DAILY JOURNAL CORP - Annual Report: 2003 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(MARK ONE)

for the fiscal year ended September 30, 2003

OR

Commission File No. 0-14665

DAILY JOURNAL CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:    (213) 229-5300

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

Securities registered pursuant to Section 12(g) of the Act:    Common Stock, par value $.01 per share.

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

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

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

As of the last business day of Daily Journal Corporation’s most recently completed second fiscal quarter, the aggregate market value of Daily Journal Corporation’s voting stock held by non-affiliates was approximately $14,700,000.

As of December 13, 2002 there were outstanding 1,508,573 shares of Common Stock of Daily Journal Corporation.

Documents incorporated by reference:    Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held during February 2004 are incorporated by reference into Part III.

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Disclosure Regarding Forward-Looking Statements

This Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in this document, including but not limited to those in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, are “forward-looking” statements that involve risks and uncertainties that may cause actual future events or results to differ materially from those described in the forward-looking statements. Words such as “expects,” “intends,” “anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. We disclaim any intention or obligation to revise any forward-looking statements whether as a result of new information, future developments, or otherwise. There are many factors that could cause actual results to differ materially from those contained in the forward-looking statements. These factors include, among others: risks associated with the functionality and resources required for new and existing case management software projects; the success or failure of Sustain’s internal software development efforts; the ultimate resolution, if any, of the disputes with the Ontario, Canada Ministries and Sustain’s terminated outside service provider; material changes in the costs of materials; a potential decline in subscriber revenue; an inability to continue borrowing on current terms; possible changes in tax laws; collectibility of accounts receivable; potential increases in employee and consultant costs; attraction, training and retention of employees; changes in accounting guidance; and competitive factors in both the case management software business and the publishing business. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic conditions (particularly in California) and other factors. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements are disclosed in this Form 10-K, including without limitation in conjunction with the forward-looking statements themselves. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents filed by the Company with the Securities and Exchange Commission.

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PART I

The Company publishes newspapers and web sites covering California, Arizona and Nevada, as well as the California Lawyer magazine, and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising. SUSTAIN Technologies, Inc. (“Sustain”), now a 93% owned subsidiary as of September 30, 2003, has been consolidated since it was acquired in January 1999. Sustain supplies case management software systems and related products to courts and other justice agencies, including district attorney offices and administrative law organizations. These courts and agencies use the Sustain family of products to help manage cases and information electronically and to interface with other critical justice partners. Sustain’s products are designed to help users manage electronic case files from inception to disposition, including all aspects of calendaring and accounting, report and notice generation, the implementation of standards and business rules and other corollary functions. Essentially all of the Company’s operations are based in California, Arizona, Colorado, Nevada and Virginia. The financial information of the Company and Sustain is set forth in Item 8 (“Financial Statements and Supplementary Data”).

Products

Newspapers and related online publications.     The Company publishes 14 newspapers of general circulation. Each newspaper, in addition to news of interest to the general public, has a particular area of in-depth focus with regard to its news coverage, thereby attracting readers interested in obtaining information about that area through a newspaper format. The publications are based in the following cities:

The Daily Journals.     The Los Angeles Daily Journal and the San Francisco Daily Journal are each published every weekday except certain holidays and were established in 1888 and 1893, respectively. In addition to covering state and local news of general interest, these newspapers focus particular coverage on law and its impact on society. (The Los Angeles Daily Journal and the San Francisco Daily Journal are referred to collectively herein as “The Daily Journals”.)

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Generally The Daily Journals seek to be of special utility to lawyers and judges and to gain wide multiple readership of newspapers sent to law firm subscribers.

The Los Angeles Daily Journal and the San Francisco Daily Journal are geared toward their respective regions, but contain much material and render many services in a common endeavor. The Los Angeles Daily Journal is the largest newspaper published by the Company, both in terms of revenues and circulation. At September 30, 2003, the Los Angeles Daily Journal had approximately 10,600 paid subscribers and the San Francisco Daily Journal had approximately 4,800 paid subscribers as compared with total paid subscriptions of 16,400 at September 30, 2002. In addition, The Daily Journals are sold on some newsstands. The Daily Journals carry commercial advertising (display and classified) and public notice advertising required or permitted by law to be published in a newspaper of general circulation. The main source of commercial advertising revenue has been local advertisers, law firms and businesses in or wishing to reach the legal professional community. The gross revenues generated directly by The Daily Journals are attributable approximately 50% to subscriptions and 50% to the sale of advertising and other revenues. Revenues from The Daily Journals constituted approximately 43% of the Company’s total revenues during fiscal 2003, 46% during fiscal 2002 and 48% during fiscal 2001.

The Daily Journals contain the Daily Appellate Report which provides the full text and case summaries of all opinions certified for publication by the California Supreme Court, the California Courts of Appeal, the U.S. Supreme Court, the U.S. Court of Appeals for the Ninth Circuit, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit, the State Bar Court and selected opinions of the U.S. District Courts in California and the Federal Circuit Court of Appeals. The Daily Journals also include a monthly court directory in booklet form. This directory includes a comprehensive list of sitting judges in all California courts as well as courtroom assignments, phone numbers and courthouse addresses, plus “Judicial Transitions” which lists judicial appointments, elevations, confirmations, resignations, retirements and deaths.

The Daily Journals also include Daily Journal Extra, a weekly supplement that features (i) in-depth coverage of current topics of interest to lawyers with a focus on the business aspects of the practice of law and (ii) important settlements and verdicts along with the attorneys and experts representing each party.

It is the policy of The Daily Journals (1) to take no editorial position on the legal and political controversies of the day but instead to publish an “op-ed” page consisting of well-written editorial views of others on many sides of a controversy and (2) to try to report on factual events with technical competence and with objectivity and accuracy. It is believed that this policy suits a professional readership of exceptional intelligence and education, which is the target readership for the newspapers. Moreover, The Daily Journals believe that they bear a duty to their readership, particularly judges and justices, as a self-imposed public trust, regardless, within reason, of short-term income penalties. The Company believes that this policy of The Daily Journals is in the long-term interest of the Company’s shareholders.

The Company publishes the Directory of California Lawyers (the “Directory”), which is updated and published semiannually, in January and July. The Directory includes in a single volume names, addresses, fax and telephone numbers of California lawyers and many informational sections including listings of corporate counsel, private judges, arbitrators and mediators, and federal and state courts and governmental offices. In addition, the Directory

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includes commercial advertising and specialty listings. The Directory is provided as part of normal newspaper service to subscribers of The Daily Journals. In addition, there are about 7,000 directories sold. The regular annual rate is $38. In due course the Company plans to provide an option of subscription service for The Daily Journals at a lower price for subscribers who do not wish to receive the Directory.

