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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 0-01097

THE STANDARD REGISTER COMPANY

(Exact name of Registrant as specified in its charter)


OHIO	31-0455440
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

600 ALBANY STREET, DAYTON OHIO	45408
(Address of principal executive offices)	(Zip code)
(937) 221-1000
(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT


	Name of each exchange
Title of each class	on which registered

Common stock $1.00 par value	New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes[ ] No[X]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No[X]

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

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

Indicate by check mark whether the Registrant is 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 [ ]

Accelerated filer [X]

Non-accelerated filer [ ]

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes[ ] No[X]

The aggregate market value of all stock held by non-affiliates of the Registrant at July 2, 2006 was approximately $149,875,153 based on a closing sales price of $11.85 per share on July 2, 2006.

At January 28, 2007, the number of shares outstanding of the issuer’s classes of common stock is as follows:


Common stock, $1.00 par value	23,895,161 shares
Class A stock, $1.00 par value	4,725,000 shares

Part III incorporates information by reference from the Proxy Statement for Registrant’s Annual Meeting of Shareholders to be held on April 26, 2007.

THE STANDARD REGISTER COMPANY

FORM 10-K

TABLE OF CONTENTS

Item Description

Page

Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

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

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

Item 6. Selected Financial Data

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers, and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

Item 14. Fees and Services of Independent Registered Public Accounting Firm

Item 15. Exhibits and Financial Statement Schedules

Signatures

Index to Exhibits

Independent Registered Public Accounting Firm’s Report on Supplemental Schedule

Schedule II – Valuation and Qualifying Accounts and Reserves

PART I

Item 1 – BUSINESS

COMPANY OVERVIEW

The Standard Register Company (referred to in this report as the “Company,” “we,” “us,” “our,” or “Standard Register”) is a publicly traded company that began operations in 1912 in Dayton, Ohio. Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol SR. Our principal executive offices are located at 600 Albany Street, Dayton, Ohio 45408 (telephone number: 937-221-1000.)

Standard Register is a leading provider of custom printed documents and related services in the United States. Over the last 90 plus years, we have helped our customers manage their document costs and improve their business processes in what has been a largely paper-driven world. Throughout our history, we have successfully adapted to disruptive changes in technology and have continued to deliver value to our customers. We continue to pursue that course today in response to ongoing advances in digital technologies – principally application software and the Internet. Our mission today is to help our customers improve productivity, reduce cost, mitigate risk of fraud, meet compliance standards, and grow their revenue.

In pursuit of our mission, we offer consulting, software, document design, printing, sourcing, distribution, and staffing services. Our portfolio of products and services finds application across a customer’s entire enterprise – from the desktop, to the internal data center or print shop, to externally-produced print. Our knowledge of business processes and our past experience in helping customers improve their workflow, combined with our adoption of new digital technologies, puts us in a strong position to continue to deliver on our mission.

OUR INDUSTRIES

We primarily serve the healthcare, financial services, and manufacturing industries in the United States. We are a leading provider of products and services to a majority of the acute care hospitals as well as larger financial institutions.

OUR PRODUCTS AND SERVICES

An overview of our principal products and services follows, organized by reportable segment. In June 2006, we sold 100% of the outstanding capital stock of InSystems Corporation (InSystems) to Whitehill Technologies, Inc. Our three reportable segments are Document and Label Solutions, Print On Demand (POD) Services, and Digital Solutions.

You can read additional information related to revenues, operating profit, identifiable assets, financial information by geographic area, and capital expenditures of each reportable segment for years 2004 through 2006 in Note 15 “Segment Reporting” in the Notes to Consolidated Financial Statements.

Document and Label Solutions Segment

Document and Label Solutions (DLS) accounted for 64.3%, 66.9%, and 67.0% of our consolidated revenues in 2006, 2005, and 2004. Primary markets are large- and middle-market companies in the healthcare, financial services, and manufacturing industries. We provide the following products and services that help our customers find the most cost-effective way to manage and distribute documents and labels.

Document Design

We provide design services that tailor the document to the application. Proper design is instrumental to optimal cost and user productivity.

Printed Documents

We print a wide variety of high quality, custom documents that meet each customer’s design and functional specifications. Most documents are used as part of internal business processes or to facilitate business transactions between buyer and seller. A few examples are statements and invoices, payroll and expense checks, purchase orders, shipping documents, and letterhead. In certain complex applications, our engineers often consult with our customers to identify the best way to achieve the desired outcome. We are known for our innovative solutions.

Warehouse and Distribution Services

Many of our custom printed documents are warehoused for subsequent deliveries to our customers in the quantity, time, and place of their choosing. We provide an extensive network of distribution centers across the country which allows us to service customers with multiple locations. Inventory control, reporting, and reorder are provided in a module of our proprietary SMARTworks® document management system that resides on the customer’s desktop.

Secure Document Solutions

Checks, money orders, birth certificates, transcripts, identification, and a myriad of other documents of value are subject to fraudulent alteration. As a leader in document security, we utilize specialized inks, secure papers, unique constructions, and other proprietary security features, often in combination, to defeat attempts to make fraudulent copies or alterations.

Supplies

We provide printer supplies, computer supplies and accessories as well as fax and copier supplies.

Conversion Management

We provide personnel to plan and carry out massive document conversions that arise from acquisitions or new branch openings, assuming responsibility for signage, supplies, and marketing materials in addition to documents.

Labels

Labels are at the core of process management, helping to convey information, safeguard assets, and mitigate risk. We have broad design and production capabilities, plus expertise in workflow management to help customers address their unique needs. We provide innovative solutions such as specially-formulated adhesives and substrates to withstand environmental stresses; highly specialized inks and patterns to provide the necessary level of security; smart chips to add intelligence and flexibility; and unique design configurations to eliminate redundancy, streamline processes and reduce costs. We provide a total integrated solution that includes printers, applications, readers, and software.

Identification labels

Our labels serve a broad range of identification needs – product inventory, parts, assets, branding, and security. Examples include hospital patient wristbands, identification cards, nameplates, and vehicle stickers.

Instructional labels

We produce a wide range of instructional labels, such as wiring diagrams, installation, operating, and service - designed for the life of the product. We have competency in more than 30 languages.

Bar Code Label Solutions

We provide a comprehensive solution including workflow analysis, labels, application software, printers, conveyor controls, sorting and manifesting systems, implementation services, training, and service support.

Product Configuration Control

We provide product warning, identification, and instruction labels that are critical parts of many manufactured products. These must often perform under very demanding environmental conditions.

Market Trends – Excess production capacity and price competition are prevalent in the DLS segment. The introduction of alternative technologies has reduced industry demand for traditional custom printed business documents while a very competitive market has led to price competition. In spite of these challenges, we believe there is opportunity to increase our market share if we effectively carry out our sales strategies and offer an increasing array of application software and professional services.

Driven by an increase in both consumer and industrial end-use applications, the market for pressure-sensitive labels in North America is projected to exhibit steady growth. Companies in the industry will increasingly need to incorporate technologies such as bar code technology, radio frequency identification, Internet-based commerce, digital presses, and environmentally-friendly adhesives and inks. All of these factors will make the industry more efficient allowing us to compete for new markets with alternative technologies.

Other market trends include:

National and personal security issues are becoming more important as identity theft and terrorism are becoming more visible threats to security

Lean manufacturing and just-in-time inventory management are driving customers to seek company-wide, multi-site suppliers in order to reduce part number proliferation and inventories of documents that are part of the manufacturing process

Customers are migrating to fewer suppliers and more strategic relationships

Paper-based documents and workflow are increasingly being automated and migrated to digital form

Demand for RFID, liner-less, laser, thermal, and on-press adhesives is increasing

Media recommendations by printer manufacturers are influencing designs

Customers are increasing their use of variable data

Electronic commerce is driving an increase in shipping label demand as more businesses and individuals buy goods online.

Competition – Our principal competitors include R. R. Donnelley & Sons Company and WorkflowOne. These companies offer products and services similar to ours. In addition, we compete against local and regional manufacturers, brokers, and distributors. We believe we have several strategic advantages over our competitors including:

We are recognized as a leader in secure documents, particularly in the healthcare and financial services markets

We have knowledge and experience in document workflow management, a strong national reputation, excellent domestic geographic coverage, and a complete line of products from paper to digital

We have developed proprietary total-solutions offerings, such as our Manufacturing Label Solutions software, process management, and labels program.

Backlog – Document and Label Solutions’ backlog of orders at January 28, 2007, was approximately $55.5 million compared with $55.3 million at January 29, 2006. We expect to fill all orders in 2007.

POD Services Segment

POD Services accounted for 29.0%, 26.9%, and 27.5% of our consolidated revenues in 2006, 2005, and 2004. The combination of improved digital printing devices and more sophisticated workflow software is transforming a printing industry once dominated by long-run offset production to one increasingly characterized by shorter, digitally-printed runs. Minimal set-up costs, shorter runs, and greater flexibility affords users of digitally-printed documents significant economic advantages over offset for many documents – warehousing costs are eliminated, document obsolescence is reduced, and each image printed can be unique. We provide digital printing services at 25 locations throughout the United States. The following summarizes several of our POD services offerings.

Manuals

We provide training, instruction, and other manuals on demand, often in limited quantities to meet our customers’ needs.

One-to-One Communications

Digital print, in combination with our services, enables our customers to vary each printed image in order to tailor their marketing and communication programs for each individual.

Campaign Management

We provide a turnkey solution, including data management, printing, kit-building, mailing, and archiving to manage one-time communications or on-going marketing campaigns.

Marketing StoreFront

We provide an e-library that allows users to search and order marketing collateral. QuickPrint, DesignOnDemand®, and Dynamic Communications software tools permit users to create personalized collateral for specific recipients.

Statement Printing / Internet Presentment

We print and mail invoices, statements, and other customer and employee communications on behalf of our clients. We also make these communications available via the Internet for clients that prefer to offer a paperless option.

Contracted Print Services

We operate print shops and copy centers within customer locations, providing customers convenience for quick turnaround work well suited to the on-site equipment, plus access to our regional print centers for more complex jobs.

Market Trends – We expect the overall market for document outsourcing and POD to grow as companies seek outside help in creating and delivering business communications with more impact, while reducing print inventory levels and related costs. The POD market is one that permeates all industries and is a natural extension of our core business because it is a transaction-intensive market that we already serve with our core products. Increasingly, companies strive to reach their customers with targeted, customized, and personalized messages in order to maximize their sales and marketing investments. The ability to print and distribute these communications on demand will also fuel growth in this area. Our focus remains on growing digital color in support of the print-on-demand business.

Competition – Our principal competitors include R. R. Donnelley & Sons Company, Kinko’s, and Xerox.

Backlog – POD Services’ backlog of orders at January 28, 2007, was $9.3 million compared with $7.3 million at January 29, 2006. We expect to fill all orders in 2007.

Digital Solutions Segment

Digital Solutions accounted for less than 1% of our consolidated revenues in the last three years. Using a camera-equipped digital pen and specially-printed digital paper, our ExpeData solution automatically converts handwriting on a form into digital format, verifies it, and makes it available to application systems such as customer relationship management, inventory management, and patient records. This solution streamlines workflow, helps reduce errors commonly experienced in manual processing, and eliminates the delay and costs associated with data entry, mailing, scanning and

indexing. It helps establish greater accountability and control by providing an exact image of the handwritten document and a secure audit trail

Market Trends – The ExpeData digital writing solution is commercially available and deployed in several markets including pharmaceutical, healthcare, field service, transportation and others, both domestically and internationally. ExpeData expects to see the use of the Bluetooth® digital writing solution on the rise as the mobile and wireless markets continue to grow. With the use of Bluetooth, handwritten information is transmitted through cell phones and/or BlackBerry® devices, providing virtual real-time data transfer and two-way communication, essential for the mobile workers.

Competition – In the emerging marketplace for digital solutions, there are offerings similar to our solutions. There are, however, no clear leaders in the marketplace. In addition to competition from other companies, there is also competition from competing technologies such as PDAs, laptop computers, tablet PCs, and custom input devices.

Backlog – Digital Solutions’ backlog of orders is not material.

Other Business Segments

Document Systems

Our LinkUp® Enterprise (LUE) software operates within a customer’s existing network to retrieve and intelligently route data to printers, faxes, PCs – delivering hardcopy documents, electronic documents, or e-mail messages in the formats needed by users. It is widely used in check disbursement applications such as payroll and accounts payable where control and confidentiality are important. Patient Linkup® Enterprise software is tailored for use in hospitals where it is widely used in admissions.

PathForward Consulting

We provide consulting services to help our customers evaluate and improve their document-intensive processes. We provide a structured approach that determines total document expense and identifies opportunities to standardize, consolidate, streamline, and eliminate obsolescence or duplication. This business unit also markets software that enables a company to manage the cost and utilization of its fleet of desktop printers, copiers, and fax machines.

Commercial Print Services

We purchase commercial print as a service to our customers, utilizing the commercial print expertise of our PrintConcierge® group and proprietary software that facilitates bidding and order management among a nationwide network of third party commercial printers.

International

We maintain a network of associates throughout the world and provide this GlobalPrint Network (GPN) with intellectual property, document management methodology, marketing strategy, and sales opportunities. In addition, we have developed specialty materials and offer these to our GPN members and customers.

