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 Annual Report on Form 10-K.

Business

R.R. Donnelley & Sons Company (“RR Donnelley,” the “Company,” “we,” “us,” and “our”) is the world’s premier full-service provider of print and related services, including business process outsourcing. Founded more than 144 years ago, the Company provides products and solutions in commercial printing, direct mail, financial printing, print fulfillment, labels, forms, logistics, call centers, transactional print-and-mail, print management, online services, digital photography, color services, and content and database management to customers in the publishing, healthcare, advertising, retail, technology, financial services and many other industries. The largest companies in the world and others rely on RR Donnelley’s scale, scope and insight through a comprehensive range of online tools, variable printing services and market-specific solutions.

The Company operates primarily in the commercial print portion of the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to target audiences. The Company’s reportable segments reflect the management reporting structure of the organization and the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. The reporting structure includes two segments: “U.S. Print and Related Services” and “International.”

The U.S. Print and Related Services segment includes the Company’s U.S. printing operations, managed as one integrated platform, along with related logistics, premedia and print-management services. This segment’s products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing, direct mail, forms, labels, office products, premedia and logistics services.

The International segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America and Canada. Additionally, this segment includes the Company’s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management services through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe and North America.

18

Table of Contents

2008 pre-tax restructuring and impairment charges : included $1,125.4 million of non-cash charges for the impairment of goodwill and intangible assets; charges of $44.1 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $10.6 million of other restructuring costs, primarily lease termination costs; and $4.6 million for impairment of other long-lived assets.

2007 pre-tax restructuring and impairment charges : included $752.2 million of non-cash charges for the impairment of goodwill and intangible assets; charges of $49.3 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $11.1 million of other restructuring costs, including lease termination costs; and $26.4 million for impairment of other long-lived assets.

Pre-tax loss on termination of cross-currency swaps: Investment and other income (expense) included a $9.9 million ($1.8 million after tax) loss in 2008 resulting from the Company’s termination of its cross-currency swaps.

Non-recurring tax benefits: reflected tax benefits of $228.8 million realized in 2008 related to the decline in value and reorganization of certain entities within the International segment, as well as a benefit of $38.0 million in 2008 from the recognition of uncertain tax positions upon the final settlement of certain U.S. federal tax audits for the years 2000 – 2002 and a benefit of $9.3 million in 2007 from a reduction in net deferred tax liabilities due to a decrease in the statutory tax rate in the United Kingdom.

Operations: reflected lower net sales driven by the global economic slowdown, partially offset by cost savings from restructuring actions, productivity efforts, lower incentive compensation expense, the impact of share repurchases and the impact of the Von Hoffmann, Banta, Perry Judd’s, Cardinal Brands and Pro Line acquisitions. See further details in the review of operating results by segment that follows below.

2008 Overview

The unprecedented credit crisis and its impact on the global economy and on our customers resulted in significant declines in volume across nearly all products and services during the second half of 2008, particularly in the fourth quarter. On a consolidated pro forma basis, net sales declined approximately 3.7% (See Note 2 to the Consolidated Financial Statements). Volume declines were experienced across most products and services in both operating segments, with the exception of Logistics, Latin America and Asia. Despite the overall slowdown

19

Table of Contents

in demand for print and related services, the Company has continued to have success in renewing and extending existing customer contracts, expanding the scope of services with existing customers and winning new business. The impact of these successes has partially offset the impacts of the economic crisis and should position the Company for stronger growth when the economy recovers.

The cost containment initiatives and restructuring activities put in place in 2008 have helped to mitigate the effects of the volume shortfalls. In addition, the Company was able to achieve cost savings through the integration of the Pro Line and Cardinal Brands acquisitions. Further, the Company significantly lowered its full-year payouts for employee incentive-based and discretionary compensation plans. As a result, incentive-based compensation costs were $134.6 million lower during 2008 as compared to 2007 on a consolidated basis, with a decline of approximately $99.2 million, $18.0 million and $17.4 million reflected in the U.S. Print and Related Services, Corporate and International segments, respectively.

The Company continues to maintain liquidity to meet its operating needs, although the credit crisis has increased the cost of short-term and long-term borrowings. Cash flows from continuing operations were $1,016.7 million, a $160.1 million decrease from 2007, as a result of the lower volume noted above. However, the Company also reduced its capital expenditures by $159.1 million, or 33.0%, compared to 2007. The Company used available cash flow to complete $132.6 million in acquisitions, repurchase $278.8 million in Company shares, pay $219.2 million in dividends to common shareholders and reduce debt by approximately $200.0 million. As of December 31, 2008, approximately $1.5 billion was available under the Company’s committed credit facilities.

The declines in the market value of the securities held by the Company’s pension plans during 2008 materially reduced the funded status of these plans. As reported in the Company’s consolidated balance sheet and further described in Note 11, Retirement Plans , to the consolidated financial statements, the Company’s pension plans were underfunded by $481.4 million as of December 31, 2008 compared to an overfunded position of $682.2 million as of December 31, 2007. The significant decrease in plan assets during 2008 will increase the level of pension expense and required contributions in 2010, with larger increases expected in future years. The Company could also make larger non-required contributions during 2009.

During the fourth quarter, the Company recorded $1,125.4 million in non-cash, pre-tax charges for the impairment of goodwill and intangible assets. These charges reflect actual and expected declines in net sales and cash flows, primarily as a result of the global economic crisis and recessionary environment. In its International segment, the Company recorded $249.4 million, $152.0 million and $22.3 million of goodwill impairment at its business process outsourcing, Canada and Global Turnkey Solutions reporting units, respectively. In addition, the Company recorded a $325.3 million impairment charge of customer relationships at its business process outsourcing reporting unit. In its U.S. Print and Related Services segment, the Company recorded $297.8 million and $78.6 million of goodwill impairment at its forms and labels and office products reporting units, respectively.

OUTLOOK

Vision and Strategy

RR Donnelley’s vision is to improve on our existing position as the world’s premier print and print-related services company by providing our customers with the highest quality products and services.

20

Table of Contents

The Company’s long-term strategy is focused on maximizing long-term shareholder value by driving profitable growth, continuing its focus on productivity, and maintaining a disciplined approach to capital deployment. To increase shareholder value, the Company pursues three major strategic objectives. These objectives are summarized below, along with more specific areas of focus.

Despite the current recessionary environment, the Company’s long-term strategy is to generate profitable growth. In order to accomplish this, the Company will continue to make targeted capital investments to support new business and leverage its global platform. The Company is focusing its capital investments in information technology projects that facilitate integration or improve productivity. The Company is also working to more fully integrate its sales efforts to broaden customer relationships and meet our customers’ demands. The Company will continue to seek to provide a larger portion of our customers’ print and related needs in order to capture segment share. The Company’s global platform provides differentiated solutions for its customers through its broad range of complementary print-related services, strong logistics capabilities, and technology leadership.

Management believes productivity improvement and cost reduction are critical to the Company’s competitiveness, while enhancing the value the Company delivers to its customers. The Company has implemented strategic initiatives across all platforms to reduce its overall cost structure and enhance productivity including restructuring, consolidation, reorganization and integration of operations, and streamlining of administrative and support activities. In addition, the Company has implemented additional cost reductions, certain salary freezes and suspended the Company’s 401(k) match in 2009 in order to further reduce costs in the face of the current difficult economic conditions. Incentive compensation for 2008 was substantially eliminated.

The Company seeks to deploy its capital using a disciplined and balanced approach in order to ensure financial flexibility and provide returns to shareholders. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, dividend payments to shareholders, capital expenditures, targeted acquisitions and share repurchases. In order to manage through credit market disruptions and the economic slowdown in the current uncertain economic environment, maintaining liquidity is a high priority. The Company also expects the current economic environment to create opportunities for targeted acquisitions that extend its capabilities, drive cost savings, and reduce future capital spending needs.

21

Table of Contents

The Company uses several key indicators to gauge progress toward achieving these objectives. These indicators include net sales growth, operating margins, cash flow from operations and capital expenditures. The Company targets long-term net sales growth at or above industry levels, while achieving modest growth in operating margins. Combined with working capital management, this growth is expected to drive long-term increases in cash flow from operations over time.

Industry Environment

The Company faces many challenges and risks as a result of competing in highly competitive global markets. Item 1A, Risk Factors, discusses many of these issues, but the Company’s strategy is primarily focused on meeting the challenges of industry-wide price competition and the advancement of technology.

