As we expected, the second year of our "Building the new Deluxe" initiative brought many wide-ranging, fundamental changes to our Company. Both internally and externally, Deluxe's world was in constant movement last year, as we worked to repair or divest underperforming and non-strategic units, while preparing our Company for the rapidly approaching global financial services marketplace of the 21st century.

We experienced many significant successes last year, including progress in rounding out our value proposition to become an integrated information solutions provider to our key customer groups. We also witnessed a few disappointments, but I am proud to report that today's Deluxe is significantly stronger than it was a year ago. In one year's time, we have developed a broader, richer, and more focused set of paper payment, information, and electronic products and services. We have also improved our operating earnings, strengthened our balance sheet, and created a leadership team that is committed to working with the thousands of outstanding, dedicated Deluxers who are the very heart of our Company.

In 1996, our reported earnings declined 25 percent to $65.5 million, down from $87 million in 1995. This decline reflected $142.3 million in special pretax charges we took for goodwill impairment, plant consolidation, and other one-time events related to our restructuring. However, when adjusted for these charges in both years, our operating earnings improved 17 percent to $1.90 per share in 1996, up from $1.62 per share in 1995. Our quarterly dividend payout remained unchanged at 37 cents per share throughout the year, and our stock price began the year at $29, reached a high of $39 3/4 in August, and closed the year at $32 3/4. I suspect our stock performance reflected the struggles many of our investors had in understanding the short- and long-term impact of the complicated charges we recorded last year. However, Deluxe's financial picture should become clearer in 1997, as the Company profile that will carry us into the next century continues to take shape.

1996 In Review
Improving profitability and effectiveness of existing business An essential element of our 1996 rebuilding program was a corporatewide effort to strengthen the profits and operating capabilities of our existing businesses.

In 1996, we closed 12 plants, with another 13 set to close this year. We also combined two direct marketing warehouses and fulfillment centers into one site, resulting in greater efficiency and substantially lower costs. Moreover, we completed the pilot phase of our new check printing order entry and customer service system -- or customer interface (CI) as we call it. CI is now being rolled out and is expected to serve more than 6,700 financial institutions by year-end 1997, with the remainder converting in 1998.

In addition, our new centralized purchasing organization began delivering a more efficient, lower-cost way to make our purchases. We also reduced our officer group by more than 30 percent last year, extending accountability to our operating units and reducing redundant operational responsibilities.

Finally, we began eliminating unprofitable and slow-selling product lines throughout the Company, reducing inventory by 19 percent (without the effect of acquisitions or divestitures). This product simplification initiative continues into 1997, as we prepare to trim our very extensive check printing inventory and eliminate complexity that doesn't add value to the customer.

As we continue these initiatives toward our target of $150 million in annual cost reductions, we are already beginning to see the tangible benefits of our efforts in an improved cash position. In fact, cash provided by our continuing operations was $290.6 million in 1996, compared to $214.6 million in 1995 and $199 million in 1994.

Market-serving units Our Deluxe Financial Services market-serving unit, which includes check printing, had an excellent year with strong growth coming from our newer businesses, including payment protection services. In this unit, we combined our formerly independent marketing and sales organizations to generate an integrated and more effective approach to our financial services and retail clients. One result of this move has been a major increase in new products, allowing us to increase significantly our revenues from new products as a percent of sales.

Our Deluxe Direct market-serving unit -- the source of significant red ink during 1995 -- overcame difficult circumstances in 1996 to deliver a much improved performance before one-time charges. Led by President Larry Mosner, Deluxe Direct executed a strong turnaround, even as our strategic assessment indicated that we should divest many of Deluxe Direct's businesses. Under Larry's direction, Deluxe Direct consolidated facilities, revamped product lines, enhanced its marketing effectiveness, focused on customer satisfaction, and made painful-but-needed work force reductions.