OUR MARKETING AND DISTRIBUTION

We utilize several sales channels that are devoted to selling a variety of our solutions and products as part of an enterprise solution or single product offering. These channels are primarily organized based upon a combination of their sales objective, market segmentation, and account segmentation as follows:

A geographically-based, direct sales channel that focuses on the retention, expansion, and acquisition of middle-market to larger accounts primarily focused on the healthcare, financial services, and manufacturing industries

A strategic account sales organization that serves those customers that buy a breadth of our products and views the Company as a partner in the development of their enterprise business solutions

An inside-sales channel that is focused on the retention and expansion of business supplies and specialized product offerings targeted to smaller accounts or remote geographies where our direct sales force cannot be cost effective

A business development group that focuses on the acquisition of new business

A healthcare sales group that supports our direct sales channel; this group also directs the sale of, and provides specialized support for, selling software and systems integration

A technical sales group that supports our direct and strategic accounts’ sales organizations in the expansion and acquisition of POD products, professional consulting services, and commercial print applications to our larger accounts.

We support our sales channels with a centralized marketing organization that provides product support, strategic marketing, alliance development and marketing communications. In addition, we utilize a direct client care organization that uses customer relationship management systems to improve sales productivity by automating repetitive and administrative tasks, reducing selling costs and enhancing account management. We plan to continue to invest in strategic marketing tools to help in our account management and satisfaction systems, one-to-one marketing, and e-business efforts.

Documents are printed at 36 geographically-disbursed locations in the United States. Documents are shipped directly to customers or are stored by us in warehouses for subsequent on-demand delivery. The management of document inventories to provide just-in-time delivery is a major element of customer service.

OUR RAW MATERIALS

We purchase raw paper in a wide variety of weights, grades, and colors from various paper mills in the United States and Canada. Carbonless paper, inks, and printing supplies are available nationally and are purchased from leading vendors. We continuously ensure that we have adequate supplies to meet present and future sales objectives. We generally order from suppliers with whom we have long-standing relationships.

OUR RESEARCH AND DEVELOPMENT

During 2006, we spent $5.1 million on research and development compared with $4.0 million and $4.4 million in 2005 and 2004. Research and development is primarily focused on two areas: the design and development of new products, services, software and technologies, and process improvement activities. The design and development of new products and technologies also includes equipment design and development used in production as well as the integration of new technologies available in the marketplace.

OUR INTELLECTUAL PROPERTY

We have many patents related to documents, equipment, systems, labels, and security products that provide a competitive advantage or generate license income. None of these, individually, have a material effect upon the business.

SEASONALITY

No material portion of our business could be considered seasonal.

OUR CUSTOMERS

The business of the Company taken as a whole, or by individual business segments, is not dependent upon any single customer or a few customers. No single customer accounts for 10% or more of total consolidated revenue.

GOVERNMENTAL AND ENVIRONMENTAL REGULATION

We have no significant exposure with regard to the renegotiation or termination of government contracts. Any expenditure made to comply with federal, state, or local provisions of environmental protection have not had a material effect upon our capital expenditures, earnings, or competitive position.

OUR EMPLOYEES

At December 31, 2006, we had approximately 3,760 employees compared with 4,000 at January 1, 2006 and 4,100 at January 2, 2005.

OUR WEBSITE

Our Internet website is www.standardregister.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports are available, without charge, on the website as soon as reasonably practicable after we file these reports with the SEC. You can also obtain these reports, free of charge, by contacting Investor Relations, Standard Register, Corporate Offices, P.O. Box 1167, Dayton, Ohio 45401, E-mail: investor@standardregister.com, phone: 937-221-1304. In addition, these reports and other information can be obtained, free of charge, at www.sec.gov. You may also read and copy materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 800-732-0330. We are not including the information contained in our website as part of, or incorporating it by reference to, this Annual Report on Form 10-K.

FORWARD-LOOKING INFORMATION

This report includes forward-looking statements covered by the Private Securities Litigation Reform Act of 1995. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. All statements regarding our expected future financial condition, revenues or revenue growth, projected costs or cost savings, cash flows and future cash obligations, dividends, capital expenditures, business strategy, competitive positions, growth opportunities for existing products or products under development, and objectives of management are forward-looking statements that involve certain risks and uncertainties. In addition, forward-looking statements include statements in which we use words such as “anticipates,” “projects,” “expects,” “plans,” “intends,” “believes,” “estimates,” “targets,” and other similar expressions that indicate trends and future events. These forward-looking statements are based on current expectations and estimates; we cannot assure you that such expectations will prove

to be correct. The Company undertakes no obligation to update forward-looking statements as a result of new information, since these statements may no longer be accurate or timely.

Because such statements deal with future events, actual results for fiscal year 2007 and beyond could differ materially from our current expectations depending on a variety of factors including, but not limited to, the risk factors discussed below.

Item 1a – RISK FACTORS

Risk Factors

Investment in any business involves inherent risks and uncertainties. In addition to the other information presented in this Annual Report on Form 10-K, and beyond the risks and uncertainties of ordinary business operations, important factors that could cause our actual results to differ materially from those contained in this Annual Report on Form 10-K include the following:

Digital technologies may continue to erode the demand for our printed business documents.

Many of our custom printed documents help companies control their internal business processes and facilitate the flow of information. The increasing sophistication of software, intranets, and our customers’ general preference for a paperless office environment will continue to reduce the number of printed documents sold. Moreover, the documents that will continue to coexist with software applications will likely contain less value-added print content.

Many documents we sell to customers, such as purchase orders, checks, and statements, serve to facilitate transactions between businesses. These applications will increasingly be conducted over the Internet or through other electronic payment systems.

The predominant method of our clients’ communication to their customers is by printed information mailed to their homes or offices. As the customers become more accepting of Internet communications, our clients may increasingly opt for the less costly electronic option, which would reduce our revenue.

The pace of these and other technological substitutions is difficult to predict. These factors will tend to reduce the industry-wide demand for printed documents and require us to gain market share to maintain or increase our current level of print-based revenue.

For reasons discussed below, we operate in a very competitive industry and we may not be successful in gaining market share in which case the rate of decline in revenue could outpace our rate of cost reduction, lowering our margins.

The document printing industry is likely to continue to be over-supplied and highly price competitive, which may reduce our gross margins.

Flat-to-declining market demand for many printed products, steady advances in manufacturing productivity, and the absence of meaningful industry consolidation may prolong or even worsen the current overcapacity situation within the industry, further weakening market pricing and lowering our margins. The increasing use of reverse auctions or other bidding tools may also contribute to lower prices for our printed products.

Although we have endeavored in the past to continually improve productivity and reduce our cost structure in an effort to maintain a competitive position, there is no guarantee that we would be able to do so successfully in the future. Consequently, our margins could be unfavorably impacted.

Our plans to deal with the threats and opportunities brought by digital technology may not be successful.

Digital technologies pose a significant threat to many of the printed documents that have been the mainstay of our historical profit and cash flow. In 2000, we embarked on a multi-year restructuring program to maintain our competitive position in our traditional markets, invest in existing products and services not threatened by technology and add new offerings with future growth potential.

We have eliminated unprofitable business and aggressively reduced costs in an effort to maintain a competitive position. These actions produced significant restructuring and impairment charges as we reduced staffing levels, excess production capacity and other operating costs.

It is likely that market forces will require us to continue to improve our productivity and cost structure, possibly resulting in additional restructuring charges. Margins on traditional products could suffer if we do not successfully realize market share gains or productivity improvements in the future to offset the effects of declining unit sales and weaker pricing.

Digital technology poses less of a threat to some of our traditional products other than printed documents, such as labels and secure documents, and we will invest in an effort to grow the sales of these products. We opened a manufacturing plant in Mexico to supply labels to our customers who manufacture there. We have limited experience in operating a manufacturing facility outside of the United States and may have difficulty with the cultural and administrative aspects of this venture, which could unfavorably impact our margins.

As our traditional printed products come under increasing pricing pressure, we will endeavor to separately price and sell related software and services. These include document design, application software, software support, consulting, program management and other services that we believe our customers need and will value. Some of these services have traditionally been bundled into the value of the product; others have been sold at a highly discounted price. Our success in this initiative will require a change in behavior on the part of our sales representatives and our customers, and accordingly it is difficult to predict the rate of adoption. There is no guarantee that we will get the increase in margins we need to offset potentially weaker product margins.

We are also investing to bring our customers new services which we believe have future growth potential. Among these are Print On Demand Services, PathForward Consulting Services, ExpeData digital pen and paper, and our Commercial Print Exchange. These initiatives depend heavily upon our ability to develop and deploy software that will streamline order workflow, enrich the customer experience and differentiate us from the competition. Our success will depend upon our ability to invest the required capital and attract and retain experienced talent. Given the challenging market dynamics for each of these services, there is no guarantee that we will be successful, and we may incur operating losses as we progress through the learning curve.

A significant downturn in the general economy could adversely affect our revenue, gross margin and earnings.

Our business could be unfavorably affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates and the effects of governmental plans to manage economic conditions. The demand for many of our printed documents, and hence our revenue and gross margin, is strongly correlated with general economic conditions and with the level of business activity of our customers. Economic weakness and constrained customer spending has resulted in the past, and may result in the future, in decreased revenue, gross margin, earnings, or growth rates. We also have experienced, and may experience in the future, gross margin declines reflecting the effects of increased pressure for price concessions as our customers attempt to lower their cost structures. In this environment, we may not be able to reduce our costs sufficiently to maintain our margins which, in the case of severe financial difficulty, may affect our ability to pay dividends for a period of time.

We may not be able to pass through increases in our paper costs or may experience several quarters of delay in recovering higher paper costs.

Paper is a commodity that is subject to periodic increases or decreases in price, with all major paper mills setting their prices within a narrow band at any point in time. There is no effective futures market to cost-effectively insulate us against unexpected changes in price, and corporate-negotiated purchase contracts provide only limited protection against price increases.

When paper prices are increased, we attempt to recover the higher costs by raising the prices of our products to our customers. Since each order is custom printed to each customer’s specification, the price increase varies by product and customer and is accomplished by individual negotiation between the sales representative and the buyer.

In the price-competitive marketplace in which we operate, the sales representative may not be able to pass through any or all of the higher paper cost, or more likely, may experience some negotiated delay in achieving the higher price. In addition, we have contracts with some customers that limit the amount and frequency of price increases. To the extent we cannot recover the full cost increase, our gross margins would be reduced. We have generally been successful in the past in recovering higher paper costs, albeit with some delay; there is no guarantee, however, that this experience will be repeated in the future.

We may make larger contributions to our pension plans in the future, diverting cash from other corporate purposes.

Our qualified defined benefit pension plan has shifted from overfunded to underfunded, largely as a result of poor stock market returns in years 2001 and 2002 that reduced the market value of our pension plan assets and lower interest rates which increased the present value of future benefit obligations.

We have been making voluntary contributions to our pension plan over the last five years, averaging approximately $17.4 million annually. Although subject to change, we expect to make voluntary contributions of approximately $20 million annually which would bring the plan to a fully-funded position in about six years based on current actuarial assumptions.

If our actuarial assumptions are not realized, we may have to increase our contributions to our pension plan, diverting cash from capital expenditures or other important corporate purposes, or perhaps increasing the level of our long-term debt. For more information related to our actuarial assumptions and pension obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates.”

Our investment in digital pen and digital paper may not be successful.

We are investing in the development of software and services to serve the emerging digital pen and paper market. Our solution translates handwriting on a custom-printed paper document to digital format for automatic input to a customer’s software application. This segment markets custom-designed and printed “digital” documents, software, digital pens, and professional services.

Our technology solution has been successfully demonstrated in customer pilot tests and is now in full operation with several customers. Our offering is being primarily marketed through third-party channels, both in the United States and abroad, with which we have limited past experience. Because this is a relatively new application, it is difficult to judge the size of the potential market and the rate of adoption.

Our development and marketing costs have been substantial and have produced operating losses for this segment of our business. We are encouraged by the progress we have made, but are not yet certain that the market will develop successfully. We have elected to seek venture capital investment in order to continue the business plan and will likely spin this venture out and become a minority partner. If we are not successful, we may continue to incur operating losses over the near term as we pursue our product development and marketing plans.

Failure to attract and retain qualified personnel may result in difficulties in managing our business effectively and meeting revenue growth objectives.

Our success in efforts to grow our business depends on the contributions and abilities of key executives, operating officers and other personnel. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may not be able to manage our business effectively including the development of both existing and new products and services. Success in meeting our revenue and margin objectives also depends in large part on our ability to attract, motivate, and retain highly qualified personnel in sales and information management positions. Competition for such personnel is intense and there can be no assurance that we will be successful in attracting, motivating and retaining such personnel. Any inability to hire and retain salespeople or any other qualified personnel, or any loss of the services of key personnel, could harm our business.

Steps that have been or may be taken to restructure our business and align our resources with market opportunities may not be effective or could disrupt our business.

Over the past several years, we have undertaken several actions designed to restructure our business and to reduce future operating costs and dispose of excess assets. These actions have included reductions in workforce, dispositions of assets, and plant and office closures and internal reorganizations of our sales force to better match our resources with market opportunities. The completion of these activities or the introduction of additional restructuring programs could be disruptive to our business. Reductions to headcount and other cost cutting measures could result in the loss of technical expertise that could adversely affect our plans for growth and development of new and existing products and services.