Overcapacity and pricing environment

The print and related services industry in general continues to have excess capacity and remains highly competitive. Across the Company’s operations, many competitors rely on price as a key competitive lever. Management expects that prices for the Company’s products and services will therefore continue to be a focal point for customers, particularly as a result of the economic crisis. In this environment, the Company believes it needs to continue to lower its cost structure and focus on differentiating itself in its core print and related services. While the industry environment has been difficult for a number of years, the Company has demonstrated its ability to maintain and enhance margins through productivity cost-savings and by offering higher-value products and services.

Technology

Technological changes, such as the electronic distribution of documents and data, online distribution and hosting of media content, advances in digital printing, print-on-demand, and internet technologies continue to impact the market for the Company’s products and services. As a substitute for print, the impact of these technologies has been felt mainly in directories, forms and statement printing, as electronic communication and transaction technology has eliminated or devalued the role of many traditional paper forms. In 2008, electronic substitution accelerated in directory printing in part driven by environmental concerns and cost pressures at key customers. Electronic substitution for books and related products has not been significant to date, but is expected to increase in future years. The future impact of technology on the Company’s business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies.

While new technologies present significant challenges to certain of the Company’s traditional products, management believes that the Company is a leader in key technologies that, as customers continue to shift towards customized and higher-valued-added print, will be valuable sources of industry growth. These technologies include digital content management and premedia services, digital print for personalization and print-on-demand, and low-cost document process management. In addition, the ability to offer compliance assurance and secure environments for print is increasingly important to customers. While the majority of the Company’s capital expenditures fund acquisitions of traditional printing machinery, the Company continues to make focused investments in digital technologies in order to capitalize on these opportunities.

2009 Outlook

In 2009, the Company expects net sales to decrease from 2008, although the uncertain economy makes the magnitude of this decrease very difficult to predict. The Company’s plans assume the current economic crisis will continue into 2009, further impacting our customers, and likely resulting in significant cutbacks in volume across nearly all our products and services. In addition, the highly competitive market conditions continue to put pressure on prices for both transactional work and contract renewals. We anticipate further consolidation of printers, customers and suppliers during 2009, which may result in continued price pressures. We will continue to leverage the “One RR Donnelley” platform and powerful customer relationships in order to provide a larger

22

Table of Contents

share of our customers’ print and related needs. Volatility in commodity and energy costs are expected for 2009, which could impact our operating margins. For 2009, the Company plans to implement cost savings initiatives by freezing salaries, lowering incentive compensation and suspending the Company’s matching contribution under its 401(k) plan. The Company expects to continue cost control initiatives through selected facility consolidations across certain platforms, and by reducing selling, general and administrative expenses.

U.S. Print and Related Services

Net sales in U.S. Print and Related Services are expected to decrease in 2009 driven primarily by the current economic crisis. Sales across the magazine, catalog, retail, book and directory platforms are expected to decrease, reflecting lower advertising spending, tight state educational budgets, and decreased retail activity. In forms and labels and commercial print, the Company is expecting to largely offset the impacts of the lower business activity and continuing price declines with volume increases from new and existing customers. Sales of financial print services are expected to maintain 2008 levels for compliance-oriented work, but the impact of the tight credit environment and economic uncertainty could severely impact transactional volumes. Net sales of direct mailings are expected to decrease as a result of volume reductions from lower marketing spending, primarily from financial services customers. Pricing intensity is expected to continue in 2009 for both direct mail and statement printing, as customers continue to seek lower cost formats and pursue environmental initiatives. Net sales of logistics services are expected to increase, driven by growth in mail center and commingling services due to an additional U.S. postal rate increase effective in the second quarter of 2009. This increase may largely be offset by decreases in fuel surcharges passed on to customers. The postal increase may also reduce overall demand for direct mail, statement, catalog and magazine printing.

U.S. Print and Related Services operating income comparisons will be significantly impacted by the goodwill impairment charges recorded in 2008. In addition, decreases in operating margin resulting from lower volume and competitive price pressures made worse by current economic conditions are expected to more than offset the continuing impacts of cost savings achieved through the Company’s productivity initiatives, integration of the 2008 acquisition of Pro Line and cost control.

International

Net sales in the International segment are expected to decrease from 2008, as foreign exchange rates reflect weaker international currencies. In addition, many international operations are expected to experience volume declines driven by the widening global recession. The Company generally expects volumes in Latin America to remain relatively constant, but reported net sales are expected to be negatively impacted by foreign exchange rates. The Company expects a decline in Asia due to aggressive price and volume pressure for telecommunications and technology manuals and export book sales. Commercial print net sales in Europe are expected to decline as a result of the pricing pressure on technology manuals and directories. Global economic pressure and volume cutbacks by major customers are expected to drive a decrease in sales in Global Turnkey Solutions. Net sales in business process outsourcing are expected to continue to decline due to the impact of foreign exchange rates, lower volume and continued price pressure. The Company continues to evaluate restructuring actions across all platforms, particularly the business process outsourcing platform and Global Turnkey Solutions.

International operating income comparisons will be significantly impacted by the impairment charges recorded in 2008. Productivity initiatives and restructuring actions to lower the cost structure across all platforms will be implemented; however, the declines in sales as a result of the current economic crisis are expected to more than offset the cost savings.

Other

The Company expects to maintain or enhance its current liquidity, despite the current economic crisis. As a result of lower incentive compensation in 2008, the Company will pay significantly less in cash compensation during the first quarter 2009 as compared to 2008. However, the Company is expecting cash payments for future restructurings to increase. Capital expenditures are expected to decrease further in 2009, as lower volumes across

23

Table of Contents

most platforms increase excess capacity and lessen the need for new machinery and equipment. In addition, the Company completed an offering of $400.0 million in 11.25% senior notes due February 1, 2019 on January 14, 2009. The Company used the proceeds to pay down short-term debt in anticipation of borrowing additional short-term debt to pay down the April 1, 2009 maturity of $400.0 million in senior notes. Despite a projected decrease in overall debt levels, interest expense will increase due to these notes. In addition, the Company anticipates maintaining its quarterly dividend in 2009 at current levels.

The effective tax rate in 2009 is expected to be more reflective of the applicable statutory rates in contrast with the 2008 rate that was impacted by the non-deductible, non-cash $800.1 million goodwill impairment charge and the $228.8 million tax benefit related to the decline in value and reorganization of certain entities within the International segment. Weighted average shares outstanding in 2009 are expected to decline due to the full year impact of the 2008 share repurchases.

Given the significant uncertainty in the worldwide economic outlook, there is an increased risk of additional impairments to goodwill and intangible assets during 2009. As of December 31, 2008, the Company had $2.4 billion of goodwill and $831 million of intangible assets. The impairment charges recorded in 2008 and prior years were based, in part, on management’s projections of future net sales and cash flows for each of the Company’s reporting units. If actual results for 2009 or expected future results are worse than management’s projections, additional impairment charges could be required. Changes in other key assumptions used in the valuation of goodwill and intangible assets, including changes in costs of capital and other market assumptions, could also result in further impairments.

As part of its recycling efforts and to offset its cost of materials, the Company resells waste paper and other by-products of its manufacturing processes. The global recession has caused reductions in demand for these by-products, resulting in significant declines in prices the Company receives for these materials. Prices for these commodities are volatile, and the Company cannot predict the impact that price fluctuations will have on its cost of sales. However, the Company currently expects by-products prices to remain well below those of comparable periods in 2008.

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 Company’s most critical accounting policies are 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. The Company has identified the following as its most 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 from these estimates under different assumptions or conditions.

Revenue Recognition

The Company recognizes revenue for the majority of its products upon the transfer of title and risk of loss, which is generally upon shipment to the customer. Contracts and customer agreements 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 may receive a logistics or warehouse management fee for the services it provides. In certain of these cases, delivery and billing schedules are outlined in the customer agreement and product revenue is recognized when manufacturing is complete, title and risk of loss transfer to the customer, 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.

24

Table of Contents

Revenue from services is recognized as services are performed. Within the Company’s financial print operations, which serve the global financial services end market, the Company produces highly customized materials such as regulatory S-filings, initial public offerings and 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.

Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as a principal or net of related costs as an agent, in accordance with EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and the related guidance in EITF 00-10, “Accounting for Shipping and Handling Fees and Costs” and EITF 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.” Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross. In the Company’s Global Turnkey Solutions operations, each contract is evaluated using various criteria to determine if revenue for components and other materials should be recognized on a gross or net basis. In general, these revenues are recognized on a gross basis if the Company has control over selecting vendors and pricing, is the primary obligor in the arrangement, bears all credit risk, and bears the risk of loss for inventory in its possession. Revenue from contracts that do not meet these criteria is recognized on a net basis. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper or Company-supplied paper.