The Daily Journals are distributed by mail and hand delivery, with subscribers in the Los Angeles and San Francisco areas usually receiving copies the same day. Certain subscribers in Los Angeles, San Francisco, Santa Clara, Alameda, Orange, Sacramento and San Diego counties receive copies by hand delivery, and additional copies are distributed through newsstands and by microfilm subscriptions. The regular yearly subscription rate for each of The Daily Journals is $610.

Much of the information contained in The Daily Journals is available to subscribers online at www.dailyjournal.com. There is a charge to use some parts of this online service.

Daily Commerce.    Published since 1917, the Daily Commerce, in addition to covering news of general interest, devotes substantial coverage to items designed to serve real estate investors and brokers, particularly those interested in Southern California distressed properties. The nature of the news coverage enhances the effectiveness of public notice advertising in distributing information about foreclosures to potential buyers at foreclosure sales. The features of the paper include default listings, probate estate sales and real estate examination applicants. The Daily Commerce carries both public notice and commercial advertising and is published in the afternoon each business day. It had approximately 1400 paid subscriptions at September 30, 2003. A subscription to the Daily Commerce is $230 per year, and it is primarily distributed by mail.

California Real Estate Journal.    The California Real Estate Journal (the “Real Estate Journal”) is a weekly newspaper directed primarily to persons interested in the commercial real estate market, including real estate brokers, developers, bankers and real estate lawyers. The Real Estate Journal carries news and features such as the status of commercial projects, financial information and articles on brokers and transactions, including defaults and new financings. It carries display and classified advertising. At September 30, 2003, the Real Estate Journal had a circulation of approximately 2,500 paid and requester subscribers at an annual subscription rate of $105. It is distributed by mail and hand delivery. In addition, there is an online news service for subscribers to the California Real Estate Journal.

The Daily Recorder.    The Daily Recorder, based in Sacramento, began operations in 1911. It is published each business day. In addition to general news items, it focuses on the Sacramento legal and real estate communities and on California state government and activities ancillary to it. Among the regular features of The Daily Recorder are news about government leaders and lobbyists, as well as the Daily Appellate Report for those who request it. Advertising in The Daily Recorder consists of both commercial and public notice advertising. The Daily Recorder currently has approximately 1,100 paid subscribers, and is distributed by hand and by mail. The current subscription rate is $265 per year.

The Inter-City Express.    The Inter-City Express (the “Express”) has been published since 1909. It covers general news of local interest and focuses its coverage on news about the real estate and legal communities in the Oakland/San Francisco area. The Express carries both

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commercial and public notice advertising. The Express is published two days a week and is mailed to its approximately 500 subscribers. The annual subscription rate is $144.

San Jose Post-Record.    The San Jose Post-Record (the “Post-Record”) has been published since 1910. In addition to general news of local interest, the Post-Record, which is published three days a week, focuses on legal and real estate news and carries commercial and public notice advertising. A yearly subscription to the Post-Record is $122. It has approximately 300 subscribers, all of whom receive it by mail.

Sonoma County Herald-Recorder.    The Sonoma County Herald-Recorder (the “Herald-Recorder”) has been in existence since 1899. The newspaper carries general news of local interest and is designed to be of special interest to members of the legal and real estate professions. Advertising in the newspaper consists of both public notice and commercial advertising. Its approximately 200 subscribers receive the newspaper two days a week by mail, at a rate of $197 annually.

Orange County Reporter.    The Orange County Reporter (“Orange Reporter”) has been an adjudicated newspaper of general circulation since 1922. In addition to general news of local interest, the Orange Reporter reports local and state legal, business and real estate news, and carries primarily public notice advertising. The Orange Reporter is mailed three days a week to approximately 400 paid and requester subscribers. The annual subscription rate is $87.

San Diego Commerce.    The San Diego Commerce is a thrice-weekly newspaper which carries general news of local interest and public notice advertising and has been an adjudicated newspaper of general circulation since 1970. The San Diego Commerce also serves legal and real estate professionals in San Diego County. It has approximately 200 paid subscribers. The annual subscription rate is $63, covering distribution by mail.

Business Journal.    The Business Journal publishes news of general interest and provides coverage of the business and professional communities in Riverside County. It carries public notice advertising, and its approximately 100 paid subscribers receive it by mail twice weekly. The annual subscription rate is $54.

Antelope Valley Journal.    Started in 1997, the Antelope Valley Journal is a weekly newspaper carrying general news of local interest, as well as public notice advertising. It also serves the real estate professional in north Los Angeles County. It has approximately 100 paid subscribers, and the annual subscription rate is $30.

The Record Reporter (Arizona).    The Record Reporter was acquired in 1995. In addition to general news of local interest, The Record Reporter, which is published three days a week, focuses on real estate news and public record information and carries primarily public notice advertising. It is mailed to approximately 200 paid subscribers. The annual subscription rate is $165 for most subscribers.

Nevada Journal.    The Company acquired the Nevada Supreme Court Reporter in 1994, and the name was changed to the Nevada Journal. Besides stories of general interest and those concerning the courts and legal communities, the Nevada Journal features summaries and full-text opinions issued by the Nevada State and Federal Courts. Special features include local verdicts and settlements, bar examination results and articles on federal opinions. Both commercial and public notice advertising appear in the newspaper. The weekly Nevada Journal,

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as of September 30, 2003, had approximately 100 subscribers. The yearly subscription rate is $152. Much of the information in the Nevada Journal is available to its subscribers online.

Magazines.    Since 1988, the Company has published the California Lawyer, a legal affairs magazine formerly produced by the State Bar of California (the “State Bar”). The magazine was published by the Company in cooperation with the State Bar until December 1993 when the agreement was terminated and the State Bar commenced publishing its own monthly newspaper. The magazine is mailed free to the active members of the State Bar of California and also has approximately 500 paid subscribers. An annual subscription to California Lawyer is $79.

Information Services.    The specialized information services offered by the Company have grown out of its newspaper operations or have evolved in response to a desire for such services primarily from its newspaper subscribers.

The Company has several court rules services. One is Court Rules, a multi-volume, loose-leaf set which had approximately 4,500 subscribers at September 30, 2003 paying $278 per year. Court Rules reproduces court rules for certain state and federal courts in California. The Court Rules appear in two versions, one of which covers Northern California courts (nine volumes) and one of which covers Southern California courts (eight volumes). The Company updates Court Rules on a monthly basis. In addition, the Company publishes a single volume of rules known as Local Rules for major counties of California. Six versions are published for Southern California, each a single bound volume for the rules of: (1) Los Angeles County; (2) Orange County; (3) San Diego County; (4) San Bernardino County; (5) Riverside County; and (6) Ventura, Santa Barbara and San Luis Obispo counties. In addition, the Company publishes single-volume rules for the Federal District Court in the Southern District of California, Federal District Court in the Central District of California and California Probate Rules. In Northern California, three versions of the Local Rules appear in loose-leaf books for Santa Clara/San Mateo, Alameda/Contra Costa and San Francisco counties. The regular subscription price for Local Rules volumes ranges from $45 to $90 per year and volumes are normally updated or replaced whenever there are substantial rule changes. At September 30, 2003, the Company had approximately 4,500 subscribers for its Local Rules publications.