Any additional restructuring efforts to reduce components of operating expense that may occur in the future would most likely result in additional restructuring or asset impairment charges. If this were to occur, our earnings per share or net loss per share would be adversely affected in such period.

There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and may not be detected.

While we continue to take action to ensure compliance with the disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002 and the related SEC and NYSE rules, there are inherent limitations in our ability to control all circumstances. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that any company’s controls, including our own, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be evaluated in relation to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Other Risk Factors

There are numerous other factors, many of which are outside of our control, which could adversely impact our financial condition, cash flows, and results of operations. Such factors include: adverse events such as natural disasters; large scale medical outbreaks; acts of international or domestic terrorism; and international, political and military developments. Among other things, such factors could provoke economic uncertainty which could reduce demand for, and consumer spending on, our products; price increases in commodities such as paper, which would increase our product costs; and legal and regulatory developments that could impact how we operate. Any of these factors could have a material adverse effect on our business.

Item 1b – UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments.

Item 2 – PROPERTIES

Our corporate offices are located in Dayton, Ohio. The following table is a list of our major production facilities:


Location	Square Footage	Business Segment	Type of Facility
Fayetteville, Arkansas	146,349	Document and Label Solutions	Continuous, Form Labels
Monterrey, Mexico	29,064	Document and Label Solutions	Booklets, Short-run Labels, Kitting and Distribution
Middlebury, Vermont	115,698	Document and Label Solutions	Continuous, Form Labels, 50'' Rolls
Murfreesboro, Tennessee	82,209	Document and Label Solutions	Short-run Continuous
Salisbury, Maryland	114,607	Document and Label Solutions	Continuous, Form Labels, 50'' Rolls
Shelbyville, Indiana	60,930	Document and Label Solutions	Short-run Zipsets and Cut Sheets
York, Pennsylvania	214,110	Document and Label Solutions	Zipset, MICR Cut Sheet, Laser Forms
Radcliff, Kentucky	79,000	Document and Label Solutions	Custom Labels, MatchWeb Labels, and DocuLabels II Labels
Tampa, Florida	39,634	Document and Label Solutions	Custom Labels and Roll Labels
Charlotte, North Carolina	57,191	POD Services	Document Outsourcing, Imprinting, Digital Color
Sacramento, California	51,760	POD Services	Document Outsourcing, Kitting/Digital Color
Tolland, Connecticut	56,159	POD Services	Document Outsourcing, Kitting/Imprinting, Financial Forms
Carrollton, Texas	81,435	POD Services	Document Outsourcing, Imprinting, Digital Color

Sacramento, California; Tampa, Florida; Carrollton, Texas; and Tolland, Connecticut, are leased facilities. In addition, we operate 21 smaller Stanfast Print Centers. In most cases, these facilities are located in major metropolitan cities in the United States and are leased.

Our current capacity, with modest capital additions, is expected to be sufficient to meet production requirements for the near future. Utilization by press varies significantly, averaging an estimated 66% overall. We believe our production facilities are suitable and can meet our future production needs.

On January 26, 2007, the Company announced that we will close our facility in Middlebury, Vermont, in May, 2007, and transfer production to other plants in the United States.

Item 3 – LEGAL PROCEEDINGS

We have no material claims or litigation pending against us.

Standard Register has been named as a potentially responsible party by the U.S. Environmental Protection Agency or has received a similar designation by state environmental authorities in several situations. None of these matters have reached the stage where a significant liability has been assessed against the Company. We have evaluated each of these matters and believe that none of them individually, nor all of them in the aggregate, would give rise to a material charge to earnings or a material amount of capital expenditures. This assessment is notwithstanding our ability to recover on existing insurance policies or from other parties that we believe would be held as joint and several obligors under any such liabilities. However, since these matters are in various stages of process by the relevant environmental authorities, future developments could alter these conclusions. However, currently we do not believe that there is a likelihood of a material adverse effect on our financial condition in these circumstances.

Item 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal 2006, no matters were submitted to a vote of our shareholders.

Executive Officers of the Registrant

The following is a list of our executive officers, their ages as of December 31, 2006, their current titles, and any positions they held during at least the last five years:


Name	Age	Office and Experience	Officer Since
Donna L. Beladi	57	Vice President, Chief Strategy Officer. Ms. Beladi has served in this position since September 2005. From January 2004 to September 2005, she served as Vice President, Chief Marketing Officer, and as Vice President, Business Development, from January 2000 to December 2003.	2000
Craig J. Brown	57	Senior Vice President, Treasurer and Chief Financial Officer. Mr. Brown has served in his current position since March 1995.	1987
Tom Furey	42	Vice President, Chief Supply Chain Officer and General Manager, Document and Label Solutions. Mr. Furey has served in this position since April 2006. From December 2004 to April 2006, he served as Vice President and General Manager, Document and Label Solutions. He joined the Company as Vice President, Manufacturing Operations, Document and Label Solutions, in May 2004. Prior to joining the Company, Mr. Furey was Director, Process Technology and Quality for the Fasson Roll North America division of Avery Dennison from January 2002 to September 2002, and was Director of Operations, Avery Dennison Fasson Roll North America, from September 2002 to May 2004.	2006
Kathryn A. Lamme	60	Senior Vice President, General Counsel and Secretary. Ms. Lamme was appointed to this position in April 2002, having previously served as Vice President, Secretary and Deputy General Counsel of Standard Register, from April 1998 to April 2002.	1998
Joseph P. Morgan, Jr.	47	Vice President, Chief Technology Officer and General Manager, On Demand Solutions Group. Mr. Morgan has served in this position since December 2005, having previously served as Vice President, Chief Technology Officer from January 2003 to December 2005. Mr. Morgan was President and Chief Executive Officer of the Company’s wholly-owned subsidiary, SMARTworks, LLC, from July 2001 to January 2003.	2003
Dennis L. Rediker	63	President and Chief Executive Officer. Mr. Rediker has served in his current position since June 2000. He has served on The Standard Register Company's Board of Directors since 1995.	2000

There are no family relationships among any of the officers. Officers are elected at the annual organizational meeting of the Board of Directors, which is held immediately after the annual meeting of shareholders, to serve at the pleasure of the Board.

PART II

Item 5 - MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Market Price - The following table lists the high and low market prices as reported on the NYSE and cash dividends paid per share:


*2006*
Quarter	Dividend	High	Low	Last

1^st	$ 0.23	$ 18.40	$ 14.65	$ 15.50
2^nd	$ 0.23	$ 15.55	$ 11.37	$ 11.85
3^rd	$ 0.23	$ 13.86	$ 11.01	$ 13.20
4^th	$ 0.23	$ 16.00	$ 11.75	$ 12.00

*2005*
Quarter	Dividend	High	Low	Last

1^st	$ 0.23	$ 14.44	$ 11.90	$ 12.22
2nd	$ 0.23	$ 16.15	$ 11.67	$ 15.97
3rd	$ 0.23	$ 16.98	$ 13.66	$ 14.95
4th	$ 0.23	$ 16.86	$ 13.62	$ 15.81

Approximate Number of Holders of Common Stock - On January 28, 2007, there were 2,558 shareholders of record of our common stock. This number includes restricted shares, but excludes individual holders whose shares are held by nominees. There are also 16 holders of Class A stock.

Dividends - We expect to continue paying quarterly cash dividends in the future; however, the amounts paid will be dependent upon earnings and the future financial condition of the Company.

Information regarding our equity compensation plans is included in Item 12 on page 69 and is incorporated by reference into this section of Item 5.

Performance Graph

The following performance graph presents our cumulative total shareholder return on our common stock from December 31, 2001 to each of the years ending 2002, 2003, 2004, 2005, and 2006. Each year’s ending value is calculated as follows:

(i) The sum of

the cumulative amount of dividends, assuming dividend reinvestment during the periods presented, and

the difference between our share price at the end and beginning of the periods presented is divided by

(ii) The share price at the beginning of the periods presented.

The cumulative shareholder return is then compared with that for a published industry index, and a broad equity market index.

The Company uses the S&P SmallCap 600 Industrial Index and the S&P 500 Index. There were 99 companies in the S&P 600 Industrial Index on December 29, 2006, including Standard Register.

Performance Graph attached in PDF format


Item 6 - SELECTED FINANCIAL DATA

THE STANDARD REGISTER COMPANY
SIX-YEAR FINANCIAL SUMMARY
(Dollars in thousands except per share amounts)

	*2006 (a,c)*	*2005 (b,c,f)*	*2004 (b,c,d,f)*	*2003 (b,c,f)*	*2002 (b,c,e,f)*	*2001 (b,f)*

SUMMARY OF OPERATIONS
Revenue	$ 894,904	$ 890,740	$ 878,327	$ 875,700	$ 991,590	$ 1,151,142
Cost of sales	587,712	588,675	569,168	553,553	602,323	753,307
Gross margin	307,192	302,065	309,159	322,147	389,267	397,835
Selling, general and administrative	268,311	249,481	271,518	296,051	280,909	316,253
Depreciation and amortization	28,786	33,848	37,202	40,210	43,275	45,063
Asset impairments	2,738	303	854	11,423	-	41,512
Restructuring charges (reversals)	2,671	998	11,008	18,256	(1,837)	64,038
Interest expense	2,285	2,465	2,643	4,048	13,261	12,755
Investment and other income (expense)	228	499	113	857	(711)	3,171
Income tax expense (benefit)	2,475	8,323	(6,642)	(17,944)	20,964	(32,702)
Income (loss) from continuing
operations	154	7,146	(7,311)	(29,040)	31,984	(45,913)
(Loss) income from discontinued
operations	(1,849)	(6,297)	(35,727)	(10,027)	597	2,592
(Loss) gain on sale of discontinued
operations	(10,044)	550	12,820	-	-	-
Net income (loss)	$ (11,739)	$ 1,399	$ (30,218)	$ (39,067)	$ 32,581	$ (43,321)

DILUTED PER SHARE DATA
Income (loss) from continuing
operations	$ 0.01	$ 0.25	$ (0.26)	$ (1.02)	$ 1.12	$ (1.66)
(Loss) income from discontinued
operations	(0.07)	(0.22)	(1.25)	(0.36)	0.02	0.09
(Loss) gain on sale of discontinued
operations	(0.35)	0.02	0.45	-	-	-
Net income (loss)	$ (0.41)	$ 0.05	$ (1.06)	$ (1.38)	$ 1.14	$ (1.57)

Dividends paid	$ 0.92	$ 0.92	$ 0.92	$ 0.92	$ 0.92	$ 0.92
Book value per share	$ 4.13	$ 6.02	$ 7.21	$ 8.73	$ 11.10	$ 15.03

YEAR-END FINANCIAL DATA
Current ratio	2.1 to 1	2.1 to 1	1.3 to 1	2.8 to 1	3.6 to 1	3.9 to 1
Working capital	$ 116,456	$ 113,855	$ 63,216	$ 184,083	$ 283,096	$ 362,917
Plant and equipment	$ 119,339	$ 129,989	$ 147,160	$ 165,538	$ 206,222	$ 225,216
Total assets	$ 452,079	$ 475,912	$ 542,973	$ 628,957	$ 754,864	$ 837,783
Long-term debt	$ 41,021	$ 34,379	$ 867	$ 125,000	$ 200,010	$ 202,300
Shareholders' equity	$ 118,167	$ 173,452	$ 205,405	$ 248,588	$ 312,480	$ 415,290
OTHER DATA
Number of shares
outstanding at year-end	28,621,104	28,833,939	28,494,239	28,468,455	28,145,272	27,634,864
Number of employees	3,760	4,000	4,100	5,000	5,681	5,692
Capital expenditures	$ 22,906	$ 20,224	$ 23,228	$ 18,343	$ 28,220	$ 25,647

Note: Balance sheet data for 2001-2005 does not reflect InSystems as a discontinued operation.
(a) Reflects the loss on sale of InSystems on June 5, 2006.
(b) Reflects income (losses) from discontinued operations as a result of the sale of the equipment service
business on December 31, 2004.
(c) Reflects income (losses) from discontinued operations as a result of the sale of InSystems on June 5, 2006.
(d) Reflects the gain on sale of the equipment service business on December 31, 2004.
(e) Reflects the acquisitions of InSystems and PlanetPrint on July 2, 2002 and July 12, 2002, respectively.
(f) Reflects a reclassification of costs related to design services from selling, general, and administrative to cost of sales.

Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions, Except Per Share Amounts)

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties, including those discussed under the caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K and elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested below.

OVERVIEW

The Company – We are a leading document services provider that helps our customers manage, control and source their document and print-related spending. We primarily serve the healthcare, financial services, and manufacturing industries.

We are a document services company entrusted by our customers to manage business-critical documents with a variety of products and professional services. As a strategic partner in migrating companies from paper-based to digital processes, our strategy is to provide a full spectrum of solutions including printing solutions, label solutions, print-on-demand services, document and marketing automation, outsourcing and managed services, and professional services.

Our Enterprise Document Management approach includes analysis of where, how - and even if - documents should be printed. This document study includes everything from forms, stationery and reports to four-color marketing collateral and also addresses what is printed internally as well as externally. By improving the efficiency of these processes and applying appropriate sourcing strategies, customers are able to save on their entire document-related supply chain costs.

