UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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|For the year ended December 31, 2003 |  | Commission file number: 333-97721
|------------------------------------ |  | ---------------------------------

VERTIS, INC.(Exact name of registrant as specified in its charter)

|Delaware
(State or other jurisdiction of
incorporation or organization)       |  | 13-3768322
(I.R.S. Employer Identification)
|----------------------------------------------------------------------------- |  | -------------------------------------------
|250 West Pratt Street, Baltimore, MD
(Address of principal executive offices) |  | 21201
(Zip Code)                           

Registrant's telephone number, including area code: (410) 528-9800

Securities registered pursuant to Section 12 (b) of the Act: None

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Securities registered pursuant of Section 12(g) of the Act: None

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

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

Indicate by check mark whether the registrant is an accelerated filer as defined in Exchange Act
rule 12b-2. Yes o    No ý

The number of shares outstanding of Registrant's common stock as of March 1, 2004 was 1,000 shares.

Documents Incorporated By Reference: None



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VERTIS, INC.

ANNUAL REPORT ON FORM 10-K  FOR THE YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

Form 10-K

|Item No.                                                       |  | Name of Item                                                                          |  | Page
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|Part I                                                         |  |                                                                                       |  |     
|Item 1                                                         |  | Business                                                                              |  | 3   
|Item 2                                                         |  | Properties                                                                            |  | 12  
|Item 3                                                         |  | Legal Proceedings                                                                     |  | 14  
|Item 4                                                         |  | Submission of Matters to Vote of Security Holders                                     |  | 14  
|Part II                                                        |  |                                                                                       |  |     
|Item 5                                                         |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 15  
|Item 6                                                         |  | Selected Financial Data                                                               |  | 15  
|Item 7                                                         |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|Item 7A                                                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 35  
|Item 8                                                         |  | Financial Statements and Supplementary Data                                           |  | 35  
|Item 9                                                         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 36  
|Item 9A                                                        |  | Controls and Procedures                                                               |  | 36  
|Part III                                                       |  |                                                                                       |  |     
|Item 10                                                        |  | Directors and Executive Officers of Vertis                                            |  | 37  
|Item 11                                                        |  | Executive Compensation                                                                |  | 40  
|Item 12                                                        |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 45  
|Item 13                                                        |  | Certain Relationships and Related Transactions                                        |  | 49  
|Item 14                                                        |  | Principal Accounting Fees and Services                                                |  | 50  
|Part IV                                                        |  |                                                                                       |  |     
|Item 15                                                        |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 51  
|Index to Financial Statements and Financial Statement Schedule |  | F-1                                                                                  
|Signatures                                                     |  | II-1                                                                                 

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CAUTIONARY STATEMENTS

We have included in this Annual Report on Form 10-K, and from time to time our management may make, statements which may constitute
"forward-looking statements" within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You may find discussions containing such forward-looking
statements in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as within this Annual Report generally. In addition, when used in this
Annual Report, the words "believes," "anticipates," "expects," "estimates," "plans," "projects," "intends" and similar expressions are intended to identify forward-looking statements. These
forward-looking statements include statements other than historical information or statements of current condition, but instead represent only our belief regarding future events, many of which, by
their nature, are inherently uncertain and outside of our control. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these
forward-looking statements. Important factors that could cause actual results to differ from those in our specific forward-looking statements include, but are not limited to, those discussed under
"Certain Factors That May Affect Our Business," as well as:



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

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PART I

ITEM 1    BUSINESS

Overview

Vertis, Inc. is a leading provider of targeted advertising, media, and marketing solutions that drive consumers to marketers more effectively. Our
comprehensive products and services range from consumer research, audience targeting, creative services, and workflow management to targeted advertising inserts, direct mail, interactive marketing,
packaging solutions, and digital one-to-one marketing and fulfillment. We deliver a comprehensive range of solutions that simplify, improve, and maximize the effectiveness of
multiple phases of our customers' marketing campaigns, from inception of an advertising concept, through design, production, targeted distribution, and ultimately the measurement of advertising
effectiveness. We believe that our ability to produce cost-effective and measurable results in a relatively short time-frame is critically important to our clients. Our clients
include more than 3,000 grocery stores, drug stores and other retail chains, general merchandise producers and manufacturers, financial and insurance service providers, newspapers, and advertising
agencies.

In
2003, Vertis had net sales of approximately $1.6 billion and had approximately 8,000 employees worldwide. We offer an extensive list of solutions across a broad spectrum of
media designed to enable our clients to reach target customers with the most effective message. Customers may employ these services individually or on a combined basis to create an integrated
end-to-end targeted marketing solution.

We
believe that the breadth of our client base limits our reliance on any individual customer. Our top ten customers in 2003 accounted for 31.4% of our net sales, and no customer
accounted for more than 6.7% of our net sales. We have excellent relationships with our customers as evidenced by the average length of our relationships with our ten largest customers, which is over
15 years.

Vertis, Inc.
is a Delaware Corporation incorporated in 1993. Our principal executive offices are located at 250 West Pratt Street, Baltimore, Maryland 21201. Our Internet address
iswww.vertisinc.com. We are subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and file
annual, quarterly and special reports and other information with the Securities and Exchange Commission, or SEC. Our filings are available to the public at the SEC's website at www.sec.govand also at
our website, under "investor relations", at the specified address shown above. You may read and copy any documents we file with
the SEC at its public reference facility in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference facilities.

In
this Annual Report, when we use the terms "Vertis," "we," "our," and the "Company," we mean Vertis, Inc., and its consolidated subsidiaries. The words "Vertis Holdings" refer
to Vertis Holdings, Inc., the parent company of Vertis and its sole stockholder.

Business Segments

We operate in the advertising and marketing services industry through two business segments based on the way management views and manages the company, which is
based on our geographic presence. These segments are Vertis North America and Vertis Europe. Vertis North America provides a full array of solutions to clients primarily in the United States. Vertis
Europe provides services to clients in Europe, principally the United Kingdom. Financial and other information relating to our business segments for each of 2003, 2002 and 2001 can be found in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations", and Note 20, "Segment Information", to our consolidated financial statements included in this Annual
Report.

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In
September 2003 we announced a realignment of our North American platform. The realignment and resulting management changes created a structure we believe will drive top line
revenue growth and improve the support we provide to our customers' targeted marketing needs. The realignment consolidated the sales, marketing and production facilities of our entire North American
platform. Before the realignment, we managed our business, and delivered our products and services to customers, in accordance with our production capability. Likewise, we reported our business
segments within our North American platform in-line with these production capabilities. We believe the new structure will align our production capabilities and sales organization into a
single integrated entity. From a capabilities standpoint, establishing one production platform will ensure better overall asset utilization and will foster best-in-class
processes.

Effective
with the reporting of our 2003 full-year results and commensurate with our realignment of our North American operations we have consolidated the operations of our
former Retail and Newspaper Services segment, Direct Marketing Services segment and Advertising Technology Services segment into Vertis North America. This segmentation better matches our overall
strategy to provide a full array of targeted advertising and marketing services to a wide array of clients. The realignment was undertaken with the intent to drive top-line growth by
establishing a single sales force that will sell our comprehensive products and services to a diverse client base.

Vertis North America

General.Vertis North America provides the full array of targeted advertising, media, and marketing services. We enable
advertisers to achieve targeted distribution to large and diverse audiences. These products and services are delivered by means of our nationwide network of digitally connected facilities. Our
products and services include:


Targetable advertising insert programs for


Highly customized one-to-one marketingretailers and manufacturers


programs
Newspaper products (TV magazines,


Automated digital fulfillment servicesSunday magazines, color comics and


Direct mail production with varying levelsspecial supplements)


of personalization
Consumer research


Data design, collection and management to
Creative services including page layout


identify target audiencesand design


Mailing management services
Digital advertising workflow design and


Effectiveness measurementtransmission


Newspaper advertising development
Freight and logistics management


Media planning and placement and software
Digital content management


solutions
Graphic design and animation


Response management, warehousing and
Digital photography, compositing and


fulfillment servicesretouching


Call center and telemarketing services
In-store displays, billboards and building


Interactive marketingwraps
Consulting services


We
are a leading provider of advertising inserts and the largest single producer of newspaper TV listing guides and Sunday comics in the United States. In 2003, we produced more than
30 billion advertising inserts. Advertising inserts are typically produced in color on better quality paper than the reproductions that appear in run-of-press newspaper
advertisements. In addition, advertising inserts allow marketers to vary layout, artwork, design, trim size, paper type, color and format. Variations may be targeted by newspaper zones and by specific
customer demographics.

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We
provide 71 of the top 100 Sunday newspapers in the United States with circulation-building newspaper products and services through production of comics, TV listing guides, Sunday
supplements and special sections. In 2003, we produced approximately 1.6 billion Sunday comics, and approximately 1.0 billion TV listing guides.

We
are also one of the largest providers of highly customized direct mail, one-to-one marketing programs, mailing management services, automated digital
fulfillment and specialty advertising products in the United States. We derive the majority of our revenues from the design, production, and execution of personalized advertising mailings rather than
traditional, broadbase direct mailings. Personalized direct mail enables consumer goods and other marketers to communicate with their customers on an individual-by-individual
basis, an approach that provides higher response rates than broad, non-personalized mailings.

We
use sophisticated, data-driven techniques to target prospects and deliver full color, individualized marketing messages. We can process and manipulate databases to enable
our customers to target direct mail recipients based on many attributes, ranging from age, gender, and address to spending habits, type of car owned, whether the recipient is a pet owner, etc. These
highly individualized marketing campaigns are designed to enhance customer response levels and improve client marketing efficiencies through on-demand workflow automation. In addition, we
employ a broad range of technologies to assist clients with their advertising campaigns including digital media production and content management solutions to retailers, consumer and commercial
products companies and advertising agencies. These services and technologies enable clients to more efficiently create, produce and manage traditional print and advertising content. More importantly,
these services and technologies also enable clients to benefit from the influences of digital advertising media such as CD-ROM and the Internet. Our integrated offering enables advertisers
to maintain consistency of appearance of their products and brand names throughout various media forms.

Sales and Customers.Vertis North America employs approximately 140 sales representatives. Our sales force is organized into
four key business groups to maximize the development of business for newspapers and local, regional and national customers. The four key sales groups are managed under the overall Vertis North America
management structure and are responsible for selling all of our solutions. The Corporate Sales group focuses on selling solutions to national customers and is complemented by two regional geographic
groups covering the eastern and western United States. The National Sales and Strategic Account Planning group focuses on selling marketing solutions to national manufacturers, technology companies,
financial services and non-profit organizations and provides market research to assist our customers in effectively designing and implementing targeted advertising and marketing campaigns.

Our
customers include grocery stores, drug stores, other retailers, newspapers, consumer goods manufacturers, financial institutions, Internet advertisers,
not-for-profit organizations, government agencies, advertising agencies, consumer packaging customers, and commercial products manufacturers. While a majority of our net sales
are made directly to clients, we also sell our products and services through agencies and brokers. Our advertising insert products are distributed in national newspapers and, depending on their target
audience, through various forms of mail distribution and in store circulation. Vertis North America's ten largest customers accounted for approximately 33.9% of its 2003 net sales, and no single
customer represented more than 6.7% of total net sales of Vertis. We have established and maintained long-standing customer relationships with our major customers.

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Vertis Europe

General.Vertis Europe offers our European customers many of the products and services we offer our North American customers.
The products, services and technology offered in Europe include:


response fulfillment services


transactional printing
extensive inline printing and finishing


fragrance promotions
fully integrated direct marketing services


phone and loyalty card production
direct mail printing and fulfillment


data processing
laser imaging and lettershop capabilities


consulting


We
believe our European production facilities have unique production capabilities to meet demand for shorter run, highly personalized mailing and for transactional and billing
communications.

Sales and Customers.In addition to leveraging our national and retail sales groups, Vertis Europe has 43 sales
representatives devoted to this segment's specific products and services. Vertis Europe serves advertising agencies and corporate marketers. The main categories of direct marketing clients serviced
are financial services, agency, publishing, mail order, non-profit and retail. Vertis Europe's ten largest customers accounted for approximately 30.9% of its 2003 net sales.

Raw Materials

In 2003, we spent approximately $560 million on raw materials. The primary raw materials required in our operations are paper and ink. We also use other
raw materials, such as film, chemicals, computer supplies and proofing materials. We believe that there are adequate sources of supply for our primary raw materials and that our relationships with our
suppliers yield improved quality, pricing and overall service to our customers; however, there can be no assurance that we will not be adversely affected by a tight market for our primary raw
materials.

Our
results of operations depend to a large extent on the cost of paper and our ability to pass along to our customers any increases in these costs and remain competitive when there are
decreases. In recent years, the number of suppliers of paper has declined, and we have formed stronger commercial relationships with selected suppliers. This has enabled us to reduce costs by
increasing efficiency, negotiating favorable price discounts and achieving more assured sourcing of high quality paper that meets our specifications.

We
have contracts covering the purchases of ink and press supplies, (i.e. plates, blankets, solutions, etc.) These contracts, which range from 1 to 8 years in length, include
target minimum quantities and prices. All of these agreements allow for shortfalls of purchase minimums to be made up over the life of the contract. In addition, each of the agreements allows for the
reduction in obligations for a decline in volume experienced by Vertis, and all have competitive pricing clauses, whereby suppliers' prices must remain competitive in the market or the purchase
minimums can be adjusted.

We
have an agreement expiring July 2006 with a supplier to purchase all of our requirements for mailing services (inserting, sorting, tying, bagging and applying postage to direct
mail). The prices for the mailing services are negotiated annually.

Competition

The principal methods of competition in our businesses are pricing, quality, flexibility, customer targeting capabilities, breadth of service, timeliness of
delivery, customer service and other value-added services. Pricing depends in large part on the prices of paper and ink, which are our major raw materials (see "Raw Materials" above). Pricing is also
influenced by product type, shipping costs, operating efficiencies and the ability to control costs. We believe that the introduction of new technologies, continued excess capacity in this industry,
consolidation in our customer's markets, and

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softness
in traditional brand advertising spending, combined with the cost pressures facing customers resulting from other factors, including the cost of paper and postal rates, have resulted in
margin pressures and increased competition in our core businesses.

Our
major competitors in North America are R.R. Donnelley & Sons Company, Quebecor World Inc., American Color Graphics, Valassis Communications, Inc.,
Harte-Hankes, Inc., News America Marketing, ADVO, Inc., Acxiom Corporation, Experian, Applied Graphics Technologies, Inc., Schawk, Inc., and Southern Graphics, a division
of Alcoa. In addition, we compete with television, radio and other forms of print and electronic media. Vertis Europe's major competitor is Seven Worldwide, a division of Applied Graphics
Technologies, Inc. The U.K. direct mail market, while also fragmented, has certain key players, including Communisis, St. Ives, Polestar and Primecom, who collectively dominate the market. The
European direct mail market has been growing steadily over the last ten years, but this growth has attracted new players. There appears to be a significant increase in printing capacity due in part to
generalist printing companies converting to direct marketing printing.

Trade Names, Trademarks and Patents

We own certain trade names, trademarks and patents used in our business. The loss of any such trade name, other than "Vertis", or any trademark or patent would
not have a material adverse effect on our consolidated financial condition or results of operations.

Governmental Regulations

Our business is subject to a variety of federal, state and local laws, rules and regulations. Our production facilities are governed by laws and regulations
relating to workplace safety and worker health, primarily the Occupational Safety and Health Act ("OSHA") and the regulations promulgated
thereunder. Except as described herein, we are not aware of any pending legislation that in our view is likely to affect significantly the operations of our business. We believe that our operations
comply substantially with all applicable governmental rules and regulations.

Environmental Matters

Our operations are subject to a number of federal, state, local and foreign environmental laws and regulations including those regarding the discharge, emission,
storage, treatment, handling and disposal of hazardous or toxic substances as well as remediation of contaminated soil and groundwater. These laws and regulations impose significant capital and
operating costs on our business and there are significant penalties for violations.

Certain
environmental laws hold current owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of hazardous or toxic substances.
Because of our operations, the long history of industrial operations at some of our facilities, the operations of predecessor owners or operators of certain of our businesses, and the use, production
and release of hazardous substances at these sites and at surrounding sites, we may be subject to liability under these environmental laws. Various facilities of ours have experienced some level of
regulatory scrutiny in the past and are, or may become, subject to further regulatory inspections, future requests for investigation or liability for past practices.

The
Comprehensive Environmental Response, Compensation & Liability Act of 1980 as amended ("CERCLA"), provides for strict, and under certain circumstances, joint and several
liability, for among other things, generators of hazardous substances disposed of at contaminated sites. We have received requests for information or notifications of potential liability from the
Environmental Protection Agency under CERCLA for a few off-site locations. We have not incurred any significant costs relating to these matters and we do not believe that we will incur
material costs in the future in responding to conditions at these sites.

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The
nature of our operations exposes us to certain risks of liabilities and claims with respect to environmental matters. We believe our operations are currently in material compliance
with applicable environmental laws and regulations. In many jurisdictions, environmental requirements may be expected to become more stringent in the future which could affect our ability to obtain or
maintain necessary authorizations and approvals or result in increased environmental compliance costs.

We
do not believe that environmental compliance requirements are likely to have a material effect on us. We cannot predict what additional environmental legislation or regulations will
be enacted in the future or how existing or future laws or regulations will be administered or interpreted, or the amount of future expenditures that may be required in order to comply with these
laws. There can be no assurance that future environmental compliance obligations or discovery of new conditions will not arise in connection with our operations or facilities and that these would not
have a material adverse effect on our business, financial condition or results of operations.

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Employees

As of December 31, 2003, we had approximately 8,000 employees. Most of the hourly employees at our North Brunswick and Newark, New Jersey facilities
(approximately 170 employees) are represented by the Paper, Allied Industrial, Chemical and Energy Workers International Union. In addition, approximately 10 employees of our Chicago facilities are
represented by the Graphic Communications International Union or the Chicago Typographical Union. We believe we have satisfactory employee and labor relations.

Certain Factors That May Affect Our Business

Our highly leveraged status may impair our financial condition and we may incur additional debt.

We currently have a substantial amount of debt. As of December 31, 2003, our total consolidated debt was $1,052 million, excluding our accounts
receivable securitization facility. Our substantial debt could have important consequences for our financial condition, including:



The
indentures governing our debt instruments, subject to specified limitations, permit us and our subsidiaries to incur substantial additional debt. In addition, as of
December 31, 2003, our senior credit facility would permit us to borrow up to an additional $79.3 million. If new debt is added to our and our subsidiaries' current debt levels, the
related risks that we and they now face could intensify.

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends upon many factors, some of which are
beyond our control.

Our ability to make payments on and refinance our debt and to fund planned capital expenditures depends on our ability to generate cash flow in the future. To
some extent, this is subject to general economic, financial, competitive and other factors that are beyond our control. Based on the current and anticipated level of operations, we believe that our
cash flow from operations, together with amounts available under our senior credit facility, is adequate to meet our anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the next twelve months. We cannot assure you, however, that our business will continue to generate cash flow at or above current levels. If we are unable
to generate sufficient cash flow from operations in the future to service our debt, we may have to refinance all or a portion of our existing debt or obtain additional financing. We cannot assure you
that any refinancing of this kind would be possible or that any additional financing could be obtained. The inability to obtain additional financing could materially impact our ability to meet our
future debt service, capital expenditure and working capital requirements.

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Covenant restrictions under our indebtedness may limit our ability to operate our business.

Our indentures and other debt agreements contain, among other things, covenants that may restrict our ability to finance future operations or capital needs or to
engage in other business activities. The indentures and agreements restrict, among other things, our and the subsidiary guarantors' ability to:



In
addition, our senior credit facility requires us to maintain various financial ratios and satisfy financial condition tests, which may require that we take action to reduce our debt
or to act in a manner contrary to our business objectives. For more information about those financial ratios and financial condition tests, see Note 10 "Long-Term Debt" to our
consolidated financial statements included in this Annual Report and "Liquidity and Capital Resources" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Events
beyond our control, including changes in general economic and business conditions, may affect our ability to meet our financial ratios and financial condition tests. We cannot
assure you that we will meet those tests or that the lenders will waive any failure to meet those tests. A breach of any of these covenants would result in a default under our indentures and debt
agreements. All of our debt instruments have customary cross-default provisions. If an event of default under our debt instruments occurs, the lenders could elect to declare all amounts outstanding
thereunder, together with accrued interest, to be immediately due and payable. In that event, we might not have sufficient assets to pay amounts due on our outstanding debt.

The high level of competition in the advertising and marketing services industry could have a negative impact on our ability to service debt,
particularly in a prolonged economic downturn.

The advertising and marketing services industry is highly competitive in most product categories and geographic regions. Competition is largely based on price,
quality and servicing the specialized needs of customers. Moreover, rapid changes in information technology may result in more intense competition, as existing and new entrants seek to take advantage
of new products, services and technologies that could render our products, services and technologies less competitive or, in some instances, even obsolete. See "Competition" above. Technological
advances in digital transmission of data and advertising creation have resulted in the in-house production of advertising content by certain end-users which has had a negative
impact on our profitability. In addition, the recent prolonged economic downturn has resulted in competitive pricing pressure and changes in product mix favoring simpler formats, both of which
primarily effect the margin on our advertising insert and direct mail products. Simpler product formats generally result in increased competition, thereby increasing capacity

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for
our products and services. The competitive pricing pressures and changes in product mix have resulted in a decline in our margins.

The
recent prolonged economic downturn and any future periods of economic downturn could result in continuing increased competition and possibly affect our sales and profitability. A
decline in sales and profitability may decrease our cash flow, and make it more difficult for us to service our level of debt.

Demand for our services may decrease due to a decline in clients' or an industry's financial condition or due to an economic downturn.

We cannot assure you that the demand for our services will continue at current levels. Our clients' demand for our services may change based on their needs and
financial condition. In addition, when economic downturns affect particular clients or industry groups, demand for advertising and marketing services provided to these clients or industry groups is
often adversely affected. In 2001, the advertising industry experienced the first year-over-year decline in advertising spending since World War II. In 2002, the industry
posted a relatively modest year-over-year growth of approximately 2% in advertising spending. Although 2002 represented a partial reversal of the decline in 2001, the rate of
year-over-year growth was below historical growth rates dating back to 1990. In 2003, the challenging environment continued, as geopolitical events and high unemployment
continued to affect consumer confidence. Additionally, the advertising insert segment of the industry experienced a decline over the last few years, beginning in 2001. A substantial portion of our
revenue is generated from customers in various sectors of the retail industry, which has been particularly impacted by this recent challenging economic environment. There can be no assurance that
economic conditions
or the level of demand for our services will improve or that they will not deteriorate. If there is another period of economic downturn or stagnation, our results of operations may be adversely
affected.

Changes in the cost of paper could have a negative impact on our ability to service our indebtedness.

An increase in the cost of paper, a key raw material in our operations, may reduce our production volume and profits. If (i) we are not able to pass paper
cost increases to our customers, or (ii) our customers reduce the size of their print advertising programs, our sales and profitability could be negatively affected. A decline in volume may
decrease our cash flow, and make it difficult for us to service our level of debt.

Capacity
in the paper industry has remained relatively stable in recent years. Increases or decreases in demand for paper have led to corresponding pricing changes and, in periods of
high demand, to limitations on the availability of certain grades of paper, including grades used by us. A loss of the sources of paper supply or a disruption in those sources' business or failure by
them to meet our product needs on a timely basis could cause temporary shortages in needed materials which could have a negative effect on our net sales and profitability.

Regulations and government actions on direct marketing may affect us.

Federal and state legislatures have passed a variety of laws in recent years relating to direct marketing and related areas. This and similar future legislation,
as well as other government actions, could negatively affect direct marketing activities by imposing restrictions on telemarketing and on advertising in certain industries such as tobacco and
sweepstakes, increasing the postal rate and tightening privacy regulations. Therefore, they might have a substantial impact on our direct marketing services, which represent over 17% of our
consolidated revenues for the twelve months ended December 31, 2003, as we and our customers adjust our behaviors in response to such legislation and government actions.

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We rely on key management personnel.

Our success will depend, in part, on the efforts of our executive officers and other key employees, including Mr. Donald E. Roland, Mr. Dean D.
Durbin and Mr. Herbert W. Moloney III. Each of Messrs. Roland, Durbin and Moloney has significant years of service in the advertising and marketing industry, including time spent in
senior-level positions at our current end-user customer groups. We believe each of Messrs. Roland, Durbin and Moloney provides us with an in-depth understanding of the
needs of our customers and are key to delivering our integrated advertising products and marketing services. In addition, the market for qualified personnel is competitive and our future success will
depend upon, among other factors, our ability to attract and retain these key personnel. The loss of the services of any of our key management personnel or the failure to attract and retain employees
could have a material adverse effect on our results of operations and financial condition due to disruptions in leadership and continuity of our business relationships.

There can be no assurance that Thomas H. Lee Partners L.P. and its affiliates ("THL L.P."), as controlling shareholder, will exercise its control in our
best interests as opposed to its own best interests.

Because of its position as controlling shareholder of Vertis, THL L.P. is able to exercise control over decisions affecting us, including:



There
can be no assurance that THL L.P. will exercise its control in our best interests as opposed to its best interests as controlling shareholder.

In
addition, THL L.P. owns debt securities in Vertis, and may choose to take actions that are in its best interests as a debt holder, rather than a shareholder.

ITEM 2    PROPERTIES

Executive Offices

Our principal executive offices are located at 250 West Pratt Street, Baltimore, Maryland, and comprise approximately 56,000 square feet of leased space,
pursuant to a lease agreement expiring on August 31, 2007.