The Company records deferred revenue in situations where amounts are invoiced but the revenue recognition criteria outlined above are not met. Such revenue is recognized when all criteria are subsequently met.

Accounts Receivable

The Company maintains an allowance for doubtful accounts, which is reviewed for estimated losses resulting from the inability of its customers to make required payments for products and services. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. The Company’s estimates of the recoverability of amounts due could change, and additional changes to the allowance could be necessary in the future if a major customer’s creditworthiness deteriorates, or if actual defaults are higher than the Company’s historical experience.

Inventories

The Company records inventories at the lower of cost or market value. Most of the Company’s inventories are valued under the last-in first-out (LIFO) basis. Changes in 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 for excess and obsolete inventories determined in part by future demand forecasts. If there were to be a sudden and significant decrease in demand for its products, or if there were a higher incidence of inventory obsolescence because of changing technology and customer requirements, the Company could be required to increase its inventory allowances.

Goodwill and Other Long-Lived Assets

The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors including valuations performed by

25

Table of Contents

third-party appraisers. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its organization structure, the Company has identified fifteen reporting units for which cash flows are determinable and to which goodwill is allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit. When the Company’s organization structure changes, new or revised reporting units may be identified, and goodwill is reallocated, if necessary, based on relative excess fair value.

The Company performs its annual goodwill impairment tests as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” prescribes a two-step method for determining goodwill impairment. In the first step, the Company compares the estimated fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds the estimated fair value, step two is completed to determine the amount of the impairment loss. Step two requires the allocation of the estimated fair value of the reporting unit to the assets, including any unrecognized intangible assets, and liabilities in a hypothetical purchase price allocation. Any remaining unallocated fair value represents the implied fair value of goodwill, which is compared to the corresponding carrying value of goodwill to compute the goodwill impairment amount. In 2008, the Company recorded a total non-cash charge of approximately $800.1 million to reflect impairment of goodwill in the following reporting units; $297.8 million for forms and labels, $249.4 for business process outsourcing, $152.0 million for Canada, $78.6 million for office products and $22.3 million for Global Turnkey Solutions.

As part of its annual impairment analysis for each reporting unit, the Company engaged a third-party appraisal firm to assist the Company in its determination of the estimated fair value of each unit. This determination included estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, discount rates, and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. In most cases, the Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit.

The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. The allocation requires several analyses to determine fair value of assets and liabilities including, among others, trade names, customer relationships, and property, plant and equipment (valued at replacement costs). Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. We also compared the sum of the estimated fair values of the reporting units to the Company’s total value as implied by the market value of the Company’s equity and debt securities. This comparison indicated that, in total, our assumptions and estimates were reasonable. However, future declines in the overall market value of the Company’s equity and debt securities may indicate that the fair value of one or more reporting units has declined below its carrying value.

One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair value exceeds the carrying amount) or “failed” (the carrying amount exceeds fair value) the first step of the goodwill impairment test. For the ten units that passed step one, fair value exceeded the carrying amount by 13% to 57% of their respective estimated fair values. For the five units that failed, the carrying amount exceeded fair value by between 15% and 822% of their respective

26

Table of Contents

estimated fair values. Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. That is, a 1% change in estimated future cash flows would decrease the estimated fair value of the reporting unit by approximately 1%. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. The discount rate for each reporting unit in the US Print and Related Services segment was estimated to be 9.5% as of October 31, 2008. Estimated discount rates for units in the International segment ranged from 9.5% to 15.5%. A 1.0 percentage point increase in estimated discount rates would not have resulted in additional reporting units failing step one.

The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs impairment tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances. Factors considered important which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or 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 Company recorded an impairment charge of $325.3 million in 2008 related to the write-off of the business process outsourcing customer relationship intangible assets.

Certain investments in affordable housing, which are included in other noncurrent assets, are recorded at cost, as adjusted for the Company’s share of any declines in the fair value of the underlying properties that are deemed to be other than temporary. The Company’s basis for determining fair value of the underlying properties requires applying management’s judgment using a significant number of estimates. Management derives its estimates of fair value using remaining future tax credits and tax deductions to be realized and expected residual values upon sale or disposition of the Company’s ownership interests. Because most of the tax credits from these investments were received in prior periods, the current values of these investments are primarily attributable to residual values, which are inherently more uncertain. 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. In 2008, the Company recorded a write-down of its investments in affordable housing of $0.5 million.

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 and others 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 may revise its estimates.

The Company purchases third-party insurance for workers’ compensation, automobile and general liability claims that exceed a certain level. The Company is responsible for the payment of claims below these insured limits, and consulting actuaries are utilized to assist the Company in estimating the obligation associated with incurred losses, which are recorded in accrued liabilities and other noncurrent liabilities. Historical loss

27

Table of Contents

development factors for both the Company and the industry are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claims experience and settlement. If actual experience of claims development is significantly different from these estimates, an adjustment in future periods may be required.

Restructuring

The Company records restructuring charges when liabilities are incurred as part of a plan approved by management with the appropriate level of authority, for the elimination of duplicative functions, the closure of facilities, or the exit of a line of business, generally in order to reduce the Company’s overall cost structure. Certain restructuring costs are recognized as a cost of acquisitions, because the plans were contemplated at the time of the acquisition and were, therefore, included in the purchase price allocation. These restructuring charges and related liabilities were based on contractual obligations or management’s best estimates at the time the charges are recorded. Effective January 1, 2009, upon adoption of SFAS 141 (R), “Business Combinations,” as described in Note 21, New Accounting Pronouncements , to the consolidated financial statements, most restructuring costs will not be included in the purchase price allocation, but will be recorded when the liabilities are incurred.

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; or changes to original plans as a result of mergers or acquisitions. Such changes might result in reversals of or additions 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 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 U.S. and foreign tax authorities. On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109,” which clarifies the accounting for and disclosure of uncertain tax positions. The Company recognizes a tax position in its financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The consolidated financial statements as of December 31, 2008 and 2007 reflect the impact of FIN 48. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s historical financial statements.

The Company has recorded deferred tax assets related to domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period, and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when 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. As of December 31, 2008 and 2007, valuation allowances of $224.7 million and $260.0 million, respectively, were recorded.

28

Table of Contents

Share-Based Compensation

The Company recognizes share-based compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options, restricted stock units and performance share units. The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. The amount of expense recognized for these awards is impacted by the Company’s estimates of several factors, including future forfeitures of awards, expected volatility of the Company’s stock, and the average life of options prior to expiration. See Note 17, Stock and Incentive Programs for Employees , to the consolidated financial statements for further discussion.

Pension and Postretirement Benefit Plans

The Company records annual amounts relating to its pension and postretirement benefit plans based on calculations which include various actuarial assumptions including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the balance sheet, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income. 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 and investment advisors. The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of that date. The discount rates for pension benefits at December 31, 2008 and 2007 were 6.8% and 6.4%, respectively. The discount rates for postretirement benefits at December 31, 2008 and 2007 were 6.9% and 6.3%, respectively. A one percentage point decrease in the discount rates at December 31, 2008 would increase the pension plans’ accumulated benefit obligation and projected benefit obligation by approximately $359.2 million and $371.5 million, respectively. A one percentage point decrease in the discount rates at December 31, 2008 would increase the postretirement plans’ accumulated benefit obligation by approximately $38.6 million.

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 contributions by outperforming the growth in plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolios contain a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across geography and market capitalization through investments in U.S. large-capitalization stocks, U.S. small-capitalization stocks and international securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions, risk and active management premiums. The prospective target asset allocation percentage for both the pension and postretirement benefit plans is approximately 75% for equity securities and approximately 25% for fixed income and other securities. The expected return on plan assets assumption at December 31, 2008 ranged from 7.5% to 8.5% for the Company’s major U.S. and Canadian pension plans and was 8.0% for the Company’s partially funded U.S. postretirement medical benefit plans.

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

The health care cost trend rates used in valuing the Company’s postretirement benefit obligations are established based upon actual health care cost trends and consultation with actuaries and benefit providers. At December 31, 2008, the current weighted average health care trend rate assumption was 8.6% for pre-age 65

29

Table of Contents

participants and 9.7% 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):

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

Off-Balance Sheet Arrangements

Other than non-cancelable operating lease commitments, the Company does not have off-balance sheet arrangements, financings, or special purpose entities.

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.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2007

The following table shows the results of operations for the years ended December 31, 2008 and 2007, which reflects the results of acquired businesses from the relevant acquisition dates.