The Judicial Profiles services contain biographical and professional information concerning nearly all judges in California, both active and retired, many of whom are available for private judging. Most of the profiles have previously appeared in The Daily Journals as part of a regular feature. The Judicial Profiles include biographical data on judges and information supplied by each judge regarding the judge’s policies and views on various trial and appellate procedures and the manner in which appearances are conducted in his or her courtroom. Subscribers may purchase either the seven-volume set for Southern California or the six-volume set for Northern California. The approximately 1,000 subscribers to Judicial Profiles receive updates on a quarterly basis. A subscription is $500 per year. During fiscal 2003, the Company discontinued publishing the Judges Books for several counties in the State of Washington.

The Company’s only bankruptcy publication is now the online California Bankruptcy Journal. The Company discontinued the Fourth Circuit Bankruptcy Court Reporter and the Texas Bankruptcy Court Reporter in fiscal 1999 and the online Colorado Bankruptcy Journal in fiscal 2002. The online bankruptcy service has approximately 50 subscribers at September 30, 2003. The annual subscription rate is $150 a year. The online publication contains summaries and full-text bankruptcy opinions from the U. S. Supreme Court and U.S. Court of Appeals for

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the Ninth Circuit, U.S. Bankruptcy Appellate Panel for the Ninth Circuit, and selected full texts from the U.S. Bankruptcy District Courts in California.

The Company also provides computer online foreclosure information to about 700 customers. This service primarily provides distressed property information, some of which also appear in some of the Company’s newspapers, as well as expanded features. Consolidation of both newspapers and online products more effectively utilizes the costs of gathering such information.

Special Online Information Services Supplementing Traditional Services.     The Company, like most modern newspapers, supplements service to Daily Journal subscribers and advertisers with an increasing Internet-based online information service. Some of this online service comes as part of a newspaper subscription, or advertising placement, with no additional charges, and some can be obtained only when customers pay additional charges. So far, in this activity, incremental costs have exceeded supplemental incremental revenues. The Company believes its online service must continue to grow, partly to defend existing profits through continuous product improvement, and partly in the hope of eventually obtaining profits from services not traditionally rendered by newspapers.

Advertising and Newspaper Representative.     The Company’s publications carry commercial advertising, and most also contain public notice advertising. Commercial advertising consists of display and classified advertising. Public notice advertising consists of about 100 different types of legal notices required by law to be published in an adjudicated newspaper of general circulation, including notices of death, fictitious business names, trustee sale notices and notices of governmental hearings. The major types of public notice advertisers are real estate-related businesses and trustees, governmental agencies, attorneys and businesses or individuals filing fictitious business name statements. Many government agencies use the Company’s Internet-based advertising system to produce and send their notices to the Company. California Newspaper Service Bureau (“CNSB”), a division of the Company, is a statewide newspaper representative (commission-earning selling agent) specializing since 1934 in public notice advertising. CNSB places notices and other forms of advertising with adjudicated newspapers of general circulation, many of which are not owned by the Company.

Public notice advertising revenues and related advertising and other service fees for the Company constituted about 28% of the Company’s total revenues in fiscal 2003, 29% in fiscal 2002 and 27% in fiscal 2001. Most of these revenues were generated by (i) notices published in the Company’s newspapers, (ii) commissions and similar fees received from the publication in which the advertising is placed and (iii) filing service fees generated when filing notices with government agencies. The remainder of these revenues are attributable to service fees from users of an online foreclosure/fictitious business name database, service fees for public record searches, fees from attorneys taking continuing legal education “courses” published in the Company’s publications and other miscellaneous fees.

In many states, including California and Arizona, legislatures have considered various proposals, which would result in the elimination or reduction of the amount of public notice advertising required by statute. There is a risk that such laws could change in a manner that would have a significant adverse impact on the Company’s public notice advertising revenues. The acquisition of CNSB, a marginal and threatened enterprise with a negative book net worth

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when purchased, improved the Company’s ability to protect the continued existence of public notice advertising.

Information Systems and Services.    In January 1999, the Company purchased 80% of the capital stock of Sustain from Sustain and certain of its shareholders. As of September 30, 2003, the Company owned 93% of Sustain. Sustain has installations in ten states and three countries, and many of its clients have more than a decade of experience with the Sustain product line. The Company’s revenues derived from Sustain’s operations constituted about 12% of the Company’s total revenues in fiscal 2003, 7% in fiscal 2002 and 6% in fiscal 2001. As a technology based company, Sustain’s success depends on the continued development and improvement of its products. The Company’s expenditures in support of the Sustain software are highly significant and will continue to be necessary to maintain and increase Sustain’s revenues. The Company has expanded its consulting staff to meet its planned internal software development efforts and has also expanded relationships with other service providers. If these development programs are not successful, it will significantly and adversely impact the Company’s ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business. Sustain’s internal development costs, which are primarily incremental costs, are being expensed as incurred and accordingly will materially impact earnings at least through fiscal 2004, and very likely much longer. If the Company is unable to fund all such development, that also may impact the Company’s ability to maximize its existing investment in the Sustain software and to compete for new opportunities in the case management software business.

Printing.    The Company’s main printing facilities are located in Los Angeles and currently are used primarily to print the Los Angeles Daily Journal including supplements, the Daily Commerce, the Post-Record, The Express, The Daily Recorder, the Orange Reporter, the Herald-Recorder and the Real Estate Journal. The Daily Appellate Report is printed in Los Angeles and shipped to Sacramento and San Francisco for inclusion in the Daily Recorder and the San Francisco Daily Journal. In fiscal 2003 the Company installed new computer-to-plate production equipment in Los Angeles. The San Francisco Daily Journal, San Diego Commerce, the Business Journal, the Record Reporter, the Antelope Valley Journal, the Directory, the Judicial Profiles, the Court Rules and California Lawyer magazine are printed by outside contractors. The Company has a small offset press for in-house printing of items such as legal advertising forms, letterhead and envelopes, promotional flyers and other material for its publications.

Materials

After personnel and software development costs, postage and paper costs are typically the Company’s next two largest expenses.

The Company is subject to periodic increases in postal rates. During the past several years, the Company has instituted changes in an attempt to mitigate higher postage costs. These changes have included contracting for hand delivery in selected sections of the San Francisco Bay area, San Diego, Orange County, Sacramento and Los Angeles, delivering pre-sorted newspapers to the post office on pallets, which facilitates delivery and improves service, and implementing a method of bundling newspapers which reduces the per piece charges. In addition,

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the Company has an ink jet labeler which eliminates paper labels and enables the Company to receive bar code discounts from the postal service on some of its newspapers.