Our solutions give customers the tools to manage the entire lifecycle of their documents from concept to delivery. We make a measurable difference for our customers by helping them achieve their desired business outcomes by assisting them with reducing costs; transitioning to more efficient processes; effectively managing their risks and meeting their regulatory and industry requirements; and driving their business growth.

Our operations include three reportable segments: Document and Label Solutions, POD Services, and Digital Solutions.

Our Business Challenges – The market for many of our traditional printed products is very price competitive. In order to maintain or improve our margins in these segments, we must execute our plans to gain market share, improve productivity, and increase the sale of related value-added software and services.

Paper mill operating rates were reported in the 92%-93% range during 2006, which were above 2005 rates and served to support increases in paper prices. The expectation is that mills will continue to reduce capacity during 2007 in an attempt to offset expected weakness in overall paper demand and pricing. There are currently no price announcements in the market; however, pulp and energy costs, coupled with less supply, may push prices modestly higher in the second half of 2007.

Despite a competitive marketplace, we have traditionally been successful in recovering all or most of the increases in paper costs. Recovery ordinarily occurs over a period of several quarters. We would expect to increase our selling prices to our customers to recover any paper cost increases that might take place in 2007.

We fully expect the increasing use of reverse auctions and other bidding tools will gain in popularity and will most likely lower our prices for our printed products.

Our pension plan became underfunded in late 2002, primarily as a result of weak stock market returns in 2001 and 2002. The amortization of these and other actuarial losses has resulted in significant expense in subsequent years – equivalent to $0.40 per share in 2005 and $0.54 per share in 2006. We have continued to make voluntary cash contributions to our qualified pension plan, averaging approximately $17.4 million annually over the last five years; we plan to make voluntary contributions in 2007 of approximately $20 million.

Our Digital Solutions segment has produced operating losses in recent periods, reflecting software development and other investments made to bring our digital pen and paper technology and services solution to market. We have made significant investments in this venture over the last three years and believe there is a very good likelihood that a viable market will emerge for this technology. We have elected to seek venture capital investment in order to continue the business plan and will likely spin this venture out and become a minority partner.

Our Focus – Our objective is to continue to improve the sales trend in our core document business by taking market share in targeted accounts and vertical markets where we have a strong reputation and value proposition. We will continue to reduce costs and improve productivity in order to stay cost competitive.

We plan to address the large and growing market to provide for digital print-on-demand output, including color and variable print. Services that provide the customer with added convenience, design capability and control over the process are expected to be a strong differentiator. We plan to step up the level of investment in our POD Services business in order to ensure that we catch the building market momentum in this important growth segment. This will translate into higher capital expenditures and selling, general and administrative expenses in the coming quarters.

We intend to continue to bring our customers products and services that improve their ability to capture, manage and move information in their business processes. We also offer a portfolio of Standard Register managed services that help our customers reduce costs and improve their business processes allowing them to concentrate on their core competencies. Over time, services will become an increasing source of our revenue stream. Our strategy is beginning to resonate with customers and we have successfully completed implementation of these offerings.

We expect to continue to focus on generating positive cash flow and maintaining our current strong financial condition.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our financial statements and accounting for the underlying transactions and balances, we applied the accounting policies disclosed in the Notes to the Consolidated Financial Statements. Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although we believe our estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates.

We consider the estimates discussed below as critical to an understanding of our financial statements because they place the most significant demands on management’s judgment about the effect of matters that are inherently uncertain, and the impact of different estimates or assumptions is material to our financial condition or results of operations. Specific risks for these critical accounting estimates are described in the following paragraphs. The impact and any associated risks related to these estimates are discussed throughout this discussion and analysis where such estimates affect reported and expected financial results. With the exception of contingent liabilities, the impact of changes in the estimates and assumptions pertaining to pension and postretirement healthcare benefit plans, asset impairments, deferred taxes, and LIFO reserves generally do not affect segment results. Share-based compensation expense is reflected in segment results through an allocation of corporate expenses.

For a detailed discussion of the application of these and other accounting policies, see “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements. Management has discussed the development and selection of the critical accounting policies and the related disclosure included herein with the Audit Committee of the Board of Directors.

Pension and Postretirement Healthcare Benefit Plan Assumptions

We have defined benefit pension plans covering eligible U.S. employees. We also have a postretirement benefit plan that provides certain healthcare benefits for eligible retired employees.

Included in our financial results are significant pension and postretirement obligations and benefit costs and credits which are measured using actuarial valuations. The use of actuarial models requires us to make certain assumptions concerning future events that will determine the amount and timing of the benefit payments. Such assumptions include the discount rate, the expected long-term rate of return on plan assets, the rate of future compensation increases and the healthcare cost trend rate. In addition, the actuarial calculation includes subjective factors, such as withdrawal and mortality rates, to estimate the projected benefit obligation. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension or postretirement obligations and benefit expense recorded in future periods.

Discount rate – One of the principal components of calculating the projected benefit obligation, the accumulated benefit obligation and certain components of pension and postretirement healthcare benefit expense is the assumed discount rate. The discount rate is the assumed rate at which future pension and postretirement healthcare benefits could be effectively settled. The discount rate established at fiscal year-end for the benefit obligations is also used in the calculation of the interest component of benefit expense for the following year. Discount rates are established based on prevailing market rates for high-quality, fixed-income instruments with maturities equal to the future cash flows to pay the benefit obligations when due.

Expected long-term rate of return on plan assets – One of the principal components of the net periodic pension cost calculation is the expected long-term rate of return on plan assets. The required use of an expected long-term rate of return on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by our employees. Our qualified defined benefit pension plan’s assets are invested in a broadly- diversified portfolio consisting primarily of publicly-traded common stocks and fixed-income securities. We use long-term historical actual return experience and estimates of future long-term investment return with consideration to the expected investment mix of the plan’s assets to develop our expected rate of return assumption used in the net periodic pension cost calculation. Differences between actual and expected returns are recognized in the pension cost calculation over five years using a five-year, market-related asset value method of amortization. The amortization of these differences has, and could continue to have, a significant effect on net periodic pension cost.

Our nonqualifed pension and postretirement healthcare benefit plans are unfunded plans and have no plan assets. Therefore, the expected long-term rate of return on plan assets is not a factor in accounting for these benefit plans.

Assumptions regarding mortality – One of the assumptions made in the calculation of the projected benefit obligation is an estimate of mortality rates for the population of pension participants. Our actuaries use mortality tables, which include death rates for each age, in estimating the amount of pension benefits that will become payable. The mortality tables include the proportion of the number of deaths in a specified group to the number living at the beginning of the period in which the deaths occur. We changed to the RP-2000 Mortality Table to determine benefit obligations at December 31, 2006 and to determine pension and postretirement benefit cost for 2007. This change increased our pension benefit obligation by approximately $20 million and decreased our postretirement healthcare benefit obligation by approximately $0.6 million. Our pension expense will increase in 2007 by approximately $3.3 million and our postretirement benefit income will decrease by approximately $0.1 million as a result of this change.

Rate of future compensation increases – The rate of anticipated future compensation increases is another significant assumption used in the actuarial model for pension accounting and is determined based upon our long-term plans for such increases.

Healthcare cost trend rate – One of the principal components of calculating the projected benefit obligation, as well as the net periodic benefit cost for our postretirement healthcare plan, is the healthcare cost trend rate. We review external data and our own historical trends for healthcare costs to determine the healthcare cost trend rates used for the benefit obligation and expense.

We review the assumptions used to account for pension and postretirement healthcare benefit obligations and cost each fiscal year-end.

Weighted-Average Assumptions


Projected benefit obligation	*2006*	*2005*	*2004*
Discount rate	5.75%	5.75%	6.00%
Future compensation increase rate
- current year	3.50%	3.50%	3.50%
- subsequent years	3.50%	3.50%	3.50%

Holding all other assumptions constant, a 1% increase or decrease in the discount rate would decrease or increase the pension and postretirement obligation recorded by approximately $53.0 million and $1.6 million, respectively. A 1% increase in the assumed healthcare cost trend rate would increase the postretirement healthcare benefit obligation recorded by approximately $1.6 million, and a 1% decrease would reduce the obligation by $1.5 million.


Net periodic benefit cost	*2006*	*2005*	*2004*
Discount rate	5.75%	6.00%	6.00%
Expected long-term rate of return on plan assets	8.75%	8.75%	8.75%
Healthcare cost trend rate assumed for current year	8.00%	9.00%	9.00%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate)	4.75%	4.75%	4.75%
Year that the rate reaches the ultimate trend rate	2012	2012	2010

The change in the discount rate increased 2006 pension cost by $1.7 million and had an immaterial impact on postretirement healthcare benefit cost. Holding all other assumptions constant, a 1% increase or decrease in the discount rate would increase or decrease pension cost by approximately $7.0 million and would have an immaterial impact on the postretirement benefit cost.

Amortization of differences between the expected and actual returns on the plan assets, including those resulting from losses in 2002 and 2001, will continue to impact our pension cost. The long-term rate of return on plan assets that we expect to use to determine fiscal 2007 net periodic pension cost is 8.75%, the same as 2006. The amortization of past market losses and other probable changes in actuarial assumptions is expected to increase 2007 pension cost by approximately $3.0 million over the 2006 amount. Total 2007 pension expense is expected to increase over the 2006 amount by approximately $5.0 million, excluding any applicable pension settlement losses.

During 2005 the Company determined that the prescription benefits offered under Medicare Part D were more favorable to its retirees than the rates offered under the Company’s Postretirement Healthcare Benefit Plan. As a result, effective January 1, 2006, the plan was amended to discontinue prescription benefits offered under the plan. The effect of this change reduced the benefit obligation at January 1, 2006 by $13.4 million and reduced postretirement benefit cost in 2006 by approximately $1.9 million.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, which include intangible assets, goodwill, and plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include, but are not limited to, the following:

Sustained underperformance relative to expected historical or projected future operating results

Changes in the manner of use of the assets, their physical condition or the strategy for the Company’s overall business

Negative industry or economic trends

Declines in stock price of an investment for a sustained period

The Company’s market capitalization relative to net book value

A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit, or a long-lived asset will be sold or otherwise disposed of, significantly before the end of its previously estimated useful life

A significant decrease in the market price of a long-lived asset

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator

An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset

A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset

Unanticipated competition

A loss of key personnel.

Goodwill and indefinite-lived intangibles are required to be evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value. Fair values are typically calculated using discounted expected future cash flows using a risk-adjusted discount rate.

PlanetPrint Goodwill

During the second quarters of 2006 and 2005, the Company performed the annual impairment test for goodwill which did not result in any impairment. The tests were performed at the reporting unit level using a fair-value-based test that compares the fair value of the asset to its carrying value.

In performing the tests for impairment, we made assumptions about future sales and profitability that required significant judgment. In estimating expected future cash flows for the 2006 test, we used internal forecasts that were based upon actual results assuming flat to slightly increasing revenue and modest cost and gross margin improvement. At the time of the 2006 impairment test, the carrying value of net assets for PlanetPrint was $9.3 million. The most critical estimates used in determining the expected future cash flows were the revenue and cost assumptions and the terminal value assumed. If our estimate of expected future cash flows had been 10% lower, or if either of these two assumptions changed by 10%, the expected future cash flows would still have exceeded the carrying value of the assets, including goodwill.

Deferred Taxes

We record income taxes under the asset and liability method. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

At December 31, 2006, we have net deferred tax assets of $105 million attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to operating loss and tax credit carryforwards. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and,

in certain cases, business plans, tax planning strategies and other expectations about future outcomes. Since the effect of a change in tax rates is recognized in earnings in the period when the changes are enacted, changes in existing tax laws or rates could affect actual tax results, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time.

Our ability to realize deferred tax assets is primarily dependent on the future taxable income of the taxable entity to which the deferred tax asset relates. We evaluate all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax asset will not be realized.

Valuation Allowances - The decision to record a valuation allowance requires varying degrees of judgment based upon the nature of the item giving rise to the deferred tax asset. We have established valuation allowances for U.S. and Canadian capital loss carryforwards that we believe will not be utilized before the expiration period. Should future taxable income be materially different from our estimates, changes in the valuation allowance could occur that would impact our tax expense in the future.

Inventories

Substantially all inventories are valued at the lower of cost or market and are stated using the last-in, first-out (LIFO) dollar value method. We subcontract, store, and later distribute finished goods to fulfill certain customer orders. Such subcontracted finished goods inventories are recorded at cost on a first-in, first-out (FIFO) basis and amounts related to such subcontracted finished goods inventories are excluded from our LIFO calculation. At December 31, 2006 and January 1, 2006, the amounts excluded for subcontracted finished goods inventories were $27.4 million and $22.3 million, respectively.

We believe the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. Under the LIFO method, the cost assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items purchased remain in inventory and are used to value ending inventory. The excess of our estimated current costs over LIFO carrying value, or the LIFO reserve, was approximately $34.9 million and $33.9 million at December 31, 2006 and January 1, 2006.