Production Facilities

As of December 31, 2003, we owned 13 and leased 43 production facilities, 49 of which are located in the United States with an aggregate area of
approximately 3,900,000 square feet. The leased production facilities have lease terms expiring at various times from 2004 to 2016. We believe that our facilities are suitable and adequate for our
business. We continually evaluate our facilities to ensure

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they
are consistent with our operational needs and business strategy. A summary of production facilities is set forth in the table below:

|Locations               |  | Square
Footage |  | Lease Term Expiration
|----------------------- |  | -------------- |  | ---------------------
|North America Locations |  |                |  |                      
|Atlanta, GA(1)          |  | 94,700         |  | Fee Ownership        
|Atlanta, GA             |  | 15,588         |  | February 28, 2006    
|Atlanta, GA             |  | 10,607         |  | March 31, 2008       
|Bristol, PA             |  | 123,000        |  | Fee Ownership        
|Carlsbad, CA            |  | 17,600         |  | September 30, 2005   
|Chalfont, PA            |  | 320,000        |  | Fee Ownership        
|Charlotte, NC           |  | 105,400        |  | April 30, 2013       
|Chicago, IL             |  | 38,302         |  | July 31, 2009        
|Chicago, IL             |  | 52,024         |  | May 31, 2011         
|City of Industry, CA    |  | 103,000        |  | September 30, 2006   
|Clifton Park, NY        |  | 9,219          |  | May 31, 2005         
|Columbus, OH            |  | 141,185        |  | December 31, 2004    
|Dallas, TX              |  | 90,000         |  | September 30, 2007   
|Delray Beach, FL        |  | 10,300         |  | May 31, 2005         
|East Longmeadow, MA     |  | 159,241        |  | February 3, 2006     
|Elk Grove Village, IL   |  | 80,665         |  | August 31, 2005      
|Greenville, MI          |  | 130,000        |  | Fee Ownership        
|Harrison, NJ            |  | 22,125         |  | May 31, 2010         
|Irvine, CA              |  | 29,825         |  | May 21, 2005         
|Irving, TX              |  | 91,649         |  | November 30, 2012    
|Lenexa, KS              |  | 89,403         |  | Fee Ownership        
|Long Island City, NY    |  | 11,500         |  | August 31, 2006      
|Manassas, VA            |  | 108,120        |  | May 31, 2014         
|Minnetonka, MN          |  | 8,550          |  | August 31, 2006      
|Monroe Township, NJ     |  | 57,987         |  | February 28, 2009    
|Newark, NJ              |  | 22,692         |  | December 31, 2007    
|Newark, NJ              |  | 23,000         |  | Fee Ownership        
|New York, NY            |  | 6,500          |  | July 31, 2006        
|New York, NY            |  | 31,500         |  | September 30, 2004   
|Niles, MI               |  | 90,000         |  | Fee Ownership        
|North Brunswick, NJ     |  | 173,232        |  | Fee Ownership        
|North Haven, CT         |  | 30,600         |  | December 27, 2007    
|Pomona, CA              |  | 144,542        |  | May 31, 2006         
|Portland, OR            |  | 125,250        |  | October 31, 2007     
|Richmond, VA            |  | 2,935          |  | April 30, 2004       
|Riverside, CA           |  | 84,000         |  | Fee Ownership        
|Rochester, NY           |  | 80,000         |  | Fee Ownership        
|Sacramento, CA          |  | 57,483         |  | Fee Ownership        
|Salt Lake City, UT      |  | 103,600        |  | August 31, 2009      
|San Antonio, TX         |  | 67,900         |  | Fee Ownership        
|San Antonio, TX         |  | 7,927          |  | March 31, 2008       
|San Francisco, CA       |  | 30,000         |  | June 14, 2005        
|San Francisco, CA       |  | 3,200          |  | June 14, 2005        
|San Leandro, CA         |  | 143,852        |  | August 31, 2005      
|Saugerties, NY          |  | 225,000        |  | Fee Ownership        
|                        |  |                |  |                      

13

---

|Scottsdale, AZ   |  | 7,184   |  | September 30, 2004
|---------------- |  | ------- |  | ------------------
|St. Louis, MO    |  | 38,782  |  | May 30, 2006      
|St. Louis, MO    |  | 30,300  |  | August 31, 2005   
|Tampa, FL        |  | 72,418  |  | December 31, 2008 
|Europe Locations |  |         |  |                   
|Croydon, UK      |  | 56,277  |  | December 1, 2013  
|Leicester, UK    |  | 58,205  |  | January 23, 2006  
|Leicester, UK    |  | 35,115  |  | September 28, 2007
|Leicester, UK    |  | 34,000  |  | March 11, 2013    
|London, UK       |  | 17,429  |  | September 29, 2013
|London, UK       |  | 12,356  |  | June 20, 2016     
|Swindon, UK      |  | 110,000 |  | June 25, 2014     

---

Sales Offices and Other Facilities

We maintain a large number of facilities for use as sales offices and other administrative purposes. All but two of the sales offices and other facilities are
leased, with lease terms expiring at various times from 2004 to 2006.

ITEM 3    LEGAL PROCEEDINGS

Certain claims, suits and complaints (including those involving environmental matters) which arise in the ordinary course of our business have been filed or are
pending against us. We believe, based upon the currently available information, that all the results of such proceedings, individually, or in the aggregate would not have a material adverse effect on
our consolidated financial condition or results of operations.

ITEM 4    SUBMISSION OF VOTE TO SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of our fiscal year ended December 31, 2003.

14

---



PART II

ITEM 5    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Not applicable.

ITEM 6    SELECTED FINANCIAL DATA

The following table sets forth selected historical consolidated financial data for Vertis and its subsidiaries as of and for the years ended December 31,
2003, 2002, 2001, 2000 and 1999. The historical data for the three-year period ended December 31, 2003 has been derived from our audited consolidated financial statements included
elsewhere in this Annual Report. The historical data for the two-year period ended December 31, 2000 has been derived from our audited consolidated financial statements not included
herein. We sold our subsidiary, Columbine JDS Systems, Inc. ("Columbine"), in connection with the recapitalization of Vertis Holdings in 1999. This table presents the operating results of
Columbine and its subsidiaries as discontinued operations in all applicable periods.

EBITDA
is included in this Annual Report as it is the primary measure we use to evaluate our business segments. EBITDA, as we used it for this purpose, represents net (loss) income,
plus:



We
present EBITDA here to provide additional information regarding our ability to meet our future debt service, capital expenditures and working capital requirements and because it is
the measure by which we gauge the profitability of our segments. EBITDA is not a measure of financial performance in accordance with accounting principles generally accepted in the United States of
America ("GAAP"). You should not consider it an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Our calculation of
EBITDA may be different from the calculation used by other companies and therefore comparability may be limited. A full quantitative reconciliation of EBITDA to its most directly comparable GAAP
measure, net (loss) income, is set forth in footnote (13) below.

You
should read the following selected historical consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations"
and the

15

---

related
historical consolidated financial statements and related notes included elsewhere in this Annual Report.

|                                                                                             |  | Year ended December 31, |          
|-------------------------------------------------------------------------------------------- |  | ----------------------- | ---------
|
|(in thousands)                                                                               |  |                         |          
|Operating data:                                                                              |  |                         |          
|Net sales                                                                                    |  | $                       | 1,585,909
|Operating income                                                                             |  |                         | 83,301   
|Interest expense, net(6)                                                                     |  |                         | 136,557  
|(Loss) income before income tax expense (benefit) and cumulative effect of accounting change |  |                         | (47,496  
|(Loss) income before cumulative effect of accounting change                                  |  |                         | (95,925  
|Loss from discontinued operations, net                                                       |  |                         |          
|Cumulative effect of accounting change, net                                                  |  |                         |          
|Net (loss) income                                                                            |  |                         | (95,925  
|Balance sheet data (at year end):                                                            |  |                         |          
|Working capital(11)                                                                          |  | $                       | (60,606  
|Net property, plant and equipment                                                            |  |                         | 401,820  
|Total assets                                                                                 |  |                         | 1,147,498
|Long-term debt (including current portion)                                                   |  |                         | 1,051,950
|Accumulated deficit                                                                          |  |                         | (742,512 
|Other stockholder's equity                                                                   |  |                         | 400,314  
|Common stockholder's (deficit) equity                                                        |  |                         | (342,198 
|Other data:                                                                                  |  |                         |          
|Capital expenditures                                                                         |  | $                       | 44,111   
|Cash flows provided by operating activities                                                  |  |                         | 89,046   
|Cash flows used in investing activities                                                      |  |                         | 40,903   
|Cash flows (used in) provided by financing activities                                        |  |                         | (53,176  
|EBITDA(13)                                                                                   |  |                         | 172,683  
|Dividends to parent                                                                          |  |                         |          
|Ratio of earnings to fixed charges                                                           |  |                         |         

---

16

---

(in thousands)

2003

2002

2001

2000

1999Net (loss) income

$
(95,925
)
$
(120,146
)
$
(54,863
)
$
(25,212
)
$
2,450Interest expense, net


136,557


134,374


132,816


150,032


78,087Income tax expense (benefit)


48,429


(2,479
)

(21,572
)

(6,901
)

27,221Depreciation and amortization of intangibles


83,622


89,241


104,350


97,544


88,076EBITDA

$
172,683

$
100,990

$
160,731

$
215,463

$
195,834


17

---



ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This
section provides a review of the financial condition and results of operation of Vertis during the three years ended December 31, 2003. The analysis is based on the
consolidated financial statements and related notes that are included elsewhere in this Annual Report, prepared in accordance with accounting principles generally accepted in the United States of
America ("GAAP").

Introductory Overview

Executive Summary

Vertis is a leading provider of targeted advertising, media and marketing services. We deliver a comprehensive range of solutions that simplify, improve and
maximize the effectiveness of multiple phases of our customers' marketing campaigns from the inception of an advertising concept, through design, production, targeted distribution, and ultimately to
providing advertising effectiveness measurement.

We
operate through two business segments based on the way management views and manages the Company, which is based on our geographic presence in the advertising and marketing services
industry. These business segments are Vertis North America and Vertis Europe. Vertis North America provides the full array of advertising, media and marketing solutions to clients, primarily in the
United States. Vertis Europe provides both production and direct mail services to clients overseas, principally in the United Kingdom.

Since
the merger and recapitalization of Vertis Holdings and the Company in December of 1999, the Company has been, and continues to be, highly leveraged. In addition, the overall
economy and specifically the advertising markets in which we operate have declined or experienced only moderate growth from 2000 through 2003. In this environment the Company has focused on cost
reductions, cash management, strict capital discipline and revenue growth through product differentiation.

In
2001, the advertising industry experienced its first year-over-year decline in advertising spending since World War II. In 2002, advertising spending grew at a
modest 2% rate year-over-year. Although 2002 represented a partial reversal of the decline in 2001, the rate of year-over-year growth was below
historical growth rates dating back to 1990. Additionally, the advertising insert segment of the industry experienced a decline over the last few years, beginning in 2001. In early 2003, the economic
environment continued to decline as geopolitical events continued to affect consumer confidence. A substantial portion of our revenue is generated from customers in the retail industry, which have
been particularly impacted by the recent challenging economic environment. These near-term trends in the advertising industry have had a negative impact on our performance. Although there
is continued uncertainty regarding the prospects for an economic recovery, we believe advertising spending growth rates will return to more normal levels in 2004.

The
most significant impact driving our operating results for 2003 was the ongoing decline in margins of advertising insert products, and to a lesser extent, direct mail products due to
competitive pricing pressures and changes in product mix to simpler products in an effort by retailers and other customers to reduce costs. Additionally, we believe that the introduction of new
technologies, continued excess capacity in the industry, consolidation in our customer's markets, and softness in traditional brand advertising spending, combined with the cost pressures facing
customers resulting from other factors, including the cost of paper and postal rates, have resulted in margin pressures and increased competition in our core businesses. The Company does not expect to
see a continuation of this trend and expects pricing will stabilize and improve slowly if overall market conditions and capacity utilization firm up. In fact, nearly 100% of the decline in pricing
occurred during the first three quarters of 2003.

18

---

In
addition, the Company has seen a decline in the business received from advertising agencies that it expects will continue in 2004.

Cost
reductions have been accomplished through streamlining of shared service and corporate functions, combining operations, closing unprofitable locations, staff reductions and asset
write-offs. These actions have resulted in the Company incurring approximately $101.2 million in restructuring charges over the last 5 years.

Liquidity
continues to be a primary focus for the Company. As of December 31, 2003, the Company was in compliance with all of its covenants, financial or otherwise. The Company
has approximately
$79.3 million available to borrow under our revolving credit facility, its primary source of funds. While we currently expect to be in compliance in future periods, if the fragile economic
conditions and margin pressures that have influenced our results in recent years continue, there can be no assurance that we will continue to meet these financial covenants. Based upon the latest
projections for the first quarter of 2004, including results from January and February 2004, we believe we will be in compliance in the upcoming year.

We
refinanced approximately $700 million of our outstanding debt that existed as of December 31, 1999, and as a result we have renegotiated all of our financial covenants
and eliminated all significant debt repayments until 2005 and beyond. This refinancing has allowed the Company to restructure the business and focus on improving operations.

Capital
expenditures in 2003 were consistent with the 2002 level of spending, both of which amounted to a decrease of approximately 38% as compared to 2001. The capital expenditures in
2003 were approximately 25% of EBITDA as compared to the 2002 and 2001 spending which was approximately 45% of EBITDA in both years. The Company believes this level of spending was appropriate given
its leverage and, more importantly, did not lead to any decline in productivity. Prior to the year ended December 31, 2002 the Company's capital expenditures were higher than the spending in
2003 and 2002. In the span of 1999 through 2001, the Company invested an aggregate of $48.4 million in new printing presses, incurred $27.0 million to acquire assets financed under
operating leases and invested $6.2 million in infrastructure software to support certain business units. The level of capital spending in 2002 and 2003 leveraged the higher capital spending
levels in the three preceding years. We anticipate a modest increase in capital expenditures in the coming year.

During
2002, Vertis received payments from a customer under an order of the bankruptcy court classified as critical vendor payments (the "Payments"). These Payments totaled approximately
$7 million. On February 24, 2004, the United States Court of Appeals for the Seventh Circuit affirmed a lower court ruling reversing the order authorizing these Payments. The Seventh
Circuit did not; however, issue an order for the repayment of these Payments. Rather, and more narrowly, the decision of the Seventh Circuit affirmed the lower court ruling that a proper factual
record proving the need for the Payments had not been established, which may or may not provide a basis for the customer to recover any, some or all of the Payments. Additionally, the Company believes
it has legitimate counterclaims and rights of set-off and currently intends to vigorously resist any such recovery proceedings. However, because of the uncertainties explained above
management is unable to determine at this stage of the litigation the size of any such repayments, if any, or when they would be required to be made.

A
large portion of the Company's revenue is generally seasonal in nature. However, our efforts to expand our other product lines as well as expand the market for our advertising inserts
to year-round customers, have reduced the overall seasonality of our revenues. Of our full year 2003 net sales, 23.4% were generated in the first quarter, 23.8% in the second, 24.7% in the
third and 28.1% in the fourth. Profitability, however, continues to follow a more seasonal pattern due to the higher margins and efficiencies gained from running at full capacity during the fourth
quarter holiday production season. On the other hand, lower volume negatively impacts margins since we are not able to fully leverage

19

---

fixed
depreciation, amortization and interest costs that are incurred evenly throughout the year. Based on our historical experience and projected operations, we expect our operating results in the
near future to be strongest in the fourth quarter and softest in the first.

Segment Realignment

In September 2003, we announced a realignment of our North American platform. The realignment consolidated the sales, marketing and production facilities
of our entire North American platform. Before the realignment, we managed our business, and delivered our products and services to customers, in accordance with our production capability. Likewise, we
reported our business segments within our North American platform in-line with our production capabilities. Effective with the reporting of our 2003 full-year results and
commensurate with our realignment of our North American operations, we have consolidated the operations of our former Retail and Newspaper Services segment, Direct Marketing Services segment and
Advertising Technology Services segment into Vertis North America. This segmentation better matches our overall strategy to provide a full array of targeted advertising and marketing services to a
wide array of clients. Our decision making, resource allocation, and performance measurement are based on the two geographic locations in which we operate: Vertis North America and Vertis Europe.
Vertis Europe has not been affected by this realignment and remains unchanged from the segment reported in prior years.

Corporate Consolidation and Restructuring

In 2000, we began a multi-phase consolidation and restructuring plan intended to streamline operations, improve sales and reduce the cost of operating our
business in order to better serve our customers while at the same time also improving our operating and financial performance. Our consolidation plan had three principal components:



As
part of this plan, we also consolidated our sales organization to create an integrated product offering and sales effort. We have organized our sales force into four key business
groups to maximize the development of business for newspaper, local, regional and national customers with a focus on accounts that can employ multiple service lines. We believe that this structure,
which we call Vertis Integrated Selling, will maximize multi-solution sales opportunities. Finally, this consolidation has allowed us, through the elimination of duplicative positions, to reduce much
of the corporate overhead previously incurred by our parent, Vertis Holdings.

During
2001, we continued the restructuring program initiated in 2000. Certain production and sales administration facilities were combined in strategic areas resulting in the closure of
14 facilities, abandonment of assets in those locations and reduction in work force. In order to reduce duplicative overhead, on January 1, 2001, we transferred 13 management and support
personnel employed at our parent, Vertis Holdings, to Chancery Lane Capital ("CLC"), an affiliate of the former chairman of Vertis Holdings, in exchange for a $14.0 million one-time
payment by us to CLC. This cost was recorded in restructuring expense in 2001. Concurrently, Thomas H. Lee Partners acquired an additional $40 million of our equity from an affiliate of CLC in
exchange for $40 million of Vertis Holdings' mezzanine debt.

In
2002, the Company planned and implemented two restructuring programs. In the first quarter of 2002, two Vertis Europe facilities were combined and ten employees were terminated
resulting in

20

---

severance
of $0.7 million, facility closure costs of $1.6 million and losses on asset dispositions of $0.2 million. The North American 2002 restructuring plan resulted in a
reduction in work force of approximately 530 employees, which resulted in a severance charge of $8.0 million and the closure of five facilities, which resulted in a charge of
$7.0 million including $4.9 million in losses on the disposition of assets at the closed facilities and an offsetting adjustment of $1.3 million to adjust the 2001 estimated
restructuring accrual. Additionally, the Company recorded $1.6 million of other charges, which are primarily legal fees and the cost of leased equipment no longer needed due to the North
American restructurings.

We
began a new restructuring program in the third quarter of 2003, the execution of which is expected to be complete by the first quarter of 2004. This program includes the closure of
facilities, some of which are associated with the consolidation of operations and positions; reductions in work force of approximately 260 employees; and the abandonment of assets associated with
vacating these premises. In 2003, Vertis North America recorded $4.7 million in severance costs due to headcount reductions of 200 employees, $6.9 million in facility closure costs and
$3.0 million in asset write-offs related to the closure of five facilities. In 2003, Vertis Europe recorded $0.6 million in severance costs due to headcount reductions of 14
employees related to the closure of one facility and the consolidation of several subsidiaries into one entity.

We
expect the costs associated with the restructuring programs to be an estimated $16.1 million (net of estimated sublease income of $7.5 million) of which approximately
$3.0 million are non-cash costs. Execution of the North American program is expected to be complete in the first quarter of 2004. We expect no future costs associated with the
restructuring effort at Vertis Europe, as the European program is complete as of December 31, 2003.

In
connection with these actions, we recorded $15.2 million, $19.1 million and $42.2 million of restructuring charges in the years ended December 31, 2003,
2002 and 2001, respectively. We expect to pay $6.4 million of the accrued restructuring costs in 2004 and the remainder, approximately $5.4 million, by 2011. For more information about
our restructuring charges, see Note 2 of our consolidated financial statements included in this Annual Report.

Factors Affecting Comparability

Several factors can affect the comparability of our results from one period to another. Primary among these factors are the cost of paper, changes in business
mix, the timing of restructuring expenses and the realization of the associated benefits.

The
cost of paper is a principal factor in our pricing to certain customers since a substantial portion of net sales includes the pass-through cost of paper. Therefore,
changes in the cost of paper and changes in the proportion of paper supplied by our customers significantly affects our revenue generated from the sale of advertising insert and direct mail products,
both of which are products where paper is a substantial portion of the costs of production. Changes in the cost of paper do not materially impact our net earnings since we are generally able to pass
on increases in the cost of paper to our customers, while decreases in paper costs generally result in lower prices to customers.

Variances
in expenses expressed in terms of percentage of net sales can fluctuate based on changes in business mix and are influenced by the change in revenue directly resulting from
changes in paper prices and the proportion of paper supplied by our customers. As our business mix changes, the nature
of products sold in a period can lead to offsetting increases and decreases in different expense categories.

The
following items also affect the comparability of the results from year-to-year. Included in the net loss for 2003 is an increase of $67.4 million in
the tax valuation allowance on deferred tax assets. In 2002, net loss includes a $108.4 million charge for the cumulative affect of accounting change resulting

21

---

from
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles".

You
should consider all of these factors in reviewing the discussion of our operating results.

Results Of Operations

The following table presents major components from our consolidated statements of operations and consolidated statements of cash flows.

|                                             |  | Year ended December 31, |           | Percentage of Sales |  
|-------------------------------------------- |  | ----------------------- | --------- | ------------------- | -
|
|
|Net sales                                    |  | $                       | 1,585,909 |                     | $
|                                             |  |                         |           |                     |  
|Costs of production                          |  |                         | 1,226,420 |                     |  
|Selling, general and administrative          |  |                         | 177,323   |                     |  
|Restructuring charges                        |  |                         | 15,243    |                     |  
|Depreciation and amortization of intangibles |  |                         | 83,622    |                     |  
|                                             |  |                         |           |                     |  
|Total operating costs                        |  |                         | 1,502,608 |                     |  
|                                             |  |                         |           |                     |  
|Operating income                             |  |                         | 83,301    |                     |  
|                                             |  |                         |           |                     |  
|Other data:                                  |  |                         |           |                     |  
|Cash flows provided by operating activities  |  | $                       | 89,046    |                     | $
|Cash flows used in investing activities      |  |                         | 40,903    |                     |  
|Cash flows used in financing activities      |  |                         | 53,176    |                     |  
|EBITDA                                       |  |                         | 172,683   |                     |  

EBITDA
is included in this Annual Report as it is the primary measure we use to evaluate our performance. EBITDA, as we used it for this purpose, represents net (loss) income, plus



We
present EBITDA here to provide additional information regarding our performance and because it is the measure by which we gauge the profitability and assess the performance of our
segments. EBITDA is not a measure of financial performance in accordance with GAAP. You should not consider it an alternative to net income as a measure of operating performance. Our calculation of
EBITDA may be different from the calculation used by other companies and therefore comparability

22

---

may
be limited. A full quantitative reconciliation of EBITDA to its most directly comparable GAAP measure, net (loss) income, is provided as follows:

Year ended December 31,2003

2002

2001(in thousands)Net loss

$
(95,925
)
$
(120,146
)
$
(54,863
)Interest expense, net


136,557


134,374


132,816Income tax expense (benefit)


48,429


(2,479
)

(21,572
)Depreciation and amortization of intangibles


83,622


89,241


104,350EBITDA

$
172,683

$
100,990

$
160,731


Results of Operations2003 compared to 2002



For the year ended December 31, 2003, our consolidated net sales declined $89.3 million, or 5.3%, from $1,675.2 million in 2002 to
$1,585.9 million in 2003. The decline reflects competitive pricing pressures; lower volume; weak sales to advertising agency customers, indicative of the weak advertising
environment and the shift by advertising agencies to in-house production; and lower pass-through items consisting of paper, ink and contract services. We believe these declines
reflect the continuously challenging macro-economic conditions, which have dampened spending for our products and services. Changes in the per ton cost of paper resulted in an increase in net sales of
$1.3 million for the year ended December 31, 2003, which was more than offset by a reduction in paper costs due to volume.

At
Vertis North America, net sales declined $88.0 million, or 5.7%, from $1,536.5 million for the year ended December 31, 2002 to $1,448.5 million for the
year ended December 31, 2003. The decline in net sales was the result of:



23

---



The
above declines were partially offset by increases in net sales arising from our advertising production capabilities and other items.

At
Vertis Europe, net sales for the year ended December 31, 2003, were $137.4 million, a decline of $1.5 million, or 1.1%, compared to 2002 net sales, which totaled
$138.9 million. Excluding the positive impact of the foreign exchange rate fluctuation, aggregating $10.9 million, Vertis Europe's net sales were down $12.4 million due to a 12.7%
decline in sales from direct mail products and services for the year ended December 31, 2003, which was only partially offset by modest growth in net sales arising from our advertising
production capabilities for the same period. The decline in net sales from direct mail products and services reflects subdued business conditions due to industry-wide excess capacity and
changes to simpler product formats, both resulting in lower prices.



For the year ended December 31, 2003, our consolidated costs of production decreased $29.2 million, or 2.3%, from $1,255.6 million in 2002 to
$1,226.4 million in 2003. The cost of paper and ink consumed represents $13.7 million and $3.5 million, respectively, of the decline in costs of production for the year ended
December 31, 2003. The balance of the decline in costs of production reflects the decline commensurate with the noted declines in net sales, cost management of variable and fixed costs and the
ongoing efforts to improve operating efficiencies.

Selling,
general and administrative expenses decreased $10.5 million, or 5.6%, from $187.8 million in 2002 to $177.3 million in 2003. The decline was largely the
result of lower staffing-related costs and includes the benefits of the Company's restructuring activities. Selling, general and administrative expenses were 11.2% of net sales in both 2003 and 2002.

Restructuring
charges for the year ended December 31, 2003 totaled $15.2 million. The comparable 2002 period included restructuring charges of $19.1 million. The
Vertis North America restructuring charges in 2003 are comprised of $4.7 million in severance costs due to headcount reductions of 200 employees, $6.9 million in facility closure costs
and $3.0 million in asset write-offs related to the closure of five facilities. In 2003, Vertis Europe recorded $0.6 million in severance costs due to headcount reductions of
14 employees related to the closure of one facility and the consolidation of several subsidiaries into one entity.

Operating
income amounted to $83.3 million for the year ended December 31, 2003, a decline of $40.2 million, or 32.6% compared to operating income of
$123.5 million in the comparable 2002 period. The reduction in operating income is attributable to the noted declines in net sales, partially offset by reductions in costs of production,
selling, general and administrative costs and restructuring costs as
previously discussed. As a percentage of net sales, operating income decreased 2.1 percentage points to 5.3% for the year ended December 31, 2003 as compared to 7.4% in 2002.



Interest expense, net increased $2.2 million in the year ended December 31, 2003 as compared to 2002, due to the interest associated with the
issuance of the 93/4% notes in June 2003 and the issuance of the 107/8% notes in June and November 2002, offset by the decrease in interest expense due to
the payments on the revolver and term loans related to those issuances.

The
year-over-year increase in other, net of $9.1 million is primarily due to a $10.1 million recovery in 2003 from a settlement to the legal
proceeding arising from a life insurance policy which covered the former Chairman of Vertis Holdings, Inc., offset by a $1.1 million adjustment to record the changes in the interest rate
swap agreement (see Note 10 to our consolidated financial statements included in this Annual Report).

24

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Net loss for the year ended December 31, 2003 was $95.9 million, a decrease in net loss of $24.2, or 20.1%, compared to a net loss of
$120.1 million for the year ended December 31, 2002. Included in the 2003 net loss is an increase of $67.4 million in the tax valuation allowance on deferred tax assets (see
"Seasonality and Other Factors" below). Included in the 2002 net loss is a $108.4 million charge for the cumulative effect of accounting change resulting from our adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles" (see "New Accounting Pronouncements" below). Loss before income tax expense and cumulative effect of accounting
change for the year ended December 31, 2003 increased from the comparable prior year period by $33.2 million. This increase is a result of the aforementioned changes in net sales and
costs, as discussed above.



Set forth below is a discussion of the performance of our business segments based on EBITDA, which is the measure reported to our chief operating decision makers
for the purpose of making decisions about allocating resources to the segment and assessing performance of the segment. A tabular reconciliation of segment EBITDA to the directly comparable
consolidated GAAP measure, net (loss) income, in accordance with Financial Accounting Standards Board ("FASB") Statement No. 131, "Disclosure about Segments of an Enterprise and Related
Information", is contained in the notes to our consolidated financial statements included elsewhere herein.