Consolidated

Net sales for the year ended December 31, 2008 decreased $5.5 million to $11,581.6 million versus the prior year. Net sales increased $412.4 million, or 3.6%, due to the acquisitions of Banta, Perry Judd’s, Von Hoffman, Cardinal Brands and Pro Line and $33.0 million, or 0.3%, from changes in foreign exchange rates. These increases were more than offset by volume and price declines across most products and services as customer demand decreased due to the global economic slowdown.

30

Table of Contents

Cost of sales increased $43.9 million to $8,576.3 million for the year ended December 31, 2008 versus the prior year, primarily due to acquisitions, changes in foreign exchange rates and increased LIFO provisions, offset by lower incentive compensation expense and increased productivity. Cost of sales as a percentage of consolidated net sales increased from 73.6% to 74.1%, reflecting the impact of cost inflation and price pressures on net sales, partially offset by lower incentive compensation and improved productivity.

Selling, general and administrative expenses decreased $81.8 million to $1,220.5 million for the year ended December 31, 2008 versus the prior year, primarily due to lower incentive compensation expense, partially offset by acquisitions and a higher provision for doubtful accounts receivable. Selling, general and administrative expenses as a percentage of consolidated net sales decreased from 11.2% to 10.5%, which reflected lower incentive compensation expense and the reduction of costs through improved productivity and restructuring activities.

For the year ended December 31, 2008, the Company recorded a net restructuring and impairment provision of $1,184.7 million compared to $839.0 million in 2007. In 2008, these charges included non-cash, pre-tax charges of $1,125.4 million for the impairment of goodwill and other intangible assets and $44.1 million for workforce reductions of 2,245 employees (of whom 2,183 were terminated as of December 31, 2008) associated with actions resulting from the reorganization of certain operations and the exiting of certain business activities. These actions included the realignment and consolidation of the Canadian organization, management reorganization within Latin America, the closing of two Global Turnkey Solutions manufacturing facilities within the International segment and the realignment and consolidation of the financial print organization in the U.S. Print and Related Services and International segments. In addition, the Company recorded $4.6 million of impairment charges of other long-lived assets and $10.6 million of other restructuring costs, mainly related to lease terminations in exited facilities. For the year ended December 31, 2007, these charges included $436.1 million for the impairment of goodwill for the business process outsourcing operations and a non-cash pre-tax charge of $316.1 million reflecting the write-off of the Moore Wallace, OfficeTiger and other trade names, most of which were indefinite-lived. In addition, these charges included $49.3 million for workforce reductions of 1,169 employees (all of whom were terminated as of December 31, 2008) associated with actions resulting from the reorganization of certain operations and the exiting of certain business activities. These actions included management changes to simplify the management reporting structure and cost structure reductions including the closing of two manufacturing facilities within the U.S. Print and Related Services segment and two facilities within the International segment. Further, these charges included $11.1 million of other restructuring costs primarily related to lease terminations in exited facilities and $26.4 million for the impairment of other long-lived assets, of which $19.1 million related to the write-off of capitalized customer contract set-up costs in the business process outsourcing unit. Management believes that certain restructuring activities will continue in 2009, as the Company continues to streamline its manufacturing, sales and administrative operations.

Depreciation and amortization increased $42.3 million to $640.6 million for the year ended December 31, 2008 compared to 2007, primarily due to acquisitions and capital expenditures. Depreciation and amortization included $123.3 million and $119.7 million of amortization of purchased intangibles related to customer relationships, trade names and patents for the year ended December 31, 2008 and 2007, respectively.

The loss from continuing operations for the year ended December 31, 2008 was $40.5 million compared to income from continuing operations of $315.1 million for the year ended December 31, 2007. The decrease in earnings was primarily driven by the increase in non-cash impairment charges. The lower earnings also reflect the decline in volumes and cost inflation and price pressures across both segments, partially offset by acquisitions, productivity efforts, lower incentive compensation and the benefits achieved from procurement savings and restructuring activities.

Net interest expense decreased by $0.9 million for the year ended December 31, 2008 versus 2007, primarily due to higher interest income earned on cash balances invested internationally, partially offset by higher interest expense in the U.S. due to increased short-term debt.

31

Table of Contents

Net investment and other income (expense) for the year ended December 31, 2008 and 2007 was expense of $2.4 million and income of $3.6 million, respectively. In 2008, the Company terminated its cross-currency swaps, which resulted in a loss of $9.9 million. In addition, the Company sold an equity investment in Latin America, which resulted in a gain of $4.9 million. For the year ended December 31, 2007, the Company recorded a gain of $1.1 million for the changes in fair value of the portion of derivative financial instruments that was ineffective as a net investment hedge.

The effective income tax rate for the year ended December 31, 2008 was a benefit of 31.2% compared to a provision of 149.3% in 2007. The effective income tax rate for the year ended December 31, 2008 was impacted by the non-deductible goodwill impairment charge of $800.1 million and by tax benefits of $228.8 million related to the decline in value and reorganization of certain entities within the International segment and the benefit of $38.0 million from the recognition of uncertain tax positions upon final settlement of certain U.S. federal income tax audits for the years 2000-2002. The 2007 effective tax rate included the impact of the non-deductible goodwill impairment charge of $436.1 million, tax benefits of $107.0 million associated with the $316.1 million charge for the write-off of the Moore Wallace, OfficeTiger and other trade names, the enactment of a lower statutory tax rate in the United Kingdom, an increased benefit from the domestic manufacturing deduction and the impact of the increased proportion of the Company’s taxable income derived from lower-tax jurisdictions.

The net loss from continuing operations for the year ended December 31, 2008 was $191.7 million or $0.91 per diluted share compared to the net loss from continuing operations of $48.4 million or $0.22 per diluted share for the year ended December 31, 2007. In addition to the factors described above, the per share results reflect a decrease in weighted average diluted shares outstanding of 7.8 million, primarily resulting from the Company’s repurchase of 10.0 million shares of its common stock in 2008.

U.S. Print and Related Services

The following tables summarize net sales, income from continuing operations and certain items impacting comparability, which reflect the results of acquired businesses from the relevant acquisition dates, within the U.S. Print and Related Services segment:

32

Table of Contents

Net sales for the U.S. Print and Related Services segment for the year ended December 31, 2008 were $8,704.2 million, an increase of $102.3 million, or 1.2%, compared to 2007. Sales from the acquired facilities of Banta, Perry Judd’s, Von Hoffmann, Cardinal Brands and Pro Line increased sales by $399.3 million, or 4.6%. The increases due to acquisitions were offset by volume and price declines across most products and services due to the economic crisis that worsened in the second half of 2008. Sales of magazines, catalogs and retail inserts increased due to acquisitions and new catalog customers, partially offset by lower volume resulting from reduced advertising spending and lower volume from existing customers. Sales of books and directories decreased slightly as the impact of acquisitions was more than offset by the impact of lower prices from major customer contract renewals and reduced volume in sales of directories. Sales of variable printing products decreased due to lower direct mail sales and reduced fulfillment and distribution volume. Sales of forms and labels decreased due to lower sales of forms, resulting from increased price pressure and lower demand for consumable forms products. Commercial printing sales decreased due to the economic slowdown. Sales of financial printing decreased due to decreases in the size and number of capital market transactions. Sales of logistics services increased primarily due to higher fuel surcharges. Sales of office products increased due to an acquisition. Finally, sales of digital solutions grew due to acquisitions and increased volume from new customers.

U.S. Print and Related Services income from continuing operations decreased $114.9 million mainly driven by the increase in restructuring and impairment charges of $120.7 million. In addition, the benefits of acquisitions, lower incentive compensation expense and improved productivity were partially offset by the volume declines and competitive price pressures discussed above. Operating margins in the U.S. Print and Related Services segment decreased from 9.6% to 8.1% for the year ended December 31, 2008. Of the margin decrease, 1.4 percentage points were attributable to higher restructuring and impairment charges. In addition, lower employee incentive compensation expense and continued productivity efforts largely offset the impact of reduced volume, price pressure and cost inflation.