An adequate supply of newsprint and other paper is important to the Company’s operations. The Company currently does not have a contract with paper suppliers. The Company has always been able to obtain sufficient newsprint for its operations, although in the past, shortages of newsprint have sometimes resulted in higher prices. In 1999 and 2002 newsprint prices declined, but in 2000, 2001 and 2003, the price of paper increased moderately. Paper prices may fluctuate substantially in the future, and this could significantly impact income from operations.

Marketing

The Company actively promotes its individual newspapers and its multiple newspaper network as well as its other publications. The Company’s staff includes a number of employees whose primary responsibilities include attracting new subscribers and advertisers. The specialization of each publication creates both target subscribers and target advertisers. Subscribers are likely to be attracted because of the nature of the information carried by the particular publication, and likely advertisers are those interested in reaching such consumer groups. In marketing products, the Company also focuses on its ancillary products which can be of service to subscribers, such as its specialized information services.

The Company receives, on a non-exclusive basis, public notice advertising from a number of agencies. Such agencies ordinarily receive a commission of 15% to 25% on their sales of advertising in Company publications. Commercial advertising agencies also place advertising in Company publications and receive commissions for advertising sales.

Sustain’s staff includes several employees who provide marketing and consulting services which may also result in the licensing of Sustain products.

Competition

Competition for readers and advertisers is very intense, both by established publications and by new entries into the market. For example, shortly before the Company purchased the San Francisco Daily Journal, Associated Newspapers, the owner of a controlling interest in a number of American law-oriented publications including the American Lawyer, purchased a law-oriented San Francisco newspaper and thereafter pursued subscribers and advertisers with more skill and determination than were employed by the former publisher. In 1989 Associated Newspapers sold a controlling interest to Time Warner Inc., which continued very aggressive competition, including amazingly low “price-war” type prices for multiple-copy subscriptions. In 1997 these publications were sold by Time Warner Inc. to a group headed by the investment firm of Wasserstein Perella, Inc., which subsequently also purchased National Law Publishing, publishers of the New York Law Journal, among others. All of the Company’s real estate and business publications and products face strong competition from other publications and service companies.

Readers of specialized newspapers focus on the amount and quality of general and specialized news, amount and type of advertising, timely delivery and price. The Company designs its newspapers to fill niches in the news marketplace that are not covered as well by major metropolitan dailies. The in-depth news coverage which the Company’s newspapers provide along with general news coverage attracts readers who, for personal or professional

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reasons, desire to keep abreast of topics to which a major newspaper cannot devote significant news space. Other newspapers do provide some of the same subject coverage as does the Company, but the Company believes its coverage, particularly that of The Daily Journals, is more complete and therefore attracts more readers. The Company believes that The Daily Journals are the most important newspapers serving California lawyers on a daily basis.

In attracting commercial advertisers, the Company competes with other newspapers and magazines, television, radio and other media, including electronic network systems for employment-related classified advertising. Factors which may affect competition for advertisers are the cost for such advertising compared with other media, and the size and characteristics of the readership of the Company’s publications. The Company competes with anywhere from one serious competitor to several competing newspapers for public notice advertising revenue in all of its markets. Large metropolitan general interest newspapers normally do not carry a significant amount of legal advertising, although recently they too have solicited certain types of public notice advertising. The Company estimates its market share of public notice advertising revenues ranges from 10% to 75%, in the various areas where its adjudicated newspapers are published. CNSB, a division of the Company, faces competition from a number of companies based in California, some of which specialize in placing certain types of notices.

Commencing in 1994, the Company’s California Lawyer magazine faced additional competition from a new State Bar of California publication that is discussed in the Products-Magazines section above. In 1999 the State Bar started a statewide directory that competes with the Company’s Directory. This new publication has not had a material impact on the Company’s operations.

The Company’s court rules publications face competition in both the Southern California market as well as in Northern California. In addition, the Company expects increased competition from online court rules services and the Courts. Subscriptions to the multi-volume Court Rules and Local Rules volumes have declined during fiscal 2003. The Company’s Judicial Profile services have direct competition and also indirect competition, since some of the same information is available through other sources.

The pricing of the Company’s products is reviewed every year. Subscription price increases have in recent years exceeded inflation, as have advertising rate increases.

There is significant competition among a limited number of companies to provide services and software to the courts, and some of these companies are much larger and have greater access to capital and other resources than Sustain. Others provide services for a limited number of courts. Normally, the vendor is selected through a bidding process. Many courts now desire Internet solutions to centralize databases and their management, and to facilitate electronic filing and the publishing of certain information from case management systems. The Sustain product line provides a version of these services, but there are many uncertainties in the process of courts migrating to newer electronic based systems, including whether Sustain’s version of case management systems will find general acceptance and whether the development and modification of such systems can be done in a cost effective manner. The Company is in the process of developing new Internet-based software, but an inability to fully fund and develop a marketable product could impact the Company’s ability to compete in the case management software business. Most of Sustain’s consulting revenues presently come from the particular installation project for the California Administrative Office of the Courts. As a California state

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government agency, the AOC may be subject to budget constraints resulting from California’s significant budget deficit. If those constraints result in a scaling back of the installation project or an inability of the AOC to pay for Sustain’s services, Sustain’s revenues would be materially affected.

Employees

The Company employs approximately 280 full-time employees and about 30 part-time employees including about 20 employees at Sustain. The Company is not a party to any collective bargaining agreements. Certain benefits, including medical insurance, are provided to all full-time employees. Management considers its employee relations to be good.

Executive Officers of the Registrant

The table below sets forth certain information with regard to the one executive officer who is not a director of the Company. All of the executive officers of the Company serve at the pleasure of the Board of Directors.

Working Capital

Traditionally, the Company has generated sufficient cash flow from operations to cover all needs including capital expenditures without significant borrowing. To a very considerable extent, the Company benefits in this regard from the fact that subscriptions are generally paid a year in advance. In fiscal 2001, expenditures to develop Sustain software exceeded cash flow from all other sources, thus triggering borrowing plans for the first time in many years. The Company’s expenditures in support of the development of Sustain software continue to be very significant, but much below the level of fiscal 2001. If the Company’s overall cash need exceeds cash flow from operations, the Company may borrow under its available line of credit, secure additional financing or change its software development strategy.

Inflation

The effects of inflation are not significantly any more or less adverse on the Company’s businesses than they are on other publishing companies. The Company has experienced the effects of inflation primarily through increases in costs of personnel, newsprint, postage and services. These costs have generally been offset by periodic price increases for advertising and subscription rates, but with frequent exceptions during several years when the Company has experienced substantial increases in postage and newsprint expenses and additional costs related to acquisitions.

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Item 2.     Properties

The Company owns office and printing facilities in Los Angeles and leases space for its other offices under operating leases, which expire at various dates through 2006. The Company’s office and storage facilities in Sacramento were sold during fiscal 2002 and smaller office space has been leased.