At
Vertis North America, EBITDA amounted to $164.3 million for the year ended December 31, 2003, an increase of $45.0 million, or 37.7%, compared to
$119.3 million in the comparable 2002 period. The increase in 2003 was largely due to the $86.6 million impairment loss recorded in January 2002 to reduce the carrying value of
Vertis North America goodwill in accordance with SFAS 142 (see "New Accounting Pronouncements" below). Excluding the impact of this adjustment, EBITDA in North America would be
down $41.6 million, or 20.2%, as compared to 2002. The decline was largely a result of competitive pricing pressures, changes in product mix toward simpler formats and to a lesser extent
reductions in volume.

At
Vertis Europe, EBITDA of $8.5 million for the year ended December 31, 2003, represents an increase of $17.1 million as compared to an EBITDA loss of
$8.6 million in the comparable prior year. The majority of the increase in 2003, $21.8 million, reflects the impairment loss recorded in January 2002 to reduce the carrying value
of the Vertis Europe goodwill in accordance with SFAS 142 (see"New Accounting Pronouncements" below). Excluding the impact of this adjustment, EBITDA in Europe would be down
$4.7 million, or 35.6%, as compared to 2002 due to the poor direct mail conditions. In addition, costs were higher in 2003, largely due to increased selling costs to develop and expand our
product offering in response to the sluggish direct mail market, offset by the $1.5 million positive impact of the change in foreign currency exchange rates.

Results of Operations2002 compared to 2001



For the year ended December 31, 2002, net sales declined $175.9 million, or 9.5%, from $1,851.1 million in 2001 to $1,675.2 million in
2002 largely as a result of a $114.2 million downward impact on revenue caused by declines in the cost of paper. As of December 31, 2002, the average cost per ton of newsprint paper in
the U.S. had decreased 4.1% versus 2001. The remainder of the decline in net sales, excluding the effect of paper, is largely the result of declining sales of direct mail pieces and sales to
advertising agency customers. These negative impacts on net sales reflect the sluggish advertising environment.

25

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At
Vertis North America, net sales declined $173.4 million, or 10.1%, from $1,709.9 million for the year ended December 31, 2001 to $1,536.5 million for the
year ended December 31, 2002. The decline in net sales was the result of:



Net
sales at Vertis Europe were $138.9 million in 2002 and $141.4 million in 2001, a decline of $2.5 million, or 1.8%. Excluding the impact of the change in the
foreign exchange, the decline in net sales would have been $8.5 million, or 6.0%. This decline is due to sluggish market conditions and the sale of a subsidiary of Vertis Europe, effective
May 2001, which generated net sales of $1.5 million in 2001.



For the year ended December 31, 2002, our consolidated costs of production decreased $176.1 million, or 12.3%, from $1,431.7 million in 2001
to $1,255.6 million in 2002. The cost of paper and ink consumed represents $139.0 million of this decline. The balance of the decline in costs of production reflects the decline
commensurate with the noted declines in net sales, cost management of variable and fixed costs and the ongoing efforts to improve operating efficiencies. As a percentage of net sales, cost of
production decreased 2.3 percentage points for the year ended December 31, 2002, largely due to the noted decline in net sales.

Selling,
general and administrative expenses amounted to $187.8 million in 2002 versus $202.2 million in 2001. The decline of $14.4 million, or 7.1%, reflects
benefits realized from our restructuring programs and other cost control measures. As a percentage of net sales, selling, general and administrative costs increased 0.3 percentage points for
the year ended December 31, 2002. After adjusting net sales for the impact of the decline in paper costs, selling, general and administrative costs amounted to 10.5% of net sales in 2002 versus
10.9% in 2001.

Restructuring
and asset impairment charges in 2002 totaling $19.1 million are comprised of $8.7 million in severance costs, $5.1 million in losses on the disposition
of assets at closed facilities,

26

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$3.7 million
in closed facility costs, and $1.6 million of other charges which are primarily legal fees and the cost of leased equipment no longer needed due to the restructurings.
Included in the 2002 restructuring amount is an offsetting adjustment of $1.3 million to adjust the 2001 estimated restructuring accrual. In 2001, restructuring and asset impairment charges
were $42.2 million.

Operating
income amounted to $123.5 million for the year ended December 31, 2002, an increase of $52.9 million, or 74.9% compared to operating income of
$70.6 million in the comparable 2001 period. The decrease in restructuring and asset impairment charges and the adoption of SFAS 142 provided $23.1 million and
$13.3 million of the increase in operating income, respectively. The remainder of the increase is attributable to a decrease in variable costs. Our cost management initiatives and continued
focus on operating efficiencies contributed to the increase in operating income as a percentage of net sales to 7.4% in 2002 (6.9% excluding the impact of declining paper costs) versus 3.8% in 2001.



Interest expense, net increased $1.6 million in the year ended December 31, 2002 as compared to 2001, due largely to the interest associated with
the issuance of the 107/8% notes in June and November 2002, an $11.5 million write-off of deferred financing fees recorded in connection with these debt
offerings and the related pay down on the revolver and term loans. Offsetting these amounts are the decrease in interest expense due to the debt paydown and a decrease due to lower market interest
rates.

Other,
net declined $10.9 million in 2002 versus 2001 due to $5.9 million impairment loss recorded in 2001 to reflect a permanent decline in the value of investments and a
$2.0 million loss related to the sale of the remaining portion of an equity investment in 2001. Additionally, we recorded $2.8 million in fees associated with the 1996 Facility, as
defined below under "Liquidity and Capital ResourcesContractual ObligationsOff-Balance Sheet Arrangements", which was a $3.3 million decrease from the
amount of fees recorded in 2001 associated with the facility.



Net loss in 2002 was $120.1 million, an increase in net loss of $65.2 million over the 2001 net loss of $54.9 million. Included in the 2002
net loss was a $108.4 million charge for the cumulative effect of accounting change resulting from our adoption of SFAS No. 142 discussed in "New Accounting Pronouncements."
The 2002 loss before cumulative effect of accounting change was less than the 2001 loss by $43.1 million. This increase is a result of the aforementioned changes in net sales and costs, as
discussed above.



At Vertis North America, EBITDA amounted to $119.3 million for the year ended December 31, 2002, a decrease of $40.0 million, or 25.1%,
compared to $159.3 million in the comparable 2001 period. The decrease in 2002 was largely due to the $86.6 million impairment loss recorded in January 2002 to reduce the carrying
value of Vertis North America goodwill in accordance with SFAS 142 (see "New Accounting Pronouncements" below). Excluding the negative impact of this adjustment, EBITDA in North
America would have increased $46.6 million, or 29.3%, as compared to 2001. This improvement primarily reflects lower restructuring costs of $25.1 million and overall cost management.
Volume gains, largely from sales of inserts were more than offset by lower volume, primarily in direct mail products, resulting in an aggregate decline in EBITDA of $4.4 million.

At
Vertis Europe, the EBITDA loss of $8.6 million for the year ended December 31, 2002, represents a decline in EBITDA of $25.6 million as compared to EBITDA of
$17.0 million in the comparable prior year. The majority of the decrease in 2002, $21.8 million, reflects the impairment loss

27

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recorded
in January 2002 to reduce the Vertis Europe carrying value of their goodwill in accordance with SFAS 142 (see "New Accounting Pronouncements" below). The remainder
of the decline reflects a decline in net sales and an increase in restructuring costs totaling $2.0 million as we streamlined portions of our European business.

Liquidity and Capital Resources

Sources of Funds

We fund our operations, acquisitions and investments with internally generated funds, revolving credit facility borrowings, sales of accounts receivable, and
issuances of debt.

We
believe that the facilities in place, as well as our cash flows, will be sufficient to meet operational needs (including capital expenditures and restructuring costs) for the next
twelve months and beyond. At December 31, 2003, we had approximately $79.3 million available to borrow under our revolving
credit facility. There can be no assurance, however, that our operations will generate sufficient cash flows or that we will always be able to refinance our current debt. In the event we are unable to
obtain sufficient financing, we would pursue other sources of funding such as debt offerings by Vertis Holdings, equity offerings by us and/or Vertis Holdings or asset sales.

Items
that could impact our liquidity are described below.

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The following table discloses aggregate information about our contractual obligations as of December 31, 2003 and the periods in which payments are due:

|Contractual Obligations            |  | Total |           | Less than
1 year |   | 1-3 years |  | 4-5 years |         | After
5 years
|---------------------------------- |  | ----- | --------- | ---------------- | - | --------- |  | --------- | ------- | -------------
|
|Long-term debt                     |  | $     | 1,051,950 |                  | $ | 73        |  | $         | 80,603  |              
|Operating leases                   |  |       | 127,066   |                  |   | 32,280    |  |           | 43,781  |              
|                                   |  |       |           |                  |   |           |  |           |         |              
|Total contractual cash obligations |  | $     | 1,179,016 |                  | $ | 32,353    |  | $         | 124,384 |              
|                                   |  |       |           |                  |   |           |  |           |         |              

The
Company has contracts covering the purchases of ink and press supplies, i.e. plates, blankets solutions, etc. These contracts, which range from 1 to 8 years in length,
include target minimum quantities and prices. All of these agreements allow for shortfalls of purchase minimums to be made up over the life of the contract. In addition, each of the agreements allows
for the reduction in obligations for a decline in volume experienced by Vertis, and all have competitive pricing clauses, whereby suppliers' prices must remain competitive in the market or the
purchase minimums can be adjusted. Because of these variable factors, the amounts are not included in the table above.



In 2002, we issued $350.0 million of 107/8% senior unsecured notes (the "107/8% notes") with a maturity date of
June 15, 2009. After deducting the initial purchasers' discounts and transaction expenses, the net proceeds received by us from the sale of these notes were approximately $338.0 million.
We used these net proceeds to repay $181.5 million of the term loans and $156.5 million of debt outstanding under our senior subordinated credit facility. In addition, pursuant to the
senior subordinated credit facility, we issued $210.7 million of 131/2% senior subordinated notes due December 7, 2009, in 2003 in exchange for some of the term notes
under the senior subordinated credit facility.

On
May 7, 2003, in the course of our internal financial review, we became aware of a required payment due under the senior credit facility to the holders of our term loans in the
amount of $40.9 million. This past due payment was discovered during a review of the definition of "excess cash flow", as defined in the senior credit facility agreement, resulting in a
revision of the previously calculated "excess cash flow" out of which a prepayment was required to be made. The only period where this re-calculation resulted in a required prepayment was
for the year ended December 31, 2002, which was due on March 31, 2003. On May 8, 2003, we received the required waivers for this technical default and made the payment with
borrowings from the revolving credit facilities. The remainder of the term loans, $267.9 million, was paid off in connection with the issuance of the 93/4% notes, as discussed
below, and the provision under the senior credit facility requiring prepayment out of "excess cash flow" was eliminated. Following the payment of the term loans in their entirety, the senior credit
facility consists solely of the revolving credit facility.

In
June 2003, we issued $350.0 million of senior secured second lien notes with an interest rate of 93/4% (the "93/4% notes") and maturity
date of April 1, 2009. After deducting the initial purchasers discount and transaction expenses, the net proceeds received by us from the sale of these notes were $330.3 million.
We used these net proceeds to pay off $267.9 million remaining on the term loans outstanding under our senior credit facility and $62.4 million of our revolving credit facility.

Our
senior credit facility, senior subordinated credit facility, the outstanding 93/4% notes due April 1, 2009, the outstanding 107/8% notes due
June 15, 2009, and the outstanding 131/2% senior subordinated notes due December 7, 2009 all contain customary high-yield debt covenants imposing limitations
on the payment of dividends or other distributions on or in respect of us or the capital stock

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of
our restricted subsidiaries. Substantially all of our assets are pledged as collateral for the outstanding debt under our senior credit facility. All of our debt has customary provisions requiring
prepayment in the event of a change in control and from the proceeds of asset sales, as well as cross-default provisions. In addition, our debt agreements have customary provisions requiring
prepayment from the proceeds of issuances of debt and equity securities, and financial covenants that require us to maintain specified financial ratios.

The
existing ratio requirements under the Company's debt agreements are as follows: The consolidated net interest coverage ratio is the ratio of EBITDA to net interest expense, which is
required to be, at a minimum, 1.50 to 1.00. At December 31, 2003, our net interest coverage ratio is calculated as 1.64 to 1.00. The leverage ratio is the ratio of consolidated debt to EBITDA,
which must not exceed 6.50 to 1.00. At December 31, 2003, our leverage ratio is calculated as 6.09 to 1.00. The senior secured leverage ratio is the ratio of senior secured debt to EBITDA,
which must not exceed 2.00 to 1.00. Our senior secured leverage ratio, as calculated at December 31, 2003, is 1.11 to 1.00. The amounts of EBITDA and net interest expense used in the preceding
ratio calculations are not equivalent to the amounts included in these financial statements, but rather are amounts calculated as set forth in the senior credit facility agreement. The agreement also
sets forth that the net interest coverage ratio and the leverage ratio decline over time. The changes in the ratio requirements are summarized, as follows:

Changes
in Financial Ratios Requirements

|                            |  | Quarter Ended,
|--------------------------- |  | --------------
|
|
|Leverage ratio              |  | 6.25 to 1.00  
|Net interest coverage ratio |  | 1.50 to 1.00  

The Company's net interest coverage ratio must not be less than the required ratio at the end of any quarter as specified above. The leverage
ratio must not exceed the required ratio at any time during a fiscal quarter as specified above. The required senior secured leverage ratio remains the same throughout the remainder of the term of the
debt agreements. If we are unable to maintain these financial ratios, the bank lenders could require us to repay any amounts owing under the senior credit facility. At December 31, 2003, we
were in compliance with our debt covenants.

While
we currently expect to be in compliance in future periods, if the fragile economic conditions and margin pressures that have influenced our results in recent years continue, there
can be no assurance that these financial covenants will continue to be met. Based upon the latest projections for the first quarter of 2004, including actual results for January and February, we
believe we will be in compliance in the upcoming year. For further information on our long-term debt, see Note 10 to the consolidated financial statements included elsewhere in this
Annual Report.



In 1996, we entered into a six-year agreement to sell certain trade accounts receivable of certain subsidiaries (as amended, the "1996 Facility")
through the issuance of $130.0 million of variable rate trade receivable backed certificates. In April 2002, the revolving period for these certificates was extended and the certificates
were refinanced. In December 2002, the 1996 Facility expired and we entered into a new three-year agreement terminating in December 2005 (the "A/R Facility") through the
issuance of $130.0 million variable rate trade receivable backed notes. The proceeds from the A/R Facility were used to retire the certificates issued under the 1996 Facility.

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The
A/R Facility allows for a maximum of $130.0 million of trade accounts receivable to be sold at any time based on the level of eligible receivables. Under the 1996 Facility and
the A/R Facility, we sell our trade accounts receivable through a bankruptcy-remote wholly-owned subsidiary. However, we maintain an interest in the receivables and have been contracted to service the
accounts receivable. We received cash proceeds for servicing of $3.2 million and $3.3 million in 2003 and 2002, respectively. These proceeds are fully offset by servicing costs.

At
December 31, 2003 and 2002, accounts receivable of $122.5 million and $125.9 million, respectively, had been sold under the facilities and, as such, are reflected
as reductions of accounts receivable. At December 31, 2003 and 2002, we retained an interest in the pool of receivables in the form of overcollateralization and cash reserve accounts of
$53.2 million and $46.3 million, respectively, which is included in Accounts receivable, net on the balance sheet at allocated cost, which approximates fair value. The proceeds from
collections reinvested in securitizations amounted to $1,482.7 million and $1,545.5 million in 2003 and 2002, respectively.

Fees
for the program under the facilities vary based on the amount of interests sold and the London Inter Bank Offered Rate ("LIBOR") plus an average margin of 90 basis points in 2003,
37 basis points in 2002 and 34 basis points in 2001. The loss on sale, which approximated fees, totaled $2.6 million in 2003, $2.8 million in 2002 and $6.0 million in 2001, and is
included in Other, net.

We
have no other off-balance sheet arrangements that may have a material current or future effect on financial condition, changes in financial condition, results of
operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.



Our current liabilities exceeded current assets by $60.6 million at December 31, 2003 and by $18.5 million at December 31, 2002. This
represents a decrease in working capital of $42.1 million for the year ended December 31, 2003. The excess of current liabilities over current assets reflects the impact of accounts
receivable sold under the A/R Facility. We use the proceeds from those accounts receivable sales to reduce long-term borrowings under our revolving credit facility. After the sale of all
trade accounts receivable, however, we still retain an interest in the receivables in the form of over-collateralization and cash reserve accounts, and we have been contracted to service
the receivables. Therefore, if we add back the accounts receivable of $122.5 million and $125.9 million sold under the A/R Facility as of December 31, 2003 and 2002, respectively,
and reflect the offsetting increase in long-term debt as if the A/R Facility were not in place, our working capital at December 31, 2003 and December 31, 2002 would have been
$61.9 million and $107.4 million, respectively. The ratio of current assets to current liabilities as of December 31, 2003 was 0.81 to 1 (1.19 to 1, excluding the impact of the
A/R Facility) compared to 0.92 to 1 as of December 31, 2002 (1.46 to 1, excluding the impact of the A/R Facility).

The
decrease in working capital was due primarily to fluctuations in operating assets and liabilities, mainly accounts receivable and accounts payable.

Summary of Cash Flows

Cash Flows from Operating Activities

Net cash provided by operating activities in 2003 decreased by $7.7 million from the 2002 level. Adjusted for the increase (decrease) in outstanding checks
drawn on controlled disbursement accounts, which are classified as a financing activity, net cash provided by operating activities decreased $5.1 million in 2003. This is a result of improved
results of operations offset by the timing of payments and collection of receivables.

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Net
cash provided by operating activities in 2002 decreased by $33.7 million from the 2001 level. Adjusted for the increase (decrease) in outstanding checks drawn on controlled
disbursement accounts, which are classified as a financing activity, net cash provided by operating activities increased $56.6 million in 2002. This is a result of improved results of
operations before the cumulative effect of accounting change and the decrease in restructuring expense in 2002 offset by the timing of payments and collection of receivables.

Cash Flows from Investing Activities

Net cash used for investing activities in 2003 remained relatively consistent when compared with 2002. Capital expenditures increased a modest
$0.3 million, offset by an increase in proceeds from sale of property, plant and equipment of $0.9 million. We anticipate a modest increase in capital expenditures in the coming year.

Net
cash used for investing activities in 2002 declined from the 2001 level due to a $27.3 million decrease in capital expenditures.

Cash Flows from Financing Activities

In 2003, we issued $350 million of senior secured second lien notes, which after deducting the initial purchasers discount and transaction expenses, netted
proceeds of approximately $330.3 million. In 2002, we issued $350 million of senior unsecured notes, which netted proceeds of approximately $338.0 million after deducting the debt
discount and fees. The proceeds from both issuances were used to repay existing debt. These two transactions, which are the primary financing activities in each respective period, are the primary
reasons for the decline in cash used in financing activities from $68.4 million in 2002 to $53.2 million in 2003.

Other Factors

We have approximately $306.3 million of federal net operating losses available to carry forward as of December 31, 2003. These carryforwards expire
beginning in 2005 through 2024. In 2003 we recorded tax expense of $48.4 million which included an additional valuation allowance of $67.4 million against more than half of our tax
benefit carryforwards. The valuation allowance reserves a portion of the net operating losses and tax credit carryforwards that may not be offset by reversing taxable temporary differences. We intend
to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. (See Note 12 to the consolidated financial statements included in this Annual Report.)

New Accounting Pronouncements

On January 1, 2002, we adopted SFAS 142. This statement applies to goodwill and intangible assets with indefinite lives, and requires that these
assets no longer be amortized but instead tested for impairment on at least an annual basis. For further discussion of the effect of adopting this statement, see Note 4 to the consolidated
financial statements included in this Annual Report.

In
June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires recording costs associated with
exit or disposal activities at their fair value when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. In the first quarter of 2003, we adopted the provisions of this statement, which were incorporated in the consolidated financial statements.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees." The disclosure requirements are effective for
financial

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statements
issued after December 15, 2002, and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. In
the first quarter of 2003, we adopted the provisions of this statement, which did not have an impact on our consolidated financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." This statement amends SFAS No. 123
to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the
effect of the method used on reporting results. The disclosure provisions of this standard are effective for fiscal years ended after December 15, 2002 and have been incorporated into the
consolidated financial statements and accompanying notes included in this Annual Report.

In
April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." In general, this statement is effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material impact on our consolidated financial position.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of financial position certain financial instruments that embody certain mandatory redeemable obligations for the issuer that are
required to be classified as liabilities. This statement is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The provisions of the statement did not have a material impact on our consolidated financial position.

In
December 2003, the FASB issued Interpretation No. 46 (revised), "Consolidation of Variable Interest Entities" ("FIN 46R"), which addresses how a business enterprise
should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity ("VIE"). FIN 46R
replaces FASB Interpretation No. 46 that was issued in January 2003. Companies are required to apply FIN 46R to VIEs generally as of March 31, 2004 and to special-purpose entities
as of December 31, 2003. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interest
of the VIE initially would be measured at their carrying amounts, and any difference between the net amount added to the balance sheet and any previously recognized interest would be recorded as a
cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and
non-controlling interest of the VIE. The adoption of this interpretation did not have a material impact on our consolidated financial position or results of operations.

In
December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132R"). This standard
prescribes employers' disclosures about pension plans and other postretirement benefits plans, but does not change the measurement of recognition of those plans. SFAS No. 132R retains and
revises the disclosure requirements contained in the original standard. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit costs of defined
benefit pension plans and other postretirement benefit plans. For public companies, SFAS No. 132R is generally effective for fiscal

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years
ending after December 15, 2003. The revised disclosure requirements are incorporated in Note 13 to our Consolidated Financial Statements included in this Annual Report.

Application of Critical Accounting Policies

Our significant accounting policies are described in Note 3 to our consolidated financial statements included in this Annual Report. Several accounting
policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty. We base our estimates and judgments on historical experience, terms of existing contracts, observance of trends in the industry, information provided by customers and
outside sources and various other assumptions that we believe to be reasonable under the circumstances. Significant accounting policies which we believe involve the application of significant judgment
and discretion by management and are therefore "critical" accounting policies include:

Revenue Recognition

We provide a wide variety of print and print related services and products for specific customers, primarily under contract. Revenue is not recognized until the
earnings process has been completed in accordance with the terms of the contracts. Revenue from premedia operations is recognized upon the completion of orders. Unbilled receivables are recorded for
completed services or products which remain unbilled as of the period end.

The
Company charges customers for shipping and handling charges. The amounts billed to customers are recorded as net sales and actual charges paid by the Company are included in costs of
production in the consolidated statements of operations.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the failure of our customers to make payments. If actual customer payments differ
from our estimates, we would need to increase the allowance for doubtful accounts, which would adversely affect our results of operations.

Long-lived Assets

We evaluate the recoverability of our long-lived assets, including property, plant and equipment and intangible assets, periodically or when there are
changes in economic circumstances or
business objectives that indicate the carrying value may not be recoverable. Our evaluations include estimated future cash flows, profitability and estimated future operating results and other factors
determining fair value. As these assumptions and estimates may change over time, it may or may not be necessary to record impairment charges.

Effective
January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible Assets" in its entirety. Under this standard, goodwill and other intangibles with indefinite
useful lives are no longer amortized (see "New Accounting Pronouncements").

Income Taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. We estimate future taxable
income in assessing the need for the valuation allowance. In the event we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess
of our net recorded amount, an

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adjustment
to the deferred tax assets would increase income in the period that determination was made.

Defined Benefit Pension Plans

Accounting for defined benefit pension plans requires various assumptions, including, but not limited to discount rates, expected rates of return on plan assets
and future compensation rates. We evaluate these assumptions at least once each year and make changes as conditions warrant. Changes to these assumptions will increase or decrease our reported income,
which will result in changes to the recorded benefit plan assets and liabilities.

We
determined the discount rate using a measurement date of December 31, 2003. The weighted average discount rate assumed in 2003 was 6.25%. We developed our expected
long-term rate of return assumption based on historical experience and by evaluating input from the trustee managing the plans' assets. Our expected long-term rate of return on
plan assets is based on a target allocation of assets as follows: 60% for equity and 40% for fixed income securities. We assumed returns of 9%-10.2% for the equity securities and 6.5% for
fixed income securities.

Item 7A.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative Information

Our primary exposure to market risks relates to interest rate fluctuations on variable rate debt, which bears interest at both the Prime rate and the LIBOR rate.
Generally, our exposure to foreign currency exchange rate fluctuations is immaterial as foreign operations are a small proportion of the total company and foreign currency borrowings act as a natural
hedge against fluctuations in net asset values.

The
objective of our risk management program is to seek a reduction in the potential negative earnings effects from changes in interest and foreign exchange rates. To meet this
objective, consistent with past practices, we intend to vary the proportions of fixed-rate and variable-rate debt based on our perception of interest rate trends and the
marketplace for various debt instruments. Except for those used to meet hedging requirements in our credit facility, we generally do not use derivative financial instruments in our risk management
program. This practice may change in the future as market conditions change. We do not use any derivatives for trading purposes.

Quantitative Information

At December 31, 2003, 17.3% of our long-term debt held a variable interest rate (including off-balance sheet debt related to the
accounts receivable securitization facility, the fees on which are variable).

If
interest rates increased 10%, the expected effect related to variable-rate debt would be to increase net loss for the twelve months ended December 31, 2003 by
approximately $1.2 million.

For
the purpose of sensitivity analysis, we assumed the same percentage change for all variable-rate debt and held all factors constant. The sensitivity analysis is limited
in that
it is based on balances outstanding at December 31, 2003 and does not provide for changes in borrowings that may occur in the future.

ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to the consolidated financial statements and schedule on Page F-1 for our consolidated financial statements and notes
thereto and supplementary schedule.

35

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ITEM 9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A    CONTROLS AND PROCEDURES

The Company has carried out an evaluation under the supervision and with the participation of Vertis' management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-14(c) under the Securities Exchange Act of
1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were
effective as of December 31, 2003. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their
evaluation.

