Commission file number number:1-7945

DELUXE CORPORATION
(Exact name of registrant as specified in its charter)

	DELUXE CORPORATIONMinnesota	(Exact name of registrant as specified in its charter)41-0216800

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. [ü]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ü                    Accelerated filer                   Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes    ü No

        The aggregate market value of the voting stock held by non-affiliates of the registrant is $2,043,326,849 based on the last sales price of the registrant’s common stock on the New York Stock Exchange on June 30, 2005. The number of outstanding shares of the registrant’s common stock as of February 10, 2006, was 51,035,834.

Documents Incorporated by Reference:

PART I

Item 1.   Business.

Deluxe Corporation was incorporated under the laws of the State of Minnesota in 1920. From 1920 until 1988 our company was named Deluxe Check Printers, Incorporated. Our principal corporate offices are located at 3680 Victoria Street North, Shoreview, Minnesota 55126-2966. Our main telephone number is (651) 483-7111.

COMPANY OVERVIEW

        We provide a wide range of personalized printed productsThrough our industry-leading businesses and services tobrands, we help small businesses and financial institutions better manage, promote, and consumers. Our two largest product groups are checks and business forms.

        We are the largest provider of checks in the United States, both in terms of revenue and the number of checks produced. We provide check printing and related services for approximately 8,000 financial institution clients, as well as providing personalized checks, related accessories and fraud prevention services directly to consumers and smallgrow their businesses.

        We are also a leading provider of printed forms to small businesses, providing products to more than six million customers. Printed forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. We produce computer forms compatible with most accounting software packages commonly used by small businesses. We also provide stationery, letterhead, envelopes and business cards in a variety of formats and ink colors. These items are designed to provide small business owners with customized documents necessary to efficiently manage their business. We also provide promotional printed items designed to fulfill a variety of selling and marketing needs.

We use direct response marketing, financial institution referrals,a North American sales representatives, independent distributors and the Internet to market and sell our products and services.

ACQUISITION OF NEW ENGLAND BUSINESS SERVICE, INC.

        On June 25, 2004, we completed our acquisition of New England Business Service, Inc. (NEBS) for $639.8 million. NEBS is a leading provider of products and services to small businesses. NEBS offerings include checks, forms, packaging supplies, embossed foil anniversary seals, promotional products and other printed material and payroll services which are marketed through direct response marketing,force, financial institution referrals, independent distributors sales representatives and the Internet. Strategically, we both serve smallinternet to provide our customers a wide range of customized products and services: personalized printed items (checks, forms, business customers,cards, stationery, greeting cards, labels, and the acquisition expands our product offerings,shipping/packaging supplies), promotional products and merchandising materials, fraud prevention services and financial institution customer baseretention programs. We also sell personalized checks and non-check revenue. With this acquisition, we added established brandsaccessories directly to our business and created opportunities for productivity improvements and cost synergies. For a more detailed description of the NEBS acquisition and related financing, see the caption “Note 4: Acquisition of New England Business Service, Inc.” of the Notes to Consolidated Financial Statements appearing in Part II of this report.consumers.

        The acquisition of NEBS brought several brand names to Deluxe. These include NEBS®, Safeguard®, McBee®, Chiswick®, Histacount®, SYCOM®, Bags & Bows®, Main Street® and Holiday Expressions®.

        Following the acquisition of NEBS and a review of our combined strategic approach, we decided to sell NEBS’ European businesses and PremiumWear, which provides specialty apparel products. Historical

results related to PremiumWear and Europe are presented as discontinued operations in our consolidated financial statements. For a more detailed description of these discontinued operations, see the caption “Note 5: Discontinued operations” of the Notes to Consolidated Financial Statements appearing in Part II of this report.

BUSINESS SEGMENTS

        Our business segments subsequent to the NEBS acquisition consist of the following: Small Business Services, Financial Services and Direct Checks. Our businesses are generally organized by type of customer and reflect the way we manage the company. Additional information concerning our segments appears under the caption “Note 15:17: Business segment information” of the Notes to Consolidated Financial Statements appearing in Part IIItem 8 of this report.

Small Business Services

        Small Business Services (SBS) is comprised of the newlyNew England Business Service, Inc. (NEBS), which we acquired NEBS businessin June 2004, and our former Business Services segment. This segment is our largest in terms of revenue, and we intend to concentrateare concentrating on growth ingrowing this segment. SBS endeavorsstrives to be thea leading resource of business products to small businesses by integrating existingproviding products and distribution channelsservices that help them manage and by adding new ones. We currentlybuild their businesses. Through SBS, we sell business checks, forms and related printed products to more than six million small businesses and home offices.products. We also distribute packaging, shipping and warehouse supplies, advertising specialties, and otherprinting and payroll services. SBS serves more than six million small business products. We provide payroll services to small businessescustomers in the United States and Canada.

        The majority of SBS products are distributed through more than one channel. Our primary channel is direct mail, in which promotional advertising offering our products is delivered by mail to small businesses. These efforts are supplemented by the prospecting and account development efforts of an outbound telemarketing group. We also utilize aA field sales organization which callsis utilized to call on small businesses, mainly under the McBeeMcBee® and ChiswickChiswick® brand names. A third channel of distribution is our network of independent local dealers and Safeguard® distributors. We also utilize financial institution referrals and the Internetinternet to market and distribute our products. Customer service for initial order support, product reorders and routine service is provided by a network of call center representatives located throughout the United States and Canada.

        As we concentrate on growing this segment, we will focusWe are focusing on the following:following initiatives to grow this segment:

        During 2005, we launched the Deluxe Business Advantage^SM program. This program provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses. Our inside sales team works in combination with our customers’ needs in a manner that is efficientdirect sales force, which makes one-on-one contact with small businesses and easy.
financial institution branches more effective.

        We continueThroughout 2005, we continued to focus on integrating theintegrate NEBS operations and take advantage of NEBS to lower costs and improve efficiencies. We closed one NEBS printing facility in 2004 and havesynergies. As previously announced, planswe plan to close two additionalour Los Angeles, California and Athens, Ohio printing facilities. We alsofacilities in mid-2006, and we continue to eliminate redundancies between the two companies and will seek other means to further lower our cost structure.increase efficiencies.

Financial Services

        Financial Services is the leading supplier ofsupplies checks, and check-related products and check merchandising services to financial institutions. Additionally, weWe offer enhanced services to our financial institution clients, such as customized reporting, file management, expedited account conversion support and fraud prevention. Our relationships with specific financial institutions are usually formalized through supply contracts averaging

three to five years in duration. Consumers and small businesses typically submit their check ordersorder to their financial institution, which then submitsin turn transmits the ordersorder to us. We then process the ordersorder and ship themit directly to the consumers andconsumer or small businesses.business. Financial Services produces a wide range of check designs, with many consumers preferring one of the dozens of licensed or cause-related designs we offer, including Disney®, Warner Brothers®, NASCAR®, Harley-Davidson®, Coca-Cola®, Susan G. Komen Breast Cancer Foundation, American Heart Association and Laura Ashley®National Arbor Day Foundation®. We are committedFinancial Services’ strategy is to ourincrease its relevance to financial institution relationships and seek to strengthen and expand theminstitutions by emphasizing the breadth and value of our checks and related products and services. We are leveraging our DeluxeSelect^SM merchandising platform, our Deluxe Business Advantage program and enhanced small business customer service. This is expected to create:

        Our Deluxe Business Advantage program is designed to maximize financial institution business check programs by offering expanded personalized service to small businesses with a number of service level options. This program leverages the 2004 NEBS acquisition which brought us expanded product and service offerings, as well as a nationwide sales force with extensive knowledge of small business needs.

        Our DeluxeSelect^SM program allows a financial institution’s customers to buy checks when, where and in what manner they desire, whether it’s via the phone, our voice response unit or the internet. By allowing us to perform the check merchandising function on their behalf, financial institutions have the opportunity to lower their costs, increase the profitability of their check programs and increase their brand image and customer satisfaction.

        In 2004Through our ID TheftBlock® program, we launched Deluxe ID TheftBlock™ and DeluxeCard™ Visa® gift card. ID TheftBlock isoffer an advanced suite of monitoring and protection services which we offer to consumers on behalf of our financial institution clients. ID TheftBlockclients that enhances traditional identity protection tools by adding check order screening, daily credit monitoring, access to fraud resolution assistance and a comprehensive membership kit. The DeluxeCard VisaDeluxeCard™ Visa® gift card is an open-systema stored value prepaid gift card that allows financial institutions to meet growing consumer demand for a versatile payment tool and universal gift solution.

        Our DeluxeSelect^SM program provides financial institution customers with more information regarding check and check-related products as they interact directly with our professional sales associates, our voice response system or our website when placing an order. We actively promote our broad product offerings during both the new account opening and check re-ordering processes by engagingsolution that is available to consumers through our call centers, advanced Internet ordering capabilities and point-of-sale marketing support at financial institution branch offices. The benefits of this program include: 1) increased financial institution customer satisfaction from selecting a check style that reflects their personal interests and taste; 2) increased revenue and enhanced profitability for our financial institution clients as they realize the value of our merchandising and check ordering process; 3) lower costs forvia financial institutions, because we perform this work on their behalf;the internet and 4) increased accuracy. As of the end of 2004, over 5,000 clients had enrolled in DeluxeSelect.telephone.

        We have continued to expand our Knowledge Exchange Series wherefor financial institution clients through which we host knowledge exchange expos, conduct web seminars and host special industry conference calls, as well as offer specialized publications. Through this program, financial institutions gain knowledge and exposure to thought leaders in areas that most impact their core strategies: client loyalty, small business and retail client strategy, cost management, experience and brand enhancement. Our Collaborative initiative, a key component of the Knowledge Exchange Series, enlists a team of leading financial institution executives who meet with us over a one year timeframe to develop and test specific and focused solutions on behalf of the financial services industry. These events allow knowledge to be shared withfindings and amongnew strategies or services are then disseminated for the benefit of all our clients. Our Small Business Collaborative initiative grew out of our Knowledge Exchange Series and explores new innovative ways for financial institution clients to help financial leaders develop ways to improve customer experiences. We believe that a leading concern for financial institutions is finding innovative ways to satisfy customers. Our Knowledge Exchange Series represents a new approach to identify areasrelationships with small businesses. In addition, these activities are an important part of opportunity and develop strategies to transform financial transactions into compelling and memorable interactions for customers.our client retention strategy.

Direct Checks

        Direct Checks is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited® and Designer® Checks brand names. Through these two brands, we sell personal and business checks, as well as related products, using direct response marketing and the Internet.internet. We believeestimate the direct-to-consumer personal check printing portion of the payments industry accounts for approximatelynearly 20% of all personal checks sold. Our strategy is to maximize customer lifetime value through more effective new customer acquisition, increased customer retention and maximization of the direct segment small business opportunity.

        We use a variety of direct marketing techniques to acquire new customers, including freestandingnewspaper inserts, in newspapers, in-package advertising, statement stuffers and co-op advertising. We also use e-commerce strategies to direct traffic to our websites, which include: www.checksunlimited.com, www.designerchecks.com and www.checks.com. Our direct-to-consumer focus has resulted in us having a customer base of over 4041 million lifetime customers, the highest brand awareness, as well as the most advertising impressions in the direct-to-consumer checks marketplace.