Under the dollar value LIFO method, similar items of inventory are aggregated to form inventory "pools." Increases and decreases in a pool are identified and measured in terms of the total dollar value - not the quantity of physical items - of inventory in the pool. The use of indices is an integral part of the dollar value LIFO method. Using the link-chain technique, a cumulative index is used to convert (deflate) year-end inventories priced at current cost to base-year cost and to convert (inflate) an increment stated at base-year cost back to LIFO cost. Under both techniques, indices are developed by pricing all inventory items twice. In other words, inventory quantities on hand at the end of the current year are priced at current year current costs and at prior year current costs. This ratio of costs is then used to adjust the cumulative index at the end of the preceding year to a new cumulative index. The total current cost of current year-end inventories is next converted to total base-year cost by means of the new cumulative index. The net change in inventory is then determined by comparing the total inventory at base-year cost at the beginning and the end of the current year. LIFO values are determined, by layer, by applying the applicable cumulative index to the increments stated at base-year cost.

We evaluate the LIFO calculation each quarter and record an adjustment each quarter, if necessary, for the expected annual effect of inflation, and these estimates are adjusted to actual results determined at year-end. We determine the LIFO cost on an interim basis by estimating annual inflation trends, annual purchases and ending inventory levels for the fiscal year. We apply internally-developed indices that we believe more consistently measure inflation or deflation in the components of our inventories and product mix and our merchandise mix. We believe the internally-developed indices more accurately reflect inflation or deflation in our own prices than the U.S. Bureau of Labor Statistics producer price indices or other published indices. Should actual annual inflation rates and inventory balances as of the end of any fiscal year differ materially from our interim estimates, changes could occur that would materially affect our Consolidated Statement of Income for that year.

At December 31, 2006, a 10% increase in our 2006 cumulative index would have increased our LIFO expense approximately $1.1 million, or approximately $0.7 million after tax. Conversely, a 10% decrease in our 2006 cumulative index would have decreased our LIFO expense by approximately $1.4 million, or approximately $0.8 million after tax.

Contingent Liabilities

Accruals for contingent liabilities are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. At January 1, 2006, our total liability for unclaimed funds was $4.2 million, including an estimate of the liability for the results of an ongoing audit related to numerous states for years prior to 2002. We believed this was a critical accounting estimate because of the considerable uncertainty surrounding estimation, including the outcome of the ongoing audit. The calculation was based upon evaluation of information that was available to us at that time, prior experience in settling state audits, an estimate for any interest and penalties, as well as any liability for states not involved

in the audit. Actual results could have differed from the expected results used in determining the estimate. In the second quarter of 2006, we reached a favorable settlement to that audit and reversed $2.5 million of the reserve to income.

Share-Based Compensation Expense

Effective January 2, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No.123(R), “Share Based Payment (Revised 2004),” which requires that compensation costs relating to share-based payment transactions be recognized in the financial statements based on estimated fair values. We adopted SFAS 123(R) using the modified prospective transition method. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect the impact of SFAS 123 (R). We recognized a $78 reduction of expense, net of taxes, to record the cumulative effect of a change in accounting principle as of January 2, 2006. Incremental compensation expense recognized under SFAS No. 123(R) in 2006 is not material.

We previously accounted for share-based compensation using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No share-based employee compensation cost for stock options was recognized in consolidated net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In December 2004, the compensation committee of the Company’s Board of Directors voted to accelerate the vesting of approximately 965,500 unvested options which had option prices at least 30% greater than the market price as of December 15, 2004. The accelerated vesting of these stock options provided reward, recognition and immediate motivation for the Company’s associates. By accelerating the vesting on these “out-of-the-money” options, we reduced the future expense to be recognized under SFAS No. 123(R) by approximately $1,250 which we believed was in the best interest of the shareholders.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be different in the future.

Under the fair value recognition provisions, we recognize stock-based compensation expense net of an estimated forfeiture rate and only recognize compensation expense for those shares expected to vest over the requisite service period of the award. If our actual forfeiture rate is materially different from our estimate, our stock-based compensation expense could be significantly different from what we have recorded in the current period.

We currently have 224,051 shares of performance-based restricted stock which vests upon attainment of a performance goal by the Company by fiscal year-end 2007. We currently expect the full amount of the outstanding performance-based restricted stock awards to vest in 2007 and therefore have not reduced compensation expense for estimated forfeitures. As of December 31, 2006, we have recognized $1.7 million of expense and expect to recognize an additional $1.3 million in 2007. If the performance goal is not attained in 2007, these restricted stock awards will be forfeited and canceled and all expense recognized to date will be reversed.

RESULTS OF OPERATIONS

Discontinued Operations

In June 2006, we sold 100% of the outstanding capital stock of InSystems Corporation (InSystems) to Whitehill Technologies, Inc,. for $8.5 million in cash, plus the return of certain cash deposits The transaction resulted in a loss of approximately $10.1 million, net of taxes, which includes a charge of $2.0 million for contractual obligations to Whitehill Technologies, Inc., related to the leased facility. In conjunction with the recording of this contractual obligation, we reversed a restructuring liability of $1.1 million to discontinued operations.

In December 2004, we sold selected assets and transferred selected liabilities of our former equipment service business to Pitney Bowes for approximately $16.8 million in cash and retained $2.4 million of equipment service business accounts receivable. The transaction resulted in a gain of $12.8 million net of taxes.

The InSystems and equipment service businesses were sold because they no longer fit with the Company’s strategic direction. The sale of InSystems, a reportable segment since its acquisition in 2002, and the sale of the equipment service business, a component of the Document and Label Solutions segment, met the criteria to be accounted for as a discontinued operation under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” As a result, we have segregated the assets, liabilities, revenue and expenses of these discontinued operations in the accompanying Consolidated Balance Sheets and Consolidated Statements of Income. Cash flows related to discontinued operations are not separately disclosed in the Consolidated Statements of Cash Flows.

Revenue, results of operations, and gain or loss on sale for these discontinued operations appear in the table below.


	*2006*	*2005*	*2004*
Revenue
InSystems	$ 4.9	$ 11.2	$ 11.9
Equipment service	-	-	22.9
Total	$ 4.9	$ 11.2	$ 34.8

(Loss) Gain from Discontinued Operations, net of tax
InSystems	$ (1.4)	$ (6.3)	$ (37.4)
Equipment service	(0.4)	-	1.7
Total	$ (1.8)	$ (6.3)	$ (35.7)

(Loss) Gain on Sales of Discontinued Operations, net of tax
InSystems	$ (10.1)	$ -	$ -
Equipment service	-	0.6	12.8
Total	$ (10.1)	$ 0.6	$ 12.8

Continuing Operations

The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations and financial condition, supplemented by a discussion of segment results where appropriate. The discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

The discussion includes non-GAAP financial measures that exclude asset impairments, restructuring charges, pension loss amortization, pension settlement loss, and certain tax adjustments. We believe that the non-GAAP financial measures presented will enhance the understanding of our results of operations due to the non-operational nature of the identified items and the significant and varying effect they have on our reported results from period to period. This presentation is consistent with the manner in which our Board of Directors establishes incentives and internally evaluates performance. This non-GAAP information is not meant to be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States.

References to 2006, 2005, and 2004 refer to the 52-week periods ended December 31, 2006 and January 1, 2006 and the 53-week period ended January 2, 2005.

Overview

Consolidated revenue from continuing operations has grown modestly in each of the last two years, up 0.5% and 1.4% in 2006 and 2005. Adjusting for the extra accounting week in 2004, which added an estimated $17 million to 2004’s revenue, the 2004 increase would have been 3.4%.

More noteworthy perhaps is evidence of a gradual but accelerating shift in the composition of the Company’s revenue. Traditional, business forms are less in demand, yielding to competing technologies or shorter-run digitally printed documents. Labels have continued to play a larger role and our focus on offering tailored total document solutions to our customers has added an increased focus on commercial print, application software, and services.

Consolidated gross margin improved $5.1 million in 2006 on an incremental revenue gain of $4.2 million, rebounding from the $7.1 million gross margin decline in 2005. As a percent of revenue, the overall gross margin was 35.2% in 2004, 33.9% in 2005, and 34.3% in 2006.

We evaluate our financial performance primarily on operating income before restructuring, impairment, pension loss amortization, and pension settlement losses. On this basis, consolidated operating income was $37.3 million in 2006, compared to $37.7 million in 2005, and $17.9 million in 2004. The following table reconciles our consolidated financial statements to these amounts.


	2006	2005	2004

Income (Loss) from Continuing Operations	$ 4.7	$ 17.4	$ (11.4)
Asset impairments	2.7	0.3	0.9
Restructuring charges	2.7	1.0	11.0
Amortization of prior period pension losses	25.6	19.0	17.4
Pension settlement loss	1.6	-	-
Total Pre-tax Operating Income, exluding the above	$ 37.3	$ 37.7	$ 17.9

Revenue, Gross Margin, and Operating Income (Loss) by Segment

We also evaluate each of our segments on the same basis, except LIFO inventory adjustments are also excluded. The actual cost of sales and depreciation are recorded for each segment and a selling, general and administrative expense (SG&A) allocation is made based on an evaluation of each segment’s utilization of our selling, support, and engineering resources.

In 2006, we reclassified the Document Systems business unit that was previously part of Document and Label Solutions to a separate operating segment included in Other. This change is in response to changes in the organizational structure of the Company and a reevaluation of the aggregation criteria. After the sale of InSystems, our three reportable segments are Document and Label Solutions, POD Services, and Digital Solutions. Other includes our Commercial Print, Document Systems, International, and PathForward operating segments. As a result of a review of design service revenue and the allocation of corporate selling, general, and administrative expense to our operating units, in 2006, we made modifications that affect revenue between segments and the expense allocation to our segments.

Segment profit and loss information for 2005 and 2004 has been revised from previously reported amounts to reflect the current presentation. The tables below present revenue, gross margin, and income (loss) from operations for each of our reportable segments.


	2006	% Change	2005	% Change	2004	% Change
Revenue
Document & Label Solutions	$ 575.3	-3.5%	$ 596.2	1.3%	$ 588.7	-1.1%
Print On Demand Services	260.0	8.4%	239.8	-0.1%	241.7	2.5%
Digital Solutions	0.6	-14.3%	0.7	600.0%	0.1	-
Other	59.0	9.3%	54.0	13.0%	47.8	6.7%
Total Segments	$ 894.9	0.5%	$ 890.7	1.4%	$ 878.3	3.0%

	2006	% Revenue	2005	% Revenue	2004	% Revenue
Gross Margin *
Document & Label Solutions	$ 188.8	32.8%	$ 200.0	33.5%	$ 202.1	34.3%
Print On Demand Services	100.7	38.7%	85.7	35.7%	92.7	38.4%
Digital Solutions	0.4	66.7%	0.6	85.7%	-	-
Other	18.3	31.0%	16.2	30.0%	14.4	30.1%
Total Segments	$ 308.2	34.4%	$ 302.5	34.0%	$ 309.2	35.2%

	2006	% Revenue	2005	% Revenue	2004	% Revenue
Operating Income (Loss) *
Document & Label Solutions	$ 25.4	4.4%	$ 41.7	7.0%	$ 22.6	3.8%
Print On Demand Services	13.8	5.3%	(1.7)	-0.7%	1.5	0.6%
Digital Solutions	(5.2)	-	(5.7)	-	(6.5)	-
Other	1.7	2.9%	1.2	2.2%	(6.2)	-13.0%
Total Segments*	$ 35.7	4.0%	$ 35.5	4.0%	$ 11.4	1.3%

LIFO Adjustments	$ (1.0)		$ (0.4)		$ -
Other Unallocated	2.6		2.6		6.5
Consolidated	$ 37.3		$ 37.7		$ 17.9

*Segment gross margin and operating income (loss) before unallocated items. See reconciliation to consolidated information on page 24.

Document & Label Solutions (DLS) - Overall, 2006 DLS revenue was $575.3 million, 3.5% below 2005. In 2006, unit sales declined approximately 5.5% and net prices averaged about 2.0% higher than in 2005. The price gain was the net of two major factors – increases to recover paper cost increases early in the year, and reductions due to reverse auctions and other aggressive pricing actions at a few large accounts. In 2005, revenue was up 1.3%. Adjusting for the extra accounting week in 2004, revenue increased approximately 3.2% over the prior year. Pricing accounted for two-thirds of the increase, again related to the paper costs.

The DLS segment included $125.3 million of label revenue in 2006, which was up 1.5% from the prior year. Adjusting for the extra accounting week in 2004, label revenue is estimated to have increased approximately 2.8% in 2005 versus 2004. We see opportunities for growth in pressure sensitive labels and related services, particularly in the manufacturing sector, and have recently streamlined our U.S. label production and added capacity in Mexico.

The remainder of the DLS segment revenue includes custom printed documents, supplies, and distribution and other services. Revenue for these products and services was $450.0 million in 2006, down 4.8% from 2005. Adjusting for the extra accounting week in 2004, revenue is estimated to have increased approximately 3.3% in 2005 versus 2004.

Industry economics for much of traditional print is marked by declining demand due to technology substitutes, excess production capacity, and aggressive price competition. Notwithstanding these challenges, we believe that there will continue to be opportunities for good margin, cash flow, and return on investment in this product group, which will require market share penetration in targeted vertical markets where the Company is well positioned, judicious capital investment in niche areas, and continuing improvements in cost and productivity. It is noteworthy that these traditional print products and services are well established in a broad cross-section of customers and provide a platform to launch our other products and services.