36

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PART III

ITEM 10    DIRECTORS AND EXECUTIVE OFFICERS OF VERTIS

The following table sets forth certain information regarding the directors and executive officers of Vertis.

|Name                   |  | Age |  | Positions                                   
|---------------------- |  | --- |  | --------------------------------------------
|Donald E. Roland       |  | 61  |  | Chairman and Chief Executive Officer        
|Dean D. Durbin         |  | 51  |  | Chief Financial Officer                     
|Herbert W. Moloney III |  | 53  |  | Chief Operating OfficerVertis North America
|Adriaan Roosen         |  | 52  |  | Managing DirectorVertis Europe             
|John V. Howard, Jr.    |  | 42  |  | Senior Vice PresidentGeneral Counsel       
|Catherine S. Leggett   |  | 53  |  | Senior Vice PresidentHuman Relations       
|David P. Colatriano    |  | 41  |  | Group PresidentVertis North America East   
|Thomas R. Zimmer       |  | 55  |  | Group PresidentVertis North America West   
|Roger C. Altman        |  | 57  |  | Director                                    
|Austin M. Beutner      |  | 43  |  | Director                                    
|Anthony J. DiNovi      |  | 41  |  | Director                                    
|Thomas H. Lee          |  | 59  |  | Director                                    
|Soren L. Oberg         |  | 33  |  | Director                                    
|Michael S. Rawlings    |  | 49  |  | Director                                    
|Scott M. Sperling      |  | 46  |  | Director                                    

Donald E. Rolandhas been President and Chief Executive Officer of Vertis and a Director of Vertis since June 2000 and has been
Chairman since April 2, 2001. Prior to June 2000, Mr. Roland was the President since October 1994 and, in addition since June 1995, Chief Executive Officer of
Treasure Chest Advertising Company, Inc. ("TC Advertising"), the predecessor of a portion of our current North American segment. Mr. Roland joined TC Advertising in 1983 as Senior Vice
President of Operations and became Executive Vice President in 1993. Prior to joining TC Advertising, he was at Times Mirror Press, the commercial printing division of the Los Angeles Times. In his
17 years at Times Mirror Press, Mr. Roland held numerous management positions including Director of Computer Graphics and Vice President of Operations. Mr. Roland is on the Board
of Directors of the University of Maryland, Baltimore Foundation, and the Board of Directors of Students In Free Enterprise ("SIFE"). He is also on the Advisory Board of the School of Education,
Center for Graphic Communications & Technology at New York University.

Dean D. Durbinhas been Chief Financial Officer of Vertis since March 2000, and has been Senior Vice President and Chief Financial
Officer of TC Advertising since September 1997. Prior to joining TC Advertising, Mr. Durbin served as Vice President and Chief Financial Officer at Thomson Professional
Publishing, and served for more than 13 years with the McGraw-Hill Companies, beginning as Accounting Supervisor in 1974 and completing his tenure at McGraw-Hill as Vice
President and Group Controller, Construction Information Group. He is on the Board of Directors of the Baltimore Museum of Industry.

Herbert W. Moloney IIIwas named Chief Operating OfficerVertis North America in June 2000. Formerly,
Mr. Moloney was Executive Vice President, Marketing and Sales of TC Advertising. Prior to joining TC Advertising in 1994, he held numerous positions from 1973 to 1994 with Knight
Ridder, Inc., including Senior Vice President of Advertising for The Philadelphia Inquirer / Daily News, Sales Manager for WPRI-TV in Providence, Rhode Island and Retail Advertising
Manager for The Miami Herald. Mr. Moloney is also on the Board of Directors of Lee Enterprises Incorporated.

David P. Colatrianowas named Group President of Vertis North America East in August 2003. From June 2000 to August 2003,
Mr. Colatriano served as the Group President of the former Direct

37

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Marketing
Services segment of Vertis. Prior to June 2000, he held numerous positions at Webcraft, Inc., beginning in January 1987, including Senior Vice President and General
Manager, Vice President of Operations and Division Director. Prior to joining Webcraft, Inc., Mr. Colatriano worked as an Industrial Engineer with the Boeing Company.

Thomas R. Zimmerwas named Group President of Vertis North America West in September 2003. From June 2000 to September 2003,
Mr. Zimmer served as Group President of the western region of the former Retail and Newspaper Services segment of Vertis. Prior to June 2000, he was Senior Vice President and General Manager of
TC Advertising, where he has been employed since 1970.

Adriaan Roosenhas been Managing DirectorVertis Europe in London since November 2000. Prior to joining Vertis,
Mr. Roosen served as a Senior Vice President and Managing Director Europe at Modus Media International, Inc., providing fulfillment and supply chain management solutions to computer
hardware and software companies. From 1995 through 1999, Mr. Roosen was the Director of European Operations at Denver-based Quark, Inc. Prior to that, he was the Managing Director of
R.R. Donnelley Netherlands, BV and held a number of sales and marketing positions at the Netherlands Foreign Investment Agency while based in New York and San Francisco. Mr. Roosen is a Dutch
national and a lawyer by training.

John V. Howard, Jr.was named Senior Vice PresidentGeneral Counsel of Vertis in July 2000. Previously,
Mr. Howard was Executive Vice President and General Counsel for Columbine JDS Systems, Inc. and Executive Vice President and General Counsel for Laser Tech Color, Inc. Prior to
joining Columbine JDS Systems, Inc. and Laser Tech Color, Inc., Mr. Howard was Counsel and Chief Intellectual Property Counsel for Andersen Worldwide, S.C. in Chicago, the parent
entity of Arthur
Andersen and Andersen Consulting, in charge of all worldwide intellectual property matters for the Andersen organization. Before leaving for Andersen he was Chief Counsel for Quark, Inc., in
Denver, developer of Quark XPress, in charge of all worldwide legal matters. Mr. Howard is also a Trustee on the Board of Trustees of the Hammond-Harwood House.

Catherine S. Leggettwas named Senior Vice PresidentHuman Resources of Vertis in June 2000. She joined TC Advertising
as Senior Vice PresidentHuman Resources in April 2000. Prior to joining us, Ms. Leggett was Senior Vice President of Human Resources at PG&E Generating Company, a subsidiary
of Pacific Gas & Electric, Vice President of Human Resources for Federal Home Loan Mortgage Corporation in McLean, Virginia, and Senior Vice President of Human Resources for Hechinger Company
in Landover, Maryland. She is a professor at the Johns Hopkins University Graduate School and is a member of the Bars for the District of Columbia and Iowa, as well as the U.S. District Court of the
District of Columbia.

Roger C. Altmanhas been a director of Vertis since May 2001 and Vertis Holdings since December 1999. Mr. Altman is
Chairman of Evercore, which he co-founded in 1996. He spent 14 years at Lehman Brothers, where he was Managing Director, Co-Head of Investment Banking, Member of the
Management Committee and Member of the Board of Directors. From 1987 through 1992, Mr. Altman was Vice Chairman of The Blackstone Group. He has also served two tours of duty in the U.S.
Treasury Department, most recently as Deputy Treasury Secretary.

Austin M. Beutnerhas been a director of Vertis since May 2001 and Vertis Holdings since December 1999. Mr. Beutner
is President of Evercore, which he co-founded in 1996, Chairman of Evercore Capital Partners and Chairman and CEO of Evercore Ventures. Mr. Beutner serves on the Board of Directors
of American Media, Inc., Business.com, Causeway Capital Management LLC, Continental Energy Services, Inc., eCompanies LLC, Encoda Systems, and Telenet Holding N.V. He also serves as a
Trustee of the California Institute of the Arts and is a member of the Council on Foreign Relations.

38

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Anthony J. DiNovihas been a director of Vertis since March 2001 and Vertis Holdings since December 1999. Mr. DiNovi
has been employed by Thomas H. Lee Partners, L.P. and its predecessor Thomas H. Lee Company since 1988 and currently serves as Managing Director. Mr. DiNovi is currently a Director of America
Media, Inc., Endurance Specialty Holdings Ltd., Eye Care Centers of America, Inc., Fisher Scientific International, Inc., FairPoint Communications, Inc., Michael
Foods, Inc., National Waterworks, Inc., US LEC Corporation, as well as several private companies.

Thomas H. Leehas been a director of Vertis since May 2001 and Vertis Holdings since December 1999. Mr. Lee founded
Thomas H. Lee Partners L.P. (formerly the Thomas H. Lee Company) in 1974 and since that time has served as its President. Mr. Lee serves or has served as a Director of numerous
public and private companies in which the Lee Company and its affiliates have invested, including Finlay Enterprises, Inc., General Nutrition Companies, Metris Companies, Inc., Playtex
Products, Inc., Snapple Beverage Corp., and Wyndham International, Inc. In addition, Mr. Lee is a Member of the J.P. Morgan Chase & Co. National Advisory Board.

Soren L. Oberghas been a director of Vertis and Vertis Holdings since May 2001. Mr. Oberg has been employed by Thomas H.
Lee Partners, L.P., and its predecessor Thomas H. Lee Company since 1993. From 1992 to 1993, Mr. Oberg worked at Morgan Stanley & Co., Inc. in the Merchant Banking Division.
Mr. Oberg serves on the boards of America Media, Inc., National Waterworks, Inc. and several other private companies.

Michael S. Rawlingshas been a director of Vertis since January 2004. Mr. Rawlings is also a partner at Cardinal Investment
Company, Inc. Prior to that he was President of Pizza Hut, Inc. from 1997 to 2002.

Scott M. Sperlinghas been a director of Vertis since May 2001 and Vertis Holdings since December 1999. Mr. Sperling
has been employed by Thomas H. Lee Partners, L.P. and its predecessor Thomas H. Lee Company since 1994 and currently serves as Managing Director. Mr. Sperling is currently a Director of
Houghton Mifflin Company, Fisher Scientific International, Inc., GenTek Inc., Wyndham International, as well as several private companies.

The
term of office of each executive officer is until the organizational meeting of our board of directors following the next annual meeting of our stockholders and until a successor is
elected and qualified, or until that officer's death, resignation, retirement, disqualification or removal.

Each
of our directors was elected to hold office until the next annual meeting of our stockholders and until his successor is elected and qualified and subject to his death, resignation,
retirement, disqualification or removal.

Audit Committee and Audit Committee Financial Expert

The Company has established a separate Audit Committee of the Board of Directors, comprised of three of its members: Roger C. Altman, Soren L. Oberg and Scott M.
Sperling. The Company's Board of Directors has determined that Mr. Altman qualifies as an audit committee financial expert as defined under Item 401 of Regulation S-K of the
Securities Exchange Act of 1934. The Company believes that Mr. Altman is "independent", as that term is defined by the American Stock Exchange listing standards.

Code of Ethics

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller
and certain other senior financial personnel. The code of ethics is filed as Exhibit 14.1 to this annual report on Form 10-K.

39

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ITEM 11    EXECUTIVE COMPENSATION

The following table sets forth the compensation paid in respect of the years ended December 31, 2003, 2002 and 2001 to Donald E. Roland, Chairman,
President and Chief Executive Officer of Vertis, and to each of the five other most highly paid executive officers of Vertis (collectively, the "Named Executive Officers").

Summary Compensation Table

|                                                                         |  | Annual Compensation |  | Long-Term
Compensation
Awards |  |         | 
|------------------------------------------------------------------------ |  | ------------------- |  | ----------------------------- |  | ------- | 
|
|Donald E. Roland
Chairman, President
and Chief Executive Officer         |  | 2003
2002
2001      |  | 650,000
608,577
601,500       |  | 357,748 | 
|Dean D. Durbin
Chief Financial Officer                                   |  | 2003
2002
2001      |  | 400,000
372,423
352,333       |  | 220,153 | 
|Herbert W. Moloney III
Chief Operating Officer
Vertis North America     |  | 2003
2002
2001      |  | 480,180
446,379
427,333       |  | 264,282 | 
|Adriaan Roosen
Managing DirectorVertis
Europe                           |  | 2003
2002
2001      |  | 302,575
278,097
243,371       |  | 152,069 | 
|John V. Howard, Jr.
Senior Vice President
General Counsel
and Secretary |  | 2003
2002
2001      |  | 273,000
258,259
251,041       |  | 150,254 | 
|Thomas R. Zimmer
PresidentVertis West                                   |  | 2003
2002
2001      |  | 366,401
338,654
347,500       |  | 75,871  | 

---

40

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The following table sets forth certain information concerning the number and the value at the end of 2003 of unexercised in-the-money
options to purchase Vertis Holdings' common stock granted to the Named Executive Officers as of the end of 2003. No stock appreciation rights have been granted to any of the Named Executive Officers.

Aggregated Option Exercises In Last Fiscal Year  And Fiscal Year-End Option Values

|                    |  |   |  |   |  | Number of Securities
Underlying Unexercised
Options at Fiscal 2003 End (#) |  | Value of Unexercised
In-the-Money
Options at
Fiscal 2003 End ($)
|------------------- |  | - |  | - |  | -------------------------------------------------------------------------- |  | ----------------------------------------------------------------
|
|Donald E. Roland    |  | 0 |  | 0 |  | 168,294/52,414                                                             |  | 0/0                                                             
|Dean D. Durbin      |  | 0 |  | 0 |  | 42,532/15,089                                                              |  | 0/0                                                             
|Herbert W. Moloney  |  | 0 |  | 0 |  | 60,586/18,995                                                              |  | 0/0                                                             
|Adriaan Roosen      |  | 0 |  | 0 |  | 14,841/7,144                                                               |  | 0/0                                                             
|John V. Howard, Jr. |  | 0 |  | 0 |  | 17,663/8,775                                                               |  | 0/0                                                             
|Thomas R. Zimmer    |  | 0 |  | 0 |  | 24,940/4,406                                                               |  | 0/0                                                             

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Supplemental Executive Retirement Plan

The following table sets forth annual amounts payable to Messrs. Roland, Durbin, Moloney, Howard and Zimmer upon their retirement under Vertis Holdings and
Subsidiaries Supplemental Executive Retirement Plan (the "SERP").

Pension Plan Table

|         |  | Years of Service
|-------- |  | ----------------
|
|
|$150,000 |  | $               
|175,000  |  |                 
|200,000  |  |                 
|225,000  |  |                 
|250,000  |  |                 
|275,000  |  |                 
|300,000  |  |                 
|500,000  |  |                 
|600,000  |  |                 
|700,000  |  |                 
|800,000  |  |                 
|900,000  |  |                 

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The compensation covered by the SERP includes each of the participants entire annual base salary. Messrs. Roland, Durbin, Moloney, Howard and Zimmer currently have 20, 6, 9, 5 and
34 years of service, respectively. See "Employment Arrangements with Executive Officers" below. Benefits under the SERP are computed by multiplying the participant's average salary for the last
five years prior to retirement by a percentage equal to one percent for each year of service up to a maximum of 30 years. Benefits under the SERP are not subject to a deduction for Social
Security or other offset amounts.

Compensation of Directors

Donald E. Roland, the only director of Vertis who is also an executive officer of Vertis, does not receive any additional compensation for service as a member of
the Board of Directors of Vertis (the "Board"). For information relating to compensation of Mr. Roland, see "Employment Arrangements with Executive Officers" below.

All
other directors of Vertis (each a "non-employee director"), except Mr. Rawlings, are directly affiliated with either Thomas H. Lee Partners ("THL")
or ECP, two significant shareholders of Vertis Holdings. Mr. Rawlings was appointed to the Board upon the nomination of THL and ECP pursuant to the Amended and Restated Investors' Agreement
among Vertis Holdings, THL, ECP and others, dated March 23, 2001. With the exception of Mr. Rawlings, as discussed below, none of the non-employee directors individually
receive any compensation from Vertis for serving on the Board. Vertis, however, entered into consulting agreements with Thomas H. Lee Capital, LLC (an affiliate of THL), THL Equity Advisors IV, LLC
(an affiliate of THL) and Evercore Advisor Inc. (an affiliate of ECP), pursuant to which Vertis pays annual fees to these parties in amounts of approximately $414,000, $586,000 and $250,000.
See "Certain Relationships and Related Transactions."

Mr. Rawlings
receives the following annual compensation for his service:



Employment Arrangements with Executive Officers

Roland Employment Agreement.The Company has entered into an employment agreement with Donald E.
Roland, effective August 31, 2003 (the "Roland Agreement"), pursuant to which Mr. Roland currently serves as Chairman, President and Chief Executive Officer. The Roland Agreement may be
terminated by either Mr. Roland or the Company at any time for any reason. Under the Roland Agreement, Mr. Roland receives an annual base salary, as adjusted by the board of directors,
and various employment benefits. In 2003, Mr. Roland received a base salary of $650,000. The Roland Agreement also provides that Mr. Roland receive an annual bonus targeted at not less
than 75% of base salary (assuming bonus targets under the Company's Executive Incentive Plan (the "EIP"), which are based upon the percentages of the achievements of an internally calculated pro forma
EBITDA measure, are met) and which can rise to 200% of the target incentive if the Company exceeds its goals, and certain fringe benefits, including participation in the SERP.

Durbin Employment Agreement.The Company has entered into an employment agreement with Dean D.
Durbin, effective August 30, 2003 (the "Durbin Agreement"), pursuant to which Mr. Durbin currently serves as Chief Financial Officer. The Durbin Agreement may be terminated by either
Mr. Durbin or the Company at any time for any reason. Under the Durbin Agreement, Mr. Durbin receives an annual base salary, as adjusted by the board of directors, and various employment
benefits. In 2003, Mr. Durbin received a base salary of $400,000. The Durbin Agreement also provides that Mr. Durbin receive an annual bonus targeted at not less than 75% of base salary
(assuming bonus targets under the EIP, which are based upon the percentages of the achievements of an internally

42

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calculated
pro forma EBITDA measure, are met) and which can rise to 200% of the target incentive if the Company exceeds its goals, and certain fringe benefits, including participation in the SERP.

Moloney Employment Agreement.The Company has entered into an employment agreement with Herbert W.
Moloney III, effective August 30, 2003 (the "Moloney Agreement"), pursuant to which Mr. Moloney currently serves as Chief Operating Officer of Vertis North America. The Moloney Agreement
may be terminated by either Mr. Moloney or the Company at any time for any reason. Under the Moloney Agreement, Mr. Moloney receives an annual base salary, as adjusted by the board of
directors, and various employment benefits. In 2003, Mr. Moloney received a base salary of $480,180. The Moloney
Agreement also provides that Mr. Moloney receive an annual bonus targeted at not less than 75% of base salary (assuming bonus targets under the EIP, which are based upon the percentages of the
achievements of an internally calculated pro forma EBITDA measure, are met) and which can rise to 200% of the target incentive if the Company exceeds its goals, and certain fringe benefits, including
participation in the SERP.

Roosen Employment Agreement.Big Flower Digital Services Limited, a United Kingdom company and the
subsidiary of the Company ("BFDSL"), has entered into an executive service agreement with Adriaan Roosen, effective August 30, 2003 (as amended to date, the "Roosen Agreement"),
pursuant to which Mr. Roosen currently serves as the Managing Director of Vertis Europe and the director of BFDSL. The Roosen Agreement may be terminated by either Mr. Roosen or BFDSL
with not less than 18 months prior written notice, or as otherwise provided in the Roosen Agreement. BFDSL, however, may at its sole and absolute discretion terminate the Roosen Agreement at
any time and with immediate effect by making Mr. Roosen a payment in lieu of the required 18-month notice period (or, the remainder of such notice period) equal to
Mr. Roosen's salary as of the date of termination and the cost to BFDSL of providing Mr. Roosen with the contractual benefits for the applicable notice period.

After
the termination of his service at BFDSL and the Company, Mr. Roosen will be subject to certain"garden leave" restrictions as provided in the Roosen Agreement. Under the
Roosen Agreement, Mr. Roosen receives an annual base salary, as adjusted by the board of directors, and various employment benefits. In 2003, Mr. Roosen received a base salary of
$302,575, as well as certain expatriate benefits including rental accommodation and car allowance. The Roosen Agreement also provides that Mr. Roosen is eligible to participate in the EIP.

Howard Employment Agreement.The Company has entered into an employment agreement with John Howard,
effective August 31, 2003 (as amended to date, the "Howard Agreement"), pursuant to which Mr. Howard currently serves as Senior Vice President, General Counsel and Secretary. The Howard
Agreement may be terminated by either Mr. Howard or the Company at any time for any reason. Under the Howard Agreement, Mr. Howard receives an annual base salary, as adjusted by the
board of directors, and various employment benefits. In 2003, Mr. Howard received a base salary of $273,000. The Howard Agreement also provides that Mr. Howard receive an annual bonus
targeted at not less than 75% of base salary (assuming bonus targets under the EIP, which are based upon the percentages of the achievements of an internally calculated pro forma EBITDA measure, are
met) and which can rise to 200% of the target incentive if the Company exceeds its goals, and certain fringe benefits, including participation in the SERP.

Zimmer Employment Agreement.The Company has entered into an employment agreement with Thomas R.
Zimmer, effective August 17, 2003 (the "Zimmer Agreement"), pursuant to which Mr. Zimmer currently serves as Group PresidentVertis North America West. The Zimmer Agreement
may be terminated by either Mr. Zimmer or the Company at any time for any reason. Under the Zimmer Agreement, Mr. Zimmer receives a base salary, as adjusted by the board of directors,
and various employment benefits. In 2003, Mr. Zimmer received a base salary of $366,401. The Zimmer Agreement also provides that Mr. Zimmer receive an annual bonus targeted at not less
than 60% of

43

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base
salary (assuming bonus targets under the Company's EIP, which are based upon the percentages of the achievements of an internally calculated pro forma EBITDA measure, are met) and which can rise
to 200% of the target incentive if the Company exceeds its goals, and certain fringe benefits, including participation in the SERP.

Severance Arrangements with Certain Executive Officers.The employment agreements of Donald E.
Roland, Dean D. Durbin, Herbert W. Moloney III, Adrian Roosen and John V. Howard, Jr., described above, contain provisions regarding executive severance arrangements (the "Severance Arrangements"),
with each of these executive officers. Pursuant to the Severance Arrangements, if an executive officer's employment is terminated by the Company without "cause" or by the executive officer for "good
reason" following a "change in control" of the Company, the executive officer will receive a lump sum amount equal to three times the sum of (x) the executive officer's annual base salary in
effect immediately prior to the date of termination and (y) the greater of the target bonus for the executive officer under the EIP in the year immediately preceding that in which the
termination occurs and the annual bonus the executive officer would have earned for the fiscal year in which the date of termination occurs absent such termination. In addition, (i) the
executive officer will receive a lump sum payment equal to the sum of any awarded but unpaid compensation under the EIP and a pro rata portion to the date of the executive officer's termination of the
aggregate value of all contingent incentive compensation awards to the executive officer for all uncompleted periods under the EIP calculated based on actual performance achieved for the fiscal year
through the date of termination, (ii) all outstanding stock incentive awards (including stock options) other than options that vest upon attainment of performance goals will immediately vest
and remain exercisable until upon the date of termination and shall remain exercisable in accordance with the terms of the option grant; and (iii) the executive officer will be entitled to one
year of continued medical, dental, prescription and vision care insurance coverages (the "Continued Coverage"), except that Mr. Roland is entitled to receive 18 months of the Continued
Coverage.

If
an executive officer leaves the Company absent a change of control of the Company, the Severance Arrangements provide the following more limited payments and benefits:



44

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Also,
the Company will (i) provide the executive officer or his or her eligible dependents six months of the Continued Coverage (except that Mr. Roland will receive twelve
months of the Continued Coverage) and each such executive officer will then be eligible for COBRA coverage, and (ii) credit the executive officer with an additional year of vesting for purposes
of the executive officer's then outstanding options, which will remain exercisable in accordance with the terms of the applicable option grants and equity plan.

Zimmer Severance Arrangements.The employment agreement of Thomas R. Zimmer described above also
contains provisions regarding executive severance arrangements (the "Zimmer Severance Arrangements"). Pursuant to the Zimmer Severance Arrangements, if Mr. Zimmer's employment is terminated by
the Company for any reason other than for "cause", disability or death, or by
Mr. Zimmer if the Company requires him to be based at a location more than 50 miles from the office at which he is then based, he will be entitled to receive severance payment in the form of
payroll continuation at his base salary for 12 months, with up to an additional six months severance pay if he remains unemployed after the initial 12 months.

In
addition, pursuant to the Zimmer Severance Arrangements, if Mr. Zimmer's employment is terminated by the Company for death, disability or without "cause" or by
Mr. Zimmer if the Company requires him to be based at a location more than 50 miles from the office at which he is then based, the Company will:



If
Mr. Zimmer's employment is terminated for cause, upon his death or disability, or if Mr. Zimmer voluntarily terminates employment, the Company will pay to
Mr. Zimmer or his estate a lump sum equal to earned annual base salary and earned annual bonus for completed fiscal years.

ITEM 12    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Vertis is a wholly-owned subsidiary of Vertis Holdings.

The
following table sets forth certain information regarding the beneficial ownership of Vertis Holdings' common stock as of February 28, 2004 for (i) each stockholder who
is known by us to beneficially own more than 5% of Vertis Holdings common stock, (ii) each director and executive officer of Vertis and Vertis Holdings, and (iii) all of the directors
and executive officers of Vertis and Vertis Holdings as a group.

45

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|                                                                                                                                      |  | Shares Beneficially Owned | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | 
|
|Thomas H. Lee Partners L.P. and Affiliates(2)
c/o Thomas H. Lee Partners, L.P., 75 State Street, Boston, MA
02109                     |  | 8,844,938                 | 
|Evercore Capital Partners L.P. and Affiliates(3)
65 East 55th Street, 33rd Floor, New York, NY 10022                                  |  | 2,114,519                 | 
|Estate of R. Theodore Ammon and Affiliates(4)
c/o JPMorgan Chase Bank, 345 Park Avenue, NY, NY 10154,
Attention: Patrick A. Devanney. |  | 787,031                   | 
|Donald E. Roland(5)
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                      |  | 242,085                   | 
|Dean D. Durbin(6)
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                        |  | 49,603                    | 
|Herbert W. Moloney III(7)
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                |  | 85,034                    | 
|Adriaan Roosen
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                           |  | 14,999                    | 
|John V. Howard, Jr.
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                      |  | 18,339                    | 
|Catherine S. Leggett
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                     |  | 18,070                    | 
|David P. Colatriano
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                      |  | 27,278                    | 
|Thomas R. Zimmer
c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                                         |  | 34,464                    | 
|Thomas H. Lee(8)
c/o THL Partners, 75 State Street, Boston, MA 02109                                                                  |  | 7,163,513                 | 
|Anthony J. DiNovi(9)
c/o THL Partners, 75 State Street, Boston, MA 02109                                                              |  | 7,067,824                 | 
|Scott M. Sperling(10)
c/o THL Partners, 75 State Street, Boston, MA 02109                                                             |  | 7,067,824                 | 
|Soren L. Oberg(11)
c/o THL Partners, 75 State Street, Boston, MA 02109                                                                |  | 7,047,626                 | 
|Roger C. Altman(12)
c/o Evercore Capital Partners, 65 East 55th Street, 33rd Floor,
New York, NY 10022                                |  | 2,084,383                 | 
|Austin M. Beutner(13)
c/o Evercore Capital Partners, 65 East 55th Street, 33rd Floor,
New York, NY 10022                              |  | 2,084,383                 | 
|All Directors and Executive Officers of Vertis and Vertis Holdings as a group (14 persons)(14)                                        |  | 650,540                   | 

---

46

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47

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48

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ITEM 13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On December 7, 1999, we entered into consulting agreements commencing January 1, 2000 with each of Thomas H. Lee Capital, LLC (an affiliate of
Thomas H. Lee Equity Fund IV, LP, a significant stockholder of Vertis Holdings), THL Equity Advisors IV, LLC (an affiliate of Thomas H. Lee Equity Fund IV, LP), and Evercore Advisors Inc. (an
affiliate of Evercore Capital Partners, LP, a significant stockholder of Vertis Holdings). Under each agreement, these parties have agreed to provide us with consulting services on matters involving
corporate finance, strategic corporate planning and other management skills and services. The annual fees payable to these parties under these agreements amount to approximately $414,000, $586,000 and
$250,000. Unless otherwise agreed, the consulting agreements with Thomas H. Lee Capital, LLC and THL Equity Advisors IV, LLC expire when certain persons affiliated with THL cease to own at least one
third of the number of Vertis Holdings common shares they collectively held immediately after December 7, 1999. The consulting agreement with Evercore Advisors Inc. expires when Evercore
Capital Partners, LP and certain of its affiliates cease to own at least one third of the number of Vertis Holdings common shares they collectively held immediately after December 7, 1999.
Among our directors of the board, Messrs. Di Novi, Lee, Oberg and Sperling are affiliated with THL and Messrs. Altman and Beutner are affiliated with ECP. See "Management".