33

Table of Contents

Net sales for the International segment for the year ended December 31, 2008 were $2,877.4 million, a decrease of $107.8 million, or 3.6%, compared to 2007. Although net sales increased approximately $33.0 million, or 1.1%, due to the impact of changes in foreign exchange rates and $13.1 million, or 0.4%, due to acquisitions, these increases were more than offset by volume and price declines resulting from the global economic slowdown. Foreign exchange rates favorably impacted each reporting unit for the first nine months of 2008, but had a significant unfavorable impact during the last three months of 2008. Volume increases in Latin America and Asia were more than offset by declines in the technology and telecommunications products in Europe, lower volume in print and media and outsourcing services within business process outsourcing and the impact of ongoing price pressures. Business process outsourcing net sales decreased due to lower volume and lost customers in print and media and outsourcing services, partially offset by volume growth driven by the full year impact of a large new customer contract entered into during the second quarter of 2007. Net sales in Europe decreased due to volume declines, unfavorable product mix changes and declining prices, largely related to the technology and telecommunications sector, partially offset by the impact of changes in foreign currency rates and increased commercial print product sales. In Latin America, the net sales increase was the result of changes in foreign exchange rates, combined with an increase in sales of books, forms and commercial printing. Sales in Asia increased due to foreign exchange rates and increased volume in the technology sector, partially offset by declines due to increased competition resulting in price pressure in the export book market and technology and telecommunications sectors. Global Turnkey Solutions net sales decreased slightly due to lower volume from existing customers, partially offset by changes in foreign exchange rates. The decrease in net sales in Canada was due to lower volume and price pressure on sales of forms and labels, partially offset by the impact of foreign exchange rates.

The loss from continuing operations increased $249.6 million mainly due to the $236.0 million increase in restructuring and impairment charges. The impact of the net sales decline was partially offset by productivity improvement, cost control and lower incentive compensation expense. Operating margins decreased from (10.6%) to (19.6%) for the year ended December 31, 2008. Higher restructuring and impairment charges drove an 8.9 percentage point margin decrease, with the balance of the decrease attributable to the negative impact of volume and price declines.

Corporate

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

34

Table of Contents

Corporate operating expenses for the year ended December 31, 2008 were $184.8 million, a decrease of $8.9 million compared to 2007. The decrease was driven by decreases in employee benefit and incentive compensation costs, lower restructuring and impairment charges of $11.0 million and cost reductions from productivity efforts and restructuring actions partially offset by an increase in LIFO inventory provisions and a higher provision for doubtful accounts receivable.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006

2007 pre-tax restructuring and impairment charges : included a non-cash charge of $316.1 million reflecting the write-off of the Moore Wallace, OfficeTiger and other trade names; $436.1 million non-cash charge for impairment of goodwill related to the business process outsourcing reporting unit; charges of $49.3 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $11.1 million of other restructuring costs, including lease termination costs; and $26.4 million for impairment of other long-lived assets.

2006 pre-tax restructuring and impairment charges : included a $110.0 million non-cash charge for impairment of goodwill related to the business process outsourcing reporting unit; charges of $54.1 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $11.1 million of other restructuring costs, primarily lease termination costs; and $30.9 million of impairment charges of which $26.3 million reflected the write-down of the Astron trade name intangible asset.

Non-recurring tax benefits: reflected a benefit of $9.3 million in 2007 from a reduction in net deferred tax liabilities due to a decrease in the statutory tax rate in the United Kingdom and a $23.5 million benefit in 2006 from the realization of a U.S. deferred tax asset.

Discontinued operations: reflected certain costs related to a facility previously occupied by the Company’s package logistics business, including costs resulting from a sub-lessee bankruptcy in 2006.

Operations: reflected higher operating income in the U.S. Print and Related Services segment, primarily driven by the Banta, Perry Judd’s and Von Hoffmann acquisitions and improved results in financial print and book sales, higher volume and productivity, and improved operating income in the International segment which was primarily driven by book production in Asia, partially offset by higher interest expense. See further details in the review of operating results by segment that follows below.

35

Table of Contents

The following table shows the results of operations for the years ended December 31, 2007 and 2006, which reflect the results of acquired businesses from the relevant acquisition dates.

Consolidated

Net sales for the year ended December 31, 2007 increased $2,270.5 million, or 24.4%, to $11,587.1 million versus the prior year. Of this increase, approximately $1.9 billion, or 83.7%, was due to sales from the acquired facilities of Banta, Perry Judd’s, OfficeTiger and Von Hoffmann and $146.3 million, or 6.4%, resulted from changes in foreign exchange rates. In addition, the increase in net sales was driven by volume growth in both segments, particularly in the International segment. In the U.S. Print and Related Services segment, volume increases in financial printing, logistics services, book production, and forms and labels were partially offset by lower prices for most products and services. In the International segment, net sales increases were driven by the 2007 acquisitions, increased book production in Asia, favorable exchange rates and volume growth from new customers in business process outsourcing, favorable exchange rates in Europe and increased book sales and commercial print sales in Latin America, offset by lower prices on the sales of directories and manuals in Europe and Asia.

Cost of sales increased $1,733.5 million to $8,532.4 million for the year ended December 31, 2007 versus the prior year, primarily due to acquisitions, increased sales volume and increased incentive compensation. Cost of sales as a percentage of consolidated net sales increased from 73.0% to 73.6%, as a result of continuing price competition across most of the operations in both segments and the impact of the acquired companies, which in the aggregate had lower gross margins than the Company’s historical margins. These factors were partially offset by cost reductions resulting from restructuring activities, procurement savings, and other productivity efforts.

Selling, general and administrative expenses increased $204.7 million to $1,302.3 million for the year ended December 31, 2007 versus the prior year, primarily due to acquisitions and increased incentive compensation. Selling, general and administrative expenses as a percentage of consolidated net sales decreased from 11.8% to 11.2%. This decrease reflected scale advantages, including the elimination of duplicative administrative functions at the acquired businesses.

For the year ended December 31, 2007, the Company recorded restructuring and impairment charges of $839.0 million, compared to $206.1 million in 2006. In 2007, these charges included a non-cash pre-tax charge of $316.1 million reflecting the write-off of the Moore Wallace, OfficeTiger and other trade names intangible assets, most of which were indefinite-lived, and $436.1 million for the impairment of goodwill associated with the business process outsourcing operations. In addition, these charges included $49.3 million for workforce reductions of 1,169 employees (all of whom were terminated as of December 31, 2008) associated with the reorganization of certain operations and the exiting of certain business activities. These actions included management changes to simplify the management reporting structure and cost structure reductions including the closing of two manufacturing facilities within the U.S. Print and Related Services segment and two facilities

36

Table of Contents

within the International segment. These charges also included $11.1 million of other restructuring costs including lease terminations in exited facilities and $26.4 million for the impairment of other long-lived assets, of which $19.1 million related to the write-off of capitalized customer contract set-up costs in the business process outsourcing reporting unit. For the year ended December 31, 2006, these charges included $110.0 million for the impairment of goodwill for the business process outsourcing operations within the International segment and $30.9 million for impairment of assets, of which $26.3 million reflected the write-down of the Astron trade name intangible asset. In addition, these charges included $54.1 million for workforce reductions of 1,396 employees (all of whom were terminated as of December 31, 2008), associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities and $11.1 million of other restructuring costs primarily related to lease terminations in exited facilities.

Depreciation and amortization increased $135.0 million to $598.3 million for the year ended December 31, 2007 compared to 2006, primarily due to acquisitions. Depreciation and amortization included $119.7 million and $73.2 million of amortization of purchased intangibles related to customer relationships, trade names and patents for the year ended December 31, 2007 and 2006, respectively. The write-off of the trade names in the second quarter decreased the 2007 amortization expense by $1.5 million.

Income from continuing operations for the year ended December 31, 2007 was $315.1 million, a decrease of $435.6 million compared to $750.7 million for the year ended December 31, 2006. The decrease was driven by a $316.1 million non-cash pre-tax charge reflecting the write-off of the Moore Wallace, OfficeTiger and other trade names intangible assets, a $436.1 million non-cash charge for the impairment of goodwill associated with the business process outsourcing operations, higher incentive compensation and higher depreciation and amortization expense, partially offset by the increase in net sales, productivity efforts and the benefits achieved from procurement savings and restructuring activities.

Net interest expense increased by $88.3 million for the year ended December 31, 2007 versus 2006, primarily due to the issuance of approximately $1.25 billion of debt in January 2007 and increased short-term borrowings to finance the acquisitions of Banta, Perry Judd’s, and Von Hoffmann.

Net investment and other income for the year ended December 31, 2007 was $3.6 million, compared to net investment and other expense of $10.4 million for the year ended December 31, 2006. Included in net investment and other income (expense) were charges of $0.2 million and $18.4 million (including an impairment charge of $16.9 million) for the years ended December 31, 2007 and 2006, respectively, reflecting declines in the underlying estimated fair market values of the Company’s affordable housing investments. In addition, the Company recorded a gain of $1.1 million for the year ended December 31, 2007 and a loss of $1.5 million for the year ended December 31, 2006 for the portion of the changes in fair value of derivative financial instruments that were ineffective as a net investment hedge. The Company recorded a gain of $7.0 million on the sale of certain investment property for the year ended December 31, 2006.