DLS gross margin was 32.8% of revenue in 2006, down from 33.5% and 34.3% in the preceding two years. Although higher paper costs were substantially recovered in 2006, the dollar gross margin decreased $11.2 million from the prior year – the net result of the decline in unit sales and the weaker pricing noted above at a few large accounts, offset in part by continued manufacturing cost reductions. The $2.1 million decrease in the 2005 gross margin similarly reflected declines in sales units and average pricing (aside from that related to paper costs) that exceeded manufacturing cost reductions.

Operating income in 2006 was $25.4 million, down in comparison to the $41.7 million result reported for 2005. This is attributed primarily to the unit sales decrease and price concessions at a few large accounts. The 2006 result remained higher than that for 2004, primarily due to lower SG&A expense versus 2004.

As discussed below, we announced a restructuring plan in January, 2007 that included the closing of our Middlebury, Vermont printing plant. The production capacity of the plant will be transferred to other plants over the next few quarters. Once transfers are complete, annualized savings are estimated to be $4.7 million.

POD Services - POD Services reported revenue of $260 million in 2006 – an 8.4% increase versus the prior year. Unit growth accounted for about three-fourths of this increase with the balance coming from higher selling prices, primarily related to the recovery of increased paper costs. In 2005, revenue decreased slightly from the prior year. Adjusting for the extra accounting week in 2004, revenue is estimated to have increased approximately 1%, primarily due to a modest increase in units which overcame some pricing weakness.

We believe there are good opportunities for growth in revenue and margins in this segment, and are stepping up its level of investment in digital printing equipment, personnel, and software. Much of the application software is proprietary, designed to improve both productivity and the customer experience.

Digital print carries inherent advantages for certain print applications, in particular where there is risk of obsolescence with longer production runs, where each page benefits from carrying variable information, or where fast turnaround time is critical. We provide digital printing services at 25 locations throughout the United States.

Gross margin improved significantly in 2006 – up 17.5% or $15.0 million over the prior year. The substantial increase in gross margin is attributed primarily to three major factors: unit growth in digital print; gains made in selling design, programming, and other services; and improvements in manufacturing productivity. The decrease in 2005 gross margin in relation to 2004 is attributed primarily to higher discounting and increased manufacturing costs.

Higher sales volume and productivity boosted the 2006 operating results to a profit of $13.8 million from a prior year loss of $1.7 million, demonstrating this unit’s significant operating leverage over its fixed cost base. Some additional margin improvement is possible with continuing growth in unit volumes, but we expect to invest additional capital and personnel in 2007 that will dampen near-term gains in the operating margin percentage. The decline in 2005 operating profit reflected the weaker gross margin discussed above, offset in part by lesser expense allocation.

Digital Solutions - Revenue was $0.6 million in 2006, about the same as in 2005, and slightly higher than 2004.

This start-up venture is based on the application of digital writing technology that converts conventional handwriting on paper to standard digital format for automatic entry into software applications. We have made significant investments in this venture over the last three years and believe there is a very good likelihood that a viable market will emerge for this technology. We have elected to seek venture capital investment in order to continue the business plan and will likely spin this venture out and become a minority partner.

Other Operating Segments - Other includes our Commercial Print, Document Systems, PathForward, and International operating segments.

Commercial Print revenue was $35.6 million in 2006, up 20.0% over 2005, and 68.9% over 2004. Beginning in 2006, certain products previously included in DLS revenue are now included in Commercial Print revenue. If we had adjusted prior year amounts for this change, Commercial Print revenue would have increased 8% over 2005 and 36.2% over 2004. We apply our product expertise and sophisticated software tools to assist customers in managing their commercial print programs. Commercial print is sourced from third party printers. The business model allows us to buy from the supplier and resell to the customer, or charge a fee for the management services. We believe that our asset light, services-based commercial print model will be well received by the market. It is an integral part of our effort to provide our customers with a full range of products and services to meet their document needs.

The other major source of revenue in this category is Document Systems, which sells application software and services that facilitate the secure, on-demand printing of business documents. Revenue in this operating segment was $21.1 million in 2006, versus $20.9 million and $24.2 million in 2005 and 2004. The Document Systems product portfolio is shifting – from one primarily based on reselling document printing and handling equipment to one increasingly characterized by application software and services. We believe our software is particularly well positioned to be an integral part of hospitals’ migration from paper-based recordkeeping system to electronic medical record systems.

Paper Costs

White bond paper costs rose twice during 2006 with year-end pricing up approximately 11% from the start of the year for rolls used by DLS, and up about 14% for cut sheet used primarily in POD Services. During 2005, paper prices decreased slightly for rolls and ticked up slightly for cut sheet.

Paper mill operating rates were reported in the 92%-93% range during 2006, which were above 2005 rates and served to support the paper price hikes. At this writing, the expectation is that mills will continue to reduce capacity during 2007 in an attempt to offset expected weakness in overall paper demand and pricing. There are currently no price announcements in the market; however, pulp and energy costs, coupled with less supply, may push prices modestly higher in the second half of 2007.

Despite a competitive marketplace, the Company has traditionally been successful in recovering all or most of the increases in paper costs. Recovery ordinarily occurs over a period of several quarters. We would expect to increase our target selling prices and negotiate with our customers to recover any paper cost increases that might take place in 2007.

Impact of One Large Account

The use of reverse auctions and aggressive bidding impacted revenue in 2006. Price and unit reductions during 2006 at one large account in particular had a significant unfavorable effect, reducing annualized revenue and gross margin by approximately $23.0 million and $10.0 million, respectively. About 60% of this annualized impact was felt in 2006 with the balance spilling into 2007. The majority of the change impacts DLS, but POD Services and Commercial Print were also affected.

2007 Revenue

Notwithstanding the above account’s 2007 impact and the general marketplace challenges, the Company’s growth initiatives are expected to produce overall revenue growth in the low to mid single-digit range in 2007.

Selling, General, Administrative Expense

Our qualified pension plan became underfunded in 2002 as a result of declining interest rates and the weak stock market in 2001 and 2002. This significantly increased the amortization in subsequent years of these past pension asset and liability losses. Pension loss amortization has been significant - $25.6 million, $19.0 million, and $17.4 million, in 2006, 2005, and 2004, reducing earnings per share by $0.54, $0.40, and $0.37, in the respective years. The $6.6 million increase in 2006 pension loss amortization is attributable to several factors discussed more fully under our critical accounting estimates.

Approximately $1.6 million from the reduction in the liability discount rate from 6.0% to 5.75%.

Approximately $1.0 million from a reduction in the estimated remaining working life of participants from 8.5 years to 8.1 years.

Approximately $4.0 million from the phased-in recognition of actuarial losses over a five-year period. This produces a pattern of increasing amortization over the first five years following an actuarial loss.

We also incurred a $1.6 million pension settlement loss in 2006 as a result of the relatively high lump-sum retirement payouts made during the year from the nonqualifed retirement plan. As a result of the pension obligation settlement, we recorded a non-cash charge to record a pro-rata portion of unrecognized net losses from prior periods.

Considering our past actuarial gains and losses, including the losses in 2001 and 2002, and given our current actuarial assumptions, we expect our pension amortization to peak in 2007 at approximately $28 million and begin to decrease thereafter.

In total, consolidated SG&A expenses increased $18.8 million in 2006. Excluding the pension items noted above, SG&A expenses increased $10.6 million. The primary contributors to this increase were sales compensation, fringe costs, and increased information technology spending. As previously mentioned, in the second quarter of 2006, we reached a favorable settlement to an audit for unclaimed funds and reversed $2.5 million of the reserve to SG&A expense. On the same basis, SG&A expenses decreased $23.6 million in 2005 from 2004, primarily from a decrease in those same items.

The effect of adoption of SFAS No.123(R) did not have a material effect on SG&A expense. As of December 31, 2006, there was a total of $977 of share-based compensation related to service-based restricted stock that will be amortized to expense over a weighted-average remaining service period of two years and a total of $1,344 of share-based compensation related to performance-based restricted stock that will be amortized to expense in 2007.

Depreciation and Amortization

Depreciation and amortization continued to trend lower in 2006 - $28.8 million compared with $33.8 million and $37.2 million in the two preceding years. The decrease reflects a strategic shift away from an asset-intensive business model to one based increasingly on services. Annual capital spending in recent years has remained in the low to mid $20 million range, compared to the mid $60 million range in years prior to 2001. In addition, plant consolidations undertaken in recent years have had the effect of reducing excess capacity and equipment depreciation.

We plan to step up our capital spending in 2007, particularly for digital print capacity and workflow software in our POD Services business. Capital expenditures in 2007 are estimated in the $25-$28 million range and depreciation and amortization should be slightly below that reported in 2006.

Interest Expense

Interest expense was $2.3 million in 2006, compared with $2.5 million and $2.6 million in 2005 and 2004. The reductions have been driven by lower average debt balances in each year as a result of our cash flow generation, somewhat offset by increased interest rates.

Income Taxes

The effective tax rates were 94.1%, 53.8%, and 47.6%, for 2006, 2005, and 2004. The table below details the major items that impacted the rates in each of the years.


	*2006*	%	*2005*	%	*2004*	%
Pre-tax Income (Loss) on Continuing Operations	$ 2.6		$ 15.4		$ (14.0)

Income Tax Expense (Benefit)	2.5	94.1%	8.3	53.8%	(6.6)	47.6%

Major Reconciling Items
State rate changes	0.1	3.0%	2.3	15.1%	0.1	-0.6%
Charitable contributions expiration	0.5	19.4%	-		-
Capital loss valuation allowance	0.4	16.6%	-		(0.4)	2.7%
Equity compensation	0.3	9.6%	-		-
Permanent & other items	0.2	5.8%	(0.1)	-0.5%	(0.7)	5.5%
Income Tax Expense (Benefit), adjusted for reconciling items	1.0	39.7%	6.1	39.2%	(5.6)	40.0%

In 2006, we reduced our deferred tax asset by $0.5 million for the value of charitable contributions that will not be realized as a tax deduction due to their expiration. In addition, a tax valuation allowance of $0.4 million was established in connection with a capital loss that will likely not be offset by future capital gains. Finally, the deferred tax asset was reduced by $0.3 million to recognize the lower deduction available to the Company as a result of the decrease in the value of the Company’s stock since certain restricted shares that vested in 2006 were granted. Excluding these and other items, the effective tax rate was 39.7%.

In June 2005, the State of Ohio enacted new tax legislation that had the effect of eliminating $2.3 million of the Company’s tax loss carry-forwards carried in deferred tax. The effect of this change in tax rates on future periods is not material.

Income (Loss) from Continuing Operations

As indicated in the following table, operating income before restructuring expense, impairment expense, pension loss amortization, and pension settlement losses was down slightly in 2006 - $37.3 million vs. $37.7 million in the prior year. The gains achieved from the higher gross margin and lower depreciation was eclipsed by increased SG&A spending. On the same basis, 2006 was $19.4 million above the 2004 result, driven primarily by lower SG&A spending and lower depreciation. The following table reconciles these amounts to income (loss) from continuing operations and net income on a GAAP basis.


	*Effect On Income*
	*2006*	*2005*	*2004*



Segment Operating Income	$ 35.7	$ 35.5	$ 11.4

LIFO adjustment	(1.0)	(0.4)	-
Corporate and other unallocated	0.9	(1.4)	(0.5)
Other unallocated pension	1.7	4.0	7.0

	37.3	37.7	17.9
Reconciliation to Net Income (Loss)
Restructuring expense	(2.7)	(1.0)	(11.0)
Asset impairments	(2.7)	(0.3)	(1.0)
Amortization of prior period pension losses	(25.6)	(19.0)	(17.4)
Pension settlement loss	(1.6)	-	-
Income (Loss) on Continuing Operations	4.7	17.4	(11.5)
Interest and other income (expense)	(2.1)	(2.0)	(2.5)
Pre-tax Income (Loss)	2.6	15.4	(14.0)
Income tax adjustments	(1.3)	(2.2)	-
Income Taxes	(1.2)	(6.1)	6.6
Net Income (Loss) on Continuing Operations	0.1	7.1	(7.4)
Discontinued Operations	(11.9)	(5.7)	(22.8)
Cumulative Effect of Change in Accounting Principle	0.1
Net Income (Loss)	$ (11.7)	$ 1.4	$ (30.2)

EPS on Continuing Operations Attribution
Restructuring and impairment	$ (0.11)	$ (0.03)	$ (0.25)
Pension loss amortization & pension settlement loss	(0.57)	(0.40)	(0.37)
Income tax adjustments	(0.05)	(0.08)	-
All other operations	0.74	0.76	0.36
Total on Continuing Operations	$ 0.01	$ 0.25	$ (0.26)

On a per share basis, net income from continuing operations before restructuring, impairment, pension settlement, pension amortization, and tax adjustments was $0.74 in 2006, compared with $0.76 and $0.36 in 2005 and 2004, respectively.