On
December 7, 1999, Vertis Holdings issued to certain of its equity investors $100.0 million aggregate principal amount of 12.0% mezzanine notes as part of a unit
including warrants to purchase common stock of Vertis Holdings to certain of the equity investors at the time of Vertis Holdings' recapitalization. From August 2001 to June 24, 2002, the
entire 12% interest on Vertis Holdings Mezzanine debt was payable in-kind. Previously 10% of the interest was payable in cash. Effective June 25, 2002, the interest rate was changed
to 13% payable in-kind through December 31, 2005. Effective May 30, 2003, such 13% interest was further changed to payable in kind through December 7, 2005. In the
year ended December 31, 2001, we paid dividends to Vertis Holdings of $7.7 million to pay interest on the mezzanine notes and Vertis Holdings' former convertible preferred securities.

Vertis
Holdings contributed cash of $0.2 million to us following the sale of certain Internet related investments in the year ended December 31, 2001.

In
early 2001, we made a decision to eliminate the corporate headquarters in New York City and all 13 employees employed at that location. We entered into an agreement with CLC, an
affiliate of the estate of the former chairman of Vertis Holdings, pursuant to which (i) we transferred these employees to CLC and made a one-time payment of $14.0 million to
CLC and (ii) CLC assumed all of our employment and compensation obligations with respect to these employees and that location. The $14 million
was paid by us to CLC in lieu of any severance directly to the employees or any other costs with respect to that location. Additionally, in connection with this transaction, we transferred to CLC
certain other assets, which we believe have an aggregate value of approximately $235,000. In connection with that transaction, we sold our holdings of 669,351 shares of common stock, and warrants to
purchase 875,352 shares of common stock, of 24/7 Media, Inc., to CLI Associates LLC (an affiliate of the estate of R. Theodore Ammon) for an aggregate purchase price of approximately $580,000.
In connection with this sale, we realized a pre-tax loss of $2.0 million. Concurrently, THL acquired an additional $40 million in our equity from an affiliate of CLC in
exchange for $40 million of Vertis Holdings' mezzanine financing owned by THL.

We
believe that the terms of the transactions described above are as advantageous to us as transactions that could otherwise be obtained from unrelated third parties.

In
connection with the recapitalization of Vertis Holdings in 1999 and 2000, 44 of our employees, including Messrs. Durbin, Howard, Roosen and Ms. Leggett among the Named
Executive Officers, were granted the option to purchase shares of Vertis Holdings and to finance such purchase through signing full-recourse loans with Vertis Holdings. These loans (the
"Management Loans") bear interest at 8.5% per year and compound quarterly, with the principal and interest due in a lump sum on varying dates up to December 7, 2005. The shares purchased with
the Management Loans are held as security for the Management Loans.

On
September 5, 2002, the Board of Directors of Vertis Holdings adopted a unanimous written consent offering those employees who had an outstanding Management Loan a
one-time option to sell the shares securing the Management Loans back to Vertis Holdings in exchange for the cancellation of the Management Loans. These shares had an assumed fair market
value of $31.50 as of September 5, 2002. In

49

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addition,
Vertis Holdings would forgive the interest that had accrued on the Management Loans to any employee who sold their stock back to Vertis Holdings. The tax consequence, if any, of the interest
forgiveness was the responsibility of the employee. Employees eligible for the Vertis' Executive Incentive Plan were allowed to offset the tax consequences by a partial payment of their 2002 bonus.
Substantially all employees holding the Management Loans elected this option. As of December 31, 2003, 111,448 shares of Vertis Holdings had been sold to the Company in exchange for
cancellation of the Management Loans and $0.7 million of interest was forgiven.

ITEM 14    PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table presents fees for professional audit services rendered by Deloitte & Touche LLP, the member firms of Deloitte Touche Toumatsu, and
their respective affiliates (collectively, the "Deloitte Entities") for the audit of our consolidated annual financial statements for the years ended December 31, 2003 and 2002, and fees billed
for other services rendered by Deloitte Entities.

|                       |  | Year ended December 31,
|---------------------- |  | -----------------------
|
|
|Audit fees (1)         |  | $                      
|Audit-related fees (2) |  |                        
|Tax fees (3)           |  |                        
|                       |  |                        
|Total fees billed      |  | $                      
|                       |  |                        

---

Audit Committee Pre-Approval Policies

The audit committee has established pre-approval policies and procedures pursuant to which the audit committee must approve all audit and
non-audit engagement fees and terms (other than with respect to de minimis exceptions permitted by the Sarbanes-Oxley Act of 2002). The audit
committee is also responsible for considering, to the extent applicable, whether the independent auditors' provision of other non-audit services to the Company is compatible with
maintaining the independence of the independent auditors. In accordance with the pre-approval policies and procedures of the audit committee, the Company's management is authorized to
retain the independent auditors to provide audit related services in addition to the annual audit, including services related to SEC filings, accounting and reporting research and consultations,
internal control reviews, quarterly reviews, benefit plan audits, consultations as to regulatory issues regarding benefit plans, statutory audits of subsidiaries, attest services, acquisition due
diligence services and corporate and subsidiary tax compliance and consulting services. Any additional services must be specifically pre-approved on an individual basis by the audit
committee prior to the engagement of the independent auditor. The authority for such pre-approval may be delegated to one or more designated members of the audit committee with any such
pre-approval reported to the audit committee at its next regularly scheduled meeting.

All
services provided by Deloitte Entities in fiscal 2003 were pre-approved by the audit committee or its designee.

50

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PART IV

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K





| |  | 3.1  |  | Restated Certificate of Incorporation of Vertis, Inc.**                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3.2  |  | Amended and Restated By-Laws of Vertis, Inc.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 4.1  |  | Indenture, dated as of June 24, 2002, among Vertis, Inc. (the "Company"), as Issuer, the Company's subsidiaries listed on the signature pages thereof (the "Subsidiary Guarantors") and the Bank of New York, as Trustee**                                                                                                                                                                                                                                                                                      
| |  | 4.2  |  | Indenture, dated as of June 6, 2003 (the "Indenture"), among the Company, as Issuer, the Subsidiary Guarantors and the Bank of New York, as Trustee. ***                                                                                                                                                                                                                                                                                                                                                        
| |  | 4.3  |  | Registration Rights Agreement, dated as of June 6, 2003, among the Company, the subsidiary Guarantors and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Fleet Securities, Inc. ***                                                                                                                                                                                                                                                                             
| |  | 4.4  |  | Registration Rights Agreement, dated as of June 24, 2002, among the Company, the Subsidiary Guarantors and Deutsch Bank Securities, Inc., J.P. Morgan Securities Inc., Bank of America Securities LLC and Fleet Securities Inc.**                                                                                                                                                                                                                                                                               
| |  | 4.5  |  | Registration Rights Agreement, dated as of November 29, 2002, among the Company, the Subsidiary Guarantors and Deutsche Bank Securities, Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Fleet Securities, Inc. *                                                                                                                                                                                                                                                                         
| |  | 4.6  |  | U.S. Security Agreement, dated December 7, 1999 and amended and restated as of June 6, 2003, among the Company, the Subsidiary Guarantors, Vertis Holdings, Inc. and certain of its subsidiaries listed on the signature page thereto, and JP
Morgan Chase Bank, as Collateral Agent.***                                                                                                                                                                                                                        
| |  | 10.1 |  | Senior Subordinated Credit Agreement, dated as of December 7, 1999 (the Senior Subordinated Credit Agreement"), among Big Flower Press Holdings, Inc., Big Flower Holdings, Inc., the subsidiary guarantors listed on the signature pages thereto (the
"Senior Subordinated Credit Agreement"), the lenders from time to time party thereto (the "Senior Subordinated Lenders"), and Bankers Trust Company, The Chase Manhattan Bank and NationsBridge, L.L.C., as Agents for the Senior Subordinated Lenders.
*
| |  |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

51

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| |  | 10.2  |  | Waiver, Consent and Amendment to the Senior Subordinated Credit Agreement, dated as of December 22, 1999, among Big Flower Press Holdings, Inc, Big Flower Holdings, Inc., the Subsidiary Guarantors, the Senior Subordinated Lenders, and Bankers Trust
Company, The Chase Manhattan Bank and NationsBridge, L.L.C., as Agents for the Senior Subordinated Lenders. *                                                                                                                      
| |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.3  |  | Amendment No. 2 to the Senior Subordinated Credit Agreement, dated as of December 7, 2000, among Vertis, Inc. (f/k/a Big Flower Press Holdings, Inc.) ("Vertis"), Vertis Holdings, Inc. (f/k/a Big Flower Holdings, Inc.) ("Vertis Holdings"), the
Subsidiary Guarantors, the Senior Subordinated Lenders, and Bankers Trust Company, The Chase Manhattan Bank and Banc of America Bridge LLC (f/k/a NationsBridge, L.L.C.), as Agents for the Senior Subordinated Lenders (the "Agents"). *
| |  | 10.4  |  | Amendment No. 3 to the Senior Subordinated Credit Agreement, dated as of February 22, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                     
| |  | 10.5  |  | Amendment No. 4 to the Senior Subordinated Credit Agreement, dated as of June 29, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                         
| |  | 10.6  |  | Amendment No. 5 to the Senior Subordinated Credit Agreement, dated as of August 15, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                       
| |  | 10.7  |  | Amendment No. 6 to the Senior Subordinated Credit Agreement, dated as of October 15, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                      
| |  | 10.8  |  | Amendment No. 7 to the Senior Subordinated Credit Agreement, dated as of December 4, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                      
| |  | 10.9  |  | Amendment No. 8 to the Senior Subordinated Credit Agreement, dated as of December 7, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                      
| |  | 10.10 |  | Amendment No. 9 to the Senior Subordinated Credit Agreement, dated as of December 12, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                     
| |  | 10.11 |  | Amendment No. 10 to the Senior Subordinated Credit Agreement, dated as of December 20, 2001, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                    
| |  | 10.12 |  | Amendment No. 11 to the Senior Subordinated Credit Agreement, dated as of January 11, 2002, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                     
| |  | 10.13 |  | Amendment No. 12 to the Senior Subordinated Credit Agreement, dated as of January 18, 2002, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                     
| |  | 10.14 |  | Waiver, Consent and Amendment to the Senior Subordinated Credit Agreement, dated as of May 30, 2002, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                            
| |  |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

52

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| |  | 10.15 |  | Waiver and Consent to the Senior Subordinated Credit Agreement, dated as of June 12, 2002, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.16 |  | Waiver, Consent and Amendment to the Senior Subordinated Credit Agreement, dated as of November 21, 2002, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 10.17 |  | Amendment No. 13 to the Senior Subordinated Credit Agreement, dated as of February 20, 2003, among Vertis, Vertis Holdings, the Subsidiary Guarantors, the Senior Subordinated Lenders and the Agents. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 10.18 |  | Credit Agreement, dated as of December 7, 1999 (the "Credit Agreement"), among Big Flower Holdings, Inc., a Delaware corporation ("BF Holdings"), Big Flower Press Holdings, Inc., a Delaware corporation ("BFPH"), Big Flower Limited, a
Wholly-Owned Subsidiary of BFPH and a limited company organized under the laws of England ("BFL"), Olwen Direct Mail Limited, a Wholly-Owned Subsidiary of BFL and a limited company organized under the laws of England ("Olwen"), Big Flower Digital
Services Limited, an indirect Wholly-Owned Subsidiary of BF Digital and a limited company organized under the laws of England ("BFDSL"), Fusion Premedia Group Limited (f/k/a Troypeak Limited), an indirect Wholly-Owned Subsidiary of BF Digital and a
limited company organized under the laws of England ("Fusion"), Pismo Limited, an indirect Wholly-Owned Subsidiary of BF Digital and a limited company organized under the laws of England ("Pismo"), Colorgraphic Direct Response Limited, a Wholly-Owned
Subsidiary of BFL and a limited company organized under the laws of England ("Colorgraphic") and The Admagic Group Limited, an indirect Wholly-Owned Subsidiary of BF Digital and a limited company organized under the laws of England ("Admagic", and
together with BFPH, BFL, Olwen, BFDSL, Fusion, Pismo, Colorgraphic and each other entity that may become a party hereto as a U.K. Borrower in accordance with the Credit Agreement, the "Borrowers", and each, a "Borrower"), the lenders from time to
time party thereto (the "Lenders"), Chase Securities, Inc. and Deutsche Bank Securities Inc., as Joint Lead Arrangers and Joint Book Managers (the "Joint Lead Arrangers"), The Chase Manhattan Bank, as Administrative Agent, Bankers Trust Company, as
Syndication Agent, Bank of America, N.A., as Documentation Agent, and certain Managing Agents from time to time (collectively, the "Credit Agreement Agents"). *
| |  | 10.19 |  | First Amendment to the Credit Agreement, dated as of December 9, 1999 among BF Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 10.20 |  | Second Amendment and Consent to the Credit Agreement, dated as of February 17, 2000, among BF Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 10.21 |  | Third Amendment and Consent to the Credit Agreement, dated as of December 7, 2000, among Vertis Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 10.22 |  | Fourth Amendment and Consent to Credit Agreement; First Amendment to U.S. Subsidiaries Guaranty, dated as of February 21, 2001, among Vertis Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |  | 10.23 |  | Fifth Amendment and Waiver to Credit Agreement, dated as of November 26, 2001, among Vertis Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                                                                      
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.24 |  | Sixth Amendment and Consent to Credit Agreement and First Amendment to Subordination Agreement, dated as of June 13, 2002, among Vertis Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                          
| |  | 10.25 |  | Waiver To Credit Agreement, dated as of September 28, 2001, among Vertis Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                                                                                         
| |  | 10.26 |  | Seventh Amendment to Credit Agreement, dated as of November 22, 2002, among Vertis Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents. *                                                                                                                               
| |  | 10.27 |  | Termination Agreement entered into as of December 9, 2002, among Manufacturers And Traders Trust Company, not individually but solely as trustee for the Big Flower Receivables Master Trust, Vertis Receivables, LLC (formerly BFP Receivables
Corporation) ("VR"), Vertis and EagleFunding Capital Corporation. *
| |  | 10.28 |  | Amended and Restated Receivables Purchase Agreement dated as of December 9, 2002 among Vertis, as initial Servicer, Vertis and its certain subsidiaries, as Sellers and Vertis Receivables, LLC, as Buyer. *                                                                                                       
| |  | 10.29 |  | Amended and Restated Indenture and Servicing Agreement dated as of December 9, 2002 among VR, as Issuer, Vertis, as Servicer, and Manufacturers and Traders Trust Company, as Trustee. *                                                                                                                           
| |  | 10.30 |  | Amended and Restated Guaranty, dated as of December 9, 2002 (this "Guaranty"), is issued by Vertis, as the Guarantor, for the benefit of VR and its successors and assigns.*                                                                                                                                       
| |  | 10.31 |  | Stock Option Agreement dated September 5, 2002 by and between Vertis Holdings and Dean D. Durbin. *                                                                                                                                                                                                               
| |  | 10.32 |  | Stock Purchase Agreement dated September 18, 2002 by and between Vertis Holdings and Dean D. Durbin. *                                                                                                                                                                                                            
| |  | 10.33 |  | Stock Option Agreement dated September 5, 2002 by and between Vertis Holdings and John V. Howard, Jr. *                                                                                                                                                                                                           
| |  | 10.34 |  | Stock Purchase Agreement dated September 20, 2002 by and between Vertis Holdings and John V. Howard, Jr. *                                                                                                                                                                                                        
| |  | 10.35 |  | Stock Option Agreement dated September 5, 2002 by and between Vertis Holdings and Catherine S. Leggett. *                                                                                                                                                                                                         
| |  | 10.36 |  | Stock Purchase Agreement dated September 24, 2002 by and between Vertis Holdings and Catherine S. Leggett. *                                                                                                                                                                                                      
| |  | 10.37 |  | Stock Option Agreement dated September 5, 2002 by and between Vertis Holdings and Herb Moloney. *                                                                                                                                                                                                                 
| |  | 10.38 |  | Stock Option Agreement dated September 5, 2002 by and between Vertis Holdings and Donald E. Roland. *                                                                                                                                                                                                             
| |  |       |  |                                                                                                                                                                                                                                                                                                                    

54

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| |  | 10.39 |  | Stock Option Agreement dated September 5, 2002 by and between Vertis Holdings and Adriaan Roosen. *                                                                                       
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.40 |  | Stock Purchase Agreement dated September 16, 2002 by and between Vertis Holdings and Adriaan Roosen. *                                                                                    
| |  | 10.41 |  | Executive Incentive Plan for Vertis Executives dated March 3, 2004.                                                                                                                       
| |  | 10.42 |  | Employment Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings and Donald Roland.                                                                                      
| |  | 10.43 |  | Employment Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings and Dean D. Durbin.                                                                                     
| |  | 10.44 |  | Employment Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings and Herbert W. Moloney III.                                                                             
| |  | 10.45 |  | Service Agreement dated August 31, 2003 by and between Vertis Digital Services Limited and Adriaan Roosen.                                                                                
| |  | 10.46 |  | Employment Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings and John Howard.                                                                                        
| |  | 10.47 |  | Memo of Understanding dated August 15, 2003 by and between Vertis and Thomas Zimmer.                                                                                                      
| |  | 10.48 |  | Eighth Amendment and Consent to Credit Agreement, dated as of May 21, 2003, among Vertis Holdings, the Borrowers, the Lenders, the Joint Lead Arrangers and the Credit Agreement Agents.***
| |  | 12.1  |  | Statement re computation of ratios of earnings to fixed charges.                                                                                                                           
| |  | 14.1  |  | Code of Ethics                                                                                                                                                                             
| |  | 21.1  |  | List of subsidiaries of Vertis, Inc.*                                                                                                                                                      
| |  | 31.1  |  | Certification of Donald E. Roland, Chief Executive Officer, dated March 5, 2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                 
| |  | 31.2  |  | Certification of Dean D. Durbin, Chief Financial Officer, dated March 5, 2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                   
| |  | 32.1  |  | Certification of Donald E. Roland, Chief Executive Officer, dated March 5, 2004, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                 
| |  | 32.2  |  | Certification of Dean D. Durbin, Chief Financial Officer, dated March 5, 2004, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                   

---

On
October 31, 2003, Vertis, Inc. filed a Current Report on Form 8-K reporting its earnings for the three and nine months ended September 31,
2003.

55

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VERTIS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

|                                                                                                      |  | Page
|----------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                          |  | F-2 
|Consolidated Balance Sheets at December 31, 2003 and 2002                                             |  | F-3 
|Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001            |  | F-4 
|Consolidated Statements of Stockholder's Deficit for the Years Ended December 31, 2003, 2002 and 2001 |  | F-5 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001            |  | F-6 
|Notes to Consolidated Financial Statements                                                            |  | F-7 
|Independent Auditors' Report                                                                          |  | F-36
|Schedule of Valuation and Qualifying Accounts for the Years Ended December 31, 2003, 2002 and 2001    |  | F-37

F-1

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INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholder of
    Vertis, Inc. and Subsidiaries:

We
have audited the accompanying consolidated balance sheets of Vertis, Inc. and Subsidiaries ("the Company"), a wholly-owned subsidiary of Vertis Holdings, Inc. as of
December 31, 2003 and 2002 and the related consolidated statements of operations, stockholder's deficit, and cash flows for each of the three years in the period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vertis, Inc. and Subsidiaries at December 31,
2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.

As
discussed in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," on January 1, 2002.

Deloitte &
Touche LLP
Baltimore, Maryland
March 5, 2004

F-2

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Vertis, Inc. and Subsidiaries        Consolidated Balance Sheets

|                                       |                                                                                            | As of December 31,                          |          
|-------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------- | ---------
|
|
|ASSETS                                 |                                                                                            |                                             |          
|Current Assets:                        |                                                                                            |                                             |          
|                                       | Cash and cash equivalents                                                                  |                                             | $        
|                                       | Accounts receivable, net                                                                   |                                             |          
|                                       | Inventories                                                                                |                                             |          
|                                       | Maintenance parts                                                                          |                                             |          
|                                       | Deferred income taxes                                                                      |                                             |          
|                                       | Prepaid expenses and other current assets                                                  |                                             |          
|                                       |                                                                                            |                                             |          
|                                       |                                                                                            | Total current assets                        |          
|Property, plant and equipment, net     |                                                                                            |                                             | 401,820  
|Goodwill                               |                                                                                            |                                             | 353,496  
|Investments                            |                                                                                            |                                             | 73,967   
|Deferred financing costs, net          |                                                                                            |                                             | 30,921   
|Other assets, net                      |                                                                                            |                                             | 20,718   
|                                       |                                                                                            |                                             |          
|                                       |                                                                                            | Total assets                                |          
|                                       |                                                                                            |                                             |          
|LIABILITIES AND STOCKHOLDER'S DEFICIT  |                                                                                            |                                             |          
|Current Liabilities:                   |                                                                                            |                                             |          
|                                       | Accounts payable                                                                           |                                             | $        
|                                       | Compensation and benefits payable                                                          |                                             |          
|                                       | Accrued interest                                                                           |                                             |          
|                                       | Accrued income taxes                                                                       |                                             |          
|                                       | Current portion of long-term debt                                                          |                                             |          
|                                       | Other current liabilities                                                                  |                                             |          
|                                       |                                                                                            |                                             |          
|                                       |                                                                                            | Total current liabilities                   |          
|Due to parent                          |                                                                                            |                                             | 7,457    
|Long-term debt, net of current portion |                                                                                            |                                             | 1,051,877
|Deferred income taxes                  |                                                                                            |                                             | 66,790   
|Other long-term liabilities            |                                                                                            |                                             | 36,390   
|                                       |                                                                                            |                                             |          
|                                       |                                                                                            | Total liabilities                           |          
|                                       |                                                                                            |                                             |          
|Stockholder's deficit:                 |                                                                                            |                                             |          
|                                       | Common stockauthorized 3,000 shares; $0.01 par value; issued and outstanding 1,000 shares |                                             |          
|                                       | Contributed capital                                                                        |                                             |          
|                                       | Accumulated deficit                                                                        |                                             |          
|                                       | Accumulated other comprehensive loss                                                       |                                             |          
|                                       |                                                                                            |                                             |          
|                                       |                                                                                            | Total stockholder's deficit                 |          
|                                       |                                                                                            |                                             |          
|                                       |                                                                                            | Total liabilities and stockholder's deficit |          
|                                       |                                                                                            |                                             |          

See
Notes to Consolidated Financial Statements.

F-3

---



Vertis, Inc. and Subsidiaries        Consolidated Statements of Operations

|                                                                                    |                                              | Year Ended December 31, |          
|----------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------- | ---------
|
|
|Net sales                                                                           |                                              | $                       | 1,585,909
|                                                                                    |                                              |                         |          
|Operating expenses:                                                                 |                                              |                         |          
|                                                                                    | Costs of production                          |                         |          
|                                                                                    | Selling, general and administrative          |                         |          
|                                                                                    | Restructuring charges                        |                         |          
|                                                                                    | Depreciation and amortization of intangibles |                         |          
|                                                                                    |                                              |                         |          
|                                                                                    |                                              |                         | 1,502,608
|                                                                                    |                                              |                         |          
|Operating income                                                                    |                                              |                         | 83,301   
|                                                                                    |                                              |                         |          
|Other expenses (income):                                                            |                                              |                         |          
|                                                                                    | Interest expense, net                        |                         |          
|                                                                                    | Other, net                                   |                         |          
|                                                                                    |                                              |                         |          
|                                                                                    |                                              |                         | 130,797  
|                                                                                    |                                              |                         |          
|Loss before income tax expense (benefit) and cumulative effect of accounting change |                                              |                         | (47,496  
|Income tax expense (benefit)                                                        |                                              |                         | 48,429   
|                                                                                    |                                              |                         |          
|Loss before cumulative effect of accounting change                                  |                                              |                         | (95,925  
|Cumulative effect of accounting change, net of tax                                  |                                              |                         |          
|                                                                                    |                                              |                         |          
|Net loss                                                                            |                                              | $                       | (95,925  
|                                                                                    |                                              |                         |          

See
Notes to Consolidated Financial Statements.

F-4

---



Vertis, Inc. and Subsidiaries  Consolidated Statements of Stockholder's Deficit

|                                                                                                        |                    | Shares |   | Common
Stock |   | Contributed
Capital |  | Accumu-
lated
Deficit |         | Accumulated
Other
Compre-
hensive
Income (Loss) |   | Total    |  
|------------------------------------------------------------------------------------------------------- | ------------------ | ------ | - | ------------ | - | ------------------- |  | --------------------- | ------- | ----------------------------------------------- | - | -------- | -
|
|Balance at January 1, 2001                                                                              |                    | $      | 1 |              |   |                    |  | $                     | 392,915 |                                                 | $ | (464,521 | )
|Net loss                                                                                                |                    |        |   |              |   |                     |  |                       |         |                                                 |   | (54,863  | )
|Unrealized gain on investments, net of income tax provision of $0.1 million                             |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Reclassification adjustment related to sale of investments, net of income tax benefit of $0.8 million   |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Currency translation adjustment                                                                         |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Minimum pension liability adjustment, net of income tax benefit of $1.4 million                         |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Cumulative effect of accounting change on interest rate swap, net of income tax benefit of $1.1 million |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Fair value adjustment of interest rate swap, net of income tax benefit of $1.1 million                  |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        | Comprehensive loss |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Dividends to parent                                                                                     |                    |        |   |              |   |                     |  |                       |         |                                                 |   | (7,054   | )
|Capital contributions by parent                                                                         |                    |        |   |              |   |                     |  |                       | 234     |                                                 |   |          |  
|Other                                                                                                   |                    |        |   |              |   |                     |  |                       | 24      |                                                 |   | (4       | )
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Balance at December 31, 2001                                                                            |                    |        | 1 |              |   |                    |  |                       | 393,173 |                                                 |   | (526,442 | )
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Net loss                                                                                                |                    |        |   |              |   |                     |  |                       |         |                                                 |   | (120,146 | )
|Currency translation adjustment                                                                         |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Minimum pension liability adjustment, net of income tax benefit of $2.3 million                         |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Fair value adjustment of interest rate swap, net of income tax provision of $0.8 million                |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        | Comprehensive loss |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Capital contributions by parent                                                                         |                    |        |   |              |   |                     |  |                       | 25      |                                                 |   |          |  
|Detachable warrants issued                                                                              |                    |        |   |              |   |                     |  |                       | 15,766  |                                                 |   |          |  
|Other                                                                                                   |                    |        |   |              |   |                     |  |                       | 1       |                                                 |   | 9        |  
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Balance at December 31, 2002                                                                            |                    |        | 1 |              |   |                    |  |                       | 408,965 |                                                 |   | (646,579 | )
|Net loss                                                                                                |                    |        |   |              |   |                     |  |                       |         |                                                 |   | (95,925  | )
|Currency translation adjustment                                                                         |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Minimum pension liability adjustment, net of income tax benefit of $1.0 million                         |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Fair value adjustment of interest rate swap, net of income tax provision of $1.0 million                |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        | Comprehensive loss |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Other                                                                                                   |                    |        |   |              |   |                     |  |                       | (1      | )                                               |   | (8       | )
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  
|Balance at December 31, 2003                                                                            |                    |        | 1 |              | $ |                    |  | $                     | 408,964 |                                                 | $ | (742,512 | )
|                                                                                                        |                    |        |   |              |   |                     |  |                       |         |                                                 |   |          |  

See
Notes to Consolidated Financial Statements.