The main Los Angeles property is comprised of a two-story, 34,000 square foot building constructed in 1990, which is fully occupied by the Company. Approximately 75% of the building is devoted to office space and the remainder to printing and production equipment and facilities. In 1996 the Company purchased about 40,000 square feet of land near the Los Angeles facility which was used for additional parking. In 1998 the Company purchased additional land and an 11,300 square foot building adjacent to the new parking lot. It was first used for storage and then demolished. In December 2003, the Company finished building a 37,000 square foot building and parking facilities on the properties acquired in 1996 and 1998. The new Los Angeles building provides additional office, production and storage space, and thus the Company no longer needs to occupy certain adjacent space it previously leased from a third party. The Company occupies a portion of the new building’s first floor and will complete the build-out of the second floor as needed.

At September 30, 2003, the Company had approximately 11,000 square feet of office space in San Francisco under a lease expiring in February 2004. In December 2003, the Company signed a lease for approximately 10,500 square feet of new office space in San Francisco. The new lease commences in February 2004 and has a term of approximately five years. In Denver, Sustain has approximately 9,400 square feet of office space under a lease expiring in September 2004. In addition, the Company rents facilities in each of the remaining cities where its staff is located on a month-to-month basis or pursuant to leases generally of no longer than three years duration.

See Note 5 of Notes to Consolidated Financial Statements for information concerning rents payable under leases.

Item 3.    Legal Proceedings

On April 2, 2003, Sustain received a letter from counsel acting on behalf of the Ontario, Canada Ministry of the Solicitor General, Ministry of Public Safety and Security and Ministry of the Attorney General (the “Ministries”) purporting to invoke the dispute resolution process set forth in the Integrated Justice Supplier Agreement, dated as of April 22, 1999, between Sustain and the Ministries (the “Agreement”), and claiming $20 million of damages.

The Agreement had called for the eventual license by the Ministries of the new Sustain software product that was being developed for Sustain by an outside service provider. As discussed in Item 7, the service provider’s work was seriously flawed and could not be licensed to the Ministries. The agreement was formally terminated on June 7, 2002.

Rather than immediately invoking the dispute resolution procedures set forth in the Agreement, counsel for Sustain and counsel for the Ministries engaged in informal discussions with respect to this matter, and the parties so far have not utilized the dispute resolution process set forth in the Agreement. Counsel for Sustain last communicated with counsel for the

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Ministries by a letter sent on April 15, 2003. At this point, management is unable to determine whether this matter will have a material adverse effect on Sustain and the Company.

Item 4.     Submission of Matters to a Vote of Security Holders

Rule 14a-4(c)(1) of the Securities and Exchange Commission provides that if the proponent of a shareholder proposal fails to notify the company at least 45 days prior to the date of the mailing of the prior year’s proxy statement, the proxies of the Company’s management would be permitted to use their discretionary authority at the Company’s next annual meeting of shareholders if the proposal were raised at the meeting without any discussion of the matter in the proxy statement.

No matters were submitted to a vote of shareholders during the last quarter of the Company’s fiscal year ended September 30, 2003.

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PART II

Item 5.     Market for Registrant’s Common Stock and Related Shareholder Matters

The following table sets forth the sales prices of the Company’s common stock for the periods indicated. Quotations are as reported by Nasdaq (Small-Cap Issues), the automated quotation system of the National Association of Securities Dealers, Inc.

As of December 12, 2003, there were approximately 1,300 holders of record of the Company’s common stock, and the last trade was at $30.50 per share.

The Company did not declare or pay any dividends during fiscal 2003 or 2002. A determination by the Company whether or not to pay dividends in the future will depend on numerous factors, including the Company’s earnings, cash flow, financial condition, capital requirements, future prospects, acquisition opportunities, and other relevant factors. The Board of Directors does not expect that the Company will pay any dividends or other distributions to shareholders in the foreseeable future.

From time to time, the Company has purchased shares, including treasury shares, of its common stock and may continue to do so. See Note 3 to consolidated financial statements. Stock purchases are made primarily to reduce dilution of net income (loss) per share caused by the deferred management incentive plan under which selected employees are paid, subject to certain conditions, supplemental compensation tied to future pre-tax earnings. During fiscal 2003, the Company purchased 16,115 shares of common and treasury stock at an average price per share of $25.17.

Item 6. Selected Financial Data

The following sets forth selected financial data for the Company as of, and for each of the five years ended September 30, 2003. Such data should be read in conjunction with, and is qualified in its entirety by reference to, the Company’s consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included herein.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

2003 Compared to 2002

Revenues were $34,229,000 in fiscal 2003 and $34,305,000 (including a gain of $274,000 from the sale of Sacramento property) in fiscal 2002. Consulting and other fees of Sustain increased by $1,488,000, while advertising and subscription revenues declined by $1,059,000.

Display advertising and conference revenues increased by $92,000, while classified advertising revenues decreased by $508,000. Public notice advertising revenues increased by $26,000. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 91% of the total public notice advertising revenues. Public notice advertising revenues and related advertising and other service fees constituted about 28% of the Company’s total revenues. Circulation revenues decreased an aggregate of $669,000 primarily because in the last quarter of fiscal 2002, the Company discontinued several small publications and because the court rule revenues declined as more courts are now providing their rules online. The Daily Journals accounted for about 72% of the Company’s total circulation revenues, and their circulation levels decreased slightly. The court rule and judicial profile services generated about 18% of the total circulation revenues, with the other newspapers and services accounting for the balance. Information system and service revenues increased by $1,488,000 primarily because of increased consulting revenues of Sustain for the installation of Sustain software in several California counties. The Company’s revenues derived from Sustain’s operations constituted about 12% and 7% of the Company’s total revenues for fiscal 2003 and 2002, respectively.

Costs and expenses decreased by $1,389,000 (4%) to $31,776,000 from $33,165,000. Total personnel costs were $16,511,000, representing a decrease of $728,000 (4%), primarily because of the closing of several small publications in the last quarter of fiscal 2002 and the consolidation of several activities. Newsprint and printing expenses decreased by $399,000 (19%) primarily because of the reduction in newsprint usage and the discontinuance of several publications. Depreciation and amortization expenses decreased by $188,000 (7%) primarily due to more fully depreciated assets.

The Company’s expenditures for the development of Sustain software products are highly significant and will materially impact overall results at least through fiscal 2004, and very likely much longer. These Sustain internal software development costs, primarily incremental costs, aggregated $1,195,000 and $1,760,000 for fiscal 2003 and 2002, respectively. If these development programs are not successful, they will significantly and adversely impact the Company’s ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business.