The effective income tax rate for the year ended December 31, 2007 was 149.3% compared to 32.6% in 2006. The increase primarily reflected the non-deductible, non-cash goodwill impairment charge of $436.1 million, tax benefits of $107.0 million associated with the $316.1 million non-cash charge for the write-off of the Moore Wallace, OfficeTiger and other trade names, the enactment of a lower statutory tax rate in the United Kingdom, an increased benefit from the domestic manufacturing deduction and the impact of the increased proportion of the Company’s taxable income derived from lower-tax jurisdictions. The effective income tax rate for the year ended December 31, 2006 included a $23.5 million benefit from the realization of a U.S. deferred tax asset and the reversal of reserves for tax contingencies of $27.3 million.

The net loss from continuing operations for the year ended December 31, 2007 was $48.4 million, or $0.22 per diluted share, compared to net loss from continuing operations of $402.6 million, or $1.84 per diluted share, for the year ended December 31, 2006. In addition to the factors described above, the per share results reflected a decrease in weighted average diluted shares outstanding of 0.9 million shares, as the Company’s net loss for the

37

Table of Contents

year caused all outstanding options and unvested share awards to be anti-dilutive. The increase in weighted average basic shares outstanding reflected the impact of employee stock option exercises and shares earned under share-based compensation plans, offset by the Company’s purchases in the open market of approximately 7.7 million shares at a total cost of $309.5 million.

The net loss from discontinued operations for the year ended December 31, 2007 was $0.5 million compared to $2.0 million for 2006, which primarily reflected costs resulting from a sub-lessee bankruptcy related to a facility previously occupied by the Company’s package logistics business.

U.S. Print and Related Services

The following tables summarize net sales, income from continuing operations and certain items impacting comparability, which reflect the results of acquired businesses from the relevant acquisition dates, within the U.S. Print and Related Services segment:

Net sales for the U.S. Print and Related Services segment for the year ended December 31, 2007 were $8,601.9 million, an increase of $1,460.3 million, or 20.4%, compared to 2006. Of this increase, approximately $1.4 billion, or 96%, was due to sales from the acquired facilities of Banta, Perry Judd’s and Von Hoffmann. The remaining increase resulted from volume increases, partially offset by downward price pressures. Net sales of magazines, catalogs and retail inserts increased due to the acquisitions, partially offset by lower pricing on major customer contracts. Net sales of books and directories increased, reflecting the acquisitions and higher volume in consumer and educational books, partially offset by continued pricing pressure and the impact of major directory contract renewals. Increases of variable print net sales reflected the acquisitions, partially offset by lower direct mail volume from key customers, the impact of postal rate increases and volume and price declines in statement printing. Net sales of forms and labels increased, due to the acquisitions and volume growth from new customers. Commercial printing sales slightly decreased as a result of lower volume from large corporate customers, offset

38

Table of Contents

by the acquisitions. In addition, logistics services increased, primarily due to volume growth driven by increases in print sales. Net sales of financial print increased, primarily driven by domestic capital market transactions and global investment company compliance services. Digital Solutions net sales increased due to acquisitions. Finally, office products net sales increased due to volume growth from existing customers.

U.S. Print and Related Services’ income from continuing operations decreased $101.2 million, driven by the non-cash charge of $257.4 million reflecting the write-off of the Moore Wallace and other trade names, the impact of competitive price pressures and increased incentive compensation, partially offset by the impact of acquisitions, higher volume and improved productivity. Operating margins as a percent of sales in the U.S. Print and Related Services segment decreased to 9.6% for the year ended December 31, 2007, as compared to 13.0% in 2006. The margin decrease primarily resulted from the non-cash charge of $257.4 million discussed above and the acquisitions of Banta and Perry Judd’s, both of which had lower margins than the segment’s historical margins, partially offset by the acquisition of Von Hoffmann, which had higher historical margins. In addition, acquisitions resulted in $34.3 million of incremental amortization expense on intangible assets, which reduced operating margins by 40 basis points.

Net sales for the International segment for the year ended December 31, 2007 were $2,985.2 million, an increase of $810.2 million, or 37.3%, compared to 2006. Of this increase, approximately $503.8 million, or 62%, was due to sales from the acquired facilities of OfficeTiger and Banta and $146.3 million, or 18%, was the result of favorable exchange rates. Net sales of business process outsourcing increased over 2006, primarily due to favorable foreign exchange and volume growth from new customers, partially offset by the volume declines in direct mail. In Europe, substantially all of the net sales increase was the result of changes in foreign exchange rates. Global Turnkey Solutions net sales were the result of our acquisition of Banta. In Asia, book sales increased, as a result of production mainly for the U.S. and European markets, as well as continued growth with telecommunications and technology customers. The Company had higher sales of books, forms, labels and commercial printing in Latin America. Net sales of forms and labels in Canada were up slightly, due to increased volume and favorable exchange rates.

39

Table of Contents

Income (loss) from continuing operations decreased $357.9 million, primarily due to an increase in restructuring and impairment charges of $383.7 million. These charges included $436.1 million for impairment of goodwill in the business process outsourcing reporting unit and $58.7 million for the write-off of the Moore Wallace, OfficeTiger and other trade names. In 2006, restructuring and impairment charges included $110.0 million for the impairment of goodwill within business process outsourcing operations and a $26.3 million write-off of the Astron trade name. This increase in restructuring and impairment charges was partially offset by the incremental income from continuing operations from acquisitions, volume growth, and the realization of cost reduction plans put into place during 2007.

Corporate operating expenses decreased $23.5 million to $193.7 million for the year ended December 31, 2007. The decrease in expense in 2007 is attributable to lower share-based and incentive compensation expense recorded on the corporate ledger, reductions in sales and use tax reserves, and cost reductions resulting from productivity efforts and restructuring actions. These factors were partially offset by increased information technology expense and additional costs resulting from the Banta, Perry Judd’s and Von Hoffmann acquisitions. Corporate restructuring charges of $15.2 million in the year ended December 31, 2007 primarily reflected the employee termination costs of actions taken to streamline the management structure and eliminate duplicative administrative functions. Corporate restructuring charges of $27.5 million for the year ended December 31, 2006 primarily included employee termination costs incurred as a result of actions taken to reorganize certain operations and costs related to the relocation of the global headquarters within Chicago.

40

Table of Contents

RESTRUCTURING, IMPAIRMENT, AND ACQUISITION-RELATED CHARGES

During 2008, the Company recorded restructuring and impairment charges of $1,184.7 million. These charges included $800.1 million for the impairment of goodwill, $325.3 million for the impairment of customer relationships intangible assets and $4.6 million for the impairment of other long-lived assets. In addition, these charges included $44.1 million related to workforce reductions of 2,245 employees (2,183 of whom were terminated as of December 31, 2008), associated with actions resulting from the reorganization of certain operations and the exiting of certain business activities. These actions included the realignment and consolidation of the Canadian organization, management reorganization within Latin America, the closing of two Global Turnkey Solutions manufacturing facilities within the International segment and realignment and consolidation of the financial print organization in the U.S. Print and Related Services and International segments. In addition, $10.6 million of other restructuring costs, including lease terminations in exited facilities, were recorded for the year ended December 31, 2008.

During 2008, the Company capitalized $2.1 million of restructuring costs related to employee terminations and other costs in connection with the acquisition of Pro Line. Costs of $1.7 million were for workforce reductions of 23 employees resulting from the elimination of duplicative administrative functions. Charges of $0.4 million of other restructuring costs included lease terminations in exited facilities.

During 2007, the Company recorded restructuring and impairment charges of $839.0 million. These charges included $316.1 million for the write-off of the Moore Wallace, OfficeTiger and other trade names associated with the Company’s decision in June 2007 to unify most of its printing and related service offerings under the single RR Donnelley brand. Additionally, the 2007 charges included $436.1 million for the impairment of goodwill resulting from the OfficeTiger and Astron acquisitions within the business process outsourcing reporting unit within the International segment and $26.4 million for the impairment of other long-lived assets, of which $19.1 million relates to the write-off of capitalized customer contract set-up costs in the business process outsourcing reporting unit. In addition, these charges included $49.3 million related to workforce reductions of 1,169 employees (all of whom were terminated as of December 31, 2008), associated with actions resulting from the reorganization of certain operations and the exiting of certain business activities. These actions included management changes to simplify and consolidate the management reporting structure and cost structure reductions including the closing of two manufacturing facilities within the U.S. Print and Related Services segment and two manufacturing facilities within the International segment. In addition, $11.1 million of other restructuring costs, including lease terminations in exited facilities, were recorded for the year ended December 31, 2007. Further, the Company capitalized $63.7 million of restructuring costs related to employee terminations and other costs in connection with the acquisitions of Banta, Perry Judd’s, Von Hoffmann, and Cardinal Brands. Costs of $55.1 million were for planned workforce reductions of 857 employees, resulting from the elimination of duplicative administrative functions and the planned closure of five operating facilities. Charges of $8.6 million of other restructuring costs included lease terminations in exited facilities.