F-5

---



Vertis, Inc. and Subsidiaries        Consolidated Statements of Cash Flows

|                                                     |                                                                                     | Year Ended December 31,                                                                          |        
|---------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------
|
|
|Cash Flows from Operating Activities:                |                                                                                     |                                                                                                  |        
|                                                     | Net loss                                                                            |                                                                                                  | $      
|                                                     | Adjustments to reconcile net loss to net cash provided by operating activities:     |                                                                                                  |        
|                                                     |                                                                                     | Depreciation and amortization                                                                    |        
|                                                     |                                                                                     | Restructuring and asset impairment charges                                                       |        
|                                                     |                                                                                     | Cumulative effect of accounting change                                                           |        
|                                                     |                                                                                     | Write-off of deferred financing fees                                                             |        
|                                                     |                                                                                     | Loss on sale of subsidiary                                                                       |        
|                                                     |                                                                                     | Gain on sale of investments and reduction in fair value of available-for-sale securities         |        
|                                                     |                                                                                     | Deferred income taxes                                                                            |        
|                                                     |                                                                                     | Other non-cash income and expense, net                                                           |        
|                                                     |                                                                                     | Changes in operating assets and liabilities (excluding effect of acquisitions and dispositions): |        
|                                                     |                                                                                     | Decrease in accounts receivable                                                                  |        
|                                                     |                                                                                     | (Increase) decrease in inventories                                                               |        
|                                                     |                                                                                     | Increase in prepaid expenses and other assets                                                    |        
|                                                     |                                                                                     | Increase (decrease) in accounts payable and other liabilities                                    |        
|                                                     |                                                                                     |                                                                                                  |        
|Net cash provided by operating activities            |                                                                                     |                                                                                                  | 89,046 
|                                                     |                                                                                     |                                                                                                  |        
|Cash Flows from Investing Activities:                |                                                                                     |                                                                                                  |        
|                                                     | Capital expenditures                                                                |                                                                                                  |        
|                                                     | Software development costs capitalized                                              |                                                                                                  |        
|                                                     | Proceeds from sale of property, plant and equipment and divested assets             |                                                                                                  |        
|                                                     | Other investing activities                                                          |                                                                                                  |        
|                                                     |                                                                                     |                                                                                                  |        
|Net cash used in investing activities                |                                                                                     |                                                                                                  | (40,903
|                                                     |                                                                                     |                                                                                                  |        
|Cash Flows from Financing Activities:                |                                                                                     |                                                                                                  |        
|                                                     | Issuance of long-term debt                                                          |                                                                                                  |        
|                                                     | Net (repayments) borrowings under revolving credit facilities                       |                                                                                                  |        
|                                                     | Repayments of long-term debt                                                        |                                                                                                  |        
|                                                     | Deferred financing costs                                                            |                                                                                                  |        
|                                                     | Increase (decrease) in outstanding checks drawn on controlled disbursement accounts |                                                                                                  |        
|                                                     | Dividends to parent                                                                 |                                                                                                  |        
|                                                     | Capital contributions by parent                                                     |                                                                                                  |        
|                                                     | (Advances to) distributions from parent                                             |                                                                                                  |        
|                                                     |                                                                                     |                                                                                                  |        
|Net cash used in financing activities                |                                                                                     |                                                                                                  | (53,176
|                                                     |                                                                                     |                                                                                                  |        
|Effect of exchange rate changes on cash              |                                                                                     |                                                                                                  | 1,381  
|                                                     |                                                                                     |                                                                                                  |        
|Net (decrease) increase in cash and cash equivalents |                                                                                     |                                                                                                  | (3,652 
|Cash and cash equivalents at beginning of year       |                                                                                     |                                                                                                  | 5,735  
|                                                     |                                                                                     |                                                                                                  |        
|Cash and cash equivalents at end of year             |                                                                                     | $                                                                                                | 2,083  
|                                                     |                                                                                     |                                                                                                  |        
|Supplemental Cash Flow Information:                  |                                                                                     |                                                                                                  |        
|Interest paid                                        |                                                                                     | $                                                                                                | 115,577
|                                                     |                                                                                     |                                                                                                  |        
|Income taxes paid                                    |                                                                                     | $                                                                                                | 1,950  
|                                                     |                                                                                     |                                                                                                  |        
|Non-cash investing and financing activities:         |                                                                                     |                                                                                                  |        
|Detachable warrants issued                           |                                                                                     |                                                                                                  |        
|                                                     |                                                                                     |                                                                                                  |        
|Assets acquired through lease arrangements           |                                                                                     |                                                                                                  |        
|                                                     |                                                                                     |                                                                                                  |        

See Notes to Consolidated Financial Statements.

F-6

---



Vertis, Inc. and Subsidiaries    Notes to Consolidated Financial Statements

1.     BASIS OF PRESENTATION

Principles of ConsolidationThe consolidated financial statements include those of
Vertis, Inc., and its subsidiaries (together, the "Company"). All significant intercompany balances and transactions have been eliminated.

OwnershipThe Company is a wholly-owned subsidiary of Vertis Holdings, Inc. ("Vertis Holdings").

BusinessThe Company is a leading provider of targeted advertising, media and marketing services. The Company operates in two
geographic segments: Vertis North America and Vertis Europe (see Note 20).

Use of EstimatesThe Company's management must make estimates and assumptions in preparing financial statements in conformity
with accounting principles generally accepted in the United States of America ("generally accepted accounting principles"). These estimates and assumptions 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. Actual results could differ from those
estimates.

ReclassificationsCertain amounts for prior periods have been reclassified to conform to the current period presentation.

2.     RESTRUCTURING

The Company began a new restructuring program in the third quarter of 2003, the execution of which is expected to be complete by the first quarter of 2004. This
program includes the closure of facilities, some of which are associated with the consolidation of operations; transfer of certain positions to the corporate office; reductions in work force of
approximately 260 employees; and the abandonment of assets associated with vacating these premises. In 2003, Vertis North America recorded $4.7 million in severance costs due to headcount
reductions of 200 employees, $6.9 million in facility closure costs and $3.0 million in asset write-offs related to the closure of five facilities. In 2003, Vertis Europe
recorded $0.6 million in severance costs due to headcount reductions of 14 employees related to the closure of one facility and the consolidation of several subsidiaries into one entity.

The
Company expects the costs associated with the restructuring programs to be an estimated $16.1 million (net of estimated sublease income of $7.5 million) of which
approximately $3.0 million are non-cash costs. Execution of the North American program is expected to be complete in the first quarter of 2004. The Company expects no future costs
associated with the restructuring effort at the Vertis Europe segment as the program is complete as of December 31, 2003.

In
2002, the Company planned and implemented two restructuring programs. In the first quarter of 2002, two Vertis Europe facilities were combined and ten employees were terminated
resulting in severance of $0.7 million, facility closure costs of $1.6 million and losses on disposition of assets of $0.2 million. The North America portion of the 2002
restructuring program resulted in a reduction in work force of approximately 530 employees, which resulted in a severance charge of $8.0 million and the closure of five facilities, which
resulted in a charge of $7.0 million including $4.9 million in losses on the disposition of assets at the closed facilities and an offsetting adjustment of $1.3 million to adjust
the 2001 estimated restructuring accrual. Additionally, the Company recorded $1.6 million of other charges, which are primarily legal fees and the cost of leased equipment no longer needed due
to the North America restructurings.

F-7

---

During
2001, the Company continued a restructuring program initiated in 2000. Certain production and sales administration facilities were combined in strategic areas resulting in the
closure of 14 facilities, abandonment of assets in those locations and reduction in work force. Approximately 1,000 positions were eliminated. Effective January 1, 2001, the Company transferred
13 management and support personnel employed in the Company's New York City office to Chancery Lane Capital, an affiliate of the former Chairman of Vertis Holdings. In exchange for a one time
$14.0 million payment by the Company, Chancery Lane Capital assumed all employment and compensation obligations with respect to the transferred employees. This cost was recorded in
restructuring expense in 2001.

The
restructuring plan begun in 2000, which encompasses the 2002 programs, was completed at December 31, 2002. To date, the total of all planned restructuring activities has
eliminated approximately 1,700 positions and closed 32 facilities since January 1, 2000.

The
significant components of the restructuring and asset impairment charges were as follows:

|                               |  | Severance
and Related
Costs |         | Asset Write
Off & Disposal
Costs |   | Facility
Closing
Costs |   | Other
Costs |        | Total |  
|------------------------------ |  | --------------------------- | ------- | -------------------------------- | - | ---------------------- | - | ----------- | ------ | ----- | -
|
|Balance at January 1, 2001     |  | $                           | 3,626   |                                  | $ | 227                    |   | $           | 89     |       | $
|Restructuring charges in 2001  |  |                             | 11,727  |                                  |   | 5,939                  |   |             | 9,415  |       |  
|Restructuring payments in 2001 |  |                             | (11,546 | )                                |   | (6,166                 | ) |             | (1,250 | )     |  
|                               |  |                             |         |                                  |   |                        |   |             |        |       |  
|Balance at December 31, 2001   |  |                             | 3,807   |                                  |   |                        |   |             | 8,254  |       |  
|Restructuring charges in 2002  |  |                             | 8,680   |                                  |   | 5,067                  |   |             | 3,707  |       |  
|Restructuring payments in 2002 |  |                             | (10,783 | )                                |   | (3,048                 | ) |             | (4,877 | )     |  
|                               |  |                             |         |                                  |   |                        |   |             |        |       |  
|Balance at December 31, 2002   |  |                             | 1,704   |                                  |   | 2,019                  |   |             | 7,084  |       |  
|Restructuring charges in 2003  |  |                             | 5,367   |                                  |   | 2,965                  |   |             | 6,911  |       |  
|Restructuring payments in 2003 |  |                             | (5,615  | )                                |   | (4,984                 | ) |             | (4,237 | )     |  
|                               |  |                             |         |                                  |   |                        |   |             |        |       |  
|Balance at December 31, 2003   |  | $                           | 1,456   |                                  | $ |                        |   | $           | 9,758  |       | $
|                               |  |                             |         |                                  |   |                        |   |             |        |       |  

Accrued
restructuring reserves total approximately $11.8 million. The balance that will be paid in 2004, totaling approximately $6.4 million, is included in other current
liabilities. Included in other long-term liabilities is approximately $5.4 million, which the Company expects to pay by 2011.

The
charges are comprised of the following:

2003

2002

2001(in thousands)Charges requiring cash payments

$
12,278

$
14,024

$
36,286Write off of assets in closed locations


2,965


5,067


5,939$
15,243

$
19,091

$
42,225


3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue RecognitionThe Company provides a wide variety of print and print related services and
products for specific customers, primarily under contract. Revenue is not recognized until the earnings process has been completed in accordance with the terms of the contracts. Revenue from premedia
operations is recognized upon the completion of orders. Unbilled receivables are recorded for completed services or products which remain unbilled as of the period end.

The
Company charges customers for shipping and handling charges. The amounts billed to customers are recorded as net sales and actual charges paid by the Company are included in costs of
production in the consolidated statements of operations.

F-8

---

Cash and Cash EquivalentsCash equivalents include all investments with initial maturities of 90 days or less. As the
Company's cash management program utilizes zero-balance accounts, book overdrafts in these accounts are reclassified as current liabilities, and the fluctuation
within these accounts is shown as the change in outstanding checks drawn on controlled disbursement accounts in the financing section of the Company's consolidated statements of cash flows.

InventoriesInventories are recorded at the lower of cost or market determined primarily on the first-in,
first-out method.

InvestmentsInvestments in equity securities are classified as available-for-sale and are recorded at
market value, with net unrealized gains and losses recorded in other comprehensive income.

Maintenance PartsThe Company maintains a supply of maintenance parts, primarily cylinders, drive motors, rollers and gear
boxes, which are classified as current assets on the Company's consolidated balance sheets. These parts play a vital role in the performance of the Company's printing presses.

Long-lived AssetsProperty, plant and equipment are stated at cost. Depreciation and amortization are computed
using the straight-line method over the assets' estimated useful lives, or when applicable, the terms of the leases, if shorter.

The
Company evaluates the recoverability of its long-lived assets, including property, plant and equipment and intangible assets, periodically or when there are changes in
economic circumstances or business objectives that indicate the carrying value may not be recoverable. The Company's evaluations include estimated future cash flows, profitability and estimated future
operating results and other factors determining fair value. As these assumptions and estimates may change over time, it may or may not be necessary to record impairment charges.

Software
development costs are expensed until technological feasibility is determined, after which costs are capitalized until the product is ready for general release and sale. These
costs are amortized over three to seven-year lives beginning at the respective release dates.

Certain
direct development costs associated with internal-use software are capitalized, including payroll costs for employees devoting time to the software projects and
external costs of material and services by third-party providers. These costs are included in software development and are being amortized beginning when the asset is substantially ready for use.
Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.

Intangible
assets other than goodwill are amortized over the terms of the related agreements. Deferred financing costs are amortized over the terms of the related financing instruments.

Goodwill
and intangible assets with indefinite lives are no longer amortized. See Note 4 for a discussion of the effect of adopting Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on goodwill and intangible assets.

Income TaxesIncome taxes are accounted for under the asset and liability method as outlined in SFAS No. 109
"Accounting for Income Taxes" ("SFAS 109"). Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards.

The
provision for federal income taxes recorded by the Company represents the amount calculated as outlined by SFAS 109 and allocated in accordance with a tax-sharing
arrangement with Vertis Holdings. State and foreign income taxes represent actual amounts paid or payable by the Company.

F-9

---

Fair Value of Financial InstrumentsThe Company determines the fair value of its financial instruments as follows:



Stock Based CompensationEmployees of the Company participate in Vertis Holdings' 1999 Equity Award Plan (the "Stock Plan"),
which authorizes grants of stock options, restricted stock, performance shares and other stock based awards. As of December 31, 2003, only options have been granted under the Stock Plan. See
Note 15, "Vertis Holdings Stock Award and Incentive Plan."

The
Company accounts for the Stock Plan under the intrinsic value method, which follows the recognition and measurement principles of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees, and related Interpretations." No stock-based employee compensation cost is reflected in net income. The following table summarizes the effect
of accounting for these awards as if the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123," had been applied.

|                                                                                                           |  | 2003 |         | 2002 |   | 2001     |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------- | -
|
|Net loss:                                                                                                  |  |      |         |      |   |          |  
|As reported                                                                                                |  | $    | (95,925 | )    | $ | (120,146 | )
|Deduct: total stock-based compensation determined under fair value based method for all awards, net of tax |  |      | (1,100  | )    |   | (2,349   | )
|                                                                                                           |  |      |         |      |   |          |  
|Pro forma                                                                                                  |  | $    | (97,025 | )    | $ | (122,495 | )
|                                                                                                           |  |      |         |      |   |          |  

The
weighted-average fair value per option at the date of grant for options granted under the Stock Plan was $17.70 in 2002, and $19.39 in 2001. There were no options granted in 2003.

The
fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

2002

2001Expected volatility

38.20
%
43.77
%Risk-free interest rate

4.00
%
4.40
%Expected option life (years)

10

10


Concentration of Credit RiskThe Company provides services to a wide range of clients who operate in many industry sectors in
varied geographic areas. The Company grants credit to all qualified clients and does not believe that it is exposed to undue concentration of credit risk to any significant degree.

F-10

---

New Accounting PronouncementsOn January 1, 2002, the Company adopted SFAS 142. This statement applies to
goodwill and intangible assets with indefinite lives, and requires that these assets no longer be amortized but instead tested for impairment on at least an annual basis. See Note 4 for further
discussion of the effect of adopting this statement.

In
June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires recording costs associated with
exit or disposal activities at their fair value when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability
has been incurred. In the first quarter of 2003, the Company adopted the provisions of this statement, which were incorporated in the consolidated financial statements.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees." The disclosure requirements are effective for
financial statements issued after December 15, 2002, and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after
December 31, 2002. In the first quarter of 2003, the Company adopted the provisions of this statement, which did not have an impact on the Company's consolidated financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." This statement amends SFAS No. 123
to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the
effect of the method used on reporting results. The disclosure provisions of this standard are effective for fiscal years ended after December 15, 2002 and have been incorporated into these
consolidated financial statements and accompanying notes (see Note 15).

In
April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." In general, this statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The Company has adopted the provisions of this statement, which did not have a material impact on the Company's consolidated financial position.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of financial position certain financial instruments that embody certain mandatory redeemable obligations for the issuer that are
required to be classified as liabilities. This statement is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The provisions of the statement did not have a significant impact on the Company's consolidated financial position.

In
December 2003, FASB issued Interpretation No. 46 (revised), "Consolidation of Variable Interests Entities" ("FIN 46R"), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity ("VIE"). FIN 46R replaces
FASB Interpretation No. 46 that was issued in January 2003. Companies are required to apply FIN 46R to VIEs generally as of March 31, 2004 and to special-purpose entities as of
December 31, 2003. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and

F-11

---

non-controlling
interest of the VIE initially would be measured at their carrying amounts, and any difference between the net amount added to the balance sheet and any previously
recognized interest would be recorded as a cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used
to measure the assets, liabilities and non-controlling interest of the VIE. The Company has adopted this interpretation, which did not have a material impact on its consolidated financial
position or results of operations.

In
December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132R"). This standard
prescribes employers' disclosures about pension plans and other postretirement benefits plans, but does not change the measurement of recognition of those plans. SFAS No. 132R retains and
revises the disclosure requirements contained in the original standard. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit costs of defined
benefit pension plans and other postretirement benefit plans. For public companies, SFAS No. 132R is generally effective for fiscal years ending after December 15, 2003. The revised
disclosure requirements are incorporated in Note 13.

4.     GOODWILL

Effective January 1, 2002, the Company adopted SFAS 142. Under this statement, goodwill and intangible assets with indefinite lives are no longer
amortized. Under the transitional provisions of SFAS 142, the Company's goodwill was tested for impairment as of January 1, 2002. Each of the Company's reporting units was tested for
impairment by comparing the fair value of the reporting unit with the carrying value of that unit. Fair value was determined based on a valuation study performed by an independent third party using
the discounted cash flow method and the guideline company method. As a result of the Company's impairment test completed in the third quarter of 2002, the Company recorded an impairment loss of
$86.6 million at the Vertis North America segment and $21.8 million at the Vertis Europe segment to reduce the carrying value of goodwill to its implied fair value, net of tax.
Impairment in both cases was due to a combination of factors including operating performance and acquisition price. In accordance with SFAS 142, the impairment charge was reflected as a
cumulative effect of accounting change in the accompanying 2002 consolidated statements of operations. The Company has elected to test its goodwill in the first quarter of the fiscal year. The annual
goodwill test has been completed for 2003, and did not indicate any goodwill impairment.

F-12

---

In accordance with SFAS 142, the Company stopped amortizing its existing goodwill as of January 1, 2002. A reconciliation of reported net loss to net loss adjusted to
reflect the impact of the discontinuance of the amortization of goodwill for the years ended December 31, 2003, 2002 and 2001 is as follows:

2003

2002

2001(in thousands)Reported net loss

$
(95,925
)
$
(120,146
)
$
(54,863
)Add: Goodwill amortization








13,255Adjusted net loss

$
(95,925
)
$
(120,146
)
$
(41,608
)


5.     ACQUISITIONS AND DISPOSITIONS

On June 10, 2003, the Company acquired the sales, marketing and media planning assets of The Newspaper Network, Inc. (collectively, "TNN") by
assuming the working capital deficit of approximately $4.3 million. The Newspaper Network, Inc. is a national sales and marketing company that provides a wide variety of print
advertising services specializing in the planning, pricing and placement of newspaper advertising throughout the United States. The addition of TNN will provide additional
media expertise that will better equip the Company to serve large, national clients in key industry markets.

Goodwill
arising in connection with this acquisition was approximately $4.3 million, calculated as the excess of the liabilities assumed over the fair value of the net assets
acquired. The financial results of TNN are included in the Company's consolidated financial statements from the date of acquisition. The opening balance sheet as of the date of acquisition is as
follows:

As of June 10,2003(in thousands)ASSETSCash

$
295Accounts Receivable, net


66,877Other current assets


26Total Current Assets


67,198Property, plant and equipment


202Other long-term assets


11Goodwill


4,251Total Assets

$
71,662LIABILITIESAccounts Payable

$
71,500Other Current Liabilities


162Total Current Liabilities

$
71,662


F-13

---

The
following unaudited pro forma information reflects the Company's results adjusted to include TNN as though the acquisition had occurred at the beginning of 2001.

Twelve months ended
December 31,2003

2002

2001(In thousands)Net sales

$
1,591,066

$
1,687,168

$
1,862,972Net loss


(96,138
)

(120,200
)

(54,658
)


In
May 2001, the Company sold certain assets of Iceberg Marketing Limited to Newbridge Marketing Limited for $1.4 million. The sale resulted in a pre-tax loss
of $0.2 million.

6.     ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

2003

2002(in thousands)Tradebilled

$
150,348

$
95,309Tradeunbilled


29,201


30,963Other receivables


8,168


11,213187,717


137,485Allowance for doubtful accounts


(3,942
)

(5,960
)$
183,775

$
131,525


In
1996, the Company entered into a six-year agreement to sell substantially all trade accounts receivable generated by subsidiaries in the U.S. (as amended, the "1996
Facility") through the issuance of $130.0 million of variable rate trade receivable backed certificates. In April 2002, the revolving period for these certificates was extended and the
certificates were refinanced. In December 2002, the 1996 Facility expired and the Company entered into a new three-year agreement terminating in December 2005 (the "A/R
Facility") through the issuance of $130.0 million variable rate trade receivable backed notes. The proceeds from the A/R Facility were used to retire the certificates issued under the 1996
Facility.

The
A/R Facility allows for a maximum of $130.0 million of trade accounts receivable to be sold at any time based on the level of eligible receivables. Under the 1996 Facility and
the A/R Facility, the Company sells its trade accounts receivable through a bankruptcy-remote wholly-owned subsidiary. However, the Company maintains an interest in the receivables and has been
contracted to service the accounts receivable. The Company received cash proceeds for servicing of $3.2 million and $3.3 million in 2003 and 2002, respectively. These proceeds are fully
offset by servicing costs.

At
December 31, 2003 and 2002, accounts receivable of $122.5 million and $125.9 million, respectively, had been sold under the facilities and, as such, are reflected
as reductions of accounts receivable. At
December 31, 2003 and 2002, the Company retained an interest in the pool of receivables in the form of overcollateralization and cash reserve accounts of $53.2 million and
$46.3 million, respectively, which is included in Accounts receivable, net on the consolidated balance sheet at allocated cost, which approximates fair value. The proceeds from collections
reinvested in securitizations amounted to $1,482.7 million and $1,545.5 million in 2003 and 2002, respectively.

Fees
for the program under the facilities vary based on the amount of interests sold and the London Inter Bank Offered Rate ("LIBOR") plus an average margin of 90 basis points in 2003
and 37

F-14

---

basis
points in 2002. The loss on sale, which approximated the fees, totaled $2.6 million in 2003, $2.8 million in 2002 and $6.0 million in 2001, and is included in Other, net.

7.     INVENTORIES

Inventories
consisted of the following:

2003

2002(in thousands)Paper

$
24,468

$
20,412Work in process


6,146


6,438Ink and chemicals


3,714


4,075Other


5,312


6,264$
39,640

$
37,189


8.     PROPERTY, PLANT AND EQUIPMENT

The components and useful lives of property, plant and equipment were:

Estimated
Useful Life
(Years)

2003

2002(in thousands)Land



$
8,480

$
8,502Machinery and equipment

5 to 15


669,833


650,365Buildings and leasehold improvements

1 to 40


93,671


96,792Furniture and fixtures

3 to 10


107,657


105,060Internally developed computer software

3 to 7


17,989


15,089Vehicles

3 to 4


2,260


3,366Construction in progress and deposits on equipment purchases




20,012


22,344919,902


901,518Accumulated depreciation and amortization




(518,082
)

(456,025
)$
401,820

$
445,493


9.     INVESTMENTS

Investment in Leveraged LeasesTwo special purpose limited liability companies ("LLCs"), subsidiaries
of the Company, are the head lessees and sub-lessors in two lease-leaseback transactions entered into in 1998. Under these transactions, buildings with estimated useful lives of
65 years were leased by the LLCs for terms of 57 years (the "Headleases") and subleased by the LLCs to the lessors for terms of 52 years (the "Subleases"). Under the guidelines of
SFAS No. 13, "Accounting for Leases," the Headleases qualify as capital leases and the Subleases qualify as leveraged leases. The Company's investments represented approximately 24% of the
buildings' combined leasehold values, while the balance was furnished by third-party financing in the form of long-term debt that provides no recourse against the LLCs or the Company, but
is secured by first liens on the properties. At the end of the sublease terms, the leasehold interests are returned by the LLCs, although the sublessee has the option to purchase the leasehold
interests for amounts based on their then-estimated fair market values. The Company has the benefit of tax deductions for advance rental payments under the Headleases and interest on the
long-term debt. During the early years of the transactions, the available tax deductions

F-15

---

are
expected to exceed the sublease rental income; in later years the taxable rental income is expected to exceed the deductible amounts. Deferred taxes are provided to reflect these temporary
differences.

The
Company's net investment in leveraged leases was composed of the following components:

2003

2002(in thousands)Rentals receivable

$
113,541

$
113,540Less: unearned income


(39,574
)

(41,129
)Investment in leveraged leases included in long-term investments


73,967


72,411Less: deferred taxes


(66,733
)

(65,011
)Net investment in leveraged leases

$
7,234

$
7,400


Other,
net includes $1.5 million of income earned on the leveraged lease investments in 2003, $1.6 million in 2002, and $2.5 million in 2001.

Investments in Equity SecuritiesThe Company invested in an internet-related business, 24/7 Media, Inc.
("TFSM") which is publicly traded. In response to market conditions, the Company sold its remaining TFSM shares and all TFSM warrants to CLI Associates, LLC (an affiliate of the former Chairman of
Vertis Holdings) for $0.6 million in 2001. The sale resulted in a realized pre-tax loss of $2.0 million. Additionally, in 2001, the Company recorded an impairment loss for
permanent decline in value on its investment in Naviant Stock totaling $5.9 million.