Restructuring and Asset Impairment

At the end of 2006, all of our current restructuring actions were completed. Pre-tax components of restructuring charges are as follows:


	*2006*	*2005*	*2004*

2006 Restructuring Actions
Severance and employer related costs	$ 0.7	$ -	$ -
Associated costs	1.4	-	-
Total 2006	2.1	-	-

2005 Restructuring Actions
Severance and employer related costs	0.1	0.4	-
Total 2005	0.1	0.4	-

2004 Restructuring Actions
Severance and employer related costs	-	(0.7)	8.7
Contract exit and termination costs	-	-	0.1
Associated costs	-	-	0.1
Total 2004	-	(0.7)	8.9

2003 Restructuring Actions
Contract exit and termination costs	0.3	0.2	0.1
Associated costs	-	-	0.3
Total 2003	0.3	0.2	0.4

2001 Restructuring Actions
Contract exit and termination costs	0.2	1.1	1.7
Total 2001	0.2	1.1	1.7
Total restructuring charges	$ 2.7	$ 1.0	$ 11.0

2006 Restructuring

Within the DLS segment, we closed our Terre Haute, Indiana, label production plant. The plant’s productive capacity was transferred to three other plants in the United States to improve overall efficiency and lower operating costs. Restructuring costs incurred included severance and employer related costs and other associated costs directly related to the restructuring, primarily equipment removal and relocation.

Pre-tax components of 2006 restructuring expense are as follows:


	*Total Costs*	*Total*
	*Expected*	*2006*
	*to be*	*Restructuring*
	*Incurred*	*Expense*
Severance and employer related costs	$ 0.7	$ 0.7
Associated costs	1.4	1.4
Total	$ 2.1	$ 2.1

A summary of the 2006 restructuring accrual activity is as follows:


	Charged to	Incurred	Balance
	Accrual	in 2006	2006

Severance and employer related costs	$ 0.7	$ (0.7)	$ -
Total	$ 0.7	$ (0.7)	$ -

2005 Restructuring

Within the POD Services segment, we closed one printing center, moving production to other facilities and outsourcing envelope production. We also closed a warehouse in the DLS segment. Costs incurred were primarily severance and employer-related costs.

Pre-tax components of 2005 restructuring charges are as follows:


	*Total Costs*	*Total*	*Cumulative*
	*Expected*	*2006*	*To-Date*
	*to be*	*Restructuring*	*Restructuring*
	*Incurred*	*Expense*	*Expense*
Severance and employer related costs	$ 0.4	$ 0.1	$ 0.5
Other exit costs	-	-	-
Total	$ 0.4	$ 0.1	$ 0.5

BY SEGMENT:
Document and Label Solutions	$ 0.1	$ -	$ 0.1
POD Services	0.3	0.1	0.4
Total	$ 0.4	$ 0.1	$ 0.5

A summary of the 2005 restructuring accrual activity is as follows:


	*Charged to*	*Incurred*	*Balance*	*Incurred*	*Balance*
	*Accrual*	*in 2005*	*2005*	*in 2006*	*2006*
Severance and employer
related costs	$ 0.4	$ (0.1)	$ 0.3	$ (0.3)	$ -
Total	$ 0.4	$ (0.1)	$ 0.3	$ (0.3)	$ -

2004 Restructuring

In 2004, we initiated several restructuring actions as part of a drive to reduce costs. We integrated our sales specialist organization with our regional sales organization to improve coordination, resource deployment, and productivity; adjusted our client services model to improve efficiency; and went to a shared service model in various administrative areas to reduce costs. We also outsourced part of our information technology operations, including hardware management, help desk support, and telecommunications. As a result of all these actions, we eliminated a significant number of positions, including four executive officer positions.

Costs incurred included severance and employer-related costs, including outplacement and healthcare allowances; lease termination costs for one sales office, including contractual obligations for taxes, utilities, and maintenance costs; and associated travel and moving costs related to the restructuring actions.

Approximately $0.8 million and $0.4 million of expense was reversed in 2005 and 2004, respectively, as a result of lower than expected severance and healthcare benefits for certain associates. The majority of the $0.8 million reversal in 2005 was related to the reversal of an accrual established for severance related to the outsourcing of information technology operations in 2004. We had agreed to pay severance to associates whose positions were subsequently eliminated and the number of positions eliminated was less than expected.

Pre-tax components of 2004 restructuring actions are as follows:


	*Total Expense*	*Total*	*Cumulative*
	*Expected*	*2006*	*To-Date*
	*to be*	*Restructuring*	*Restructuring*
	*Incurred*	*Expense*	*Expense*

Severance and employer related costs	$ 7.9	$ -	$ 7.9
Contract termination costs	0.2	-	0.2
Associated costs	0.1	-	0.1
Total	$ 8.2	$ -	$ 8.2

BY SEGMENT:
Document and Label Solutions	$ 4.9	$ -	$ 4.9
POD Services	0.7	-	0.7
Other	2.6	-	2.6
Total	$ 8.2	$ -	$ 8.2

A summary of the 2004 restructuring accrual activity is as follows:


	*Charged to*	*Incurred*	*Reversed*	*Balance*	*Charged to*	*Incurred*	*Reversed*	*Balance*	*Incurred*	*Balance*
	*Accrual*	*in 2004*	*in 2004*	*2004*	*Accrual*	*in 2005*	*in 2005*	*2005*	*in 2006*	*2006*

Severance and employer
related costs	$ 8.5	$ (5.5)	$ (0.4)	$ 2.6	$ 0.1	$ (1.8)	$ (0.8)	$ -	$ -	$ -

Contract termination
costs	0.1	-	-	0.1	-	(0.1)	-	-	-	-

Total	$ 8.6	$ (5.5)	$ (0.4)	$ 2.7	$ 0.1	$ (1.9)	$ (0.8)	$ -	$ -	$ -

2003 and 2001 Restructuring

Restructuring expense recorded in 2006, 2005, and 2004 for these actions is primarily related to vacated facilities, as the amount accrued is net of any expected sublease income and the Company was unable to sublease the remaining facilities. No additional expense is remaining related to these facilities.

A summary of the 2003 restructuring accrual activity is as follows:


	*Charged to*	*Incurred*	*Reversed*	*Balance*	*Incurred*	*Reversed*	*Balance*	*Incurred*	*Reversed*	*Balance*	*Incurred*	*Balance*
	*Accrual*	*in 2003*	*in 2003*	*2003*	*in 2004*	*in 2004*	*2004*	*in 2005*	*in 2005*	*2005*	*in 2006*	*2006*

Severance and
employer
related costs	$ 9.1	$ (8.9)	$ (0.1)	$ 0.1	$ (0.1)	$ -	$ -	$ -	$ -	$ -	$ -	$ -

Contract
termination
costs	2.3	(0.8)	-	1.5	(0.9)	-	0.7	(0.4)	-	0.3	(0.3)	-
Total	$ 11.4	$ (9.7)	$ (0.1)	$ 1.6	$ (1.0)	$ -	$ 0.7	$ (0.4)	$ -	$ 0.3	$ (0.3)	$ -

Asset Impairment and Net Assets Held for Sale

In conjunction with the closing of the Terre Haute plant, in 2006 we recorded $1.5 million of asset impairments, primarily related to equipment. The carrying value of the Terre Haute building and equipment was adjusted to its fair value less costs to sell, considering recent sales of similar properties and real estate valuations. Other equipment was determined to have no fair value and was disposed of. As of December 31, 2006, the Terre Haute building was classified as held for sale and subsequently sold in January 2007.

Subsequent event

In 2007, the Company is taking steps to align its supply chain with market opportunities and customer needs. We plan to organize and consolidate our manufacturing and distribution capabilities to become more efficient in meeting customer needs. On January 25, 2007, we adopted a restructuring plan to accomplish these objectives. The actions associated with the plan are expected to be completed in 2007.

In connection with this plan, on January 26, 2007, we announced that we will close our facility in Middlebury, Vermont, and transfer equipment and production operations to three other plants. The Middlebury plant, which employs about 112 people, will continue to perform limited production through May 2007. We expect to record approximately $5.0 million of restructuring costs in the DLS segment in 2007 related to the closing of the Middlebury plant. Restructuring costs will include $2.0 million for employee related costs and $3.0 million of other associated exit costs, primarily equipment removal and relocation.

At December 31, 2006, we concluded that it was more likely than not that a plant would be closed in the DLS segment which caused us to perform an impairment test on the long-lived assets. As a result, we recorded an impairment charge of $1.2 million, primarily related to equipment.

ENVIRONMENTAL MATTERS

We have been named as one of a number of potentially responsible parties at several waste disposal sites, none of which has ever been Company owned. Our policy is to accrue for investigation and remediation at sites where costs are probable and estimable. At this writing, there are no identified environmental liabilities that are expected to have a material adverse effect on our operating results, financial condition, or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Our discussion of liquidity and capital resources will include an analysis of our cash flows and capital structure, which include both continuing and discontinued operations, plus a summary of our significant contractual obligations.

This discussion also presents financial measures that are considered non-GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows where amounts are either excluded or included not in accordance with generally accepted accounting principles. The presentation of non-GAAP information is not meant to be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States. In particular, we will segregate and highlight cash flows related to restructuring and contributions to our qualified pension plan, both of which are carefully monitored by management and have a significant and variable impact on cash flow. In addition, because our outstanding debt is borrowed under a revolving credit agreement which currently permits us to borrow and repay at will up to a balance of $100 million, we take the measure of cash flow performance prior to debt borrowing or repayment; in effect, we evaluate cash flow as the change in net debt (total debt less cash and cash equivalents).

The major elements of the Statements of Cash Flows are summarized below:


CASH INFLOW (OUTFLOW)	*2006*	*2005*	*2004*
Net income plus non-cash items	$ 71.5	$ 77.6	$ 61.4
Change in accounts receivable	(14.6)	5.2	(2.4)
Change in inventories	(2.2)	4.8	(4.7)
Change in accounts payable & accrued liabilities	-	(4.7)	12.7
Restructuring payments	(3.4)	(5.2)	(11.7)
Contributions to qualified pension plan	(25.0)	(15.0)	(10.0)
Other pension & postretirement payments	(6.1)	(5.0)	(4.9)
Income taxes	0.5	(0.6)	1.6
Change in other assets & liabilities	(0.9)	0.4	(0.1)
Net cash provided by operating activities	19.9	57.5	41.9

Acquisitions	-	-	(1.5)
Capital expenditures	(22.9)	(20.2)	(23.2)
Proceeds from sale of plant and equipment	0.6	3.0	3.2
Proceeds from sale of discontinued operations	9.1	-	16.8
Proceeds from (additions to) investments	-	1.1	(0.2)
Net cash used for investing activities	(13.2)	(16.1)	(4.9)

Debt borrowings (payments)	6.4	(46.6)	(45.3)
Dividends paid	(26.6)	(26.4)	(26.2)
Proceeds from issuance of common stock	0.7	1.9	1.0
Purchase of treasury stock	(0.4)	-	-
Debt issuance costs	-	(0.7)	-
Net cash used for financing activities	(19.9)	(71.8)	(70.5)
Exchange rate differences	-	-	0.6
Net change in cash	$ (13.2)	$ (30.4)	$ (32.9)

Memo:
Add back debt (borrowed) paid	(6.4)	46.6	45.3
Cash flow before change in debt	$ (19.6)	$ 16.2	$ 12.4

The Company generated positive cash flow, before debt borrowing and repayments, of $16.2 million and $12.4 million in 2005 and 2004, respectively. In contrast, 2006 witnessed a cash outflow before borrowing of $19.6 million.

Capital expenditures and dividends were approximately the same in each of the three years. The major difference in 2006 was that pension funding was twice the average of the prior two years, and accounts receivable were higher.

Operating Activities

Cash provided from operations was $19.9 million in 2006, compared with $57.5 million and $41.9 million for 2005 and 2004, respectively. Major contributing factors identified in the table above are discussed below.

Net income plus non-cash items for 2006 was lower than in 2005, but well above 2004 – reflecting the year-to-year changes in operating profitability discussed earlier under Results of Operations.

The $14.6 million increase in 2006 accounts receivable was primarily a function of expected December payments from five accounts that were received just after the year-end cut-off, plus an increase in December’s revenue over the prior December.

Restructuring payments have declined in each successive year. The restructuring announced in January, 2007, will result in approximately $5 million in cash outflows in 2007.

Contributions to the Company’s qualified pension plan were $25 million in 2006, up significantly versus the $15 million and $10 million in the preceding two years. We plan to make voluntary contributions of $20 million per year for the next several years in order to move the plan toward fully funded status.

Investing Activities

Capital spending has remained in a narrow range in each of the years. We expect capital expenditures to be in the $25-$28 million range in 2007, primarily focused on POD Services equipment and software.

Financing Activities

Dividend payments were consistent in each year. The Company has paid a quarterly dividend since going public in 1956; the quarterly dividend has remained at $0.23 per share since the first quarter 2000.

Capital Structure

Our capital structure appears in the table below:


CAPITAL STRUCTURE	*2006*	*2005*	*2004*
Total Debt	$ 41.4	$ 35.0	$ 81.4
Less Cash and Short-term Investments	(0.5)	13.6	(44.1)
Net Debt	40.9	21.4	37.3

Equity	118.2	173.5	205.4
Total	$ 159.1	$ 194.9	$ 242.7
Net Debt:Total Capital	*25.7%*	11.0%	15.4%

The $19.6 million cash outflow described earlier for 2006 is reflected in the increase in net debt shown in the table above.