The Company’s traditional business segment pretax profit decreased by $473,000 (9%) of which $274,000 was from the sale of Sacramento property in the prior year to $4,599,000 from $5,072,000. The declines in advertising and subscription revenues were partially offset by reduced expenses resulting from the decrease in newsprint and printing expenses and personnel

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costs because of the closing of several small publications in the last quarter of fiscal 2002 and the consolidation of several activities. Sustain’s business segment pretax loss decreased by $1,830,000 (45%) to $2,196,000 from $4,026,000, primarily due to increased consulting revenues. The consolidated net income was $2,403,000 and $1,226,000 for fiscal 2003 and 2002, respectively. Tax provisions were not recorded for fiscal 2003 because the Company was able to utilize net operating loss carry-forwards attributable to the Sustain-segment losses in prior years to offset taxes which otherwise would have been payable. In subsequent years there may be additional tax benefits of $1,473,000 from past Sustain losses. During fiscal 2002, the Company recorded income tax benefits of $180,000 because of the tax law change for the carry-back of net operating losses. Net income per share increased to $1.63 from $.82.

2002 Compared to 2001

Revenues were $34,305,000 and $35,224,000 for the fiscal years ended September 30, 2002 and 2001, respectively. This decrease of $919,000 (3%) was primarily attributable to a decline in revenues from display and classified advertising which was partially offset by the advertising and subscription rate increases and the gain of $274,000 from the sale of the Sacramento property.

Display advertising and conference revenues declined by $945,000, and classified advertising revenues decreased by $660,000. Public notice advertising revenues increased by $96,000. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 91% of the total public notice advertising revenues in 2002. Public notice advertising revenues and related advertising and other service fees constituted about 29% of the Company’s total revenues in 2002. Circulation revenues decreased an aggregate of $302,000 primarily because of fewer subscriptions to the court rule services due to some courts now providing their rules online. The Daily Journals accounted for about 73% of the Company’s total circulation revenues in 2002, and their circulation levels decreased slightly. The court rule and judicial profile services generated about 18% of the total circulation revenues in 2002, with the other newspapers and services accounting for the balance. Information system and service revenues increased by $436,000 primarily because of increased consulting revenues of Sustain. The Company’s revenues derived from Sustain’s operations constituted about 7% and 6% of the Company’s total revenues for fiscal 2002 and 2001, respectively.

Costs and expenses, excluding the write-off of capitalized software of $15,048,000 in 2001, decreased by $3,009,000 (8%), to $33,165,000 from $36,174,000. Total personnel costs were $17,239,000 in 2002, representing a decrease of $504,000 (3%), primarily because of the closing of various small regional offices. Newsprint and printing expenses decreased by $819,000 (28%) primarily because of the reduction in newsprint usage and prices and the discontinuance of House Counsel magazine. Commissions and other outside services increased by $194,000 (4%) primarily because of costs of individual software consultants hired to help develop Sustain software of $1,760,000, partially offset by reduced editorial freelancers’ works and other computer support services. Depreciation and amortization expenses decreased by $1,333,000 (34%) primarily because all the Sustain’s remaining goodwill of $979,000 had been written off as of September 30, 2001. Other general and administrative expenses declined by $506,000 (12%) mainly resulting from less bad debt expense as well as reduced legal fees.

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Sustain’s internal development costs, primarily incremental costs, aggregated $1,760,000 for fiscal 2002 compared to $339,000 in fiscal 2001. During fiscal 2001 and 2000, there were $15,048,000 of costs for the development of a new Sustain software product by an outside service provider. After an initial assessment of the development effort and an analysis of the program and product designs, Sustain believed that the new software was “technologically feasible” in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (“SFAS 86”). Accordingly, the Company determined that it needed to capitalize these development costs attributable to the outside service provider. In March 2001, however, one of Sustain’s important customers was the first to discover a database-locking problem while it was conducting “acceptance testing” of the software prior to completing installation. This problem prevented the software from being “scalable” to a large number of users, which was an important requirement for Sustain’s customers. Shortly thereafter, Sustain determined that correcting the scalability problem would be prohibitively expensive, and therefore the development efforts of the outside provider were discontinued, and its work was terminated. As a result of these events, Sustain concluded that the software was no longer technologically feasible and the Company stopped capitalizing costs. In addition, the Company wrote off and expensed the previously capitalized costs aggregating $15,048,000. The Company also booked a net tax benefit of $2,000,000 in fiscal 2001 based on management’s estimate of the timing of the utilization of tax benefits, for financial statement purposes, from overall losses attributable to the Sustain segment.

The Company’s traditional business segment pretax profit increased by $1,456,000 (40%) to $5,072,000 from $3,616,000, primarily due to reduced expenses resulting from the decrease in newsprint and printing expenses and the closing of some small regional offices. In addition, in 2002 the Company realized a gain from the sale of its Sacramento property of $274,000. Sustain’s business segment pretax loss increased by $85,000 (2%) to $4,026,000 from $3,941,000, excluding the fiscal 2001 write-off of capitalized software of $15,048,000, primarily due to its software development project. The consolidated net income for fiscal 2002 was $1,226,000 as compared with a net loss of $13,373,000 in fiscal 2001. A tax provision was not recorded for fiscal 2002 because the Company was able to utilize net operating loss carry-forwards to offset taxes which otherwise would have been payable. In addition, the Company recorded income tax benefits of $180,000 in 2002 resulting from the tax law change for the carry-back of net operating losses. Net income per share was $0.82 in fiscal 2002 as compared with a net loss per share of $8.95 in fiscal 2001.

Liquidity and Capital Resources

During the fiscal year ended September 30, 2003, the Company’s cash and cash equivalents and U.S. Treasury Bill positions increased by $1,284,000. Cash and cash equivalents were used for the net purchase of capital assets of $3,281,000, including $2,565,000 for the new facilities in Los Angeles. The cash provided by operating activities of $5,037,000 included a net decrease in prepayments for subscriptions and others of $316,000, primarily related to the discontinuance of several small publications in the last quarter of fiscal 2002. Proceeds from the sale of subscriptions from newspapers, court rule books and other publications and for software maintenance and other services are recorded as deferred revenue and are included in earned revenue only when the services are rendered. Cash flows from operating activities increased by $1,358,000 for the fiscal year ended September 30, 2003 as compared to the prior comparable period primarily due to increased net income. As of September 30, 2003 the Company had

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working capital of $4,817,000 before deducting the liability for deferred subscription revenues and other revenues of $6,909,000 which will be earned within one year.

During fiscal 2004, and very likely much longer, the Company expects its total expenditures in support of the development of the Sustain software to continue to be very significant. In addition, there has never been a resolution of the issues between Sustain and the outside software development service provider which was terminated in April 2001. The terminated outside service provider filed for bankruptcy in December 2001 and stated in its filings with the U.S. Bankruptcy Court that it was considering bringing a collection action against Sustain. If it ever does, Sustain will assert counter-claims that completely offset the terminated outside provider’s claims. Sustain will vigorously defend any litigation or action brought by the terminated outside service provider, although no assurances can be made as to the ultimate outcome of the dispute. It is the opinion of management that adequate provision has been made for any amounts that may become due as a result of the dispute. In a related matter, counsel for the Ontario, Canada Ministry of the Solicitor General, Ministry of Public Safety and Security and Ministry of the Attorney General sent a letter to Sustain claiming damages of $20 million as a result of Sustain’s inability to deliver a functional software system due to the flawed work of the outside service provider. In addition to the legal risks associated with these matters, the pendency of these issues could have an impact on Sustain’s ability to attract new customers or work with its existing customers.

