market. Our two plants in China are supplemented by a range of complementary services, including premedia. This platform will allow us to serve customers from China and around the world that want to reach the China market or produce there for export to other countries.

Technology is Key Technology is essential to the success of many companies, and at RR Donnelley, it has an impact on two fronts. It is the foundation for many of the products and services we provide to customers–particularly in our premedia, financial services and logistics businesses. We also use it in our manufacturing operations to manage our printing presses and binding lines so we can optimize scheduling, assess performance and monitor continuous improvement programs. In either case–whether we embed technology in new products or use it to streamline operations–our customers benefit.

Our Employees I'd like to take a moment to acknowledge the outstanding contributions of our employees. The economic environment and the changes we've made in our businesses have been challenging for our people. They have been asked to learn new skills, adopt a new culture and operate in a very constrained cost environment–all at the same time. Our employees have responded magnificently, and for that effort, they have my greatest appreciation and respect.
    Like everybody else, I have watched with concern as issues involving questionable ethics surfaced at several companies in 2001 and 2002. We are fortunate at RR Donnelley that our founders and their successors have always stressed the highest degree of integrity throughout our 138-year history. As CEO, I am blessed to be in an environment where our employees understand the importance of doing the right thing in the right way.
    We are also fortunate to have a Board of Directors that understands the importance of responsible corporate governance. Our Board has had a majority of independent Directors for many years, and they bring a wealth of knowledge and experience to our company. Our Directors also help set the right "tone at the top"–one that emphasizes the importance of early identification of issues, open and honest communication, and integrity–and they serve as excellent role models for the RR Donnelley management team.

Outlook Looking ahead, it's my view that market conditions will remain difficult in 2003. In financial markets, we see no particular events likely to spark an upturn. Meanwhile, many of our retail and consumer catalog customers are coming off their weakest fall selling season in years. The softness throughout many industries has also weakened confidence and increased unemployment. These factors are reflected in the input we're receiving from our customers as they guide us on their expected print needs for 2003, and it appears we are headed for the third consecutive year of down market conditions. Although our volumes should be up modestly, driven by recent sales successes, we'll continue to suffer from pricing erosion. As a result, we're redoubling our efforts to achieve additional cost improvements.
    Longer term, RR Donnelley is committed to grow and prosper. We have enviable relationships with owners of some of the world's most recognizable brands, and we have expanded our products and services to help our customers be even more efficient and effective. Furthermore, I believe our people have the insight, knowledge and experience to help our customers grow and prosper. In the months and years ahead, we will maintain our focus on the customer, and we will strive to deliver on our commitments to our customers, our shareholders, our communities and each other.

Sincerely,

William L. Davis
Chairman, President and Chief Executive Officer
February 12, 2003