10.   LONG-TERM DEBT

Long-term debt consisted of the following:

2003

2002(in thousands)Revolving credit facility

$
80,570

$
155,16193/4% senior secured second lien notes


341,643107/8% senior notes


348,042


347,685131/2% senior subordinated credit facility


70,924


279,579131/2% senior subordinated notes


210,665Other notes


106


1,443Term loan A





124,981Term loan B





184,2191,051,950


1,093,068Current portion


(73
)

(5,384
)$
1,051,877

$
1,087,684


The
credit facility (the "Credit Facility") consisted of three components:



F-16

---







On
May 7, 2003, the Company, in the course of its internal financial review, became aware of a required payment due March 31, 2003, under the Credit Facility to the holders
of the Term A and B loans in the amount of $40.9 million. This past due payment was discovered during a review of the definition of "excess cash flow", as defined in the Credit Facility
agreement, resulting in a revision of the previously calculated "excess cash flow" out of which a prepayment was required to be made. The only period where this re-calculation resulted in
a required prepayment was for the year ended December 31, 2002, which was due on March 31, 2003. On May 8, 2003, the Company received the required waivers for this technical
default and made the payment with borrowings from the revolving credit facilities. The remainder of the Term A and B loans, $267.9 million, was retired in June 2003 in connection with
the issuance of the 93/4% notes, as discussed below, and the provision under the Credit Facility requiring prepayment of our "excess cash flow" was eliminated. Following the payment of
the Term A and B loans in their entirety, the Credit Facility consists solely of the revolving credit facility. At December 31, 2003, the weighted-average interest rate on the Credit Facility
was 7.33% as compared to 5.97% at December 31, 2002.

In
June 2003, the Company issued $350.0 million of senior secured second lien notes with an interest rate of 93/4% and maturity date of April 1, 2009
(the "93/4% notes"). The notes pay interest semi-annually on April 1 and October 1 of each year. After deducting the initial purchasers discount and
transaction expenses, the net proceeds received by the Company were $330.3 million. The Company used these net proceeds to pay off $267.9 million remaining on the Term A and B loans and
$62.4 million of the revolving credit facility.

In
2002, the Company issued $350.0 million of senior unsecured notes with an interest rate of 107/8% and maturity date of June 15, 2009 (the
"107/8% notes"). The notes pay interest semi-annually on June 15 and December 15 of each year. After deducting the initial purchasers discount and transaction
expenses, the net proceeds received by the Company were $338.0 million. The Company used these net proceeds to repay $181.5 million of the Term A and B loans and $156.5 million of
the senior subordinated credit facility.

The
senior subordinated credit facility, which had been originally issued in 1999 as a bridge facility, was converted into a term loan in December 2000, expiring on
December 7, 2009. The interest rate of the term notes representing this term loan is 131/2%. In connection with the issuance of the 107/8% notes in 2002,
$156.5 million was repaid under the senior subordinated credit facility. Pursuant to the senior subordinated credit facility, the Company issued $210.7 million of 131/2%
senior subordinated notes due December 7, 2009 (the "Exchange Notes") in 2003 in exchange for the term notes held by the holders requesting the exchange. The remaining $82.8 million of
outstanding term notes, excluding the discount, can be exchanged at the election of the holder in accordance with the senior subordinated credit facility. The Exchange Notes pay interest
semi-annually on June 1 and December 1 of each year.

The
Credit Facility, the senior subordinated credit facility, the 107/8% notes, the 93/4% notes and the Exchange Notes contain customary covenants including
restrictions on capital expenditures, dividends, and investments. In particular, these debt instruments all contain customary high-yield debt covenants imposing limitations on the payment
of dividends or other distributions on or in respect of the Company or the capital stock of its restricted subsidiaries. Substantially all of the Company's assets are pledged as collateral for the
outstanding debt under the Credit Facility, as well as the Company's other long-term debt. All of the Company's debt has customary provisions requiring prepayment in the event of a change
in control and from the proceeds of asset sales, as well as cross-default provisions. In addition, the Credit Facility agreement has provisions requiring prepayment from the proceeds of

F-17

---

issuances
of debt and equity securities, and financial covenants that require us to maintain specified financial ratios as follows. The consolidated net interest coverage ratio is the ratio of EBITDA
to net interest expense, which is required to be, at a minimum, 1.50 to 1.00. At December 31, 2003, the Company's net interest coverage ratio is calculated as 1.64 to 1.00. The leverage ratio
is the ratio of consolidated debt to EBITDA, which must not exceed 6.50 to 1.00. At December 31, 2003, the Company's leverage ratio is calculated as 6.09 to 1.00. The senior secured leverage
ratio is the ratio of senior secured debt to EBITDA, which must not exceed 2.00 to 1.00. The Company's senior secured leverage ratio, as calculated at December 31, 2003, is 1.11 to 1.00. The
amounts of EBITDA and net interest expense used in the preceding ratio calculations are not equivalent to the amounts included in these financial statements, but rather are amounts calculated as set
forth in the Credit Facility. If the Company is unable to maintain these financial ratios, the bank lenders could require the Company to repay any amounts owing under the Credit Facility. At
December 31, 2003, the Company was in compliance with its debt covenants.

At
December 31, 2003, the aggregate maturities of long-term debt were:

(in thousands)2004

$
732005


80,603200620072008Thereafter


971,274$
1,051,950


The
Company had an interest rate swap agreement, attached to the Term B loans, that converted a portion of variable rate debt to a fixed rate basis. This agreement was designated as a
hedge against changes in future cash flows. In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 137 and SFAS No. 138, the interest rate swap agreement was reflected at fair value in the Company's consolidated balance sheet at December 31, 2002, and the related
mark-to-market adjustment was recorded in stockholder's deficit as a component of other comprehensive income.

On
June 6, 2003, in connection with the payoff of the Term A and B loans, this interest rate swap agreement became an ineffective cash flow hedge. At this date, the remaining fair
market value of the agreement of approximately $1.1 million was expensed and is included in Other, net in the twelve months ended December 31, 2003.

11.   LEASES

Facilities and certain equipment are leased under agreements that expire at various dates through 2014. Rental expense for continuing operations under operating
leases for the years ended December 31, 2003, 2002 and 2001, was $34.0 million, $35.0 million, and $39.9 million, respectively.

F-18

---

At
December 31, 2003, minimum annual rentals under non-cancelable operating leases (net of subleases) were:

(in thousands)2004

$
32,2802005


25,6472006


18,1342007


12,2582008


9,482Thereafter


29,265$
127,066


Commitments
under the lease agreements also extend in most instances to property taxes, insurance and maintenance and certain leases contain escalation clauses and extension options.

12.   INCOME TAXES

Income tax expense (benefit) consisted of the following components:

2003

2002

2001(in thousands)Current:Federal

$
1,000

$
(565
)State and foreign


944


618

$
1,2791,944


53


1,279Deferred:Federal


46,485


(2,532
)

(22,851
)State and foreign46,485


(2,532
)

(22,851
)Total income tax expense (benefit)

$
48,429

$
(2,479
)
$
(21,572
)


Vertis
Holdings files a consolidated Federal income tax return with all of its subsidiaries, including the Company. The components of income tax disclosed above have been allocated to
the Company as if the Company had filed a separate consolidated tax return.

Federal
and state income taxes are subject to a tax allocation arrangement (the "Tax Arrangement") where the Company files as a member of Vertis Holdings' consolidated group. The Tax
Arrangement does not apply to income taxes in jurisdictions in which the Company or its subsidiaries file separate tax returns. The Tax Arrangement does not provide for remuneration in years in which
the Company has a current taxable loss as in 2001, 2002 and 2003.

The
Company's foreign pre-tax income was not a significant component of total pre-tax income or loss. No U.S. income taxes have been provided for unremitted
earnings of foreign subsidiaries as the Company intends to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so.

F-19

---

The
following is a reconciliation of the U.S. statutory federal income tax rate to the Company's effective tax rates:

2003

2002

2001(percent of pre-tax loss)Statutory income tax rate

(35.0
)%
(35.0
)%
(35.0
)%State income taxes, net of federal income tax benefits

2.0

7.8

0.6Amortization and write-off of goodwill





4.4Change in valuation allowance

136.2



0.9Foreign income taxed at other rates

3.3

(3.1
)
0.8Investment related differences

2.1

7.0Officer's life insurance

(7.2
)Other

1.4

5.9

0.1Effective tax rate

102.8
%
(17.4
)%
(28.2
)%


The
tax effects of significant items comprising deferred income taxes were:

2003

2002(in thousands)Employee benefits

$
13,093

$
8,897Net operating loss and tax credit carry forwards


102,758


92,986Accrued expenses and reserves


10,412


7,497Other deductible differences


5,959


9,307132,222


118,687Property, plant and equipment


(55,458
)

(63,109
)Leveraged lease investments


(66,733
)

(65,011
)Other taxable differences


(2,428
)

(1,866
)(124,619
)

(129,986
)Valuation allowance


(74,393
)

(6,968
)Net deferred income tax liability

$
(66,790
)
$
(18,267
)


At
December 31, 2003 the Company had a net operating loss carryforward of approximately $306.3 million. This amount is included in the consolidated Vertis Holdings net
operating loss carryforward of $325.7 million. These carryforwards expire beginning in 2005 through 2024.

During
2003, the Company established an additional valuation allowance of $67.4 million against its deferred tax assets. The valuation allowance reserves the net operating losses
and tax credit carryovers that may not be offset by reversing taxable temporary differences. The additional valuation allowance recorded in 2003 was due to the continuation of the poor economic
climate and the projected increase in the annual interest expense resulting from the issuance of the 93/4% notes in June 2003 (see Note 10). The Company intends to
maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

The
prior year valuation allowance of $7.0 million was established primarily due to limitations on net operating loss carryforward utilization under the Internal Revenue Code.

The
Company is currently under examination by the Internal Revenue Service in the United States and by the Inland Revenue in the United Kingdom. The Company believes it has adequate
provisions for all open years.

F-20

---

13.   RETIREMENT PLANS

Defined Benefit PlansThe Company maintains defined benefit plans, including pension and supplemental
executive retirement plans.

Information
regarding the defined benefit plans, collectively, is as follows:

2003

2002

2001(in thousands)Components of net periodic pension cost:Service cost

$
697

$
618

$
640Interest cost


2,216


2,168


1,827Expected return on assets


(1,187
)

(1,611
)

(1,370
)Net amortization and deferral


721


412


1Settlement loss


1,212


1,558$
3,659

$
3,145

$
1,098Changes in benefit obligations:Benefit obligation at beginning of year

$
33,694

$
26,910Service cost


697


618Interest cost


2,216


2,168Actuarial loss


3,453


5,229Benefits paid


(3,848
)

(795
)Plan amendments





1,823Settlements and curtailments


536


(2,259
)Benefit obligation at end of year

$
36,748

$
33,694Changes in plan assets:Fair value of plan assets at beginning of year

$
13,152

$
16,504Actual return (loss) on assets


1,597


(967
)Employer contributions


806


1,694Benefits paid


(3,848
)

(795
)Plan expenses





(360
)Settlements





(2,924
)Fair value of plan assets at end of year

$
11,707

$
13,152Funded status


25,041

$
20,542Unrecognized prior service cost


(1,778
)

(2,009
)Unrecognized actuarial loss


(12,930
)

(11,052
)Net amount recognized

$
10,333

$
7,481Amounts recognized in the consolidated balance sheet:Accrued benefit cost

$
22,097

$
16,850Accumulated other comprehensive loss


(11,764
)

(9,369
)Net amount recognized

$
10,333

$
7,481Weighted-average assumptions:Discount rate


6.25
%

6.75
%

7.25
%Expected return on plan assets


8.75
%

9.00
%

9.00
%Annual compensation increase


3.00
%

3.00
%

3.00
%-3.75
%


F-21

---

The Company expects to make approximately $3 million of cash contributions to its pension plans in 2004.

For
the Company's pension plans, the percentage of fair value of plan assets by asset category as of the measurement date are as follows:

2003

2002Asset category:Equity securities

57
%
50
%Fixed Income

32
%
25
%Cash and cash equivalents

11
%
25
%100
%
100
%


The
Company's investment strategy for the pension plans is to maximize the long-term rate of return on plan assets within an acceptable level of risk in order to minimize the
cost of providing pension benefits. The investment policy establishes a target allocation for each asset class. Target allocations for 2004 are shown in the table below.

The
Company developed its expected long-term rate of return assumption based on historical experience and by evaluating input from the trustee managing the plans' assets,
including the
trustee's review of asset class return expectations by several consultants and economists as well as long-term inflation assumptions. The Company's expected long-term rate of
return on plan assets is based on a target allocation of assets, which is based on the Company's investment strategy. The plans strive to have assets sufficiently diversified so that adverse or
unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. The target allocation of assets is as follows:

Asset category:

Percent of
Total

Expected
Long-term
Rate of ReturnLarge Cap Equities

47
%
9.0
%Small/Mid Cap Equities

8
%
10.2
%International Equities

5
%
10.2
%Fixed Income

40
%
6.5
%100
%


Deferred CompensationThe Company also maintains a deferred compensation plan in which certain members of management may defer
up to 100% of their total compensation through the date of their retirement. Long-term liabilities include balances related to this plan of $6.9 million as of December 31,
2003 and $6.1 million as of December 31, 2002.

Defined Contribution PlansThe Company maintains 401(k) and other investment plans for eligible employees. The Company
recorded $7.6 million in expenses for the year ended December 31, 2003, $6.7 million in 2002, and $4.5 million in 2001.

14.   STOCKHOLDER'S DEFICIT

Contributed CapitalFollowing the sale of internet-related investments by a sister subsidiary of the
Company, Vertis Holdings contributed cash of $0.2 million to the Company in 2001.

In
February 2002, the Company issued approximately 700,000 warrants, with an aggregate value of $15.8 million, to lenders of the senior subordinated credit facility which
entitle the holders to purchase one share of Vertis Holdings' stock for $0.01 per share. The warrants are immediately exercisable and expire on June 30, 2011.

F-22

---

Dividends to ParentDuring 2001, the Company paid $7.1 million of cash dividends to Vertis Holdings comprised of
$7.7 million in connection with interest payments on Vertis Holdings' debt and $0.6 million gain in connection with the purchase of the minority interest in the investment in leveraged
leases. No dividends were paid in 2002 and 2003.

Management FeesThe Company paid approximately $1.3 million in fees to the owners of Vertis Holdings in 2003, 2002 and
2001.

Accumulated Other Comprehensive LossThe components of accumulated other comprehensive loss at December 31 were:

|                                            |  | 2003 |         | 2002 |   | 2001   |  
|------------------------------------------- |  | ---- | ------- | ---- | - | ------ | -
|
|
|Cumulative translation adjustments          |  | $    | (1,592  | )    |   |        |  
|Minimum pension liability adjustment        |  |      | (11,764 | )    | $ | (4,706 | )
|Fair value adjustment of interest rate swap |  |      |         |      |   |        |  
|                                            |  |      |         |      |   |        |  
|                                            |  | $    | (13,356 | )    | $ | (4,706 | )
|                                            |  |      |         |      |   |        |  

15.   VERTIS HOLDINGS STOCK AWARD AND INCENTIVE PLAN

On December 7, 1999, Vertis Holdings adopted the Stock Plan which authorizes grants of stock options, restricted stock, performance shares, performance
units and other stock-based awards. Options under the Stock Plan generally expire in ten years and become exercisable at varying times. There are approximately 9.1 million options available for
grant at December 31, 2003 and 2002, respectively, out of 10.0 million options authorized for issuance.

Transactions
under the Stock Plan were as follows:

Year Ended December 31,2003

2002

2001(thousands of shares)Outstanding at beginning of year

888

852

879Granted



135

20Cancelled

(30
)
(99
)
(47
)Outstanding at end of year

858

888

852Exercisable at end of period

684

479

338


Options
outstanding at December 31, 2003, 2002 and 2001 have an exercise price of $31.50 per share and ten-year terms.

16.   STOCK REPURCHASE

In 1999 and 2000, certain of the Company's employees were granted the option to purchase shares of Vertis Holdings and to finance this purchase through signing
full-recourse loans with Vertis Holdings. These loans (the "Management Loans") had stated interest of 8.5% per year and compounded quarterly, with the principal and interest due in a lump
sum on varying dates up to December 7, 2005. The shares purchased with the Management Loans were held as security for the Management Loans.

F-23

---

On
September 5, 2002, the Board of Directors of Vertis Holdings adopted a unanimous written consent offering those employees who had an outstanding Management Loan a
one-time option to sell the shares securing the Management Loans back to Vertis Holdings in exchange for the cancellation of the Management Loans. These shares had an assumed fair market
value of $31.50 as of September 5, 2002. In addition, Vertis Holdings would forgive the interest that had accrued on the Management Loans to any employee who sold their stock back to Vertis
Holdings. The tax consequence, if any, of the interest forgiveness was the responsibility of the employee. Employees eligible for Vertis' Executive Incentive Plan were allowed to offset the tax
consequences by a partial payment of their 2002 bonus. Substantially all employees holding the Management Loans elected this option. As of December 31, 2002, 111,448 shares of Vertis Holdings
had been sold to the Company in exchange for cancellation of the Management Loans and $0.7 million of interest was forgiven.

On
September 5, 2002, the Board of Directors of Vertis Holdings also adopted another unanimous written consent whereby Vertis Holdings authorized issuance of 140,000 options, of
which 135,077 were ultimately issued, to certain management employees of the Company. These options will have an exercise price of $31.50, the assumed fair market value of the underlying common stock
as of the date of grant, a ten-year term and will vest in installments over three years with accelerated vesting provided certain performance goals are achieved by the Company.

17.   INTEREST EXPENSE, NET

Interest expense, net consists of the following:

2003

2002

2001(In thousands)Interest expense

$
117,831

$
112,733

$
120,159Amortization of deferred financing fees


8,045


10,416


13,193Write-off of deferred financing fees


10,958


11,508Interest income


(277
)

(283
)

(536
)$
136,557

$
134,374

$
132,816


The
Company fully amortized deferred financing fees of $11.0 million in June 2003 in connection with the retirement of the Term A and B loans (see Note 10). In 2002,
the Company fully amortized $11.5 million in deferred financing fees in connection with the repayments of a portion of the Term A and B loans and the senior subordinated credit facility (see
Note 10).

18.   OTHER, NET

Other, net for the year ended December 31, 2003 consists primarily of a $10.1 million recovery from a settlement to the legal proceeding arising
from a life insurance policy which covered the former Chairman of Vertis Holdings, Inc. Additionally, other, net includes $1.5 million in income earned on investments accounted for as
leveraged leases (see Note 9), offset by $2.6 million in fees associated with the A/R Facility (see Note 6), the $1.1 million adjustment to record the change in the
interest rate swap agreement (see Note 10) and $1.2 million in losses on the sale of property, plant and equipment. The remaining $0.9 million in expense consists of miscellaneous
charges such as commitment fees and foreign exchange losses.

Other,
net for the year ended December 31, 2002 consists primarily of $2.8 million in fees associated with the 1996 Facility (see Note 6), $1.5 million in
losses on the sale of property, plant and equipment, and $0.3 million in foreign exchange losses offset by $1.6 million in income earned on investments accounted for as leveraged leases
(see Note 9). The remaining $0.4 million in expense consists of miscellaneous charges such as commitment fees.

F-24

---

Other,
net for the year ended December 31, 2001 consists primarily of a $5.9 million impairment loss recorded to reflect a permanent decline in the value of investments and
a $2.0 million loss resulting from the sale of a portion of an equity investment (see Note 9). Additionally, we recorded $6.0 million in fees associated with the 1996 Facility
(see Note 6), $1.0 million in losses on the sale of property, plant and equipment, and $0.5 million in commitment fees offset by $2.5 million in income earned on
investments accounted for as leveraged leases (see Note 9). The remaining $1.3 million in expense consists of miscellaneous charges.

19.   QUARTERLY FINANCIAL INFORMATIONUNAUDITED

The results of operations for the years ended December 31, 2003 and 2002 are presented below.

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(in thousands)Year Ended December 31, 2003Net sales

$
371,215

$
377,348

$
390,943

$
446,403Gross profit


63,701


67,086


68,264


92,340(Loss) income before income taxes(1)


(7,962
)

(22,899
)

(22,820
)

6,185Net (loss) income(1)


(5,845
)

(71,911
)

(24,026
)

5,857Year Ended December 31, 2002Net sales

$
402,122

$
408,650

$
409,583

$
454,876Gross profit


76,786


86,028


78,957


103,705(Loss) income before income taxes(2)


(5,984
)

(2,834
)

(7,996
)

2,554(Loss) income before cumulative of accounting change(2)


(10,383
)

(1,650
)

(5,263
)

5,515Cumulative effect of accounting change, net


108,365Net (loss) income(2)


(118,748
)

(1,650
)

(5,263
)

5,515


---

20.   SEGMENT INFORMATION

The Company operates in two business segments. The accounting policies of the business segments are the same as those described in Note 3 to the
consolidated financial statements. The segments are:



F-25

---



Following
is information regarding the Company's segments:

|                                 |  |                                              |  | 2003 |           | 2002 |   | 2001      |  
|-------------------------------- |  | -------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|
|Net sales                        |  | Vertis North America                         |  | $    | 1,448,474 |      | $ | 1,536,521 |  
|                                 |  | Vertis Europe                                |  |      | 137,435   |      |   | 138,870   |  
|                                 |  | Elimination of intersegment sales            |  |      |           |      |   | (160      | )
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated                                 |  | $    | 1,585,909 |      | $ | 1,675,231 |  
|                                 |  |                                              |  |      |           |      |   |           |  
|EBITDA                           |  | Vertis North America                         |  | $    | 164,273   |      | $ | 119,316   |  
|                                 |  | Vertis Europe                                |  |      | 8,523     |      |   | (8,585    | )
|                                 |  | General Corporate                            |  |      | (113      | )    |   | (9,741    | )
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated EBITDA                          |  |      | 172,683   |      |   | 100,990   |  
|                                 |  | Depreciation and amortization of intangibles |  |      | 83,622    |      |   | 89,241    |  
|                                 |  | Interest expense, net                        |  |      | 136,557   |      |   | 134,374   |  
|                                 |  | Income tax expense (benefit)                 |  |      | 48,429    |      |   | (2,479    | )
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated Net Loss                        |  | $    | (95,925   | )    | $ | (120,146  | )
|                                 |  |                                              |  |      |           |      |   |           |  
|Restructuring Charges            |  | Vertis North America                         |  | $    | 14,649    |      | $ | 16,567    |  
|                                 |  | Vertis Europe                                |  |      | 594       |      |   | 2,524     |  
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated                                 |  | $    | 15,243    |      | $ | 19,091    |  
|                                 |  |                                              |  |      |           |      |   |           |  
|Depreciation and Amortization of |  | Vertis North America                         |  | $    | 76,262    |      | $ | 81,768    |  
|Intangibles                      |  | Vertis Europe                                |  |      | 7,360     |      |   | 7,473     |  
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated                                 |  | $    | 83,622    |      | $ | 89,241    |  
|                                 |  |                                              |  |      |           |      |   |           |  
|Additions to Long-Lived Assets   |  | Vertis North America                         |  | $    | 40,195    |      | $ | 39,638    |  
|(excluding acquisitions)         |  | Vertis Europe                                |  |      | 3,916     |      |   | 4,216     |  
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated                                 |  | $    | 44,111    |      | $ | 43,854    |  
|                                 |  |                                              |  |      |           |      |   |           |  
|Identifiable Assets              |  | Vertis North America                         |  | $    | 858,851   |      | $ | 852,287   |  
|                                 |  | Vertis Europe                                |  |      | 161,387   |      |   | 156,091   |  
|                                 |  | General Corporate                            |  |      | 127,260   |      |   | 126,620   |  
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated                                 |  | $    | 1,147,498 |      | $ | 1,134,998 |  
|                                 |  |                                              |  |      |           |      |   |           |  
|Goodwill                         |  | Vertis North America                         |  | $    | 250,128   |      | $ | 245,858   |  
|                                 |  | Vertis Europe                                |  |      | 103,368   |      |   | 96,446    |  
|                                 |  |                                              |  |      |           |      |   |           |  
|                                 |  | Consolidated                                 |  | $    | 353,496   |      | $ | 342,304   |  
|                                 |  |                                              |  |      |           |      |   |           |  

21.   GUARANTOR/NON-GUARANTOR CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The Company has senior notes (see Note 10), which are general unsecured obligations of Vertis, Inc., and guaranteed by certain of
Vertis, Inc.'s domestic subsidiaries. Accordingly, the following condensed consolidated financial information as of December 31, 2003 and December 31, 2002, and for the years
ended December 31, 2003, 2002 and 2001 are included for (a) Vertis, Inc. (the "Parent") on a stand-alone basis, (b) the guarantor subsidiaries, (c) the
non-guarantor subsidiaries and (d) the Company on a consolidated basis.

Investments
in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries eliminate investments in
subsidiaries, intercompany balances and intercompany transactions. Separate financial statements and other disclosures with respect to the subsidiary guarantors have not been made because the
subsidiaries are wholly-owned and the guarantees are full and unconditional and joint and several.

