R.H. Donnelley 1998 Annual Report

To Our Shareholders

On July 1, 1998, R.H. Donnelley became an independent public company for the first time in its 112-year history. It was an extraordinarily exciting, challenging and rewarding year. We have intensified our focus on driving advertising sales growth, capturing new markets, tightening expense controls and meeting our commitments to increase shareholder value. These are some of the highlights of those efforts:

• Full-year adjusted 1998 earnings of $1.39 per diluted share were up 11.2 percent from the prior year and slightly above the goal we set at mid-year.

• We created increased financial flexibility for the company and more tax-efficient returns to shareholders by eliminating the dividend and initiating a stock repurchase plan.

• Sales growth in our DonTech and Sprint businesses exceeded industry results by approximately 1.3 percentage points.

• Bell Atlantic selected Donnelley as its sales agent in the Buffalo, N.Y., market that had been serviced by another vendor for nearly 30 years.

• Donnelley and China United Telecommunications Corporation (China Unicom) formed a joint venture to provide print and electronic yellow pages advertising in China. China Unicom is one of only two companies licensed to sell yellow pages advertising in China.

• We accelerated the rollout of Internet and cable TV advertising products, which together with print yellow pages offer customers new multiple-media advertising solutions.

We are pleased with the overall performance of R.H. Donnelley in 1998 and are excited about the actions we are taking to position the company for continued growth in the future.

R.H. Donnelley's Growth Strategy

These are dynamic times in the yellow pages business. Print yellow pages directories have long served as the primary form of local business advertising, and they will remain an important medium for years to come, by continuing to deliver proven, trusted, and cost-effective results. We remain committed to achieving the highest level of sales performance and service in the yellow pages industry.

At the same time, the telecommunications environment is changing rapidly in the United States. Large telephone companies are consolidating, while smaller new telephone companies are forming to provide competitive local exchange services. In the yellow pages business, the smaller independent yellow pages companies are growing faster than the overall industry and experiencing some consolidation as well. It is also clear that the emergence of exciting new media, such as the Internet, will over time transform the way local businesses advertise.

What does all this mean for Donnelley? Some observers might perceive these trends, particularly the rise of the Internet, as threats to Donnelley's business. We strongly disagree. From our perspective, each of these trends provides new growth opportunities that will enable Donnelley to build significant shareholder value, both near term and long term. Our strategy for creating that value has two major elements, which I call Playing to Win and Expanding the Playing Field.

Optimizing Our Sales Performance

Playing to Win means establishing Donnelley as a second-to-none sales organization by optimizing our sales performance in terms of productivity and efficiency. We will achieve superiority by concentrating maximum resources on our selling efforts and by streamlining our support and corporate functions to reduce cycle times and costs.

Our goal is to achieve sales growth in our core business, including print yellow pages and our growing sales of bundled Internet and cable TV advertising packages, of 1-to-2 percentage points above the yellow pages industry.

Leveraging Our Expertise

Expanding the Playing Field involves leveraging our core expertise, both by expanding the number of markets we serve and broadening the range of products we sell. In the changing telecommunications environment, we see growth opportunities by partnering with traditional telephone companies and competitive local exchange carriers, or by acquiring existing independent yellow pages companies in selected markets. International expansion is another thrust, evidenced by our recent entry into China. We also see a significant opportunity to develop a new sales channel to sell Internet advertising outside our current markets. As we have already demonstrated in a number of markets, Donnelley can serve as the bridge between local businesses seeking an Internet presence and the Internet companies that are eager to find a way to deliver advertising to this large and growing customer base.

We believe our strategy will enable R.H. Donnelley to achieve its goal of sustained low double-digit growth in earnings per share in the near term, with some upside potential over the long term. Our financial strategy is straightforward: apply our strong cash flow to growth investments or share repurchase, both of which will add to EPS growth.

By executing a strategy that delivers strong, near-term results in our core business, while simultaneously building a more diversified business with multiple-media solutions in higher growth markets over the longer term, we believe we have an outstanding opportunity to deliver significant value to shareholders.

Capitalizing on a Legacy of Success

Our success has been attributable to our highly focused, disciplined, and productive sales force; sophisticated marketing techniques; innovative products; and advanced technology. In a rapidly changing environment and as a new independent public company, we must continue to raise the bar to create a high-performing entrepreneurial culture. This is an area of constant focus that will enable us to execute this strategy consistently.

We are enthusiastically committed to building an even greater company with the unique resources, capabilities and expertise that are necessary for delivering enhanced rewards to shareholders by satisfying the needs of our employees and customers.

Frank R. Noonan
Chairman and Chief Executive Officer
R.H. Donnelley Corporation

March 3, 1999

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