Our Deluxe Electronic Payment Systems market-serving unit had a difficult year and experienced a significant operating loss. A new management team has already begun the needed corrective actions at Deluxe Data Systems, the main business in this unit. Led by Bob Rosseau, the new president of Deluxe Electronic Payment Systems and former president of Diners Club U.S., I am confident that our combination of Deluxe veterans and other recruited professionals will restore Deluxe Data Systems to profitability as quickly as possible. Bob and his team are also reshaping the strategic growth initiatives needed to respond to industry changes and to the increasing demand for our electronic payment products.

On a positive note, Deluxe Data Systems saw its electronic transaction processing volume increase by 38 percent in 1996, reflecting the growing usage of automated teller machines in the United States.

Divesting non-strategic businesses Our 1996 divestitures included T/Maker Company, Health Care Forms, Financial Alliance Processing Services, Inc., Deluxe U.K. forms, and our internal bank forms business. After completion of a strategic evaluation of our Deluxe Direct businesses, our board of directors also approved the sale of PaperDirect, Inc., Nelco, Inc., and the Social Expressions component of Current, Inc. We expect to complete these sales by the end of 1997.

By the end of this year, we will have divested all or part of nine businesses that did not fit our strategic vision. These divestitures should strengthen Deluxe in three ways: 1) Profitability -- though these nine businesses represented approximately 20 percent of our 1996 revenues, they contributed far less to our operating profits. 2) Balance sheet -- when we complete the three remaining sales, we will have eliminated almost 80 percent of acquisition-related goodwill from our books. Combined with our improving profitability, our reduced goodwill significantly improves our balance sheet. 3) Management focus -- by exiting these non-strategic businesses, Deluxe's management can now focus 100 percent of its attention on our financial institution, retail, and other key customer groups.

Growth strategies It's always been clear to us that "Building the new Deluxe" would require restarting Deluxe's growth engine, so we crafted our Deluxe value proposition in late 1995 to focus our efforts on our best opportunities. We have begun pursuing revenue and profit growth through internal product development and enhancements, business alliances, and acquisitions.

Products. Reflecting the importance of check printing's profits as our fuel for other growth, we made significant enhancements to our core product line last year. We added new check designs, developed more attractive related products, and enhanced security features that increased the value of the check to end consumers. For financial institutions, we linked our payment protection businesses to the check ordering process to provide additional protection to our clients. For financial institution mergers, we refined our ability to assist major customers by managing the many elements of operational conversions, as we did with two major customers in 1996, one based on the West Coast and the other on the East Coast. To improve the check ordering process, we will soon be providing Internet-based ordering capabilities linked to our customers' home pages.

In our Deluxe Payment Protection Systems businesses, we are combining and enhancing the value of our fraud prevention, transaction authorization, and loss recovery offerings to both financial institutions and retailers. In total, these businesses delivered double-digit revenue and profit growth in 1996. With personal bankruptcies and payment fraud continuing to grow in the United States, the demand for our integrated services has never been greater. We have made our SCAN check verification product available online, and we are improving and more effectively linking our collections capabilities and developing new predictive modeling capabilities.

In Deluxe Electronic Payment Systems, two key initiatives are to provide transaction processing support to the Visa Check/ Master Money debit card product and to further our entry into home banking.

U.S. and international business alliances. In August, we announced an agreement in principle to form a joint venture with HCL Corporation, India's largest information technology company. The goals of the joint venture are to lead the modernization of India's banking system and to deliver finished software products and low-cost programming resources to our financial institution customers in the United States. HCL is India's largest manufacturer of personal computers, work stations, business servers, and other equipment for local and wide area networks. It also operates India's largest software training and development center. HCL's technology and market presence combined with Deluxe's knowledge of banking, check printing, payment protection, transaction processing, and banking software products should help lead India to a modern banking system.

Two other alliances are worth noting. In July, we formed an alliance with Online Resources & Communications Corporation to market Online's home banking and bill payment software to our financial institution customers. At the end of the year, National Revenue Corporation (NRC), our collections company, launched a joint venture with a U.K.-based company to expand our access to European markets. The venture has also enabled us to provide multinational collections support to one of our largest clients, a global travel and entertainment company.