During 2006, the Company recorded restructuring and impairment charges of $206.1 million. These charges included $110.0 million for the non-cash impairment of goodwill within the business process outsourcing operations of the International segment; $30.9 million for impairment of assets, of which $26.3 million reflects the non-cash write-down of the Astron trade name intangible asset; and $11.1 million of other restructuring costs, primarily lease termination costs. Additionally, the Company recorded $54.1 million for employee termination costs, of which $19.1 million was for management and other staff reductions associated with the Company’s management structure realignment in the fourth quarter. The workforce reductions totaled 1,396 employees (all of whom were terminated as of December 31, 2008), associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities.

The Company made cash payments of $68.9 million, $112.7 million and $66.5 million for restructuring activities during the years ended December 31, 2008, 2007 and 2006, respectively. These outlays were all funded using cash generated from operations and cash on hand.

41

Table of Contents

In 2009, the Company expects to realize further cost savings associated with the restructuring actions taken in 2008 and 2007, primarily through reduced employee and facility costs. The Company expects to identify further cost reduction opportunities within both current and newly acquired businesses and take additional actions in 2009 related to the ongoing economic slowdown, which may result in significant additional restructuring charges. If these restructuring actions occur, they will be funded by cash generated from operations and cash on hand. If necessary, the Company will fund these costs by utilizing its credit facilities.

LIQUIDITY AND CAPITAL RESOURCES

The following describes the Company’s cash flows for the years ended December 31, 2008, 2007 and 2006.

Cash Flows From Operating Activities

2008 compared to 2007

Net cash provided by operating activities of continuing operations was $1,016.7 million for the year ended December 31, 2008, compared to $1,176.8 million for the year ended December 31, 2007. Cash flows from operating activities are related both to the level of our profitability and to changes in working capital and other assets and liabilities. Operating cash inflows are largely attributable to sales of the Company’s products and services. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest and other activities. The decrease in operating cash flow from 2007 reflected higher interest payments from the issuance of approximately $1.25 billion of debt in January 2007 to fund a portion of the acquisitions of Banta and Perry Judd’s, a larger decrease in accounts payable due to the timing of vendor payments, partially offset by a decrease in accounts receivable and lower cash payments for income taxes. The reduction in incentive compensation expense that increased net earnings will impact net cash provided by continuing operations in 2009 as compared to 2008, as most annual incentive compensation is paid in the first quarter of the following year.

2007 compared to 2006

Net cash provided by operating activities of continuing operations was $1,176.8 million for the year ended December 31, 2007, compared to net cash provided by operating activities of continuing operations of $903.7 million for the year ended December 31, 2006. The increase primarily reflected the impacts of acquisitions, volume growth and productivity efforts, partially offset by higher cash payments for restructuring, interest, and income taxes.

Cash Flows From Investing Activities

2008 compared to 2007

Net cash used in investing activities of continuing operations for the year ended December 31, 2008 was $351.2 million compared to $2,510.9 million for the year ended December 31, 2007. Net cash used for acquisition of businesses in the year ended December 31, 2008 included $132.6 million for the acquisitions of Pro Line and another smaller acquisition, offset by proceeds of $10.5 million from purchase price adjustments related to previous acquisitions. For the year ended December 31, 2007, net cash used for acquisitions included $2,052.4 million for the acquisitions of Banta, Perry Judd’s, Von Hoffmann and Cardinal Brands. The Company received proceeds from the sale of investments and other assets of $53.2 million in 2008, which included $27.3 million of net proceeds from the sale of certain investment securities related to the liquidation of a captive insurance subsidiary. The Company received transfers of $40.6 million of restricted cash in 2008, of which $31.7 million related to the release of excess funding from a trust associated with the Company’s acquisition of Banta and $8.9 million was reimbursements from the same trust for payroll tax payments made by the Company. Capital expenditures were $322.9 million, a decrease of $159.1 million compared to the year ended December 31, 2007, reflecting lower spending on U.S. capacity growth due to the impact of acquisitions completed in 2007 and lower spending internationally in the Europe, Asia and business process outsourcing platforms. The Company continued to fund capital expenditures primarily through cash provided by operations. The Company expects that capital expenditures for 2009 will be approximately $250 million.

42

Table of Contents

2007 compared to 2006

Net cash used in investing activities for the year ended December 31, 2007 was $2,510.9 million versus net cash used in investing activities of $608.4 million for the year ended December 31, 2006. Net cash used for acquisition of businesses in the year ended December 31, 2007 included $2,052.4 million for the acquisition of Banta, Perry Judd’s, Von Hoffmann and Cardinal Brands. Capital expenditures were $482.0 million, an increase of $107.7 million compared to the year ended December 31, 2006. The increase reflects increased investment in expansion projects to support increased volume in Asia and Europe and capital spending at acquired businesses. The Company continued to fund capital expenditures primarily through cash provided by operations.

Cash Flows From Financing Activities

2008 compared to 2007

Net cash used in financing activities of continuing operations for the year ended December 31, 2008 was $676.8 million compared to net cash provided by financing activities of $1,476.2 million in 2007. During the year ended December 31, 2007, the Company received proceeds of $1,244.2 million from an issuance of long-term debt in order to fund a portion of the acquisitions of Banta and Perry Judd’s. In 2008, $1,275.0 million was borrowed under the revolving credit facility, while $1,475.0 million was used to pay down borrowings under this facility. The net change in short-term debt was a cash inflow of $6.8 million in the year ended December 31, 2008 due to borrowings under international credit facilities, partially offset by the repayment of commercial paper. The net change in other short-term debt for the year ended December 31, 2007 was a cash inflow of $282.1 million due to borrowings under the revolving credit facility and the issuance of commercial paper related to Banta, Perry Judd’s and Von Hoffmann acquisitions. Additionally, $278.8 million was utilized during the year ended December 31, 2008 to acquire 10.0 million shares of common stock under the Company’s share repurchase program, compared to $309.5 million to acquire approximately 7.7 million shares of common stock in 2007. In the year ended December 31, 2007, the Company received proceeds of $105.1 million for the exercise of stock options, including excess tax benefits of $9.6 million.

2007 compared to 2006

Net cash provided by financing activities for the year ended December 31, 2007 was $1,476.2 million compared to net cash used in financing activities of $457.8 million in 2006. The Company received proceeds of $1,244.2 million from an issuance of long-term debt in order to fund a portion of the acquisitions of Banta and Perry Judd’s. The net change in other short-term debt was a cash inflow of $282.1 million in the year ended December 31, 2007 reflecting the Company’s issuance of commercial paper related to the Banta, Perry Judd’s and Von Hoffmann acquisitions and share repurchases compared to a net decrease in other short-term debt of $21.6 million for the year ended December 31, 2006. The Company also received proceeds from borrowings under its revolving credit facility of $400.0 million to fund these acquisitions and share repurchases. Additionally, the Company received proceeds of $95.5 million from exercises of stock options, net of excess tax benefits. During the year ended December 31, 2007, the Company purchased in the open market approximately 7.7 million shares of its common stock at a total cost of $309.5 million.

Cash Flows From Discontinued Operations

Net cash used by discontinued operations for the year ended December 31, 2008 was $0.8 million, compared to net cash used by discontinued operations of $0.7 million in 2007 and $0.2 million in 2006.

Other

The Company’s cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the United States. Most of the amounts held outside of the United States could be repatriated to the United States but, under current law, would be subject to additional United States federal income taxes and in some cases to local country taxes. Repatriation of some foreign balances is restricted by local laws. The Company has no plans to repatriate funds in the near future.

43

Table of Contents

Included in cash and cash equivalents of $324.0 million at December 31, 2008 were short-term investments in the amount of $66.1 million, which primarily consist of certificate and short-term deposits and money market funds. These investments are with institutions with sound credit ratings and are believed to be highly liquid.

Dividends

Cash dividends paid to shareholders totaled $219.2 million, $226.8 million and $225.0 million in 2008, 2007 and 2006, 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 2009. 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 8, 2009, the Board of Directors of the Company declared a quarterly cash dividend of $0.26 per common share, payable on March 2, 2009 to shareholders of record on January 23, 2009.

The Company expects to make cash contributions of approximately $21.5 million to its pension plans and approximately $15.4 million to its postretirement benefit plans in 2009, which are not reflected above. Contributions for both pension and postretirement plans could be in the range of $150 million to $175 million in 2010.