F-26

---



Condensed Consolidating Balance Sheet at December 31, 2003

|                                                     |  | Parent |           | Guarantor
Companies |   | Non-Guarantor
Companies |   | Elim-
inations |         | Consol-
idated |  
|---------------------------------------------------- |  | ------ | --------- | ------------------- | - | ----------------------- | - | -------------- | ------- | -------------- | -
|
|ASSETS                                               |  |        |           |                     |   |                         |   |                |         |                |  
|Current Assets:                                      |  |        |           |                     |   |                         |   |                |         |                |  
|Cash and cash equivalents                            |  | $      | 389       |                     | $ | 108                     |   | $              | 1,586   |                |  
|Accounts receivable, net                             |  |        | 132,531   |                     |   | 20,086                  |   |                | 31,158  |                |  
|Inventories                                          |  |        | 26,227    |                     |   | 11,607                  |   |                | 1,806   |                |  
|Maintenance parts                                    |  |        | 17,456    |                     |   | 3,271                   |   |                |         |                |  
|Deferred income taxes                                |  |        |           |                     |   |                         |   |                |         |                |  
|Prepaid expenses and other current assets            |  |        | 13,953    |                     |   | 1,131                   |   |                | 5,267   |                |  
|                                                     |  |        |           |                     |   |                         |   |                |         |                |  
|Total current assets                                 |  |        | 190,556   |                     |   | 36,203                  |   |                | 39,817  |                |  
|Intercompany receivable                              |  |        | 54,216    |                     |   |                         |   |                |         |                | $
|Investments in subsidiaries                          |  |        | 154,349   |                     |   | 55,199                  |   |                |         |                |  
|Property, plant and equipment, net                   |  |        | 281,275   |                     |   | 99,887                  |   |                | 20,658  |                |  
|Goodwill                                             |  |        | 201,489   |                     |   | 48,625                  |   |                | 103,382 |                |  
|Investments                                          |  |        |           |                     |   | 1                       |   |                | 73,966  |                |  
|Deferred financing costs, net                        |  |        | 30,828    |                     |   | 1                       |   |                | 92      |                |  
|Other assets, net                                    |  |        | 19,913    |                     |   | 770                     |   |                | 35      |                |  
|                                                     |  |        |           |                     |   |                         |   |                |         |                |  
|Total Assets                                         |  | $      | 932,626   |                     | $ | 240,686                 |   | $              | 237,950 |                | $
|                                                     |  |        |           |                     |   |                         |   |                |         |                |  
|LIABILITIES AND STOCKHOLDER'S
(DEFICIT) EQUITY       |  |        |           |                     |   |                         |   |                |         |                |  
|Current Liabilities:                                 |  |        |           |                     |   |                         |   |                |         |                |  
|Accounts payable                                     |  | $      | 183,511   |                     | $ | 36,137                  |   | $              | 13,788  |                |  
|Compensation and benefits payable                    |  |        | 25,274    |                     |   | 9,288                   |   |                | 369     |                |  
|Accrued interest                                     |  |        | 15,384    |                     |   |                         |   |                | 985     |                |  
|Accrued income taxes                                 |  |        | 7,097     |                     |   | (192                    | ) |                | (1,766  | )              |  
|Current portion of long-term debt                    |  |        | 73        |                     |   |                         |   |                |         |                |  
|Other current liabilities                            |  |        | 17,263    |                     |   | 7,266                   |   |                | 12,705  |                |  
|                                                     |  |        |           |                     |   |                         |   |                |         |                |  
|Total current liabilities                            |  |        | 248,602   |                     |   | 52,499                  |   |                | 26,081  |                |  
|Due to parent                                        |  |        |           |                     |   | 32,989                  |   |                | 28,684  |                | $
|Long-term debt, net of current portion               |  |        | 979,224   |                     |   |                         |   |                | 72,653  |                |  
|Deferred income taxes                                |  |        | 69,437    |                     |   | (2,704                  | ) |                | 57      |                |  
|Other long-term liabilities                          |  |        | 27,392    |                     |   | 8,843                   |   |                | 155     |                |  
|                                                     |  |        |           |                     |   |                         |   |                |         |                |  
|Total liabilities                                    |  |        | 1,324,655 |                     |   | 91,627                  |   |                | 127,630 |                |  
|Stockholder's (deficit) equity                       |  |        | (392,029  | )                   |   | 149,059                 |   |                | 110,320 |                |  
|                                                     |  |        |           |                     |   |                         |   |                |         |                |  
|Total Liabilities and Stockholder's (Deficit) Equity |  | $      | 932,626   |                     | $ | 240,686                 |   | $              | 237,950 |                | $
|                                                     |  |        |           |                     |   |                         |   |                |         |                |  

F-27

---



Condensed Consolidating Balance Sheet at December 31, 2002

|                                                     |  | Parent |           | Guarantor
Companies |   | Non-Guarantor
Companies |   | Eliminations |         | Consolidated |  
|---------------------------------------------------- |  | ------ | --------- | ------------------- | - | ----------------------- | - | ------------ | ------- | ------------ | -
|
|ASSETS                                               |  |        |           |                     |   |                         |   |              |         |              |  
|Current Assets:                                      |  |        |           |                     |   |                         |   |              |         |              |  
|Cash and cash equivalents                            |  | $      | 3,590     |                     | $ | 99                      |   | $            | 2,046   |              |  
|Accounts receivable, net                             |  |        | 72,106    |                     |   | 25,954                  |   |              | 33,465  |              |  
|Inventories                                          |  |        | 23,906    |                     |   | 11,867                  |   |              | 1,416   |              |  
|Maintenance parts                                    |  |        | 15,799    |                     |   | 3,062                   |   |              |         |              |  
|Deferred income taxes                                |  |        | 7,790     |                     |   |                         |   |              | 16      |              |  
|Prepaid expenses and other
current assets            |  |        | 10,647    |                     |   | 2,344                   |   |              | 2,899   |              |  
|                                                     |  |        |           |                     |   |                         |   |              |         |              |  
|Total current assets                                 |  |        | 133,838   |                     |   | 43,326                  |   |              | 39,842  |              |  
|Intercompany receivable                              |  |        | 80,607    |                     |   |                         |   |              |         |              | $
|Investments in subsidiaries                          |  |        | 98,428    |                     |   | 18,240                  |   |              |         |              |  
|Property, plant and equipment, net                   |  |        | 305,300   |                     |   | 117,877                 |   |              | 22,316  |              |  
|Goodwill                                             |  |        | 197,202   |                     |   | 48,625                  |   |              | 96,477  |              |  
|Investments                                          |  |        |           |                     |   |                         |   |              | 72,411  |              |  
|Deferred financing costs, net                        |  |        | 36,985    |                     |   |                         |   |              | 128     |              |  
|Other assets, net                                    |  |        | 19,277    |                     |   | 1,361                   |   |              | 33      |              |  
|                                                     |  |        |           |                     |   |                         |   |              |         |              |  
|Total Assets                                         |  | $      | 871,637   |                     | $ | 229,429                 |   | $            | 231,207 |              | $
|                                                     |  |        |           |                     |   |                         |   |              |         |              |  
|LIABILITIES AND
STOCKHOLDER'S (DEFICIT) EQUITY       |  |        |           |                     |   |                         |   |              |         |              |  
|Current Liabilities:                                 |  |        |           |                     |   |                         |   |              |         |              |  
|Accounts payable                                     |  | $      | 82,168    |                     | $ | 32,565                  |   | $            | 18,444  |              |  
|Compensation and benefits payable                    |  |        | 27,466    |                     |   | 9,650                   |   |              | 718     |              |  
|Accrued interest                                     |  |        | 14,493    |                     |   |                         |   |              | 2,095   |              |  
|Accrued income taxes                                 |  |        | 8,548     |                     |   | (180                    | ) |              | (2,417  | )            |  
|Current portion of long-term debt                    |  |        | 5,341     |                     |   | 43                      |   |              |         |              |  
|Other current liabilities                            |  |        | 16,432    |                     |   | 10,435                  |   |              | 9,720   |              |  
|                                                     |  |        |           |                     |   |                         |   |              |         |              |  
|Total current liabilities                            |  |        | 154,448   |                     |   | 52,513                  |   |              | 28,560  |              |  
|Due to parent                                        |  |        |           |                     |   | 62,597                  |   |              | 25,832  |              | $
|Long-term debt, net of
current portion               |  |        | 980,678   |                     |   |                         |   |              | 107,006 |              |  
|Deferred income taxes                                |  |        | 27,447    |                     |   | (2,284                  | ) |              | 910     |              |  
|Other long-term liabilities                          |  |        | 20,578    |                     |   | 6,924                   |   |              | 388     |              |  
|                                                     |  |        |           |                     |   |                         |   |              |         |              |  
|Total liabilities                                    |  |        | 1,183,151 |                     |   | 119,750                 |   |              | 162,696 |              |  
|Stockholder's (deficit) equity                       |  |        | (311,514  | )                   |   | 109,679                 |   |              | 68,511  |              |  
|                                                     |  |        |           |                     |   |                         |   |              |         |              |  
|Total Liabilities and Stockholder's (Deficit) Equity |  | $      | 871,637   |                     | $ | 229,429                 |   | $            | 231,207 |              | $
|                                                     |  |        |           |                     |   |                         |   |              |         |              |  

F-28

---



Condensed Consolidating Statement of Operations        Year ended December 31, 2003

|                                             |  | Parents |           | Guarantor
Companies |   | Non-Guarantor
Companies |   | Elim-
inations |         | Consol-
idated |  
|-------------------------------------------- |  | ------- | --------- | ------------------- | - | ----------------------- | - | -------------- | ------- | -------------- | -
|
|Net sales                                    |  | $       | 1,107,715 |                     | $ | 356,937                 |   | $              | 141,219 |                | $
|                                             |  |         |           |                     |   |                         |   |                |         |                |  
|Operating expenses:                          |  |         |           |                     |   |                         |   |                |         |                |  
|Costs of production                          |  |         | 878,062   |                     |   | 268,858                 |   |                | 99,462  |                |  
|Selling, general and administrative          |  |         | 110,103   |                     |   | 35,328                  |   |                | 31,892  |                |  
|Restructuring charges                        |  |         | 14,495    |                     |   | 154                     |   |                | 594     |                |  
|Depreciation and amortization of intangibles |  |         | 55,294    |                     |   | 20,872                  |   |                | 7,456   |                |  
|                                             |  |         |           |                     |   |                         |   |                |         |                |  
|                                             |  |         | 1,057,954 |                     |   | 325,212                 |   |                | 139,404 |                |  
|                                             |  |         |           |                     |   |                         |   |                |         |                |  
|Operating income                             |  |         | 49,761    |                     |   | 31,725                  |   |                | 1,815   |                |  
|                                             |  |         |           |                     |   |                         |   |                |         |                |  
|Other expenses (income):                     |  |         |           |                     |   |                         |   |                |         |                |  
|Interest expense, net                        |  |         | 130,524   |                     |   | (264                    | ) |                | 6,297   |                |  
|Other, net                                   |  |         | (5,825    | )                   |   | 31                      |   |                | 34      |                |  
|                                             |  |         |           |                     |   |                         |   |                |         |                |  
|                                             |  |         | 124,699   |                     |   | (233                    | ) |                | 6,331   |                |  
|                                             |  |         |           |                     |   |                         |   |                |         |                |  
|Equity in net income (loss) of subsidiaries  |  |         | 27,438    |                     |   |                         |   |                |         |                |  
|(Loss) income before income taxes            |  |         | (47,500   | )                   |   | 31,958                  |   |                | (4,516  | )              |  
|Income tax expense (benefit)                 |  |         | 48,425    |                     |   | (12                     | ) |                | 16      |                |  
|                                             |  |         |           |                     |   |                         |   |                |         |                |  
|Net (loss) income                            |  | $       | (95,925   | )                   | $ | 31,970                  |   | $              | (4,532  | )              | $
|                                             |  |         |           |                     |   |                         |   |                |         |                |  

F-29

---

Condensed Consolidating Statement of Operations        Year Ended December 31, 2002

|                                                            |  | Parents |           | Guarantor
Companies |   | Non-Guarantor
Companies |   | Elim-
inations |         | Consol-
idated |  
|----------------------------------------------------------- |  | ------- | --------- | ------------------- | - | ----------------------- | - | -------------- | ------- | -------------- | -
|
|Net sales                                                   |  | $       | 1,160,072 |                     | $ | 398,133                 |   | $              | 142,138 |                | $
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|Operating expenses:                                         |  |         |           |                     |   |                         |   |                |         |                |  
|Costs of production                                         |  |         | 892,496   |                     |   | 292,490                 |   |                | 95,731  |                |  
|Selling, general and administrative                         |  |         | 115,875   |                     |   | 42,081                  |   |                | 29,874  |                |  
|Restructuring charges                                       |  |         | 8,662     |                     |   | 7,701                   |   |                | 2,728   |                |  
|Depreciation and amortization of intangibles                |  |         | 58,396    |                     |   | 23,226                  |   |                | 7,619   |                |  
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|                                                            |  |         | 1,075,429 |                     |   | 365,498                 |   |                | 135,952 |                |  
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|Operating income                                            |  |         | 84,643    |                     |   | 32,635                  |   |                | 6,186   |                |  
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|Other expenses (income):                                    |  |         |           |                     |   |                         |   |                |         |                |  
|Interest expense, net                                       |  |         | 126,420   |                     |   | (134                    | ) |                | 8,088   |                |  
|Other, net                                                  |  |         | 3,287     |                     |   | 26                      |   |                | 37      |                |  
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|                                                            |  |         | 129,707   |                     |   | (108                    | ) |                | 8,125   |                |  
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|Equity in net income (loss) of subsidiaries                 |  |         | (13,166   | )                   |   |                         |   |                |         |                |  
|(Loss) income before income taxes                           |  |         | (58,230   | )                   |   | 32,743                  |   |                | (1,939  | )              |  
|Income tax benefit                                          |  |         | (2,023    | )                   |   | (14                     | ) |                | (442    | )              |  
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|(Loss) income before cumulative effect of accounting change |  |         | (56,207   | )                   |   | 32,757                  |   |                | (1,497  | )              |  
|Cumulative effect of accounting change                      |  |         | 63,939    |                     |   | 22,661                  |   |                | 21,765  |                |  
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  
|Net (loss) income                                           |  | $       | (120,146  | )                   | $ | 10,096                  |   | $              | (23,262 | )              | $
|                                                            |  |         |           |                     |   |                         |   |                |         |                |  

F-30

---



Condensed Consolidating Statement of Operations        Year ended December 31, 2001

|                                             |  | Parents |           | Guarantor
Companies |   | Non-Guarantor
Companies |   | Eliminations |         | Consolidated |  
|-------------------------------------------- |  | ------- | --------- | ------------------- | - | ----------------------- | - | ------------ | ------- | ------------ | -
|
|Net sales                                    |  | $       | 1,282,571 |                     | $ | 447,583                 |   | $            | 145,393 |              | $
|                                             |  |         |           |                     |   |                         |   |              |         |              |  
|Operating expenses:                          |  |         |           |                     |   |                         |   |              |         |              |  
|Costs of production                          |  |         | 1,029,468 |                     |   | 325,724                 |   |              | 100,400 |              |  
|Selling, general and administrative          |  |         | 115,059   |                     |   | 60,582                  |   |              | 27,128  |              |  
|Restructuring and impairment charges         |  |         | 33,872    |                     |   | 7,844                   |   |              | 509     |              |  
|Depreciation and amortization of intangibles |  |         | 67,354    |                     |   | 25,787                  |   |              | 11,209  |              |  
|                                             |  |         |           |                     |   |                         |   |              |         |              |  
|                                             |  |         | 1,245,753 |                     |   | 419,937                 |   |              | 139,246 |              |  
|                                             |  |         |           |                     |   |                         |   |              |         |              |  
|Operating income                             |  |         | 36,818    |                     |   | 27,646                  |   |              | 6,147   |              |  
|                                             |  |         |           |                     |   |                         |   |              |         |              |  
|Other expenses (income):                     |  |         |           |                     |   |                         |   |              |         |              |  
|Interest expense, net                        |  |         | 124,777   |                     |   | (214                    | ) |              | 8,253   |              |  
|Other, net                                   |  |         | 1,355     |                     |   | 6,717                   |   |              | 6,158   |              |  
|                                             |  |         |           |                     |   |                         |   |              |         |              |  
|                                             |  |         | 126,132   |                     |   | 6,503                   |   |              | 14,411  |              |  
|                                             |  |         |           |                     |   |                         |   |              |         |              |  
|Equity in net income (loss) of subsidiaries  |  |         | 8,737     |                     |   |                         |   |              |         |              |  
|(Loss) income before income taxes            |  |         | (80,577   | )                   |   | 21,143                  |   |              | (8,264  | )            |  
|Income tax (benefit) expense                 |  |         | (25,714   | )                   |   | 5,117                   |   |              | (975    | )            |  
|                                             |  |         |           |                     |   |                         |   |              |         |              |  
|Net (loss) income                            |  | $       | (54,863   | )                   | $ | 16,026                  |   | $            | (7,289  | )            | $
|                                             |  |         |           |                     |   |                         |   |              |         |              |  

F-31

---

Condensed Consolidating Statement of Cash Flows        Year Ended December 31, 2003

|                                                                         |  | Parent |          | Guarantor
Companies |   | Non-Guarantor
Companies |   | Consolidated |        
|------------------------------------------------------------------------ |  | ------ | -------- | ------------------- | - | ----------------------- | - | ------------ | -------
|
|Cash Flows from Operating Activities                                     |  | $      | 29,709   |                     | $ | 61,916                  |   | $            | (2,579 
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Cash Flows from Investing Activities:                                    |  |        |          |                     |   |                         |   |              |        
|Capital expenditures                                                     |  |        | (27,148  | )                   |   | (10,148                 | ) |              | (3,916 
|Software development costs capitalized                                   |  |        | (2,899   | )                   |   |                         |   |              |        
|Proceeds from sale of property, plant and equipment and divested assets  |  |        | 3,128    |                     |   |                         |   |              | 173    
|Acquisition of business, net of cash                                     |  |        | (93      | )                   |   |                         |   |              |        
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Net cash used in investing activities                                    |  |        | (27,012  | )                   |   | (10,148                 | ) |              | (3,743 
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Cash Flows from Financing Activities:                                    |  |        |          |                     |   |                         |   |              |        
|Issuance of long-term debt                                               |  |        | 340,714  |                     |   |                         |   |              |        
|Net repayments under revolving credit facilities                         |  |        | (40,300  | )                   |   |                         |   |              | (41,602
|Repayments of long-term debt                                             |  |        | (310,430 | )                   |   | (43                     | ) |              | (71    
|Deferred financing costs                                                 |  |        | (12,846  | )                   |   |                         |   |              |        
|Increase in outstanding checks drawn on controlled disbursement accounts |  |        | 10,664   |                     |   | 1,113                   |   |              |        
|Other financing activities                                               |  |        | 6,300    |                     |   | (52,829                 | ) |              | 46,154 
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Net cash (used in) provided by financing activities                      |  |        | (5,898   | )                   |   | (51,759                 | ) |              | 4,481  
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Effect of exchange rate changes on cash                                  |  |        |          |                     |   |                         |   |              | 1,381  
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Net (decrease) increase in cash and cash equivalents                     |  |        | (3,201   | )                   |   | 9                       |   |              | (460   
|Cash and cash equivalents at beginning of year                           |  |        | 3,590    |                     |   | 99                      |   |              | 2,046  
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Cash and cash equivalents at end of year                                 |  | $      | 389      |                     | $ | 108                     |   | $            | 1,586  
|                                                                         |  |        |          |                     |   |                         |   |              |        

F-32

---



Condensed Consolidating Statement of Cash Flows        Year Ended December 31, 2002

|                                                                         |  | Parent |          | Guarantor
Companies |   | Non-Guarantor
Companies |   | Consolidated |        
|------------------------------------------------------------------------ |  | ------ | -------- | ------------------- | - | ----------------------- | - | ------------ | -------
|
|Cash Flows from Operating Activities                                     |  | $      | (28,239  | )                   | $ | 91,580                  |   | $            | 33,378 
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Cash Flows from Investing Activities:                                    |  |        |          |                     |   |                         |   |              |        
|Capital expenditures                                                     |  |        | (31,450  | )                   |   | (5,492                  | ) |              | (4,216 
|Software development costs capitalized                                   |  |        | (2,696   | )                   |   |                         |   |              |        
|Proceeds from sale of property, plant and                                |  |        |          |                     |   |                         |   |              |        
|equipment and divested assets                                            |  |        | 2,039    |                     |   | 312                     |   |              | 91     
|Investments in subsidiaries                                              |  |        |          |                     |   |                         |   |              |        
|Other investing activities                                               |  |        |          |                     |   |                         |   |              |        
|Acquisition of business, net of cash                                     |  |        |          |                     |   |                         |   |              |        
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Net cash used in investing activities                                    |  |        | (32,107  | )                   |   | (5,180                  | ) |              | (4,125 
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Cash Flows from Financing Activities:                                    |  |        |          |                     |   |                         |   |              |        
|Issuance of long-term debt                                               |  |        | 347,500  |                     |   |                         |   |              |        
|Net repayments under revolving credit facilities                         |  |        | (60,226  | )                   |   |                         |   |              | (2,965 
|Repayments of long-term debt                                             |  |        | (349,497 | )                   |   | (360                    | ) |              | (54    
|Deferred financing costs                                                 |  |        | (12,838  | )                   |   |                         |   |              |        
|Increase in outstanding checks drawn on controlled disbursement accounts |  |        | 6,821    |                     |   | 1,327                   |   |              | 1,007  
|Other financing activities                                               |  |        | 117,558  |                     |   | (86,910                 | ) |              | (29,739
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Net cash provided by (used in) financing activities                      |  |        | 49,318   |                     |   | (85,943                 | ) |              | (31,751
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Effect of exchange rate changes on cash                                  |  |        |          |                     |   |                         |   |              | 1,271  
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Net (decrease) increase in cash and cash equivalents                     |  |        | (11,028  | )                   |   | 457                     |   |              | (1,227 
|Cash and cash equivalents at beginning of year                           |  |        | 14,618   |                     |   | (358                    | ) |              | 3,273  
|                                                                         |  |        |          |                     |   |                         |   |              |        
|Cash and cash equivalents at end of year                                 |  | $      | 3,590    |                     | $ | 99                      |   | $            | 2,046  
|                                                                         |  |        |          |                     |   |                         |   |              |        

F-33

---

Condensed Consolidating Statement of Cash Flows        Year Ended December 31, 2001

|                                                                                    |  | Parent |         | Guarantor
Companies |   | Non-Guarantor
Companies |   | Eliminations |         | Consolidated |  
|----------------------------------------------------------------------------------- |  | ------ | ------- | ------------------- | - | ----------------------- | - | ------------ | ------- | ------------ | -
|
|Cash Flows from Operating Activities                                                |  | $      | (23,077 | )                   | $ | 127,358                 |   | $            | 26,089  |              |  
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  
|Cash Flows from Investing Activities:                                               |  |        |         |                     |   |                         |   |              |         |              |  
|Capital expenditures                                                                |  |        | (51,371 | )                   |   | (11,521                 | ) |              | (4,768  | )            |  
|Software development costs capitalized                                              |  |        | (3,498  | )                   |   |                         |   |              |         |              |  
|Proceeds from sale of property, plant and equipment and divested assets             |  |        | 715     |                     |   | 1,594                   |   |              | 712     |              |  
|Investments in subsidiaries                                                         |  |        | 8,737   |                     |   |                         |   |              |         |              | $
|Distributions from subsidiaries                                                     |  |        |         |                     |   |                         |   |              |         |              |  
|Other investing activities                                                          |  |        |         |                     |   | 578                     |   |              |         |              |  
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  
|Net cash used in investing activities                                               |  |        | (45,417 | )                   |   | (9,349                  | ) |              | (4,056  | )            |  
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  
|Cash Flows from Financing Activities:                                               |  |        |         |                     |   |                         |   |              |         |              |  
|Net borrowings under revolving credit facilities                                    |  |        | 78,108  |                     |   |                         |   |              | 3,309   |              |  
|Repayments of long-term debt                                                        |  |        | (27,494 | )                   |   | (419                    | ) |              | (46     | )            |  
|Deferred financing costs                                                            |  |        | (17,980 | )                   |   |                         |   |              |         |              |  
|(Decrease) increase in outstanding checks drawn on controlled disbursement accounts |  |        | (80,498 | )                   |   | 98                      |   |              | (648    | )            |  
|Dividends to parent                                                                 |  |        | (15,213 | )                   |   | (578                    | ) |              |         |              |  
|Capital contributions by parent                                                     |  |        | (475    | )                   |   |                         |   |              | 709     |              |  
|Advances to parent                                                                  |  |        | 1,771   |                     |   |                         |   |              |         |              |  
|Change in intercompany balances                                                     |  |        | 143,505 |                     |   | (118,982                | ) |              | (24,523 | )            |  
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  
|Net cash provided by (used in) by financing activities                              |  |        | 81,724  |                     |   | (119,881                | ) |              | (21,199 | )            |  
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  
|Effect of exchange rate changes on cash                                             |  |        |         |                     |   |                         |   |              | 549     |              |  
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  
|Net increase (decrease) in cash and cash equivalents                                |  |        | 13,230  |                     |   | (1,872                  | ) |              | 1,383   |              |  
|Cash and cash equivalents at beginning of year                                      |  |        | 1,388   |                     |   | 1,514                   |   |              | 1,890   |              |  
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  
|Cash and cash equivalents at end of year                                            |  | $      | 14,618  |                     | $ | (358                    | ) | $            | 3,273   |              | $
|                                                                                    |  |        |         |                     |   |                         |   |              |         |              |  

F-34

---





*
* * * *

F-35

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholder of
Vertis, Inc. and Subsidiaries:

We
have audited the consolidated financial statements of Vertis, Inc. and Subsidiaries (the "Company"), a wholly-owned subsidiary of Vertis Holdings, Inc., as of December 31, 2003
and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated March 5, 2004 (included elsewhere in this
Form 10-K). Our audits also included the financial statement schedule listed in the Index on page F-1. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set forth therein.

Deloitte &
Touche LLP
Baltimore, Maryland
March 5, 2004

F-36

---

VERTIS, INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

|                                 |  | Balance at
Beginning
of Year |       | Charged to
Costs and
Expenses |   | Write offs
Net of
Recoveries |  | Balance
at End
of Year
|-------------------------------- |  | ---------------------------- | ----- | ----------------------------- | - | ---------------------------- |  | ----------------------
|
|Allowance for Doubtful Accounts  |  |                              |       |                               |   |                              |  |                       
|Year ended December 31, 2003     |  | $                            | 5,960 |                               | $ | 1,840                        |  | $                     
|Year ended December 31, 2002     |  |                              | 8,270 |                               |   | 1,577                        |  |                       
|Year ended December 31, 2001     |  |                              | 5,906 |                               |   | 5,908                        |  |                       
|                                 |  |                              |       |                               |   |                              |  |                       
|Deferred Tax Valuation Allowance |  |                              |       |                               |   |                              |  |                       
|Year ended December 31, 2003     |  | $                            | 6,968 |                               | $ | 67,425                       |  |                       
|Year ended December 31, 2002     |  |                              | 6,968 |                               |   |                              |  |                       
|Year ended December 31, 2001     |  |                              | 6,261 |                               |   | 707                          |  |                       

F-37

---



SIGNATURES

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

| |  | VERTIS, INC.
| |  | ------------
| |  | BY:         
| |  |             

Date:
March 5, 2004

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacities and on the dates indicated.

|Signatures                            |  | Capacity                                                                     |  | Date         
|------------------------------------- |  | ---------------------------------------------------------------------------- |  | -------------
|                                      |  |                                                                              |  |              
|/s/DONALD E. ROLANDDonald E. Roland   |  | Director, Chairman and Chief Executive Officer (Principal Executive Officer) |  | March 5, 2004
|/s/ROGER C. ALTMANRoger C. Altman     |  | Director                                                                     |  | March 5, 2004
|/s/AUSTIN M. BEUTNERAustin M. Beutner |  | Director                                                                     |  | March 5, 2004
|/s/ANTHONY J. DINOVIAnthony J. DiNovi |  | Director                                                                     |  | March 5, 2004
|/s/THOMAS H. LEEThomas H. Lee         |  | Director                                                                     |  | March 5, 2004
|/s/SOREN L. OBERGSoren L. Oberg       |  | Director                                                                     |  | March 5, 2004
|                                      |  |                                                                              |  |              

II-1

---

|/s/MICHAEL S. RAWLINGSMichael S. Rawlings |  | Director                                                             |  | March 5, 2004
|----------------------------------------- |  | -------------------------------------------------------------------- |  | -------------
|/s/SCOTT M. SPERLINGScott M. Sperling     |  | Director                                                             |  | March 5, 2004
|/s/DEAN D. DURBINDean D. Durbin           |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 5, 2004

II-2

---

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