Acquisitions. Reflecting the complex internal restructuring that absorbed most of our attention last year and the high stock market multiples of potential targets, we made just a few small acquisitions in 1996. Though our acquisitions were small, we added two capabilities last year in our direct marketing group that made us significantly stronger in this growing segment. In response to our customers' clear need to market "one to one" to their key customers, we have begun offering a database management tool that takes a financial institution's customer information and enhances it with the most comprehensive national database for name, address, and homeowner information in the United States. When combined with our printing, distribution, and fulfillment services, these acquisitions make Deluxe a major provider of direct marketing programs to financial institutions throughout the United States.

NRC also completed two acquisitions of smaller collections companies during the year, expanding its reach and making it one of the five largest collections companies in the United States. Our constant improvements in operating effectiveness continue to win new collections clients, including state governments, financial institutions, and retailers in the United States and Europe.

Stronger management and director team We added significant executive and industry talent this past year, having recruited top people in database management, direct marketing, transaction processing, systems software, human resources, and finance.

We also welcomed three new board members who bring relevant industry knowledge and contacts: Calvin W. Aurand (printing), Donald R. Hollis (banking), and Robert C. Salipante (insurance).

Outlook
It is time to get on with our future, and in 1997, we are excited about focusing more of our attention on future opportunities rather than on internal restructuring, as has been the case over the last two years. Even with a smaller revenue base resulting from our divestitures and other actions, we have set a target of $2.15 adjusted earnings per share from operations this year, which would represent a 13 percent increase from our adjusted earnings per share of $1.90 in 1996. We will be working hard to improve on that goal through more effective marketing and selling and continued focus on productivity and operational excellence. Many of our recent new product initiatives will begin to bear fruit this year, and others are under development for the earliest possible introduction. We expect major improvement in both customer service and financial performance at Deluxe Data Systems, where we also expect a continued strong growth rate in transaction volumes. We also remain alert for acquisitions and new alliances that will strengthen our value proposition. Without question, we believe our tighter focus on financial institutions and retailers should further our efforts toward enhancing shareholder value.

We also have high expectations for broad initiatives aimed at Deluxe's employees. First, having begun planning for it a full year ago, we recently announced a corporatewide diversity "journey" that will touch and strengthen every facet of Deluxe's existence. Under the banner, "The Power of Many, The Spirit of One," the Deluxe Diversity Advisory Council is providing our Company with valuable insights about our interactions with customers, suppliers, employees, communities, and shareholders.

Closely related is the Deluxe Guiding Coalition of people from across our Company who are making recommendations about shaping and defining the corporate mission, values, beliefs, and culture of the new Deluxe. When combined with our significant increases in management leadership development, team effectiveness training, and a new career planning process now under development, these key investments in our people will significantly strengthen the Company as we enable more Deluxers to make the contributions that so many of them want to give.

Our markets remain intensely competitive, our customers' needs and expectations continue to evolve, and so change will remain our constant companion. But the sometimes painful and always challenging restructuring through which we have passed has created a stronger and more capable Deluxe that looks to the future with anticipation and confidence. As I look across Deluxe's competitive horizon, I find no other company participating in as many "touch points" as we do between financial institutions and their customers. Given our 81-year history of serving this industry, Deluxe is truly unique in the extent, scope, and variety of ways we help financial institutions be successful with their customers. Therein lies the continued opportunity for our Company, and with the commitment of the superb people of Deluxe, our goal is to continue rewarding your investment.

On a final note, I recognize the contributions of Jerry K. Twogood, Deluxe executive vice president, who retired from our board of directors in November, after nine years of service. Jerry also retired from the Company in January, after 37 years of service.

Sincerely,

J.A. Blanchard III
Chairman, President, and Chief Executive Officer
March 10, 1997