The Company has a real estate loan of $1,808,000 secured by its existing Los Angeles facilities. In addition, a bank has expressed interest in lending the Company up to an additional $3.4 million to be secured by the new building and parking facilities, and the Company is considering whether to pursue this opportunity.

If the Company requires additional funds, it may, among other things, change Sustain’s development strategy or attempt to secure additional financing, which may or may not be available to the Company on acceptable terms.

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Critical Accounting Policies

The Company’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Management believes that both accounting for capitalized software costs and income tax accounting are critical accounting policies.

Pursuant to Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (“SFAS 86”), costs related to the research and development of a new software product are to be expensed as incurred until the technological feasibility of the product is established. Accordingly, costs related to the development of new Sustain software products are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized, subject to expected recoverability. In general, “technological feasibility” is achieved when the developer has established the necessary skills, hardware and technology to produce a product and a detailed program design has been (a) completed, (b) traced to the product specifications and (c) reviewed for high-risk development issues.

In fiscal 2000, the Company hired an outside service provider specifically to initially assess the technical feasibility of developing new Sustain software products, and the costs of this analysis were expensed. The service provider delivered a report that included extensive product specifications, an Erwin diagram of the system, a detailed architecture analysis and a diagram of the object model. The product functions, features and technical requirements were set forth in their most detailed logical form, and coding of the new program (based in part on Sustain’s existing commercial case management software program) had already begun. While Sustain’s customers made it clear that “scalability” to a large number of users would be an important function of the new software, it would not have been reasonable to conclude at the time that “scalability” presented a high-risk development issue because the outside service provider had already developed a Microsoft-based architecture specifically designed to handle this requirement. (As discussed above, under SFAS 86, high risk development issues must be resolved before technological feasibility can be established.) Consequently, for a period of time prior to the second quarter of fiscal 2001, the Company believed that technological feasibility had been established for the new Sustain software. During the course of 2000, the development project began to run over-schedule and over-budget, but the Company was consistently receiving positive progress reports from the outside service provider. The delays and costs were attributed to factors unrelated to technological feasibility, including a sale of the service provider to a venture capital firm, significant turnover in the service provider’s senior and project management and frequent requests for additional functionality and services by Sustain’s customers. There was no suggestion of any significant risks to the successful scalability or completion of the software. In fact, the Company received a specific assurance from Microsoft Corporation, whose technical consultants had reviewed the software, that “the Sustain application supports extensive scalability.” In March 2001, however, one of Sustain’s important customers was the first to discover a database-locking problem that actually prevented scalability. The seriousness of the scalability issue was readily apparent and, upon examination, the Company came to believe that correcting it could be prohibitively expensive. The outside service provider estimated that an additional $20 million would be required to fix the problem. As a result of these developments, the Company reconsidered its earlier decision and determined that technological feasibility did

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not exist. Accordingly, the Company stopped capitalizing costs in accordance with the guidance in Question #8 of the FASB Staff Implementation Guide to SFAS 86, and the previously capitalized development costs were written off and expensed in their entirety. These events had no effect on the Company’s financial statements for 2003 or 2002.

Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and the deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the Company’s financial position or its results of operations. In future years, there may be additional tax benefits, for financial statement purposes, from past Sustain-segment losses.

In August 2001, the Financial Accounting Standard Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). SFAS No. 144 supersedes SFAS No. 121. SFAS 144 retained substantially all of the requirements of SFAS No. 121 while resolving certain implementation issues. SFAS No.144 is effective for fiscal years beginning after December 15, 2001, with early application encouraged. The Company does not believe that the adoption of this statement has a material impact on the financial statements.

The above discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included in this report. (See Notes 4-6 for taxes, debt and commitments and contingencies.)

Item 7A.    Qualitative and Quantitative Disclosures about Market Risk

The Company does not use derivative financial instruments. The Company does maintain a portfolio of cash equivalents maturing in three months or less as of the date of purchase and of U.S. Treasury Bills maturing within one year. Given the short-term nature of the investments and borrowings, and the fact that the Company had no outstanding borrowing except for the real estate loan which bears a fixed interest rate, the Company was not subject to significant interest rate risk. The real estate loan of $1,808,000 bears interest at approximately 6.84% and is repayable in equal monthly installments of about $18,000 through 2016. The real estate loan is secured by the Company’s existing facilities in Los Angeles.

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND SHAREHOLDERS

DAILY JOURNAL CORPORATION

We have audited the accompanying consolidated balance sheets of Daily Journal Corporation as of September 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a) for the years ended September 30, 2003, 2002 and 2001. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Daily Journal Corporation at September 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related 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.

/s/    ERNST & YOUNG, LLP

Los Angeles, California

October 31, 2003

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Item 8.    Financial Statements and Supplementary Data

DAILY JOURNAL CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Consolidated Financial Statements

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DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

See accompanying Notes to Consolidated Financial Statements

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DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements

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DAILY JOURNAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    THE COMPANY AND OPERATIONS

The Daily Journal Corporation (the “Company”) publishes newspapers and web sites covering California, Arizona and Nevada, as well as the California Lawyer magazine, and produces several specialized information services. SUSTAIN Technologies, Inc. (“Sustain”), now a 93% owned subsidiary as of September 30, 2003, has been consolidated since it was acquired in January 1999. (See Note 2.) Sustain supplies case management software systems and related products to courts and other justice agencies, including district attorney offices and administrative law organizations. These courts and agencies use the Sustain family of products to help manage cases and information electronically and to interface with other critical justice partners. Sustain’s products are designed to help users manage electronic case files from inception to disposition, including all aspects of calendaring and accounting, report and notice generation, the implementation of standards and business rules and other corollary functions. Essentially all of the Company’s operations are based in California, Arizona, Colorado, Nevada and Virginia.

2.    ACQUISITIONS

In January 1999 the Company acquired an 80% equity interest in Sustain for cash of $6.67 million. During March 2000, June 2000 and October 2001, the Company acquired additional equity interests in Sustain of 6%, 5% and 2%, respectively, for cash of approximately $7 million primarily paid to Sustain pursuant to rights offerings. The results of operations for the additional ownership interests have been included in the financial statements from the dates of such acquisitions. The acquisitions were accounted for using the purchase method of accounting; accordingly, the purchase price in excess of the net assets was allocated to purchased software ($3,275,000) and goodwill ($1,895,000). The purchased software is being amortized over five years, and during fiscal 2001, the remaining net book value of goodwill of approximately $979,000 was written off due to the asset’s permanent impairment, based on Sustain’s losses and expected future cash flows. (See Note 3.) Since fiscal 2001, the Company has not allocated losses to the minority interest of Sustain as there has been a deficit in the minority interest balance. The minority interest had accumulated deficit balances of $715,000 and $662,000 as of September 30, 2003 and 2002, respectively.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:    The consolidated financial statements include the accounts of the Daily Journal Corporation and its 93% owned subsidiary, Sustain. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash equivalents:    The Company considers all highly liquid investments, including U.S. Treasury Bills with a maturity of three months or less when purchased, to be cash equivalents.