        We competeDirect Checks competes primarily on price and design. Although pricing is roughly equal withinPricing in the direct-to-consumer segment, pricingchannel is generally lower than prices typically charged in the financial institution segment.channel. We also compete on design by seeking to offer the most attractive selection of images with high consumer appeal, many of which are acquired or licensed from well-known photographers, artists, and organizations such as Disney, Thomas Kinkade and NASCAR.

PRODUCTS

Revenue, by product, as a percentage of consolidated revenue for the last three years was as follows:

         We are growing our sales of non-check products. This shift, along with the decline in check usage, has resulted in a decrease in our check revenue. We are the largest provider of checks in the United States, both in terms of revenue and the number of checks produced. We provide check printing and related services for approximately 7,500 financial institution clients, as well as personalized checks, related accessories and fraud prevention services directly to small businesses and consumers.

        We are a leading provider of printed forms to small businesses, providing products to more than six million customers. Printed forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. We produce computer forms compatible with accounting software packages commonly used by small businesses. Our stationery, letterhead, envelopes and business cards are produced in a variety of formats and ink colors. These items are designed to provide small business owners with the customized documents necessary to efficiently manage their business. We also provide promotional printed items and digital printing services designed to fulfill selling and marketing needs of the small businesses we serve.

MANUFACTURING

        WeAs one of our key strategies, we continue to invest in areas of the business where we can reducefocus on reducing costs and increaseincreasing productivity. We continue to use aAn example is the lean and cellular approach utilized in many of our manufacturing facilities. Within the lean and cellular manufacturing environment,Under this approach, a group of employees works together to produce products, rather than those same employees working on individual tasks in a linear fashion. Because employees assume more ownership of the end product, the results are improvements in quality and service levels and reductions inlower costs. We closed six check printing facilitiescontinue to see the benefit of these operational efficiencies in 2004.our results. The expertise we have developed in logistics, productivity and inventory management, as well as the decline in check usage due to the use of alternative payment methods, allows us to reduce the number of production facilities while still meeting client requirements. We closed six check printing facilities in 2004 and as previously announced, we plan to close two additional printing facilities in mid-2006. We have announced our intention to utilizealso implemented a shared services approach to manufacturing. We are currently organizingmanufacturing through which our three business segments share manufacturing operations. Our printing operations are being managed by region, which allows us to enhance our focus on creatingcreate centers of operational excellence withthat have a culture of continuous improvement. This means that we will be able to createWe have created blended sites which canto serve a variety of brands.segments, brands and channels. As a result, we will be ablecontinue to reduce costs and improve performance by usingutilizing our assets and printing technologytechnologies more efficiently and by enabling employees to better leverage their capabilities and talents.

INDUSTRY OVERVIEW

Checks

        Checks are the largest single non-cash payment type in the United States.        According to a Federal Reserve study released in December 2004, approximately 37 billion checks are processed annually. This currently comprises about 45% ofThe check is the totallargest single non-cash payment transactionsmethod in the United States.States, accounting for approximately 45% of all non-cash payment transactions. However, according to our estimates, the use of checks is declining.declining by four to five percent per year. The combined total transaction volume of alternative payment methods (which include credit cards,all electronic payment methods the use of direct deposit, etc.) only recently has become more heavily used than checks. Wenow exceeds check payments, and we expect this trend to continue. The sale of checks continues to be our predominant revenue stream.

Small Business Customers

        The Small Business Administration’s Office of Advocacy defines a small business as an independent business having fewer than 500 employees. In 2003,2004, the most recent date for which information is available, it was estimated that there were approximately 23.725 million small businesses in the United States. This represents 99.7% of all employer firms.employers. Small businesses employ half of all private sector employees and generated over 60% to 80% of net new jobs annuallycreated each year over the last decade.

        The small business market is impacted by economic conditions and the rate of small business formations. Currently, small business growth is strong, which parallels the growth in the overall economy and recent Federal Reserve surveys which have noted an increase in small business loans. According to the National Federation of Independent Business (NFIB), small business optimism was at record highs

during 2004.remained strong in 2005. In addition, spendingsales volume and hiring plans are at historically high levels and profit trends support small businesses’ ability to deliver on capital spending and expansion plans.trends continued to be positive through the end of the year.

        TheWe seek to serve the needs of the small business customer is an integral part of our business.customer. We design, produce and distribute business checks, forms, envelopes, industrial packaging and related products. Some of the products we sell, such as manualto help them grow and computer forms are in decline. New technologies have provided small business customers with alternative meanspromote their business. We intend to enact and record business transactions. To date, we have been able to offset these declines by increasingincrease our customer base and through growth opportunities in packaging supplies, promotional products and payroll services.increased referrals from our financial institution channel through the Deluxe Business Advantage program. The use ofrate checks amongare used by small businesses has thus far not been impacted as significantly by the use of alternative payment methods. ThisThe Formtrac 2005 report from the Document Management Industries Association (DMIA) indicates that the business check portion of the markets serviced by SBS declined at a rate of 2%-3% in 2005. The overall small business market is impacted more significantly by economic conditions and the rate ofat which new small business formations.businesses incorporate.

Financial Institution Clients

        Checks are most commonly ordered by customers through their financial institution. Currently we believe aboutinstitutions. We estimate approximately 80% of all check sales to individualsconsumer checks are madeordered in this manner. Financial institutions include banks, credit unions and other financial services companies. Several developments related to financial institutions have affected the check printing industry:

CompetitionConsumer Response Rates

        InDirect Checks has been impacted by reduced consumer response rates to direct mail advertisements. We believe that the decline in our customer response rates is attributable to the decline in check printing portion of the payments industry, we face considerable competition from several other check printers,usage, an increase in financial institutions providing free checks to consumers, a general decline in direct marketing response rates and we expect competition to intensify as this portion of the payments industry continues to decline. As we expand our e-commerce presence, we face competition from check printing software vendors and from Internet-based sellers of checks and related products. We also face competition from alternative payment methods, including automated teller machines, credit cards, debit cards and electronic payment systems, such as pre-authorized payments and electronic bill presentment and payment.

        In the check printing business, the principal factors on which we compete are product and service breadth, price, convenience, quality and program management. From time to time, some of our check printing competitors have reduced the prices of their products in an attempt to gain greater volume. The corresponding pricing pressure placed on us has resulted in reduced profit margins and some loss of business due to our refusal to meet competitor pricing that fell below our profitability targets. Continuing pressure could result in additional margin compression. Additionally, product discounts in the form of cash incentives payable upon financial institution contract execution have been a practice within the industry since the late 1990s. However, beginning in 2001 as competitive pressure intensified, both thelower number of financial institution clients requiring these paymentseligible first-time customers. With such a large base of lifetime customers, fewer consumers are eligible for the lower introductory prices we offer first-time customers. We continue to evaluate our marketing techniques to ensure we utilize the most effective and the size of the payments have increased. These up-front payments negatively impact the industry’s cash flows in the short-term and may result in additionalaffordable advertising media.

pricing pressure when the financial institution also negotiates for greater product discount levels throughout the term of the contract.

Competition

        The small business forms and supplies industries areindustry is highly competitive.fragmented with many small local suppliers. We believe we are well positioned in these markets by having athis competitive landscape through our broad customer base, comprehensive small

business product and service offerings, multiple distribution channels, established relationships with our financial institution clients, reasonable prices, high quality and dependable service.

        In the small business forms and supplies industry, the competitive factors influencing a customer’s purchase decision are product guarantees, breadth of product line, speed of delivery, product quality, price, convenience and customer service. Our primary competitors forproviding printed products are local printers, business form dealers, contract stationers and office product superstores. Local printers provide personalization and customization, but can behave a limited on the variety of products and services, as well as the level oflimited printing sophistication. Office superstores offer a variety of products at competitive prices, but can only provide limited personalization orand customization, if any. In addition, at present, weWe are aware of more than twenty majornumerous independent companies or divisions of companies offering printed products and business supplies to small businesses through direct mail, distributors or a direct sales force.

        In the check printing portion of the payments industry, we face considerable competition from several other check printers, and we expect competition to remain intense as this portion of the payments industry continues to decline and financial institutions continue to consolidate. We also face competition from check printing software vendors and from internet-based sellers of checks and related products. Moreover, the check product must compete with alternative payment methods, including credit cards, debit cards, automated teller machines and electronic payment systems.

        In the financial institution check printing business, the principal factors on which we compete are product and service breadth, price, quality and check merchandising program management. From time to time, some of our check printing competitors have reduced the prices of their products in an attempt to gain greater volume. The corresponding pricing pressure placed on us has resulted in reduced profit margins and some loss of business. Continuing pressure will likely result in additional margin compression. Additionally, product discounts in the form of cash incentives payable to financial institutions upon contract execution have been a practice within the industry since the late 1990’s. However, both the number of financial institution clients requesting these payments and the size of the payments have increased. These up-front payments negatively impact check printers’ cash flows in the short-term and may result in additional pricing pressure when the financial institution also negotiates greater product discount levels throughout the term of the contract. We are seeking to reduce our use of up-front product discounts.

Raw Materials and Supplies

        The principal raw materials used in producing our main products are paper, ink and cartons, which we purchase from various sources. We also purchase stock business forms produced by third parties. We believe that we will be able to obtain an adequate supply of materials from current or alternative suppliers. We also utilize a paper printing plate material that is available from only a limited number of sources. We believe we have a reliable source of supply for this material and that we maintain an inventory sufficient to avoid any production disruptions in the event of an interruption of its supply.

Governmental Regulation

        We are subject to regulations implementing the privacy and information security requirements of the federal financial modernization law known as the Gramm-Leach-Bliley Act (the Act) and other federal regulation and state law on the same subject. These laws and regulations require us to develop and implement policies to protect the security and confidentiality of consumers’ nonpublic personal information and to disclose these policies to consumers before a customer relationship is established and annually thereafter.

Our financial institution clients request various contractual provisions in our supply contracts that are intended to comply with their obligations under the Act and other privacy and security oriented laws. The regulations require some of our businesses to provide a notice to consumers to allow them the opportunity to have their nonpublic personal information removed from our files before we share their information with certain third parties. The regulations, including the above provision, may limit our ability to use our direct-to-consumer data in our businesses. However, the regulations do allow us to transfer consumer information to process a transaction that a consumer requests, as well as to protect the confidentiality of a consumer’s records or to protect against or prevent actual or potential fraud, unauthorized transactions, claims or other liabilities. We are also allowed to transfer consumer information for required institutional risk control and for resolving customer disputes or inquiries. We may also contribute consumer information to a consumer-reporting agency under the Fair Credit Reporting Act. Our financial institution clients request various contractual provisions in our agreements that are intended to comply with their obligations under the Act.

        Congress and many states have passed and are considering additional laws or regulations that, among other things, restrict the use, purchase, sale or sharing of nonpublic personal information about consumers and business customers. For example, legislation has been introduced in Congress to further restrict the sharing of consumer information by financial institutions, as well as to require that a consumer opt-in prior to a financial institution’s use of his or her data in its marketing programs.