On February 22, 2006, the Company’s Board of Directors authorized a share repurchase program of up to 10.0 million shares of the Company’s common stock through a variety of methods, including open market purchases, block transactions, accelerated share repurchase agreements or private transactions. Following such authorization and prior to July 25, 2007, the Company repurchased 4.0 million shares. On July 25, 2007, the Board of Directors increased the share repurchase program by 4.0 million shares, taking the total number of shares authorized for repurchase back to 10.0 million shares. Subsequent to July 25, 2007 and through December 31, 2007, the Company repurchased approximately 3.7 million shares. On February 22, 2008, the

44

Table of Contents

Board increased the share repurchase program by approximately 3.7 million shares, bringing the total number of shares authorized for repurchase back to 10.0 million shares. Subsequent to February 22, 2008 and through October 29, 2008, the Company repurchased 10.0 million shares. On October 29, 2008, the Company’s Board of Directors approved a new share repurchase program, authorizing the repurchase of up to 10.0 million shares. As of December 31, 2008, the Company is authorized under the terms of its share repurchase program to repurchase 10.0 million shares. Such purchases may be made from time to time and discontinued at any time.

LIQUIDITY

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its shareholders. Operating cash flows are the Company’s primary source of liquidity and are expected to be used for, among other things, interest and principal on the Company’s debt obligations, dividend payments that may be approved by the Board of Directors, capital expenditures as necessary to support growth and productivity improvement, completion of restructuring programs, additional acquisitions and future common stock or debt repurchases based upon market conditions. As further discussed below, the severe credit crisis has increased the Company’s borrowing costs.

Cash and cash equivalents of $324.0 million as of December 31, 2008 included $53.5 million that was readily available in the U.S. and $270.5 that was available at international locations, most of which is subject to U.S. federal income taxes and some of which are subject to local country taxes if repatriated. In addition, repatriation of some foreign cash is further restricted by local laws. The Company maintains a cash pooling structure that enables several international locations to draw on the Company’s overseas cash resources to meet local liquidity needs. In addition, foreign cash balances may be loaned to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs.

The Company has a $2.0 billion unsecured and committed revolving credit facility (the “Facility”) that can be used for general corporate purposes, including letters of credit and as a backstop for the Company’s $2.0 billion commercial paper program. The Facility is subject to a number of restrictive covenants that, in part, 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 and a maximum leverage ratio. In the event that the entire Facility was utilized, the Company would not have been in violation of those financial covenants based on its results of operations for the year ended December 31, 2008. In addition, borrowings under the Facility are subject to certain conditions, all of which were met at December 31, 2008. The Company pays an annual commitment fee of 0.08% and LIBOR plus a spread on borrowings under the Facility. This Facility has a maturity date of January 6, 2012. As of December 31, 2008, there were $200.0 million of borrowings outstanding under the Facility. The Company also has $173.0 million in credit facilities outside of the U.S., most of which are uncommitted. As of December 31, 2008, the Company had $43.1 million in outstanding letters of credit, of which $35.7 million reduced availability under the Facility and $1.7 million reduced availability under uncommitted facilities outside of the U.S. Additionally, as of December 31, 2008, there were $289.8 million of borrowings under the Company’s commercial paper program. At December 31, 2008, approximately $1.6 billion was available under the Company’s credit facilities, of which $1.5 billion was available under the committed Facility.

The credit markets, including commercial paper markets in the United States, experienced adverse and extremely volatile conditions during 2008, particularly in the fourth quarter. At times, volatility in the capital markets increased costs associated with issuing commercial paper or other debt instruments, due to increased spreads over relevant interest rate benchmarks, or affected the Company’s ability to access the credit markets. To minimize any liquidity concerns in the commercial paper market, the Company borrowed $200 million under its revolving credit facility during 2008. These borrowings were primarily used to refinance the outstanding commercial paper balance. Notwithstanding these adverse market conditions, we currently believe that current cash balances and cash generated by operations, together with access to external sources of funds described above, will be sufficient to meet our operating and capital needs in the foreseeable future.

45

Table of Contents

A downgrade of our short-term credit ratings would limit access and capacity in the commercial paper market, as well as negatively impacting borrowing costs and causing shorter durations. As a result of the current economic crisis and its impact to the industry and Company, the Company might experience a downgrade in its credit ratings in 2009. A downgrade in our credit ratings would not affect our ability to borrow amounts under the revolving credit facility, although borrowing costs would increase. However, the failure of a financial institution supporting the Facility would reduce the size of our committed facility, unless a replacement institution could be added. Currently, the Facility is supported by 17 U.S. and international financial institutions.

On January 14, 2009, the Company issued $400 million of 11.25% notes due February 1, 2019. The Company used the net proceeds to pay down commercial paper and borrowings under the Facility. The Company anticipates using funds from additional commercial paper and Facility borrowings to repay the April 1, 2009 maturity of $400 million in senior notes. If the Company experiences a downgrade in its credit ratings, these notes are subject to an increase from the 11.25% interest rate resulting in higher interest payments.

On January 2, 2009, the Company acquired the assets of PROSA, for a purchase price of approximately $24 million. The Company financed this acquisition with cash on hand.

On March 14, 2008, the Company acquired Pro Line, for a purchase price of approximately $122 million. The Company financed this acquisition with cash on hand and through issuances of commercial paper.

On December 27, 2007, the Company acquired Cardinal Brands, for a purchase price of approximately $123 million. The Company financed this acquisition through issuances of commercial paper and with existing cash on hand.

On May 16, 2007, the Company acquired Von Hoffmann, for a purchase price of approximately $413 million. The Company financed this acquisition through issuances of commercial paper and with existing cash on hand.

On January 24, 2007, the Company acquired Perry Judd’s, for a purchase price of approximately $182 million. The Company financed this acquisition with the proceeds from the issuance of the notes described in the next paragraph, through issuances of commercial paper and with existing cash on hand.

On January 8, 2007, the Company issued $625 million of 5.625% notes due January 15, 2012 and $625 million of 6.125% notes due January 15, 2017. On January 9, 2007, the Company completed its acquisition of Banta for approximately $1.4 billion in cash. The Company financed this acquisition with the proceeds from the issuance of these notes and short-term borrowings under its commercial paper program.

For the year ended December 31, 2008, the Company purchased in the open market 10.0 million shares of its common stock at a total cost of $278.8 million. All of these repurchases were funded with cash on hand and through issuances of commercial paper. As of December 31, 2008, the Company is authorized, under the terms of a share repurchase program approved by the Board of Directors, to repurchase up to 10.0 million shares.

The Company was in compliance with its debt covenants as of December 31, 2008, and is expected to remain in compliance based on management’s estimates of operating and financial results for 2009 and the foreseeable future. In addition, the Company met all the conditions required to borrow under the Facility as of December 31, 2008 and management expects the Company to continue to meet the applicable borrowing conditions.

On January 3, 2007, the Company filed a shelf registration statement with the Securities and Exchange Commission under the rules permitting “well-known seasoned issuers,” or “WKSIs,” to register an unlimited amount of securities to be issued from time to time in the future. Pursuant to the rules governing WKSI registration statements, the Company’s WKSI registration statement automatically became effective and

46

Table of Contents

available for use upon filing with the Securities and Exchange Commission. Under this WKSI registration statement, provided the Company has necessary corporate approvals to do so, the Company may issue an unlimited amount of securities for any purpose designated by the Company, including acquisitions and refinancing existing obligations.

Risk Management

The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. As of December 31, 2008, approximately 87% of the Company’s outstanding term debt was comprised of fixed-rate debt. At December 31, 2008, the Company’s exposure to rate fluctuations on variable-interest borrowings was limited to $523.5 million of short-term debt, substantially all of which is commercial paper and short-term LIBOR based borrowings under the Facility.

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 in most countries 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 that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the operating unit, the Company is exposed to currency risk and may enter into foreign currency forward contracts to hedge the currency risk. As of December 31, 2008, the aggregate notional amount of outstanding forward contracts was approximately $299.4 million. Unrealized gains from these foreign currency contracts were $6.8 million at December 31, 2008. The Company does not use derivative financial instruments for trading or speculative purposes.

During 2008, the Company terminated all of its outstanding cross-currency swaps. The termination resulted in net cash proceeds to the Company of $22.5 million and recognition of a pre-tax loss of $9.9 million.

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 2008, 2007 and 2006, the Company adopted various accounting standards as described in Note 11, Retirement Plans , Note 12, Income Taxes and Note 17, Stock and Incentive Programs for Employees to 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.

47

Table of Contents