Shareholders’ Equity decreased $55.3 million during 2006. This change primarily reflects the $11.7 million net loss, $26.6 million in dividend payments, and the change in accounting that establishes postretirement benefit liabilities on the basis of projected rather than accumulated obligations that reduced shareholders equity $11.8 million.

The Company currently has a $100 million senior secured revolving credit agreement (Credit Facility) with seven banks that permits borrowing and repayment as needed throughout the year. The Credit Facility, which expires in May, 2010, is secured by accounts receivable, inventories, and certain other assets. There is a fixed charge coverage covenant test that becomes applicable if the sum of available unborrowed credit plus certain cash balances falls below $10 million. At year-end, outstanding borrowings under the Credit Facility were $41.0 million and unborrowed credit was $50.8 million, net of letters of credit.

Interest on the Revolver is at the London Interbank Offered Rate (LIBOR) plus an applicable spread based on the sum of available unborrowed credit plus certain cash balances. The weighted average interest rate, including the spread, was 6.88% at December 31, 2006. In addition, the Company pays a fee on the unused portion of the credit facility; currently the fee is 37.5 basis points.

We believe that the combination of internally-generated funds, available cash reserves, and our existing credit facility are sufficient to fund our operations, including capital expenditures, dividends, and investments in growth initiatives over the next year. In our judgment, our strong balance sheet could support additional debt financing.

Contractual Obligations

The following table summarizes our significant contractual obligations at December 31, 2006. Some of the amounts we included in this table are based on estimates and assumptions about our obligations, and the amounts we actually pay in the future may vary from the amounts reflected below.


	*Payments Due by Period*
	*Total*	*Less than 1 year*	*1-3 years*	*4-5 years*	*After 5 years*

Long-term debt (1)	$ 41.0	$ -	$ 41.0	$ -	$ -
Capital lease obligations	0.4	0.4	-	-	-
Operating leases	47.4	15.9	20.9	7.8	2.8
Purchase commitments	13.7	12.6	1.1	-	-
Pension plans (2)	27.8	1.7	4.4	5.0	16.7
Postretirement benefit obligation (3)	20.7	2.1	4.3	4.4	9.9
Total	$ 151.0	$ 32.7	$ 71.7	$ 17.2	$ 29.4

(1) The debt payment information represents amounts outstanding under our revolving line of credit.

(2) The pension plan obligations included in the table above represent benefit payments for 2007 to 2016 under the nonqualifed defined benefit plans that are unfunded.

(3) The postretirement benefit obligation included in the table above represents healthcare benefit payments expected to be paid for future claims under the plan for 2007 to 2016.

We are obligated under operating leases for real estate, sales offices, transportation equipment, and computer and other equipment. In accordance with GAAP, the obligations under these operating leases are not recorded on our balance sheet.

Purchase commitments for capital improvements aggregated $1.9 million at December 31, 2006. We have commitments with equipment suppliers to spend a total of $1.2 million over multiple years. We also have multiple years remaining on commitments with software companies for total annual license maintenance fees of $2.9 million. In addition, we have purchase commitments for telecommunications services from suppliers that provide for minimum annual commitments of $1.6 million in 2007. We outsource certain information technology services from suppliers under multi-year agreements that provide for early termination penalties. At December 31, 2006, the early termination penalties total approximately $6.1 million. The remaining terms of the agreements range from one to four years. As these remaining terms diminish, the amount of the termination penalties decline. We have no purchase agreements with suppliers extending beyond normal quantity requirements.

Our near-term cash requirements are primarily related to funding our operations and capital expenditures. Future cash requirements of our recently announced restructuring programs are approximately $5 million in 2007. We do not expect to have a minimum pension funding requirement in 2007, although we plan to make at least a $20 million voluntary contribution to our defined benefit pension plan.

Recently Adopted Accounting Pronouncements

Effective January 2, 2006, we adopted SFAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4 Inventory Pricing.” SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs. Under this concept, if the costs associated with the actual level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference would be charged to current-period expense, not included in inventory costs. SFAS No. 151 also requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of this standard did not have a material effect on our consolidated results of operations, financial position, or cash flows.

Effective January 2, 2006, we adopted SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and Financial Accounting Standards Board (FASB) Statement No. 3." SFAS No. 154 requires, unless impracticable, retrospective application to prior periods’ financial statements of changes in accounting principle where transition is not specified by a new accounting pronouncement. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. The adoption of this standard did not have a material effect on our consolidated results of operations, financial position, or cash flows.

Effective December 31, 2006, we adopted the recognition and disclosure provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires a Company with a defined benefit plan and other postretirement plans to: recognize the funded status of a benefit plan – measured as the difference between plan assets at fair value and the benefit obligation – in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation, for other postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation.

The new standard also requires the benefit obligations be measured as of the same date of the consolidated financial statements, which the Company already complies with, and requires additional disclosures. The effect of adopting SFAS No. 158 on our consolidated financial position at December 31, 2006, is further described in Notes 13 and 14. The adoption of this standard did not have an effect on our consolidated results of operations or cash flows in 2006.

As of December 31, 2006, we adopted Securities and Exchange Commission Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 requires the quantification of misstatements based on their impact to both the balance sheet and the income statement to determine materiality. The guidance provides for a one-time cumulative effect adjustment to correct for misstatements for errors that were not deemed material under a prior approach but are material under the SAB 108 approach. The adoption of SAB 108 did not have an effect on our consolidated results of operations, financial position, or cash flows.

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," Accounting for Income Taxes.” FIN 48 establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is required to be adopted by the Company in the first quarter of fiscal 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. We are currently assessing the impact that this standard will have on its consolidated results of operations, financial position, or cash flows. Based upon our analysis completed to date, we expect a reduction in retained earnings between $0.4 million and $1.2 million. This estimate is subject to revision as we complete our analysis.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which applies under most other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 provides a common definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants. The new standard also provides guidance on the methods used to measure fair value and requires expanded disclosures related to fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We will adopt this statement in fiscal year 2008 and are currently assessing the impact that this standard will have on our consolidated results of operations, financial position, or cash flows.

Item 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

We are exposed to interest rate risk arising from fluctuations in interest rates on our borrowings under our Credit Facility. At December 31, 2006 we had $41 million borrowed against the Credit Facility. Payment of interest on LIBOR contracts is at an annual rate equal to the LIBOR rate plus an applicable margin based on the sum of available unborrowed credit plus certain cash balances. Payment of interest on base rate loans is based on the prime rate. The weighted average interest rate, including the spread, was 6.88% at December 31, 2006. A hypothetical 100 basis point movement in the prevailing interest rates on the $41 million of borrowings under the Credit Facility would result in a $0.4 million annualized effect on our interest expense.

Foreign Currency

Prior to the sale of InSystems, we were exposed to market risk from changes in foreign currency exchange rates and utilized derivative financial instruments to manage our exposure to such fluctuations. Our risk management objective was to minimize the effects of volatility on our cash flows by identifying the assets, liabilities or forecasted transactions exposed to these risks and hedging them with forward contracts or by embedding terms into certain contracts that affect the ultimate amount of cash flows under the contract. Since there was a high correlation between the hedging instruments and the underlying exposures, the gains and losses on these exposures were generally offset by reciprocal changes in value of the hedging instruments when used. We used derivative financial instruments as risk management tools and not for trading or speculative purposes.

Commodity Prices

Paper is the principal raw material in the production of business forms. Because we have historically been successful in adjusting our sales prices in response to changes in paper costs, we do not believe a 10% change in paper costs would have a material effect on our financial statements; however, an increase of 10% in paper costs, if not recovered by us, would increase cost of sales by approximately $17.3 million.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Standard Register is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Audit Committee of the Company’s Board of Directors, composed solely of Directors who are independent in accordance with the requirements of the New York Stock Exchange listing standards, the Exchange Act, and the Company’s Corporate Governance Guidelines, meets with the independent auditors, management, and the internal auditors periodically to discuss internal control over financial reporting, auditing and financial reporting matters. The Audit Committee reviews the scope and results of the audit effort with the independent auditors. The Audit Committee also meets periodically with the independent auditors and internal auditors without management present to ensure that the independent auditors and internal auditors have free access to the Audit Committee. The Audit Committee’s Report can be found in the Company’s 2007 proxy statement.

In association with the preparation of the Company’s annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Management’s assessment included an evaluation of the design and testing the operational effectiveness of the Company’s internal control over financial reporting. Based on the assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006.

The Company’s independent auditors, Battelle & Battelle LLP, a registered public accounting firm, are appointed by the Audit Committee of the Company’s Board of Directors. Battelle & Battelle have audited and reported on the Consolidated Financial Statements of The Standard Register Company, management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting. The reports of the independent auditors are contained in this Form 10-K.

/s/ DENNIS L. REDIKER

/s/ CRAIG J. BROWN

Dennis L. Rediker

Craig J. Brown

President and Chief Executive Officer

Senior Vice President, Treasurer and

Chief Financial Officer

March 6, 2007

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

The Standard Register Company

Dayton, Ohio

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that The Standard Register Company and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Standard Register Company and subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that The Standard Register Company and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, The Standard Register Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2006 and the related consolidated statements of income and comprehensive income, cash flows, and shareholders’ equity for the year ended December 31, 2006 of The Standard Register Company and subsidiaries and our report dated March 6, 2007 expressed an unqualified opinion.

Dayton, Ohio

March 6, 2007

Item 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

The Standard Register Company

Dayton, Ohio

We have audited the accompanying consolidated balance sheet of The Standard Register Company and subsidiaries as of December 31, 2006 and January 1, 2006 and the related consolidated statements of income and comprehensive income, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Standard Register Company and subsidiaries as of December 31, 2006 and January 1, 2006 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, effective January 2, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payment (Revised 2004)” and, effective for the fiscal year ended December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Standard Register Company and subsidiaries’ internal control over financial reporting as of December 31, 2006 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2007 expressed an unqualified opinion.

Dayton, Ohio

March 6, 2007


THE STANDARD REGISTER COMPANY

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)



	*December 31,*	*January 1,*
A S S E T S	*2006*	*2006*

CURRENT ASSETS
Cash and cash equivalents	$ 488	$ 13,609
Accounts and notes receivable, net	135,839	120,491
Inventories	49,242	47,033
Deferred income taxes	18,635	14,739
Prepaid expense	13,566	13,953
Assets of discontinued operations	-	25,706
Total current assets	217,770	235,531



PLANT AND EQUIPMENT
Land	2,354	2,473
Buildings and improvements	65,408	67,349
Machinery and equipment	210,617	218,538
Office equipment	155,092	164,958
Construction in progress	10,297	5,625
Total	443,768	458,943
Less accumulated depreciation	325,620	330,342
Plant and equipment, net	118,148	128,601
Net assets held for sale	1,191	-
Total plant and equipment, net	119,339	128,601



OTHER ASSETS
Goodwill	6,557	6,557
Intangible assets, net	1,611	1,558
Deferred tax asset	86,710	80,599
Other	20,092	23,066
Total other assets	114,970	111,780


Total assets	$ 452,079	$ 475,912


See accompanying notes.


THE STANDARD REGISTER COMPANY

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)



	*December 31,*	*January 1,*
LIABILITIES AND SHAREHOLDERS' EQUITY	*2006*	*2006*

CURRENT LIABILITIES
Current portion of long-term debt	$ 358	$ 611
Accounts payable	36,254	32,770
Accrued compensation	28,050	27,876
Deferred revenue	1,725	1,237
Other current liabilities	34,927	32,353
Liabilities of discontinued operations	-	5,756
Total current liabilities	101,314	100,603

LONG-TERM LIABILITIES
Long-term debt	41,021	34,379
Pension benefit obligation	153,953	107,236
Retiree healthcare obligation	20,398	43,885
Deferred compensation	17,190	16,357
Other long-term liabilities	36	-
Total long-term liabilities	232,598	201,857

COMMITMENTS AND CONTINGENCIES - See Note 17

SHAREHOLDERS' EQUITY
Common stock, $1.00 par value:
Authorized 101,000,000 shares
Issued 2006 - 25,845,304; 2005 - 26,032,701	25,846	26,033
Class A stock, $1.00 par value:
Authorized - 9,450,000 shares
Issued - 4,725,000	4,725	4,725
Capital in excess of par value	60,321	60,223
Accumulated other comprehensive losses	(141,302)	(121,561)
Retained earnings	218,278	256,576
Treasury stock at cost:
1,949,200 and 1,923,762 shares	(49,701)	(49,351)
Unearned compensation - restricted stock	-	(3,193)
Total shareholders' equity	118,167	173,452

Total liabilities and shareholders' equity	$ 452,079	$ 475,912


THE STANDARD REGISTER COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)

	*52 Weeks Ended*	*52 Weeks Ended*	*53 Weeks Ended*
	*December 31,*	*January 1,*	*January 2,*
	*2006*	*2006*	*2005*
REVENUE
Products	$ 827,302	$ 834,915	$ 830,840
Services	67,602	55,825	47,487
Total revenue	894,904	890,740	878,327
COST OF SALES
Products	546,543	555,661	538,387
Services	41,169	33,014	30,781
Total cost of sales	587,712	588,675	569,168
GROSS MARGIN	307,192	302,065	309,159
OPERATING EXPENSES
Selling, general and administrative	268,311	249,481	271,518
Depreciation and amortization	28,786	33,848	37,202
Asset impairments	&nb