Laws and regulations may be adopted in the future with respect to the Internet,internet, e-commerce or marketing practices generally relating to consumer privacy. Such laws or regulations may impede the growth of the Internetinternet and/or use of other sales or marketing vehicles. For example, new privacy laws could decrease traffic to our

websites, decrease telemarketing opportunities and decrease the demand for our

products and services. Additionally, the applicabilityWe do not expect that changes to the Internet of existingthese laws governing property ownership, taxation and personal privacy is uncertain and may remain uncertain forregulations will have a considerable length of time.significant impact on our business in 2006.

Intellectual Property

        We rely on a combination of trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect our trademarks, software and know-how. However, intellectual property laws afford limited protection. Third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products or services. In addition, designs licensed from third parties account for an increasinga portion of our revenue. Typically, such license agreements are effective for a two- to three-year period. There can be no guarantee that such licenses will be renewed or will continue to be available on terms that would allow us to continue to be profitable with these products.

EMPLOYEES

        As of December 31, 2004,2005, we employed 8,6108,310 employees in the United States and 345410 employees in Canada. None of our employees are represented by labor unions, and we consider our employee relations to be good.

AVAILABILITY OF COMMISSION FILINGS

        We make available through the Investor Relations section of our website,www.deluxe.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to these reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after these items are electronically filed with or furnished to the Securities and Exchange Commission (SEC). These reports can also be accessed via the SEC website,www.sec.gov, or via the SEC’s Public Reference Room located at 450 Fifth100 F Street, N.W.N.E., Washington, D.C. 20549. Information concerning the operation of the SEC’s Public Reference Room can be obtained by calling 1-800-SEC-0330.

        A copy of this report may be obtained without charge by calling 1-888-359-6397 (1-888-DLX-NEWS) or by sending a written request to Investor Relations, Deluxe Corporation, P.O. Box 64235, St. Paul, Minnesota 55164-0235.

CODE OF ETHICS AND CORPORATE GOVERNANCE GUIDELINES

        We have adopted a Code of Ethics and Business Conduct which applies to all of our employees and our board of directors. The Code of Ethics and Business Conduct is available onin the Investor Relations section of our website, www.deluxe.com, and also can be obtained free of charge upon written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box 64235, St. Paul, Minnesota 55164-0235. Any changes or waivers of the Code of Ethics and Business Conduct will be disclosed on our website. In addition, our Corporate Governance Guidelines and the charters of the Audit, Compensation, Corporate Governance and Finance Committees of our board of directors are available on our website or upon written request.

EXECUTIVE OFFICERS OF THE REGISTRANT

        Our executive officers are elected by the board of directors each year. The following summarizes our executive officers and their positions.

Lawrence J. Mosner has served as chairman of the board and chief executive officer of Deluxe since December 2000. Prior to this position, Mr. Mosner served as vice chairman, a position he assumed in August 1999.

        Ronald E. Eilershas served as president and chief operatingexecutive officer of Deluxe since December 2000.November 2005. From August 1997 to December 2000 Mr. Eilers was a senior vice president of Deluxe and managed our former Paper Payment Systems business.

Guy C. Feltz was named a senior vice president of Deluxe in December 2000 and hasto November 2005 he served as our president of our Financial Services segment since July 2000 and our Direct Checks segment since July 2004. He was also a vice president of Deluxe from July to December 2000. From August 1999 to July 2000, Mr. Feltz served as senior vice president of sales and marketing for our financial institution check printing business.chief operating officer.

        Anthony C. Scarfonejoined us in September 2000 as senior vice president, general counsel and secretary and became an executive officer of Deluxe in December 2000. Prior to joining Deluxe, Mr. Scarfone served as vice president, general counsel and secretary of Dahlberg, Inc., a worldwide manufacturer, distributor and retailer of electronic hearing devices, a position he held from November 1993 to November 1999.

Warner F. Schlais has served as senior vice president and chief information officer since November 1999 and became an executive officer of Deluxe in December 2000.secretary.

        Richard L. Schultewas named a senior vice president of Deluxe in December 2000 and has served as president of our Small Business Services segment since July 2000. From May 1999 to July 2000, Mr. Schulte was our senior vice president of supply chain and operations.

        Douglas J. Treffjoined us in October 2000 as senior vice president and chief financial officer and became an executive officer of Deluxe in December 2000. From February 1993 until Mr. Treff joined us, he served as vice president, finance, of Wilsons the Leather Experts, Inc. (Wilsons), a leather specialty apparel retailer. He was also appointed chief financial officer of Wilsons in May 1996.

Stuart Alexanderwas named an executive officer of Deluxe in January 2003. He has served as vice president, investor relations and public affairs since May 1988.

Katherine L. Millerwas named chief accounting officer and an executive officer of Deluxe in January 2003 and has served as vice president and controller since January 2001. Ms. Miller joined us in February 1999 and held several finance director positions prior to assuming her vice president and controller responsibilities.officer.

        Luann Widener was named senior vice president, president of manufacturing shared services, supply chain and Financial Services effective March 1, 2006. From June 2003 to February 2006, Ms. Widener served as senior vice president, human resources and an executive officer of Deluxe in June 2003.December 2005, she assumed responsibility for our manufacturing and supply chain operations. From July 2000 to June 2003, Ms. Widener served as vice president of manufacturing operations for our Financial Services segment. From October 1997 to June 2000, Ms. Widener was vice president of process improvement for our Financial Services segment.

        * Effective March 17, 2005, Ms. Miller will be resigning for personal reasons from her position as vice president, controller and chief accounting officer. Terry D. Peterson 40, will become Deluxe’s vice president, controller andwas named chief accounting officer effective as of Ms. Miller's resignation.in March 2005. Mr. Peterson joined us in September 2004 and served as director of internal audit.audit until March 2005. From August 2002 until August 2004, Mr. Peterson was vice president and controller of the GCS Services Division of Ecolab, Inc., a worldwide developer and marketer of premium cleaning and sanitation products. Before joining Ecolab, Inc., Mr. Peterson held executive finance positions with Provell, Inc. (formerly Damark International, Inc.), a developer of customized marketing programs and services, including corporate controller from March 1999 to September 2001 and acting chief financial officer and controller from September 2001 to August 2002.

Item 1A.   Risk Factors.

The check printing portion of the payments industry is mature and, if it declines faster than expected, it could have a materially adverse impact on our operating results.

        Check printing is, and is expected to continue to be, an essential part of our business, representing approximately 65% of our revenue in 2005. We primarily sell checks for personal and small business use and believe that there will continue to be a substantial demand for these checks for the foreseeable future. However, according to our estimates, the total number of checks written by individuals and small businesses continued to decline approximately four to five percent each year over the past three years, and the total number of checks written in the United States has been in decline since the mid-1990’s. We believe that the number of checks written will continue to decline due to the increasing use of alternative payment methods, including credit cards, debit cards, smart cards, automated teller machines, direct deposit, electronic and other bill paying services, home banking applications and internet-based payment services. However, the rate and the extent to which alternative payment methods will achieve consumer acceptance and replace checks, whether as a result of legislative developments, personal preference or otherwise, cannot be predicted with certainty. A surge in the popularity of any of these alternative payment methods could have a material, adverse effect on the demand for checks and a material, adverse effect on our business, results of operations and prospects.

We face intense competition in all areas of our business.

        Although we are the leading check printer in the United States, we face considerable competition. In addition to competition from alternative payment systems, we also face intense competition from other check printers in our traditional financial institution sales channel, from direct mail sellers of checks, from sellers of business checks and forms, from check printing software vendors and from internet-based sellers of checks to individuals and small businesses. Additionally, low-price, high volume office supply chain stores offer standardized business forms, checks and related products to small businesses. We cannot assure you that we will be able to compete effectively against current and future competitors. Continued competition could result in price reductions, reduced profit margins, loss of customers and an increase in up-front cash payments to financial institutions upon contract execution or renewal.

Continuing softness in direct mail response rates could have a further adverse impact on our operating results.

        Our Direct Checks segment and portions of our Small Business Services segment have experienced declines in response and retention rates related to direct mail promotional materials. We believe that media response rates are declining across a wide variety of products and services. Additionally, we believe that our declines are attributable to the decline in check usage, the gradual obsolescence of standardized forms products and an increase in financial institutions offering free checks to consumers. To offset these impacts, we may have to modify and/or increase our marketing and sales efforts, which could result in increased expense.

        The profitability of our Direct Checks segment depends in large part on our ability to secure adequate advertising media placements at acceptable rates, as well as the consumer response rates generated by such advertising, and there can be no assurances regarding the future cost, effectiveness and/or availability of suitable advertising media. Competitive pressure may inhibit our ability to reflect any of these increased costs in the prices of our products. We can provide no assurance that we will be able to sustain our current levels of profitability in this situation.

Consolidation among financial institutions may adversely affect the pricing of our products.

        The number of financial institutions has declined due to large-scale consolidation in the last few years. Margin pressures arise from such consolidation as merged entities seek to reduce costs by leveraging economies of scale in purchasing, including their check supply contracts. This increases the importance of retaining our major financial institution clients and attracting additional clients in an increasingly competitive environment. The increase in general negotiating leverage possessed by such consolidated entities typically results in new and/or renewed contracts which are not as favorable as those historically negotiated with these clients. Although we devote considerable effort toward the development of a competitively priced, high quality suite of products and services for the financial services industry, there can be no assurance that significant financial institution clients will be retained or that the loss of a significant client can be counterbalanced through the addition of new clients or by expanded sales to our remaining clients.

Standardized business forms and related products face technological obsolescence and changing customer preferences.

        Continual technological improvements have provided small business customers with alternative means to enact and record business transactions. For example, because of the lower price and higher performance capabilities of personal computers and related printers, small businesses now have an alternate means to print business forms. Additionally, electronic transaction systems and off-the-shelf business software applications have been designed to automate several of the functions performed by business forms products. If small business customer preferences change rapidly and we are unable to develop new products and services with comparable profit margins, our results of operations could be adversely affected.

Our failure to successfully implement a project we have undertaken to replace major portions of our existing order capture, billing and pricing systems would negatively impact our business.

        During 2006, we will continue to expand our use of the SAP software platform with the planned installation of the SAP sales and distribution module in a portion of our business. Once implemented, we expect the new system to reduce redundancy while standardizing systems and processes and reducing our costs. This is a significant information systems project with wide-reaching impacts on our internal operations and business. We can provide no assurance that the amount of this investment will not exceed our expectations and result in materially increased levels of expense or asset impairment charges. There is also no assurance that this initiative will achieve the expected cost savings or result in a positive return on our investment. Additionally, if the new system does not operate as intended, or is not implemented as planned, there could be disruptions in our business which could adversely affect our results.

We face uncertainty with respect to recent and future acquisitions.

        We acquired NEBS in June 2004 and have stated that we expect growth in our Small Business Services segment as we implement the business strategies contemplated at the time of the acquisition. The integration of any acquisition involves numerous risks, including, among others, difficulties in assimilating operations and products, diversion of management’s attention from other business concerns, potential loss of our key employees or key employees of acquired businesses, potential exposure to unknown liabilities and possible loss of our clients and customers or clients and customers of the acquired businesses. While we anticipate that we will be able to achieve our stated objectives, we can provide no assurance that one or more of these factors will not negatively impact our results of operations.

        In regard to future acquisitions, we cannot predict whether suitable acquisition candidates can be acquired on acceptable terms or whether any acquired products, technologies or businesses will contribute to our revenues or earnings to any material extent. Significant acquisitions typically result in the incurrence of contingent liabilities or debt, or additional amortization expense related to acquired intangible assets, and thus, could adversely affect our business, results of operations and financial condition.

Costs incurred to implement our growth strategies within Small Business Services may exceed our expectations.

        As we execute our growth strategies within Small Business Services, we will incur additional costs, such as hiring and supporting a significant number of sales and call center personnel in early 2006. We can provide no assurance that these costs will not significantly exceed our expectations or that we will be able to hire enough qualified candidates to meet our sales targets. Additionally, we can provide no assurance that our strategy to expand sales to new and existing customers will be successful and result in a positive return on our investment.

Forecasts involving future results reflect various assumptions that may prove to be incorrect.

        From time to time, we make predictions or forecasts regarding our future results, including, but not limited to, forecasts regarding estimated revenues, earnings, earnings per share or operating cash flow. Any forecast regarding our future performance reflects various assumptions which are subject to significant uncertainties, and, as a matter of course, may prove to be incorrect. Further, the achievement of any forecast depends on numerous factors which are beyond our control. As a result, we cannot assure you that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. You are cautioned not to base your entire analysis of our business and prospects upon isolated predictions, and are encouraged to use the entire mix of historical and forward-looking information made available by us, and other information affecting us and our products and services, including the factors discussed here.

        In addition, independent analysts periodically publish reports regarding our projected future performance. The methodologies we employ in arriving at our own internal projections and the approaches taken by independent analysts in making their estimates are likely different in many significant respects. We expressly disclaim any responsibility to advise analysts or the public markets of our views regarding the accuracy of the published estimates of independent analysts. If you are relying on these estimates, you should pursue your own investigation and analysis of their accuracy and the reasonableness of the assumptions on which they are based.

We may be unable to protect our rights in intellectual property.

        Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products and services. In addition, designs licensed from third parties account for a portion of our revenues, and there can be no guarantee that such licenses will be available to us indefinitely or on terms that would allow us to continue to be profitable with those products. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm our business and ability to compete. We rely on a combination of trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect our trademarks, software and know-how. We may be required to spend significant resources to protect our trade secrets and monitor and police our intellectual property rights.

We are dependent upon third party providers for certain significant information technology needs.

        We have entered into agreements with third party providers for information technology services, including software development and support services, and personal computer, telecommunications, network server and help desk services. In the event that one or more of these providers is not able to provide adequate information technology

services, we would be adversely affected. Although we believe that information technology services are available from numerous sources, a failure to perform by one or more of our service providers could cause a disruption in our business while we obtain an alternative source of supply.

Legislation relating to consumer privacy protection could harm our business.

        We are subject to regulations implementing the privacy and information security requirements of the federal financial modernization law known as the Gramm-Leach-Bliley Act and other federal regulation and state law on the same subject. These laws and regulations require us to develop and implement policies to protect the security and confidentiality of consumers’ nonpublic personal information and to disclose these policies to consumers before a customer relationship is established and annually thereafter. These regulations could have the effect of foreclosing future business initiatives. In addition, new technologies and higher criminal capabilities may breach or compromise the security of consumers’ nonpublic personal information.

        More restrictive legislation or regulations have been introduced in the past and could be introduced in the future in Congress and the states. We are unable to predict whether more restrictive legislation or regulations will be adopted in the future. Any future legislation or regulations could have a negative impact on our business, results of operations or prospects.

        Laws and regulations may be adopted in the future with respect to the internet, e-commerce or marketing practices generally relating to consumer privacy. Such laws or regulations may impede the growth of the internet and/or use of other sales or marketing vehicles. As an example, new privacy laws could decrease traffic to our websites, decrease telemarketing opportunities and increase the cost of obtaining new customers. Additionally, the applicability to the internet of existing laws governing property ownership, taxation, libel and personal privacy is uncertain and may remain uncertain for a considerable length of time.

We may be subject to sales and other taxes which could have adverse effects on our business.

        In accordance with current federal, state and local tax laws, and the constitutional limitations thereon, we currently collect sales, use or other similar taxes in state and local jurisdictions where our direct-to-consumer businesses have a physical presence. One or more state or local jurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies which engage in remote or online commerce. Further, tax law and the interpretation of constitutional limitations thereon are subject to change. In addition, any new operations of these businesses in states where they do not currently have a physical presence could subject shipments of goods by these businesses into such states to sales tax under current or future laws. If one or more state or local jurisdictions successfully asserts that we must collect sales or other taxes beyond our current practices, it could have a material, adverse affect on our business.

We may be subject to environmental risks.

        Our printing facilities are subject to many existing and proposed federal and state regulations designed to protect the environment. In some instances, we owned and operated our printing facilities before the environmental regulations came into existence. We have sold former printing facilities to third parties and in some instances have agreed to indemnify the buyer of the facility for certain environmental liabilities. We have obtained insurance coverage related to environmental issues at certain of these facilities. We believe that, based on current information, we will not be required to incur additional material and uninsured expense with respect to these sites, but unforeseen conditions could result in additional exposure at lesser levels.

Item 1B.   Unresolved Staff Comments.

        None.

Item 2.   Properties.

        Our principal executive office is an owned property located in Shoreview, Minnesota. We own or lease a number of other properties, mainly inAside from small sales offices, we occupy 31 facilities throughout the United States and three facilities in Canada where we conduct printing, call center, distribution, administration, and sales and marketing functionsfunctions. These facilities are performed.either owned

or leased and have a combined floor space of approximately 3.3 million square feet. We believe that our properties are sufficiently maintained and are adequate and suitable for our business needs as presently conducted and are adequately maintained. The following provides a summary of our properties as of December 31, 2004:conducted.

Item 3.   Legal Proceedings.

        We are involved in routine litigation incidental to our business, but there are no material pending legal proceedings to which we are a party or to which any of our property is subject.

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

        None.

PART II

Item 5.   Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

        Our common stock is traded on the New York Stock Exchange under the symbol DLX. During the years ended December 31, 20042005 and 2003,2004, we declared dividends of $0.40 per share and $0.37 per share, respectively, during each quarterly period. In Januaryperiod, for a total annual dividend of $1.60 for 2005 we increased our quarterly dividend payment to $0.40 per share.and $1.48 for 2004. Dividends are declared by our board of directors on a current basis and therefore, may be subject to change in the future, although we currently expecthave no such changesplans to change our dividend amount. As of December 31, 2004,2005, the number of shareholders of record was 9,321.8,880. The table below shows the per share closing price ranges of our common stock for the past two fiscal years as quoted on the New York Stock Exchange.

        During the fourth quarter of 2004, we did not purchase any of our own equity securities.        In August 2003, our board of directors approved an authorization to purchase up to 10 million shares of our common stock. This authorization has no expiration date and 7.9 million shares remain available for purchase under this authorization. During the fourth quarter of 2005, we did not purchase any of our own equity securities under this authorization, and we have not completed any such purchases since the second quarter of 2004. We do not intendexpect to repurchase a significant number of additional shares in the near future, as we intend to focus on paying off a portion ofreducing our outstanding debt. However, we have not terminated this share repurchase authorization and we may purchase additional shares under this authorization in the future.

        While not considered repurchases of shares, we do at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as a result of the exercising or vesting of such awards. During the fourth quarter of 2005, we withheld 22,306 shares in conjunction with the vesting of restricted stock and restricted stock units.

Item 6.   Selected Financial Data.

(dollars in thousands, except per share amounts)			2004			2003			2002			2001			2000
Statement of Income Data:
Revenue(1)			$	1,567,015		$	1,242,141		$	1,283,983		$	1,278,375		$	1,262,712
As a percentage of revenue:
Gross profit				65.8%			65.7%			66.1%			64.5%			64.1%
Selling, general and administrative expense				43.6%			39.6%			39.2%			40.2%			41.0%
Operating income(1) (2)				22.2%			25.7%			26.9%			23.6%			22.1%
Operating income(1) (2)			$	347,912		$	318,921		$	344,931		$	301,938		$	278,934
Earnings before interest, taxes, depreciation and
amortization of intangibles and goodwill
(EBITDA)(1) (2) (3)				442,210			378,334			403,331			374,732			348,682
Earnings before interest and taxes (EBIT)(1) (2) (4)				348,354			318,252			345,126			300,750			280,112
Income from continuing operations(1) (2)				198,648			192,472			214,274			185,900			169,472
Per share – basic				3.96			3.53			3.41			2.72			2.34
Per share – diluted				3.93			3.49			3.36			2.69			2.34
Cash dividends per share				1.48			1.48			1.48			1.48			1.48
Balance Sheet Data:
Cash and marketable securities				15,492			2,968			124,855			9,571			99,190
Return on average assets				19.2%			31.2%			35.5%			31.1%			20.5%
Total assets			$	1,499,079		$	562,960		$	668,973		$	537,721		$	656,274
Long-term debt				980,207			381,694			308,199			11,465			110,873
Total debt				1,244,207			594,944			308,199			161,465			110,873
Statement of Cash Flows Data:
Net cash provided by operating activities of
continuing operations				307,591			181,467			257,139			270,623			253,572
Free cash flow(5)				189,472			78,980			123,491			140,075			97,894
Purchases of capital assets				43,817			22,034			40,708			28,775			48,483
Payments for common shares repurchased				26,637			507,126			172,803			345,399			—
Total debt to EBITDA(3)				2.8			1.6			0.8			0.4			0.3
Total debt to net income				6.3			3.1			1.4			0.9			0.7
EBIT(4) to interest expense				10.6			16.5			68.0			53.9			24.5
Net income to interest expense				6.0			10.0			42.2			33.3			14.2
Free cash flow(5) to total debt				15.2%			13.3%			40.1%			86.8%			88.3%
Net cash provided by operating activities of
continuing operations to total debt				24.7%			30.5%			83.4%			167.6%			228.7%
Other Data as of Year-end (continuing
operations):
Units(6) (millions)				83.65			89.10			92.64			96.24			97.09
Number of employees				8,955			5,805			6,195			6,840			7,800
Number of printing facilities				16			14			14			14			14
Number of call center facilities				13			7			7			7			7

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

        We are the largest provider of checks in the United States, both in terms of revenue and number of checks produced. We design, manufacture and distribute a comprehensive line of printed checks. In addition to checks, we also offer other personalized printed items (e.g., business forms, business cards, stationery, greeting cards, labels, and shipping and packaging supplies), promotional products and merchandising materials, fraud prevention services and customer retention programs.

        On June 25, 2004, we acquired New England Business Service, Inc. (NEBS). NEBS is a leading provider of products and services to small businesses. Accordingly, our consolidated results of operations include the results of NEBS from the acquisition date. We believe NEBS is a strategic fit, as we both serve small business customers, and the acquisition expands our product offerings, customer base and non-check revenue.

EXECUTIVE SUMMARY

2004 Highlights

⁽¹⁾  Units represent an equivalent quantity of checks sold calculated across all check-related product lines.

2004 Consolidated Results of Operations

2004 Cash Flow/Financial Condition

CONSOLIDATED OVERVIEW

        Following the acquisition of NEBS, we re-defined our business segments to include the following:Our businesses are organized into three segments: Small Business Services, Financial Services and Direct Checks. Our Small Business Services is comprisedsegment generated 54.3% of the newly acquired NEBS business and our former Business Services segment.2005 consolidated revenue. This segment sells checks, forms and related products to more than six million small businesses and home offices through direct response marketing, financial institution referrals, independent distributors, sales representatives and the Internet.internet. Small Business Services is comprised of New England Business Service, Inc. (NEBS), which we acquired in June 2004, and our former Business Services segment. Our Financial Services segment generated 31.3% of our 2005 consolidated revenue. This segment sells personal and business checks and related products and check merchandising services to approximately 8,0007,500 financial institution clients nationwide, including banks, credit unions and financial services companies. Our Direct Checks segment generated 14.4% of our 2005 consolidated revenue. This segment is the nation’s leading direct-to-consumer check supplier, selling under the Checks Unlimited® and Designer® Checks brands. Through these two brands Direct Checks sells personal and business checks, as well as related products, usingvia direct response marketing and the Internet. Weinternet. All three of our segments operate only in North America.

        Although we are not in a high-growth industry, we continue to generate strong cash flows. We generated operating cash flows of $307.6 million during 2004 and $181.5 million during 2003. We believe our stable cash flows and our focus on cost management and operational excellence will allow us to maintain our leadership positionprimarily in the United States. Small Business Services also has operations in Canada.

        Our results of operations for 2005 were negatively impacted by lower volume in our Financial Services and Direct Checks segments caused by financial institution client losses, consolidations among financial institutions, the continuing decline in check printing portionusage and lower direct mail consumer response rates. Continuing pricing pressure in our Financial Services segment also had a negative impact. Partially offsetting these negative trends was the full-year impact of the payments industry and to expand our presence in the small business arena. Our strong cash flows enabled us to realize the debt capacity needed to complete the NEBS acquisition duringand the second quarterresulting synergies. Additionally, we realized the benefit of 2004. We have also utilizedseveral cost reduction initiatives undertaken in response to declining revenue in Financial Services and Direct Checks.

        As we begin 2006, our debt capacityfocus is shifting from integrating NEBS to repurchase common shares overexecuting strategies we believe will drive sustained growth in Small Business Services. The foundation of these strategies is the past several years. During 2003 and 2004, we repurchased 12.9 million shares for a total of $533.8 million. We have continued to pay dividends at an annual rate of $1.48 per share, resulting in a dividend yield of 4.0% based on our December 31, 2004 closing stock price. During the first quarter of 2005, we increased our quarterly dividend to $0.40 per share, up $0.03 per share from our previous dividend level. We were able to increase the dividend for two reasons: (1) synergies realized from the NEBS integration are exceeding our expectations, and (2) we expect year-over-year growth frominterdependency between our Small Business Services segmentand Financial Services segments. The relationships we have with financial institutions help generate small business referrals, which we serve through our Small Business Services segment. We believe Small Business Services provides one of the most comprehensive product offerings for small businesses. This allows us to offset declinesmeet the needs of small businesses, which in turn, strengthens our ability to retain and acquire clients in our core check businesses beginning in 2006. We believeFinancial Services segment as we enable them to better serve small business customers.Examples of steps we have sufficientalready taken toward executing our strategies include the following:

        Major challenges in our business are as follows.        Two of our largest product groups, checks and business forms, are mature products and their use has been declining in the marketplace.declining. According to our estimates, the total number of personal, business and government checks written in the United States has been in decline since the mid-1990s as a result of alternative payment methods, such asincluding credit cards, debit cards, smart cards,automated teller machines and electronic payment systems. A 2004 Federal Reserve study reported that the check is still the largest single non-cash payment method in the United States, accounting for approximately 45% of all non-cash payments processed in 2003, down from 2000 when checks comprised approximately 60% of all non-cash payments. The Federal Reserve Study also indicated that consumer checks are declining faster than business checks. In addition, continual technological improvements have provided small business customers with alternative means to enact and other bill paying servicesrecord business transactions. For example, electronic transaction systems and Internet-based payment services.off-the-shelf business software applications have been designed to automate several of the functions performed by business forms products.

        Because check usage is declining and financial institutions are consolidating, we also have also been encountering significant pricing pressure when negotiating contracts with our financial institution clients. Our traditional financial institution relationships with specific financial institutions are usuallytypically formalized through supply contracts averaging three to five years in duration. As we compete with other check printing companies to retain and obtain financial institution business in the face of declining volume, the resulting pricing pressure has reduced our profit margins, and we expect this trend to continue.

        A 2004 Federal Reserve study reported thatWe acquired several new financial institution clients in 2005, including three major financial institutions, and we have renewed our relationship with another major client. We expect to see the check is still Americans’ largest single non-cash payment type, accounting for approximately 45%full impact of all non-cash payments. This is, however,these new clients in the second quarter of 2006. At the same time, mid-2005 client losses from financial institution consolidations will have a decrease fromnegative impact on revenue in comparison to 2005, especially in the previous Federal Reserve Study published in 2002 which reported that checks comprised approximately 60%early portions of all non-cash payments. The report does note that this measure excludes checks written which are converted into electronic transactions at the point of sale. The Federal Reserve Study also indicated that consumer checks are declining faster than business checks. This study was completed prior to the implementation of Check 21 legislation in October 2004. This banking legislation became effective on October 28 and affects how checks can be processed. The new law states that an electronic or paper reproduction of a check is the legal equivalent2006. During 2006, we expect our share of the original check. This permits financial institutionsinstitution channel to submit these “substitute” checks for processing and clearing. We believe this legislation supports the use of checks by creating a more efficient processing system which is less costly and will allow financial

institutions to detect fraud earlier. It remains to be seen what, if any, impact this legislation will have on consumers’ use of checks.

        Business forms products have also reached maturity. Continual technological improvements have provided small business customers with alternative means to enact and record business transactions. For example, the price and performance capabilities of personal computers and related printers now provide a cost effective means to print low quality versions of business forms on plain paper. Additionally, electronic transaction systems and off-the-shelf business software applications have been designed to automate several of the functions performed by business forms products.increase.

        Our Direct Checks segment and portions of our Small Business Services segment have been impacted by reduced customer response rates to direct mail advertisements. WeThe DMA 2004 Response Rate Report published by the Direct Marketing Association and our own experience indicate that direct-to-consumer media response rates are declining across a wide variety of products and services. Additionally, we believe that the decline in our customer response rates is attributable to the decline in check usage, the gradual obsolescence of our standardized forms products and an overall increase in direct mail solicitations received byfinancial institutions providing free checks to consumers. Moreover, with over 41 million customers who have purchased from our target customers. Because each advertisement is resulting in fewer new customers, the cost to acquire each new customer has increased. We have also been impacted by a lengthening of the check reorder cycle due to the decline in check usage and the multi-box promotional strategies which are standard practice for direct mail sellers of checks.

        To offset these challenges, we have focused on increasing revenue per order by improving our selling techniques, as well as introducing new product offerings.

        All of these efforts have led to increased sales of premium-priced licensed and specialty check designs and additional value-added products and services such as fraud prevention and express delivery.customers.

        We continue to focus on cost management and operational excellence. In 2004,As previously announced, we closed six printing facilities. We have also implemented other employee reductions over the past year and have announced our intentionintend to close two additional printing facilities.facilities by mid-2006. The application of lean principles in our manufacturing area has resultedcontinues to result in increased efficiencies, and we are applying these principles throughout the rest of the company. We continue to closely manage spending and seek additional cost saving opportunities wherever possible. Additionally, in integrating NEBS,During 2006, we plan to realize cost synergiescomplete our installation of at least $25 million annuallya new order capture system in portions of our order processing and call center operations. This new system is expected to lower our information technology infrastructure costs by reducing redundancy while standardizing systems and processes.

        After considering the factors previously discussed, we expect that 2006 earnings will decrease from 2005. We estimate that diluted earnings per share will be between $2.70 and $2.90 for 2006, versus $3.09 for 2005, which reflects the following key differentiators from 2005:

        We anticipate that operating cash flow will be between $240 million and $260 million in 2006, compared to $178 million in 2005. The increase in 2006 will be due primarily to anticipated decreases in contract acquisition payments to financial institution clients as fewer large clients are up for renewal in 2006 and we are seeking to reduce our use of up-front product discounts. Additionally, payments for performance-based employee compensation will be lower in 2006 based on our 2005 operating performance and we anticipate other positive working capital changes. In addition, we expect capital spending to be approximately $50 million in 2006.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated Revenue

        As NEBS was acquired in June 2004, the full year impact of NEBS operations contributed an increase in revenue of $308.0 million in 2005. The $158.7 million decrease in revenue for our other businesses compared to 2004 was primarily due to a decline in volume for our Financial Services and Direct Checks segments. The loss of a large financial institution client in late 2004 was the largest single contributor to the volume decline. In addition, the volume decrease was due to the overall decline in check usage, mid-2005 client losses due to financial institution consolidations and the following factors specific to our Direct Checks segment: lower direct mail consumer response rates, lower customer retention and an increase in financial institutions offering free checks to consumers. On a total company basis, financial institution free check programs result in either the sale of a lower-priced product or a lost sale, depending on whether the financial institution is a client of our Financial Services segment. Revenue was also negatively affected by continued pricing pressure in our Financial Services segment. Partially offsetting these synergies through eliminating redundancies, leveragingdecreases was increased revenue per order for our shared services environmentDirect Checks segment due to a shift from the mail order channel to the internet and enhancing productivity by implementing lean principlesphone order channels, which typically result in higher revenue per order and sharing best practices.a higher percentage of reorders. Additionally, Direct Checks reorders, which generate higher revenue per order, have become a larger percentage of total orders, and we benefited from price increases in our Small Business Services segment. Contract termination payments did not have a significant impact on our 2005 revenue, as compared to 2004, as the amount of these payments was comparable each year.

        Recent economic indicators have been promising,The number of orders decreased in 2005, as compared to 2004, despite the full year impact of the NEBS acquisition. The volume decreases at Financial Services and Direct Checks exceeded the positive impact of the NEBS acquisition. Revenue per order increased in 2005, as compared to 2004, as Small Business Services orders increased as a percentage of total orders and Direct Checks revenue per order increased as discussed earlier.

        The acquisition of NEBS contributed revenue of $363.2 million in 2004. The $38.3 million decrease in revenue for our 2004 resultsother businesses compared to 2003 was due to a decline in volume resulting from the decline in check usage and the following factors specific to our Direct Checks segment: lower direct mail consumer response rates, longer reorder cycles due to promotional strategies for multi-box orders and lower customer retention. These volume decreases were not impactedpartially offset by economic conditions as they were in 2003. An important measureincreased financial institution referrals for our Small Business Services segment

is small business confidence. All trendssegment. Partially offsetting the volume decline was an increase in this area are positive.revenue per order as compared to 2003 due to continued strength in selling premium-priced licensed and specialty check designs, price increases in our Direct Checks and Small Business Services segments and a $7.7 million contract termination payment from a former financial institution client in the third quarter of 2004. These increases were partially offset by increased competitive pricing pressure within our Financial Services segment.

        The National Federationnumber of Independent Business (NFIB) reported that small business sales levels, employment and capital spending are all trending upwards,orders decreased in 2004, as iscompared to 2003, despite the NFIB’s measure of small business optimism. OurNEBS acquisition in June 2004, as volume decreases at Financial Services and Direct Checks segments areoffset the increase from the NEBS acquisition. Revenue

per order increased in 2004, as compared to 2003, primarily impacted by consumer spending and employment levels. Consumer spending began improvingdue to the increase in the second half of 2003 and continued to improve through 2004. Additionally, the employment growth that began in the first quarter of 2004 continued through the end of the year, with an average of 186,000 jobs created per month in 2004. There is a correlation between employment and the rate at which consumers open checking accounts. Thus, the employment rate is a key factor for the check printing portion of the payments industry. Our early outlook indicates that on a total company basis, the economy will have a neutral impact on our business in 2005.

        One of our main focuses during 2005 will be the continued integration of NEBS. Small Business Services provides oneorders as a percentage of total orders.

        Supplemental information regarding revenue by product is as follows:

        Due to the addition of NEBS non-check revenue, as well as the revenue declines within Financial Services and Direct Checks, the percentage of total revenue derived from the sale of checks and related services decreased to 65.4% in 2005 from 75.8% in 2004 and 89.3% in 2003. Small Business Services contributed non-check revenue of $521.1 million in 2005 and $297.4 million in 2004, from the sale of forms, envelopes, packaging supplies, holiday cards, labels, business cards, stationery and other promotional products.

Consolidated Gross Margin

        Gross margin decreased in 2005, as compared to 2004, due in large part to the full year impact of NEBS operations. NEBS historical gross margins have been seven to eight points lower than our other businesses because of its non-check product mix. This resulted in a 2.5 percentage point decrease in our consolidated gross margin in 2005. Additionally, pricing pressure in our Financial Services segment continued to impact our gross margin. Offsetting these decreases was the increase in Direct Checks revenue per order discussed earlier, on-going cost management efforts, including the closing of six printing facilities in 2004, continued productivity improvements, as well as cost synergies resulting from the NEBS acquisition and lower performance-based employee compensation.

        Gross margin was flat in 2004, as compared to 2003. Higher revenue per order, as well as continued productivity improvements and on-going cost management efforts, including the closing of six printing facilities in 2004, were offset by the impact of the most comprehensivelower margin NEBS business and the continued pricing pressure facing our Financial Services segment.

Consolidated Selling, General & Administrative (SG&A) Expense

        The increase in SG&A expense in 2005, as compared to 2004, was primarily due to the full year impact of expenses of the acquired NEBS business, an increase of $18.0 million in acquisition-related amortization expense and an increase of $8.9 million in integration expenses. Partially offsetting these increases were a $19.7 million decrease in performance-based employee compensation, cost reductions in response to declining revenue, cost

synergies resulting from the NEBS acquisition and a $6.2 million decrease in Direct Checks advertising expense primarily due to spending for new product initiatives in 2004.

        SG&A expense as a percentage of revenue increased in 2005, as compared to 2004, primarily due to the decline in revenue for Financial Services and service offerings for small businesses. This providesDirect Checks being greater than the basis for usreduction in fixed SG&A expense. Additionally, NEBS results increased our SG&A percentage by 0.7 percentage points. NEBS has historically had a higher SG&A percentage than our other businesses due to increaseits greater reliance on direct mail and a direct sales force to existingacquire and retain customers, as well as its decentralization of SG&A functions. Additionally, as previously discussed, these results included an increase of $18.0 million in acquisition-related amortization expense and an increase of $8.9 million in integration expenses.

        The increase in SG&A expense in 2004, as compared to pursue2003, was primarily due to expenses of the acquired NEBS business, including $19.1 million of additional acquisition-related amortization expense and $7.1 million of integration expenses, a $12.7 million increase in performance-based employee compensation due to our 2004 operating performance exceeding planned amounts, a $10.3 million increase in stock-based compensation due to the adoption of the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 and a $4.7 million increase in Direct Checks advertising expense due to new customers.product efforts. Partially offsetting these increases were cost management efforts, including savings realized from employee reductions, lower discretionary spending and $5.3 million of asset impairment losses in 2003. The asset impairment losses related to manufacturing technologies and software. We had been intending to implement the manufacturing technologies during 2003. However, having already realized many efficiencies in our manufacturing function as a result of other initiatives, including the implementation of lean manufacturing, the incremental benefits expected from these technologies no longer warranted their implementation. The impaired software was intended to replace several of our existing systems and bring various technologies used by the company onto one platform. However, based on our continuing evaluation of investment initiatives, we determined that the costs to implement the system and the timeline for implementation did not result in an adequate return on our investment. The majority of the impaired assets had no alternative use and could not be sold to third parties. Thus, these assets were written down to a carrying value of zero. Certain related hardware was sold to third parties and was written down to its fair value less costs to sell. Of the total asset impairment losses, $3.6 million related to property, plant and equipment and $1.7 million related to intangible assets.

        SG&A expense as a percentage of revenue increased in 2004, as compared to 2003, primarily as a result of NEBS historically higher SG&A percentage. Additionally, as discussed above, NEBS results included $19.1 million of additional acquisition-related amortization expense and $7.1 million of integration expenses.

Interest Expense

        The increase in interest expense in 2005, as compared to 2004, was due to higher interest rates and the higher average debt level resulting from the full-year impact of financing the acquisition of NEBS. The increase in interest expense in 2004, as compared to 2003, was due to our higher average debt level resulting from the acquisition of NEBS, partially offset by lower interest rates.

Provision for Income Taxes

        The decrease in our effective tax rate for 2005, as compared to 2004, was primarily due to the new federal qualified production activity deduction which was passed as part of the American Jobs Creation Act of 2004, as well as changes in our state tax rates due to changes in our legal entity structure. These impacts were partially offset by lower tax credits in 2005 and the positive impact in 2004 of refunds received for prior year state income tax credits and an increase in our estimate of 2004 state income tax credits. We expect our 2006 tax rate to be approximately 37%.

        The increase in our effective tax rate for 2004, as compared to 2003, was primarily due to the reversal of $7.3 million of previously established income tax reserves during 2003. A prior year federal audit period was closed due to the expiration of the statute of limitations, and we reached agreements with two states to favorably settle proposed income tax audit assessments. As a result, the related reserves were no longer required. These reversals lowered our 2003 effective tax rate by 2.4 points. Our 2004 effective tax rate was positively impacted by refunds received for prior year state income tax credits, as well as an increase in our estimate of 2004 state income tax credits.

Income from Continuing Operations

        The decrease in income from continuing operations in 2005, as compared to 2004, was primarily due to lower volume resulting from the continuing decline in check usage, mid-2005 client losses due to financial institution consolidations, lower direct mail response rates and customer retention for our Direct Checks segment, and the loss of a large financial institution client in late 2004. Additionally, our results were negatively impacted by continued pricing pressure within our Financial Services segment, higher interest expense due to higher interest rates and the full year impact of financing the NEBS acquisition, also provides aas well as the full year impact of amortization resulting from the NEBS acquisition. These decreases were partially offset by the full-year contribution of the NEBS business and the resulting cost synergies, lower performance-based employee compensation, increased sales of premium-priced licensed and specialty check designs and cost reductions in response to lower revenue, as well as manufacturing productivity improvements.

        The increase in income from continuing operations in 2004, as compared to 2003, was due to the acquisition of NEBS, manufacturing productivity improvements, other cost management efforts and higher net restructuring charges in 2003. Further information regarding our restructuring charges can be found in the section entitledRestructuring Accruals. These increases were partially offset by higher interest expense in 2004 due to financing the NEBS acquisition, the positive impact on our product mix by increasing our non-check revenue. Based onin 2003 from the successreversal of income tax reserves and higher stock-based compensation expense in 2004 due to the adoption of the integration thus far,fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation.

        On January 1, 2004, we expect thatadopted the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation. We reported this change in accounting principle using the modified prospective method of adoption described in SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure. During 2003, we will realize both the cost synergies and growth we expected when we acquired NEBS. We anticipate that growthaccounted for our employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees. Accordingly, our 2003 results of operations do not include compensation expense for stock options or for our employee stock purchase plan. Had this expense been included in our Small Business Services segment will offsetresults, diluted earnings per share would have been $0.07 lower for 2003. This pro forma impact of stock-based compensation was calculated utilizing the decline in our core check businesses as we move into 2006.method disclosed under the caption “Note 1:

RESTRUCTURING CHARGES, ASSET IMPAIRMENTS AND OTHER DEVELOPMENTS

        Over the past three years, we have recorded charges and credits for restructurings, asset impairments and other developments. The significant items disclosed inSignificant accounting policies” of the Notes to Consolidated Financial Statements appearing in Part IIItem 8 of this report are as follows (dollarsreport. Total stock-based compensation expense recognized in thousands):

        The above pre-tax items are reflected in theour consolidated statements of income was $7.0 million in 2005, $12.2 million in 2004 and $1.0 million in 2003. The decrease in 2005, as follows (dollarscompared to 2004, was due to a lower number of stock options granted and lower restricted stock unit awards earned in thousands):2005, as our operating performance did not meet planned results.

Net Loss from Discontinued Operations

        Discontinued operations in 2005 include the results of the apparel business acquired from NEBS. This business was sold in the third quarter of 2005, resulting in a pre-tax gain of $0.8 million. In addition to the apparel business, discontinued operations in 2004 also include the European operations of NEBS, which were sold on December 31, 2004. No gain or loss was recognized on this disposition as the assets and liabilities were recorded at fair value on the acquisition date. We continue to hold one building associated with the European operations and intend to complete the sale of this facility in the first half of 2006.

Net restructuring charges –Diluted Earnings per Share

        In addition to the decrease in income from continuing operations in 2005, as compared to 2004, diluted earnings per share decreased in 2005 due to the increase in average shares outstanding resulting from shares issued under employee stock purchase and stock incentive plans. The change in shares outstanding resulted in a $0.03 decrease in earnings per share for 2005 as compared to 2004.

        In addition to the increase in income from continuing operations in 2004, as compared to 2003, diluted earnings per share increased in 2004 due to the decrease in average shares outstanding resulting from our share repurchase programs. During 2003, we purchased 12.2 million shares and during 2004, we purchased 0.6 million shares. The change in average shares outstanding resulting from share repurchases, partially offset by the impact of shares issued under employee stock purchase and stock incentive plans, resulted in a $0.34 increase in earnings per share for 2004 as compared to 2003.

Earnings before Interest, Taxes, Depreciation and Amortization of Intangibles (EBITDA)

        EBIT and EBITDA are not measures of financial performance under Generally Accepted Accounting Principles (GAAP) in the United States of America. We disclose these measures because they can be used to analyze profitability between companies and industries by eliminating the effects of financing (i.e., interest) and capital investments (i.e., depreciation and amortization). We believe these measures can indicate whether a company’s earnings are adequate to pay its debts without regard to financing, capital structure or income taxes. We also believe that increases in these measures depict increased ability to attract financing and increase the valuation of our business. We do not consider these measures to be substitutes for performance measures calculated in accordance with GAAP. Instead, we believe that they are useful performance measures which should be considered in addition to those measures reported in accordance with GAAP.

RESTRUCTURING ACCRUALS

During 2004, we recorded restructuring charges of $5.7 million for employee severance primarily related to the closing of our Financial Services check printing facility located in Dallas, Texas and our Direct Checks check printing facility located in Anniston, Alabama, as well as reductions in various functional areas primarily within our Direct Checks and Financial Services segments. The closure of the Dallas facility was primarily due to the loss of a major financial institution client whose contract expired at the end of 2004. The other reductions were a result of the continuing decline in check usage, as well as increased productivity. Both the Dallas and Anniston facilities were closed during the fourth quarter of 2004. We expect theThe other employee reductions to be substantiallywere completed during the first half2005. In total, 450 employees received a total of 2005. The restructuring charges included estimated severance benefits for 483 employees. The related$5.3 million in severance payments, are beingwhich were funded by cash from operations. Also during 2004, we reversed $1.3 million of previously recorded restructuring accruals due to fewer employees receiving severance benefits than originally estimated. These restructuring charges and reversals are reflected as cost of goods sold of $2.0$2.4 million and SG&A expense of $2.4$3.3 million in our 2004 consolidated statement of income.

        During 2003, we recorded restructuring charges of $11.8 million for employee severance primarily related to the closing of three of our Financial Services check printing facilities and other reductions in employees within Financial Services and our corporate support group.Services. We were able to close the three check printing facilities because of the expertise we have developed in logistics, productivity and inventory management, as well as the decline in check usage. The other employee reductions were the result of our ongoing cost management efforts. All three check printing facilities were closed during 2004, and the other employee reductions were also substantially completed during 2004. In total, 573 employees received a total of $10.7 million in severance payments, which were funded by cash from operations. During 2003, we also reversed $0.4 million of previously established restructuring accruals due to fewer employees receiving severance benefits than originally estimated. These restructuring charges and reversals are reflected as cost of goods sold of $5.1 million and SG&A expense of $6.7 million in our 2003 consolidated statement of income as cost of goods sold of $5.0 million and SG&A expense of $6.4 million.income.

        As a result of the five facility closings and other employee reductions discussed here, we estimate that we realized net cost savings in 2005 of approximately $5 million in cost of goods sold and $17 million in SG&A expense in 2004, in comparison to our 2003 results of operations. In 2005, we anticipate net cost savings of approximately $20$18 million in cost of goods sold and $7 million in SG&A expense, in comparison to our 2004 results of operations. Reduced costs consistconsisted primarily of labor and facility expenses such as insurance, taxes, depreciation and maintenance. In addition to a total of $16$16.0 million of severance payments, we also incurred other costs related to the closing of facilities, including equipment moves, training and travel. These costs were expensed as incurred, primarily as cost of goods sold, and totaled $2.1 million. Of this

amount, $1.8 million was expensed in 2004 and $0.3 million was expensed in 2003. We are also improvingmade improvements to our remaining check printing facilities to allow them to handle the increased volume. These improvements, which are expected to total approximatelytotaled $5 million, arewere capitalized and are being depreciated, primarily as cost of goods sold, over their estimated useful lives. During 2004, $3.3 million was spent on these improvements and $1.4 million was spent in 2003.

        During 2002,In conjunction with the acquisition of NEBS, we recorded $30.2 million of restructuring chargesaccruals in 2004 for NEBS activities which we decided to exit. These accruals primarily included severance benefits, as well as $2.8 million due under noncancelable operating leases on facilities which have been or will be vacated as we consolidate operations. The severance accruals include payments due 700 employees. This includes employees in the Tucker, Georgia printing facility, which was closed during the fourth quarter of $1.5 million for employee severance related primarily2004, and the Los Angeles, California and Athens, Ohio facilities, which we plan to manufacturingclose by mid-2006. Additionally, the accruals included employees within our Financial Services segment andin various functional areas withinthroughout NEBS resulting from our Direct Checks segment. These reductions wereshared services approach to manufacturing and certain SG&A functions. The severance accruals also included amounts due to certain NEBS executives under change of control provisions included in their employment agreements, as we eliminated redundancies between the two companies. Severance payments are expected to be substantially completed by the end of 2006, utilizing cash from operations. As a result of our ongoingthese facility closures and employee reductions, we estimate that we realized cost management efforts and were completed during 2003. In total, 121 employees received $1.5savings of approximately $1 million in severance payments. During 2002, we also reversed $0.2 million of previously established restructuring accruals. These restructuring charges and reversals are reflected in our 2002 consolidated statement of income as cost of goods sold of $0.6and $12 million andin SG&A expense in 2005, in comparison to NEBS historical results of $0.7 million.operations. We estimate that we will realize additional savings of approximately $7 million in cost of goods sold and $2 million in SG&A expense in 2006, in comparison to our 2005 results of operations.

        Further information regarding our restructuring accruals can be found under the caption “Note 6: Restructuring accruals” of the Notes to Consolidated Financial Statements appearing in Part IIItem 8 of this report.

SEGMENT RESULTS

Change in accounting for inventory– On July 1, 2004, we changed the method of accounting for a portion of        Additional financial information regarding our inventories. Inventories previously accounted for under the last-in, first-out (LIFO) method are now accounted for using the first-in, first-out (FIFO) method. This change resulted in a decrease in cost of goods sold of $2.2 million, primarily in our Financial Services segment. This equates to an increase in net income of $1.4 million, or $0.03 per diluted share. The effect of this accounting change on prior periods was immaterial, as was the effect on the current period. As such, we did not restate prior period financial statements to reflect this change. We consider the FIFO method to be preferable. The recently acquired NEBS business also utilized the FIFO method, and now we have a consistent accounting methodology across the company. Additionally, the effect on net income of utilizing the FIFO method is not significantly different than the results that would be obtained using the LIFO method.

Asset impairment losses – During 2003, we recorded asset impairment losses of $5.3 million, primarily in the Financial Services segment. The impaired assets consisted of both manufacturing technologies and software. We had been intending to implement the manufacturing technologies during 2003. However, having already realized many efficiencies in our manufacturing function as a result of other initiatives, including the implementation of lean manufacturing, the incremental benefits expected from these technologies no longer warranted their implementation. The impaired software was intended to replace several of our existing systems and bring various areas of the company onto one platform. However, based on our continuing evaluation of investment initiatives, we determined that the costs to implement the system and the timeline for implementation did not result in an adequate return on our investment. The majority of the impaired assets had no alternative uses and could not be sold to third parties. Thus, these assets were written down to a carrying value of zero. Certain related hardware was sold to third parties and was written down to its fair value less costs to sell. Of the total asset impairment losses, $3.6 million related to property, plant and equipment and $1.7 million related to intangible assets.

Post-retirement benefit curtailment gain– During the fourth quarter of 2003, we amended our retiree health care plan to limit the number of employees eligible for benefits under the plan. In order to receive the current level of benefits, employees must reach 20 years of service and 75 points (total of age and years of service) prior to January 1, 2006. Employees reaching 20 years of service and 75 points between January 1, 2006 and December 31, 2008 are eligible for the current level of benefits; however, their premiums will not be reduced once they become eligible for Medicare as is currently the case. Employees reaching 20 years of service and 75 points after December 31, 2008 must pay the full cost of coverage if they elect to participate in our health care plan. As a result of this plan change, we recognized a curtailment gain of $4.0 million during the fourth quarter of 2003. This gain is reflected as a reduction of cost of goods sold of $1.4 million and a reduction of SG&A expense of $2.6 million in our 2003 consolidated statement of income. This plan change resulted in a $2.5 million decrease in our 2004 post-retirement benefit expense.

Adjustments to provision for income taxes– During 2003, we reversed $7.3 million of previously established income tax reserves. A prior year federal audit period was closed due to the expiration of the statute of limitations, and we reached agreements with two states to favorably settle proposed income tax audit assessments. As a result, the related reserves were no longer required. Also during 2003, we recorded a $0.4 million charge for a valuation allowance related to our deferred tax asset for capital loss carryforwards which expired in 2003.

        During the fourth quarter of 2002, the Internal Revenue Service (IRS) completed its review of our income tax returns for 1996 through 1998. As a result, we reversed $12.9 million of previously established income tax reserves. Certain IRS rules were clarified in a manner favorable to us, and the related reserves were no longer required. Substantially offsetting these reversals in 2002 was a $12.2 million charge for a valuation allowance related to our deferred tax asset for capital loss carryforwards. At December 31, 2002, we had capital loss carryforwards of approximately $33.0 million which expired in 2003. By the fourth quarter of 2002, the predominance of negative evidence indicated that it was more likely than not that the tax benefits associated with a majority of the capital loss carryforwards would not be realized as certain tax planning strategies upon which we intended to rely were no longer considered to be prudent or feasible.

STOCK-BASED COMPENSATION

        On January 1, 2004, we adopted the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation.We are reporting this change in accounting principle using the modified prospective method of adoption described in SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure.Beginning in 2004, our results of operations reflect compensation expense for all employee stock-based compensation, including the unvested portion of stock options granted prior to 2004. This method results in the same amount of compensation expense which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied from its original effective date. Prior to 2004, we accounted for our employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees.Under this method of accounting, no compensation expense was recognized for stock options or for our employee stock purchase plan.

        During 2004, we implemented changes to our long-term compensation strategy. Rather than using stock options as the exclusive form of long-term incentive, we now utilize a combination of stock options, performance shares and restricted stock. All such awards are granted under our shareholder-approved stock incentive plan. The level of shares earned under the performance share component is contingent upon the attainment of specific performance targets over a three-year period. The fair value of the performance shares granted is equal to the market price of our stock at the date of grant. Compensation expense is recorded over the three-year performance period based on our estimate of the number of shares which will be earned by the award recipients. In addition, during the second quarter of 2004, we issued 40,404 restricted shares to employees. The fair value of these awards is equal to the market price of our stock at the date of grant. Compensation expense is recorded over the three year vesting period.

        Total stock-based compensation expense was $12.2 million for 2004. This expense is reflected as cost of goods sold of $0.9 million and SG&A expense of $11.3 million in our consolidated statement of income. Total stock-based compensation expense was $1.0 million in 2003 and $3.1 million in 2002. These amounts are reflected in SG&A expense in our consolidated statements of income for those years.

        In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to SFAS No. 123. The new statement is referred to as SFAS
No. 123(R) and is entitledShare-Based Payment. The new statement requires companies to recognize expense for stock-based compensation in the statement of income. We do not expect the provisions of SFAS No. 123(R) to result in a significant change in the compensation expense we currently recognize in our statements of income.

CONSOLIDATED RESULTS OF OPERATIONS

Income from continuing operations— The increase in income from continuing operations in 2004, as compared to 2003, was primarily due to the acquisition of NEBS, manufacturing productivity

improvements and other cost management efforts, partially offset by higher interest expense in 2004 due to financing associated with the NEBS acquisition and the reversal of income tax reserves in 2003.

         The decrease in income from continuing operations in 2003, as compared to 2002, was primarily due to a decline in unit volume, higher interest expense due to financing share repurchases and an increase in net pre-tax charges discussed earlier underRestructuring Charges, Asset Impairments and Other Developments, partially offset by the reversal of income tax reserves in 2003.

        During 2003 and 2002, we accounted for our employee-stock based compensation in accordance with APB Opinion No. 25,Accounting for Stock Issued to Employees. Accordingly, our 2003 and 2002 results of operations do not include compensation expense for stock options or for our current employee stock purchase plan. Had this expense been included in our results, diluted earnings per share would have been $0.07 lower for 2003 and $0.04 lower for 2002. This pro forma impact of stock-based compensation was calculated utilizing the method disclosedsegments appears under the caption “Note 1: Significant accounting policies”17: Business segment information” of the Notes to Consolidated Financial Statements appearing in Part IIItem 8 of this report.

Small Business Services

        This segment sells checks, forms and related products to small businesses and home offices through direct response marketing, financial institution referrals and via sales representatives, independent distributors and the internet.

out payment from a former financial institution client in the third quarter of 2004. These increases were partially offset by increased competitive pricing pressure within our Financial Services segment.the loss of a large financial institution client in late 2004, as well as mid-2005 client losses due to financial institution consolidations.

        The decreaseincrease in revenueoperating income in 2003,2005, as compared to 2002,2004, was due to a 3.8% decrease in units resulting primarily from an overall decline in the number of checks being written due to the increasing use of alternative payment methods and negative economic conditions. Additionally, lower customer retention, multi-box promotional strategies and lower direct mail consumer response rates for our Direct Checks segment and the timing of client gains and losses for our Financial Services segment contributed to the volume decline. Partially offsetting the decreased volume was a 0.6% increase in revenue per unit. The continued strength in selling premium-priced licensed and specialty check designs and additional value-added products and services such as express delivery and fraud prevention, as well as price increases, were partially offset by increased competitive pricing pressure within our Financial Services segment.

         Supplemental information regarding revenue by product is as follows (dollars in thousands):

        Due to the addition of NEBS non-check revenue, the percentage of total revenue derived from the sale of checks and related products decreased to 75.8% in 2004, as compared to 89.3% in 2003 and 89.1% in 2002. NEBS contributed non-check revenue of $251.8 million in 2004, primarily comprised of forms, envelopes, packaging supplies, holiday cards, labels, business cards, stationery and other promotional products.

Consolidated Gross Margin

        Gross margin was flat in 2004, as compared to 2003. Higher revenue per unit, as well as continued productivity improvements and on-going cost management efforts, including the closing of six printing facilities in 2004, were offset by thefull year impact of the NEBS acquisition, price increases and lower margin NEBS businessdelivery and the continued pricing pressure facing our Financial Services segment. NEBS has historically hadmaterials costs as we were able to negotiate lower gross margins than our other businesses because of its non-check product mix.

        The decrease in gross margin in 2003, as compared to 2002, was due primarily to pricing pressure within Financial Services, lower unit volume and an increase in net restructuring charges of $4.4 million, primarily relatedprices subsequent to the closing of three Financial Services check printing facilities. Partially offsetting these decreases were productivity improvements, cost management efforts, price increases, the continued strength in selling premium-priced licensed and specialty check designs and additional value-added products and services and the curtailment gain of $1.4 million discussed earlier underRestructuring Charges, Asset Impairments and Other Developments.

Consolidated Selling, General & Administrative Expense

        The increase in SG&A expense in 2004, as compared to 2003, was primarily due to expenses of the acquired NEBS business (including $19.1 million of additional acquisition-related amortization expense for certain intangible assets and $7.1 million of integration expenses), a $12.7 million increase in performance-based employee compensation due to our operating performance exceeding planned amounts, a $10.3 million increase in stock-based compensation and a $4.7 million increase in Direct Checks advertising expense due to new product efforts. In January 2004, we adopted the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation. Further information concerning this change in accounting principle can be found underStock-Based Compensation.acquisition. Partially offsetting these increases were an $18.0 million increase in acquisition-related amortization expense, an $8.9 million increase in integration costs and increased call center and marketing costs related to the implementation of our cost management efforts, including savings realized from employee reductions,growth strategy. Additionally, the allocation of corporate costs to the NEBS portion of Small Business Services resulted in a decrease of $12.0 million in Small Business Services operating income in 2005. As discussed under the caption “Note 17: Business segment information” of the Notes to

Consolidated Financial Statements appearing in Item 8 of this report, we began allocating corporate costs to the NEBS portion of Small Business Services on April 1, 2005 when NEBS implemented certain of our corporate information systems and lower discretionary spending.

        SG&A expense asbegan utilizing corporate shared services functions. As such, Small Business Services now bears a percentagelarger portion of revenue increasedcorporate costs. The decrease in 2004,operating margin in 2005, as compared to 2003, primarily as a result2004, was due to the full year impact of NEBS results. NEBS has historically had alower margin business, as well as the higher SG&A percentage than our other businesses because NEBS relies to a greater degree on direct mail and a direct sales force to acquire and retain customers. Additionally, as discussed above, NEBS results included $19.1 million of additional acquisition-related amortization expense and $7.1 million of integration expenses.

        The decrease in SG&A expense in 2003, as compared to 2002, was primarily due to a $16.0 million decrease in performance-based employee compensation, lower discretionary spending and cost management efforts as we managed through the challenging business and economic environments, as well as the curtailment gain of $2.6 million discussed earlier underRestructuring Charges, Asset Impairments and Other Developments. These decreases were partially offset by a $7.4 million increase in commissions for our Small Business Services segment and an increase in net restructuring charges of $5.7 million related to reductions in employees within Financial Services and our corporate support group.

Interest Expense

        The increase in interest expense in 2004, as compared to 2003, was due to our higher debt level resulting from the acquisition ofcosts. NEBS partially offset by lower interest rates. During 2004, we had weighted-average debt outstanding of $942.6 million at a weighted-average interest rate of 3.27%. During 2003, we had weighted-average debt outstanding of $468.4 million at a weighted-average interest rate of 3.67%.

        The increase in interest expense in 2003, as compared to 2002, was primarily due to higher interest rates on long-term notes we issued in December 2002, as well as higher debt levels to fund our share repurchase programs. During 2002, we had weighted-average debt outstanding of $171.8 million at a weighted-average interest rate of 2.13%.

Provision for Income Taxes

        The increase in our effective tax rate for 2004, as compared to 2003, was primarily due to the reversal of $7.3 million of previously established income tax reserves during 2003. These reversals were discussed earlier underRestructuring Charges, Asset Impairments and Other Developments, and lowered our 2003 effective tax rate by 2.4 points. Our 2004 effective tax rate was positively impacted by refunds received for prior year state income tax credits, as well as an increase in our estimate of 2004 state income tax credits. We expect our 2005 tax rate to be approximately 38%.

Earnings before Interest, Taxes, Depreciation and Amortization of Intangibles (EBITDA)

        EBIT and EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP). We disclose these measures because they can be used to analyze profitability between companies and industries by eliminating the effects of financing (i.e., interest) and capital investments (i.e., depreciation and amortization). We believe these measures can indicate whether a company’s earnings are adequate to pay its debts without regard to financing, capital structure or income taxes. We also believe that increases in these measures depict increased ability to attract financing and increase the valuation of our business. We do not consider these measures to be substitutes for performance measures calculated in accordance with GAAP. Instead, we believe that these are useful performance measures which should be considered in addition to those measures reported in accordance with GAAP. Our committed lines of credit contain covenants requiring a minimum EBIT to interest expense ratio.

        The increase in these measures in 2004, as compared to 2003, was due to NEBS results of operations, productivity improvements and other cost management efforts. The decrease in 2003, as compared to 2002, was due primarily to the revenue decline and the increase in net pre-tax charges discussed earlier underRestructuring Charges, Asset Impairments and Other Developments, partially offset by productivity improvements and other cost management efforts.

        EBITDA as a percentage of revenue decreased in 2004, as compared to 2003, due to NEBS lower margin business. NEBShistorically has historically had lower operating margins than our other businesses because of its non-check product mix and its greater reliance on direct mail and a direct sales force to acquire and retain customers.

ACQUISITION OF NEW ENGLAND BUSINESS SERVICE, INC.

        As discussed earlier, on June 25,        The increase in revenue in 2004, we acquired all of the outstanding shares of NEBS for $44 per share and agreedas compared to redeem all outstanding NEBS stock options for $44 per option share less the option exercise price. As of December 31, 2004, substantially all of the direct costs of the acquisition had been paid. The total purchase price for the acquisition2003, was comprised of the following (dollars in thousands):

        To finance the acquisition, we utilized $475.0 million of an $800.0 million bridge financing agreement, as well as commercial paper. We re-financed these borrowings in October 2004 when we issued $600.0 million of long-term debt. Further details concerning this long-term debt can be found inLiquidity, Capital Resources and Financial Condition.

        NEBS operating results are included in our consolidated results of operations from the date of acquisition. In the fourth quarter of 2004, we finalized our allocation of the purchase priceprimarily due to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. This allocation is reflected in our consolidated balance sheet as of December 31, 2004.

        Our allocation of the purchase price reflects $30.2$363.2 million of restructuring accruals for NEBS activities which we have decided to exit. These accruals primarily include severance payments, as well as $2.8 million due under noncancelable operating leases on facilities which have been or will be vacated as we consolidate operations. The severance accruals include payments due 884 employees. This includes employees in the Tucker, Georgia printing facility which was closed during the fourth quarter of 2004, the Los Angeles, California facility which we plan to closecontributed by the end of 2005 and the Athens, Ohio facility which we will begin closing in 2005 and will be completely closed by mid-2006. Additionally, the accruals include employees in various functional areas throughout the organization resulting from our shared services approach to manufacturing and certain SG&A functions. The severance accruals also include amounts due to certain NEBS executives under change of control provisions included in their employment agreements, as we eliminate redundancies between the two companies. Restructuring payments are expected to be substantially completed by the end of 2006, utilizing cash from operations. As a result of these facility closures and employee reductions, we expect to realize cost savings of approximately $7 million in cost of goods sold and $18 million in SG&A expense in 2006, in comparison to NEBS historical results of operations.

        During the fourth quarter of 2004, we disposed of substantially all of the operations of NEBS European businesses. This disposal reflects our intention to focus on our North American operations and was completed on December 31, 2004. Net proceeds from the sale were $0.8 million, subject to subsequent adjustment based on an audit of the companies’ December 31, 2004 balance sheets. No gain or loss was recognized on this disposition as the assets and liabilities were recorded at fair value on the acquisition date. Also during the fourth quarter of 2004, we announced the planned sale of NEBS apparel business, PremiumWear. This sale will allow us to focus our resources on the many critical initiatives underway within Small Business Services. We anticipate that this sale will be completed in 2005. The results of operations of these businesses are reflected as discontinued operations in our 2004 consolidated financial statements.

        The purchase price allocation resulted in goodwill of $498.5 million. We believe that the NEBS acquisition resulted in the recognition of goodwill primarily because of its industry position, the potential to introduce products across multiple channels and the ability to realize cost synergies. The following illustrates our allocation of the purchase price to the assets acquired and liabilities assumed (dollars in thousands):