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Fair Value of Financial Instruments:    The carrying amounts of cash, investments in U.S. Treasury Bills, accounts receivable, accounts payable and debt instrument approximate fair value because of the short maturity of these financial instruments.

Inventories:    Inventories, comprised of newsprint and paper, are stated at cost, on a first-in, first-out basis, which does not exceed current market value.

Income taxes:    The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of the assets and liabilities.

Property, plant and equipment:    Property, plant and equipment are carried on the basis of cost. Depreciation of assets is provided in amounts sufficient to depreciate the cost of related assets over their estimated useful lives ranging from 3 – 31.5 years. At September 30, 2003, the estimated useful lives were (i) 5 – 30.5 years for building and improvements, (ii) 3 – 5 years for furniture, office equipment and software, and (iii) 3 – 10 years for machinery and equipment. Leasehold improvements are amortized over the term of the related leases or the useful life of the assets, whichever is shorter. Assets have been depreciated using an accelerated method for both financial statement and tax purposes.

Significant expenditures which extend the useful lives of existing assets are capitalized. Maintenance and repair costs are expensed as incurred. Gains or losses on dispositions of assets are reflected in current earnings.

Capitalized Software, net:    The Company’s expenditures in support of the Sustain software are highly significant. The capitalized Sustain software costs consist of purchased software upon the acquisition of Sustain of $3,023,000, less accumulated amortization of $2,995,000 and $2,389,000 as of September 30, 2003 and 2002, respectively. The remaining capitalized software, net, represents software costs accounted for pursuant to Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. This software is being amortized over five years. The amortization expenses for capitalized software were $607,000, $605,000 and $604,000 for fiscal years 2003, 2002 and 2001, respectively. Costs related to the research and development of new Sustain software products are expensed as incurred until technological feasibility of the product has been established, at which time such costs are capitalized, subject to expected recoverability.

During fiscal 2001 and 2000, there were also capitalized costs of $15,048,000 for the development of Sustain software related to the use of an outside service provider. In March 2001, however, one of Sustain’s important customers discovered a database-locking problem in the new software while it was conducting “acceptance testing” of the program prior to its installation. This problem prevented the software from being “scalable” to a large number of users, which was an important requirement for Sustain’s customers. Shortly thereafter, in April 2001, Sustain determined that correcting the scalability problem would be prohibitively expensive, and therefore the development efforts of the outside provider were discontinued, and its work was terminated. As a result of these events, Sustain determined that the software was no longer technologically feasible and the Company stopped capitalizing costs. The Company also wrote off and expensed in fiscal 2001 the capitalized software development costs aggregating $15,048,000. In partial offset, the Company booked, through reported income, a net tax benefit of

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$2,000,000 in fiscal 2001 after taking into account management’s estimate of the timing of the utilization of all tax benefits for financial statement purposes. In subsequent years, there may be additional tax benefits of about $1,473,000 from past Sustain-segment losses.

The Company is continuing its internal Sustain software development efforts and has teamed with other service providers to seek new business opportunities. If these development and marketing efforts are not successful, there will be a significant and adverse impact on the Company’s ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business. These Sustain software development costs ($1,195,000 and $1,760,000 during fiscal 2003 and 2002, respectively), which are primarily incremental costs, are being expensed as incurred and accordingly will materially impact earnings at least through fiscal 2004, and very likely much longer.

Intangible assets:    Intangible assets consisted of goodwill resulting from the acquisitions of Sustain equity in 1999, 2000 and 2001. The remaining balance of these intangible assets of $979,000 was written off as of September 30, 2001 due to Sustain’s losses and its expected future cash flows.

Revenue Recognition:    Proceeds from the sale of subscriptions for newspapers, court rule books and other publications and other services are recorded as deferred revenue and are included in earned revenue only when the services are provided, generally over the subscription term.

The Company recognizes revenues from both the lease and sale of software products. Revenues from leases of software products are recognized over the life of the lease while revenues from software product sales are recognized normally upon delivery, installation or acceptance pursuant to a signed agreement. Revenues from annual maintenance contracts generally call for the Company to provide software updates and upgrades to customers and are recognized ratably over the maintenance period. Consulting and other services are recognized as performed.

Deferred Management Incentive Plan:    In fiscal 1987 the Company implemented a plan for Deferred Management Incentive Plan that entitles an employee to participate in pre-tax earnings of the Company for the lesser of (i) ten years or (ii) as long as that employee remains employed or is in retirement following employment to age 65. In 2003 the Company modified the Plan to provide employees with three different types of non-negotiable incentive certificates based on the natures of the particular participants’ responsibilities. Participant interests entitled employees to receive 3.85% (amounting to $218,925) of Daily Journal non-consolidated income before taxes, workers’ compensation and supplemental compensation expenses, 1.50% (amounting to $0) for Sustain and 8.2% (amounting to $260,480) for Daily Journal consolidated in fiscal 2003. In previous years, certificates entitled employees to receive 12.72% (amounting to $112,455) in fiscal 2002 and 12.49% (amounting to $0) in fiscal 2001 of the Daily Journal consolidated pre-tax earnings. In addition, the employee holders of certificates are entitled to receive the same percentage of pre-tax earnings in each of the next nine years subsequent to the year of the grant of the certificate provided they remain employed or are in retirement following employment to age 65.

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Treasury stock and net income (loss) per common share:    As of September 30, 2003 and 2002, the Company owned 46,271 of the 599,409 units of a limited partnership that has no known liabilities and owns as its sole asset 599,409 shares of common stock of Daily Journal Corporation. This investment, at a total cost of $870,000, is considered treasury stock and is excluded from the calculation of weighted average shares. The net income (loss) per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,474,805 for 2003, 1,487,798 for 2002 and 1,494,900 for 2001. The Company does not have any common stock equivalents, and therefore basic and diluted net income (loss) per share is the same.

Use of Estimates:    The presentation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Reclassifications:    Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.

Impairment of Long-Lived Assets:    The Company evaluates long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated fair value. In fiscal 2001, the Company determined that the carrying value of its existing unamortized goodwill was impaired and recorded a write-off, which resulted in an additional loss of approximately $979,000 ($.41 net loss per share.)

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4.     INCOME TAXES

The provision for income taxes (benefits) consists of the following: