**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended June 30, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                  to                 **

**Commission file number**   0-7597

**COURIER CORPORATION**

(Exact name of registrantas specified in its charter)

| **Massachusetts**                                               |       | **04-2502514**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **15  Wellman Avenue, North Chelmsford, Massachusetts**         | ** ** | **01863**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

**(978) 251-6000**

(Registrant’s telephonenumber, including area code)

**NO CHANGE**

(Former name, formeraddress and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes   x         No   o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer (asdefined in Exchange Act Rule 12b-2).

| Large accelerated filer   o |   | Accelerated  filer   x |   | Non-accelerated  filer   o |
|---------------------------------------|--------|----------------------------------|--------|--------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Exchange Act Rule 12b-2).

Yes   o         No   x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

| **Class**                   | ** ** | **Outstanding  at August 7, 2007** |
|-----------------------------|------------|------------------------------------|
| Common Stock, $1  par value |       | 12,561,332  shares                 |

 

 

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**COURIERCORPORATIONCONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(Dollars in thousands except per share amounts)**
| ** **                           | ** ** | **QUARTER ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | **June 24,**               | ** ** | **June 30,** | ** ** | **June 24,** | ** ** |
| ** **                           | ** ** | **2007**               | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                            |       | $                      | 73,411     |                            | $          | 70,424 |   | $ | 214,059 |   | $ | 185,635 |   |
| Cost of sales                        |       | 48,986                 |       | 48,310                          |       | 145,860 |   | 127,115 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Gross profit                         |       | 24,425                 |       | 22,114                          |       | 68,199 |   | 58,520 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Selling and  administrative expenses |       | 13,402                 |       | 12,560                          |       | 41,106 |   | 35,363 |   |
| Interest expense  (income), net      |       | 419                    |       | 168                             |       | 1,117 |   | (80 | ) |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Pretax income                        |       | 10,604                 |       | 9,386                           |       | 25,976 |   | 23,237 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Provision for income  taxes (Note C) |       | 3,923                  |       | 3,330                           |       | 9,663 |   | 8,301 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Net income                           |       | $                      | 6,681      |                            | $          | 6,056 |   | $ | 16,313 |   | $ | 14,936 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Net income per share  (Note D):      |       |                   |       |                            |       |   |   |   |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Basic                                |       | $                      | 0.53       |                            | $          | 0.49 |   | $ | 1.31 |   | $ | 1.21 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Diluted                              |       | $                      | 0.53       |                            | $          | 0.48 |   | $ | 1.29 |   | $ | 1.19 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Cash dividends declared per share    |       | $                      | 0.18       |                            | $          | 0.12 |   | $ | 0.54 |   | $ | 0.36 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

2

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**COURIERCORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)(Dollars in thousands)**
| ** **                                                                                                                     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                     | ** ** | **2007**          | ** ** | **2006**               | ** ** |
| Current assets:                                                                                                                |       |              |       |                   |       |
| Cash and cash  equivalents                                                                                                     |       | $                 | 1,345      |                   | $          | 1,483 |   |
| Accounts  receivable, less allowance for uncollectible accounts of $1,754 at June 30,  2007 and $1,593 at September 30, 2006   |       | 46,832            |       | 46,002                 |       |
| Inventories  (Note B)                                                                                                          |       | 40,304            |       | 29,565                 |       |
| Deferred income  taxes                                                                                                         |       | 3,886             |       | 3,703                  |       |
| Other current  assets                                                                                                          |       | 1,953             |       | 1,110                  |       |
|                                                                                                                           |       |              |       |                   |       |
| Total current  assets                                                                                                          |       | 94,320            |       | 81,863                 |       |
|                                                                                                                           |       |              |       |                   |       |
| Property, plant and  equipment, less accumulated depreciation of $138,413 at June 30, 2007 and  $129,323 at September 30, 2006 |       | 92,926            |       | 85,248                 |       |
|                                                                                                                           |       |              |       |                   |       |
| Goodwill (Note A)                                                                                                              |       | 55,200            |       | 55,406                 |       |
|                                                                                                                           |       |              |       |                   |       |
| Other intangibles, net  (Note A)                                                                                               |       | 13,090            |       | 13,691                 |       |
|                                                                                                                           |       |              |       |                   |       |
| Prepublication costs  (Note A)                                                                                                 |       | 10,303            |       | 9,327                  |       |
|                                                                                                                           |       |              |       |                   |       |
| Other assets                                                                                                                   |       | 1,752             |       | 1,653                  |       |
|                                                                                                                           |       |              |       |                   |       |
| Total assets                                                                                                                   |       | $                 | 267,591    |                   | $          | 247,188 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

3

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**COURIERCORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)(Dollars in thousands)**
| ** **                                                                                                                           | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                         | ** ** | **2007**          | ** ** | **2006**               | ** ** |
| Current  liabilities:                                                                                                                |       |              |       |                   |       |
| Current maturities of long-term debt                                                                                                 |       | $                 | 88         |                   | $          | 88 |   |
| Accounts payable                                                                                                                     |       | 16,903            |       | 15,778                 |       |
| Accrued payroll                                                                                                                      |       | 7,589             |       | 9,534                  |       |
| Accrued taxes                                                                                                                        |       | 558               |       | 3,362                  |       |
| Other current liabilities                                                                                                            |       | 6,784             |       | 6,928                  |       |
|                                                                                                                                 |       |              |       |                   |       |
| Total current liabilities                                                                                                            |       | 31,922            |       | 35,690                 |       |
|                                                                                                                                 |       |              |       |                   |       |
| Long-term debt                                                                                                                       |       | 27,251            |       | 17,222                 |       |
| Deferred income  taxes                                                                                                               |       | 10,116            |       | 8,913                  |       |
| Other  liabilities                                                                                                                   |       | 3,089             |       | 3,037                  |       |
|                                                                                                                                 |       |              |       |                   |       |
| Total liabilities                                                                                                                    |       | 72,378            |       | 64,862                 |       |
|                                                                                                                                 |       |              |       |                   |       |
| Stockholders’  equity (Note F):                                                                                                 |       |              |       |                   |       |
| Preferred stock, $1 par value - authorized 1,000,000  shares; none issued                                                            |       |              |       |                   |       |
|                                                                                                                                 |       |              |       |                   |       |
| Common stock, $1 par value - authorized 18,000,000  shares; issued 12,561,000 at June 30, 2007 and 12,445,000 at September 30,  2006 |       | 12,561            |       | 12,445                 |       |
|                                                                                                                                 |       |              |       |                   |       |
| Additional paid-in capital                                                                                                           |       | 11,795            |       | 8,592                  |       |
| Retained earnings                                                                                                                    |       | 170,857           |       | 161,289                |       |
|                                                                                                                                 |       |              |       |                   |       |
| Total stockholders’ equity                                                                                                      |       | 195,213           |       | 182,326                |       |
|                                                                                                                                 |       |              |       |                   |       |
| Total liabilities and stockholders’  equity                                                                                     |       | $                 | 267,591    |                   | $          | 247,188 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

4

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**COURIERCORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)(Dollars in thousands)**
| ** **                                                                       | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **June 30,**               | ** ** | **June 24,** | ** ** |
| ** **                                                                       | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| Operating  Activities:                                                           |       |                            |       |   |   |
| Net income                                                                       |       | $                               | 16,313     |   | $ | 14,936 |   |
| Adjustments to reconcile net income to cash provided  from operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                    |       | 14,201                          |       | 10,857 |   |
| Stock-based compensation                                                         |       | 1,101                           |       | 1,055 |   |
| Deferred income taxes                                                            |       | 1,351                           |       | 1,236 |   |
| Changes in current assets and liabilities:                                       |       |                            |       |   |   |
| Accounts receivable                                                              |       | (830                            | )          | 1,497 |   |
| Inventory                                                                        |       | (10,739                         | )          | (1,205 | ) |
| Accounts payable                                                                 |       | 1,125                           |       | (2,110 | ) |
| Accrued taxes                                                                    |       | (2,804                          | )          | (1,002 | ) |
| Other elements of working capital                                                |       | (3,057                          | )          | (2,007 | ) |
| Other, net                                                                       |       | (173                            | )          | (153 | ) |
|                                                                             |       |                            |       |   |   |
| Cash provided  from operating activities                                         |       | 16,488                          |       | 23,104 |   |
|                                                                             |       |                            |       |   |   |
| Investment  Activities:                                                          |       |                            |       |   |   |
| Capital expenditures                                                             |       | (17,920                         | )          | (14,821 | ) |
| Business acquisition, net of cash acquired                                       |       | —                          |       | (51,164 | ) |
| Prepublication costs                                                             |       | (4,327                          | )          | (2,737 | ) |
|                                                                             |       |                            |       |   |   |
| Cash used for  investment activities                                             |       | (22,247                         | )          | (68,722 | ) |
|                                                                             |       |                            |       |   |   |
| Financing  Activities:                                                           |       |                            |       |   |   |
| Long-term debt borrowings, net                                                   |       | 10,029                          |       | 16,793 |   |
| Cash dividends                                                                   |       | (6,745                          | )          | (4,439 | ) |
| Proceeds from stock plans                                                        |       | 1,806                           |       | 936 |   |
| Excess tax benefits from stock-based compensation                                |       | 531                             |       | — |   |
|                                                                             |       |                            |       |   |   |
| Cash provided  from financing activities                                         |       | 5,621                           |       | 13,290 |   |
|                                                                             |       |                            |       |   |   |
| Decrease in cash  and cash equivalents                                           |       | (138                            | )          | (32,328 | ) |
|                                                                             |       |                            |       |   |   |
| Cash and cash  equivalents at the beginning of the period                        |       | 1,483                           |       | 34,038 |   |
|                                                                             |       |                            |       |   |   |
| Cash and cash  equivalents at the end of the period                              |       | $                               | 1,345      |   | $ | 1,710 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

5

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**COURIERCORPORATIONNOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS (UNAUDITED)**

**A.**               SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

**Unaudited Financial Statements**

The balance sheet as of June 30,2007, the statements of income for the three-month and nine-month periods endedJune 30, 2007 and June 24, 2006, and the statements of cash flows for thenine-month periods ended June 30, 2007 and June 24, 2006 are unaudited.  In the opinion of management, all adjustmentsnecessary for a fair presentation of such financial statements have beenrecorded.  Such adjustments consistedonly of normal recurring items.

Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”) have been condensed or omitted.  The balance sheet data as of September 30,2006 was derived from audited year-end financial statements, but does notinclude disclosures required by generally accepted accounting principles.  It is suggested that these interim financialstatements be read in conjunction with the Company’s most recent Form 10-K andAnnual Report for the year ended September 30, 2006.

**PrepublicationCosts**

Prepublication costs, associatedwith creating new titles in the specialty publishing segment, are amortized tocost of sales using the straight-line method over estimated useful lives ofthree years for Research & Education Association, Inc. (“REA”), four yearsfor Dover Publications, Inc. (“Dover”) and five years for Federal MarketingCorporation d/b/a Creative Homeowner (“Creative Homeowner”).

**Goodwill and Other Intangibles**

The Company evaluates possible impairment annually orwhenever events or circumstances indicate that the carrying value of the assetsmay not be recoverable. There were no such events or circumstances in theperiod presented.  Other intangiblesinclude customer lists related to the fiscal 2006 acquisitions of CreativeHomeowner and Moore-Langen Printing Company, Inc. (“Moore Langen”), which arebeing amortized over 15-year and 10-year periods, respectively (Note G).  Amortization expense related to customerlists in the third quarters of fiscal 2007 and 2006 was approximately $200,000and $140,000, respectively, and for the first nine months of fiscal 2007 and2006 was approximately $600,000 and $150,000, respectively.

**New Accounting Pronouncements**

In July 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN No. 48”), an interpretation of FASB Statement No. 109, “Accounting forIncome Taxes.”  FIN No. 48 applies tofiscal years beginning after December 15, 2006; the Company’s 2008 fiscalyear.  In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), whichwill be effective at the end of the Company’s 2007 fiscal year.  The Company does not believe the adoption ofeither FIN No. 48 or SFAS 158 will have a material effect on its consolidatedfinancial position, results of operations or cash flows.

6

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**B.**               INVENTORIES

Inventories are valued at thelower of cost or market.  Cost isdetermined using the last-in, first-out (LIFO) method for approximately 46% and37% of the Company’s inventories at June 30, 2007 and September 30, 2006,respectively.  Other inventories,primarily in the specialty publishing segment, are determined on a first-in,first-out (FIFO) basis.  Inventoriesconsisted of the following:

|                 | ** ** | **(000’s Omitted)** | ** ** |
|-----------------|------------|-------------------------------|------------|
| ** **      | ** ** | **June 30, 2007**   | ** ** | **September 30, 2006** | ** ** |
| Raw materials   |       | $                             | 5,344      |   | $ | 3,910 |   |
| Work in process |       | 10,065                        |       | 6,295 |   |
| Finished goods  |       | 24,895                        |       | 19,360 |   |
| Total           |       | $                             | 40,304     |   | $ | 29,565 |   |

 

**C.**               INCOME TAXES

The provision for income taxesdiffers from that computed using the statutory federal income tax rates for thefollowing reasons:

|                                       | ** ** | **(000’s Omitted)** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Quarter Ended**        | ** ** |
| ** **                            | ** ** | **June 30, 2007**   | ** ** | **June 24, 2006** | ** ** |
| Federal taxes at statutory rates      |       | $                             | 3,711      |   | 35.0 | % | $ | 3,284 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 329                           |       | 3.1 |   | 268 |   | 2.9 |   |
| Federal manufacturers’ deduction |       | (91                           | )          | (0.9 | ) | (84 | ) | (0.9 | ) |
| Tax benefit of export related income  |       | (44                           | )          | (0.4 | ) | (200 | ) | (2.1 | ) |
| Stock-based compensation (Note F)     |       | 17                            |       | 0.2 |   | 38 |   | 0.4 |   |
| Other                                 |       | 1                             |       | - |   | 24 |   | 0.2 |   |
| Total                                 |       | $                             | 3,923      |   | 37.0 | % | $ | 3,330 |   | 35.5 | % |

 

|                                       | ** ** | **(000’s Omitted)**   | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                            | ** ** | **June 30, 2007**     | ** ** | **June 24, 2006** | ** ** |
| Federal taxes at statutory rates      |       | $                               | 9,092      |   | 35.0 | % | $ | 8,133 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 828                             |       | 3.2 |   | 678 |   | 2.9 |   |
| Federal manufacturers’ deduction |       | (223                            | )          | (0.9 | ) | (198 | ) | (0.9 | ) |
| Tax benefit of export related income  |       | (100                            | )          | (0.4 | ) | (422 | ) | (1.8 | ) |
| Stock-based compensation (Note F)     |       | 39                              |       | 0.2 |   | 113 |   | 0.5 |   |
| Other                                 |       | 27                              |       | 0.1 |   | (3 | ) | - |   |
| Total                                 |       | $                               | 9,663      |   | 37.2 | % | $ | 8,301 |   | 35.7 | % |

 

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**D.**               NET INCOME PERSHARE

The following is areconciliation of the shares used in the calculation of basic and dilutedincome per share.  Potentially dilutiveshares, calculated using the treasury stock method, consist of shares issuedunder the Company’s stock option plans.

|                                         | ** ** | **(000’s Omitted)** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                              | ** ** | **June 30, 2007**   | ** ** | **June 24, 2006** | ** ** | **June 30, 2007** | ** ** | **June 24, 2006** | ** ** |
| Average shares outstanding for basic    |       | 12,491                        |       | 12,333 |   | 12,451 |   | 12,309 |   |
| Effect of potentially dilutive shares   |       | 217                           |       | 274 |   | 233 |   | 273 |   |
| Average  shares outstanding for diluted |       | 12,708                        |       | 12,607 |   | 12,684 |   | 12,582 |   |

 

**E.**                 BUSINESS SEGMENTS

The Company has two business segments: bookmanufacturing and specialty publishing. The book manufacturing segment offers afull range of services from production through storage and distribution forreligious, educational and specialty trade book publishers. The specialtypublishing segment consists of Dover and REA, as well as Creative Homeownersince its acquisition in April 2006 (Note G).

In evaluating segment performance, managementprimarily focuses on income or loss before taxes, stock-based compensation andother income.  The elimination ofintersegment sales and related profit represents sales from the bookmanufacturing segment to the specialty publishing segment.  Corporate expenses that are allocated to thesegments include various support functions such as information technologyservices, finance, legal, human resources and engineering, and includedepreciation and amortization expense related to corporate assets*.*

The following table provides segment information forthe quarter and nine-month periods ended June 30, 2007 and June 24, 2006.

|                                    | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                         | ** ** | **June 30, 2007**   | ** ** | **June 24, 2006** | ** ** | **June 30, 2007** | ** ** | **June 24, 2006** | ** ** |
| Net sales:                         |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 58,497     |   | $ | 57,700 |   | $ | 168,923 |   | $ | 155,365 |   |
| Specialty publishing               |       | 17,917                        |       | 15,243 |   | 52,835 |   | 36,426 |   |
| Elimination of intersegment sales  |       | (3,003                        | )          | (2,519 | ) | (7,699 | ) | (6,156 | ) |
| Total                              |       | $                             | 73,411     |   | $ | 70,424 |   | $ | 214,059 |   | $ | 185,635 |   |
|                               |       |                          |       |   |   |   |   |   |   |
| Income before taxes:               |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 10,147     |   | $ | 8,731 |   | $ | 23,915 |   | $ | 21,232 |   |
| Specialty publishing               |       | 844                           |       | 1,120 |   | 3,014 |   | 3,269 |   |
| Stock-based compensation           |       | (375                          | )          | (359 | ) | (1,101 | ) | (1,055 | ) |
| Elimination of intersegment profit |       | (12                           | )          | (106 | ) | 148 |   | (209 | ) |
| Total                              |       | $                             | 10,604     |   | $ | 9,386 |   | $ | 25,976 |   | $ | 23,237 |   |

 

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**F.**                 STOCK-BASEDCOMPENSATION

The Companyrecords stock-based compensation expense for the cost of stock options andstock grants as well as shares issued under the Company’s 1999 Employee StockPurchase Plan. The fair value of each option awarded is calculated on the dateof grant using the Black-Scholes option-pricing model. Stock-based compensationrecognized in selling and administrative expenses in the accompanying financialstatements in the third quarter of fiscal 2007 and 2006 was $375,000 and$359,000, respectively, and the related tax benefit recognized was $118,000 and$87,000, respectively. For the first nine months of 2007 and 2006, stock-basedcompensation was $1,101,000 and $1,055,000, respectively, and the related taxbenefit recognized was $342,000 and $255,000, respectively. Unrecognizedstock-based compensation cost at June 30, 2007 was $1.8 million, to berecognized over a weighted-average period of 1.8 years.

**StockIncentive Plan:** TheCompany’s stock incentive plan provides for the granting of stock options andstock grants up to a total of 2,064,375 shares. Under the plan provisions, both non-qualified and incentive stockoptions to purchase shares of the Company’s common stock may be granted to keyemployees.  The option price per sharemay not be less than the fair market value of stock at the time the option isgranted and incentive stock options must expire not later than ten years fromthe date of grant.  The Company annuallyissues a combination of stock options and stock grants to its key employees.Stock options and stock grants generally vest over 3 years.  For the first nine months of fiscal 2007, atotal of 11,093 such shares were granted with a weighted-average fair value of$38.46; no such shares were issued in the third quarter.  During the third quarter and year-to-datefiscal 2007, 2,001 restricted stock grants vested with a weighted-average fairvalue of $43.04.  At June 30, 2007,non-vested restricted stock grants outstanding were 45,062 shares with aweighted-average grant-date fair value of $34.51.

Thefollowing table provides stock option activity under this plan in the firstnine months of fiscal 2007:

|                                   | ** ** | ** **         | ** ** | **Weighted Average** | ** ** | **Aggregate**                  | ** ** |
|-----------------------------------|------------|--------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Option  Shares** | ** ** | **Exercise  Price**       | ** ** | **Remaining  Term (yrs)** | ** ** | **Intrinsic  Value** | ** ** |
| Outstanding at September 30, 2006 |       | 401,891            |       | $                         | 21.69      |                           |       |   |   |   |
| Issued                            |       | 5,384              |       | 38.82                     |       |                           |       |   |   |
| Exercised                         |       | (65,240            | )          | 15.64                     |       |                           |       | $ | 1,601,000 |   |
| Outstanding at June 30, 2007      |       | 342,035            |       | $                         | 23.11      |                           | 3.0        |   | $ | 5,777,000 |   |
|                              |       |               |       |                      |       |                           |       |   |   |
| Exercisable at June 30, 2007      |       | 275,958            |       | $                         | 19.84      |                           | 2.6        |   | $ | 5,564,000 |   |
| Available for future  grants      |       | 255,948            |       |                      |       |                           |       |   |   |

 

The fair value of each option grant was estimated using the Black-Scholesoption-pricing model on the date of the grant. The key assumptions used tovalue the options granted to date in fiscal 2007 were a risk-free interest rateof 4.7%, expected volatility of 27%, a dividend yield of 1.9%, and an expectedlife of 5 years.

**Directors’ Option Plan:** In January 2005, stockholders approved the Courier Corporation 2005Stock Equity Plan for Non-Employee Directors (the “2005 Plan”). Under the 2005Plan provisions, non-qualified stock options to purchase shares of the Company’scommon stock may be granted to non-employee directors up to a total of 225,000shares.  The option price per share isthe fair market value of stock at the time the option is granted.  The options are immediately exercisable andhave a term of five years. The 2005 Plan replaced the previous non-employeedirectors’ plan, which had been adopted in 1989.  The fair value of each option grant wasestimated on the date of the grant using the Black-Scholes option-pricingmodel.  Directors may also elect toreceive their annual retainer and committee chair fees as shares of stock inlieu of cash; 4,338 such shares were issued in the second quarter of fiscal2007 with a fair market value of $39.18 per share.

9

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Thefollowing table provides activity under the directors’ option plans in thefirst nine months of fiscal 2007:

|                                   | ** ** | ** **         | ** ** | **Weighted Average** | ** ** | **Aggregate**                  | ** ** |
|-----------------------------------|------------|--------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Option  Shares** | ** ** | **Exercise  Price**       | ** ** | **Remaining  Term (yrs)** | ** ** | **Intrinsic  Value** | ** ** |
| Outstanding at September 30, 2006 |       | 185,127            |       | $                         | 25.78      |                           |       |   |   |   |
| Issued                            |       | 38,064             |       | 39.18                     |       |                           |       |   |   |
| Exercised                         |       | (40,794            | )          | 19.67                     |       |                           |       | $ | 800,000 |   |
| Outstanding at June 30, 2007      |       | 182,397            |       | $                         | 29.95      |                           | 2.6        |   | $ | 1,834,000 |   |
|                              |       |               |       |                      |       |                           |       |   |   |
| Exercisable at June 30, 2007      |       | 182,397            |       | $                         | 29.95      |                           | 2.6        |   | $ | 1,834,000 |   |
| Available  for future grants      |       | 93,282             |       |                      |       |                           |       |   |   |

 

The key assumptions used to value the 38,064 options issued in the secondquarter were a risk-free interest rate of 4.7%, expected volatility of 27%, adividend yield of 1.8%, and an expected life of 5 years.

**Employee Stock Purchase Plan:** The Company’s 1999 Employee Stock Purchase Plan (“ESPP”), as amended,covers an aggregate of 337,500 shares of Company common stock for issuanceunder the plan.  Eligible employees maypurchase shares of Company common stock at not less than 85% of fair marketvalue at the end of the grant period.  OnMarch 1, 2007, 9,529 shares were issued under the ESPP at a price of $32.47 pershare.

**G.            BUSINESS ACQUISITIONS**

OnOctober 17, 2005, the Company acquired Moore Langen, an Indianapolis-basedprinter specializing in book covers, in a $15 million cash transaction.  The acquisition was accounted for as apurchase, and accordingly, Moore Langen’s financial results were included inthe book manufacturing segment in the consolidated financial statements fromthe date of acquisition.

OnApril 28, 2006, the Company acquired Creative Homeowner, a New Jersey-basedpublisher and distributor of books, home plans and related products for thehome and garden retail book market.  TheCompany purchased 100% of the stock in a $37 million cash transaction.  The acquisition was accounted for as apurchase, and accordingly, Creative Homeowner’s financial results were includedin the specialty publishing segment in the consolidated financial statementsfrom the date of acquisition.  Inthe third quarter of fiscal 2007, adjustments were made to the allocation ofCreative Homeowner’s purchase price to assets resulting in a reduction ofapproximately $200,000 to goodwill.  Thefinal allocation of purchase price to assets acquired was as follows:

| Goodwill                       |   | $          | 16,414,000 |   |
|--------------------------------|--------|------------|------------|--------|
| Customer lists                 |   | 11,502,000 |       |
| Prepublication  costs          |   | 3,046,000  |       |
| Trade name                     |   | 1,370,000  |       |
| Accounts  receivable           |   | 7,485,000  |       |
| Inventory                      |   | 2,876,000  |       |
| Property, plant and  equipment |   | 440,000    |       |
| Accounts payable               |   | (4,863,000 | )          |
| Other  liabilities assumed     |   | (2,230,000 | )          |
| Other assets                   |   | 971,000    |       |
| Total purchase price           |   | $          | 37,011,000 |   |

 

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**COURIER CORPORATION**

**Item 2.**                          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

**Critical Accounting Policies and Estimates:**

The Company’s consolidated condensed financialstatements have been prepared in accordance with generally accepted accountingprinciples.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the amounts reported in these financial statements and accompanyingnotes.   On an ongoing basis, managementevaluates its estimates and judgments, including those related tocollectibility of accounts receivable, recovery of inventories, impairment ofgoodwill, prepublication costs and income taxes.  Management bases its estimates and judgmentson historical experience and various other factors believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe periods presented.  Actual resultsmay differ from these estimates.  Thesignificant accounting policies which management believes are most critical toaid in fully understanding and evaluating the Company’s reported financialresults include the following:

Accounts Receivable  Management performs ongoing creditevaluations of the Company’s customers and adjusts credit limits based uponpayment history and the customer’s current creditworthiness.  Collections and payments from customers arecontinuously monitored.  A provision forestimated credit losses is determined based upon historical experience and anyspecific customer collection issues that have been identified.  If the financial condition of the Company’s customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

Inventories  Managementrecords reductions in the cost basis of inventory for excess and obsoleteinventory based primarily upon historical and forecasted product demand.  If actual market conditions are lessfavorable than those projected by management, additional inventory charges maybe required.

Goodwill and Other Intangibles  Other intangibles include customer lists,which are amortized on a straight-line basis over periods ranging from ten tofifteen years. The Company evaluates possible impairment of goodwill and otherintangibles annually or whenever events or circumstances indicate that thecarrying value of the assets may not be recoverable.  The Company completed the annual impairmenttest at September 30, 2006 resulting in no change to the nature or carryingamounts of its intangible assets. Changes in market conditions or poor operating results could result in adecline in value thereby potentially requiring an impairment charge in thefuture.

Prepublication Costs  The Company capitalizes prepublication costs,which include the costs of acquiring rights to publish a work and costsassociated with bringing a manuscript to publication such as artwork andeditorial efforts. Prepublication costs are amortized on a straight-line basisover periods ranging from three to five years. Management regularly evaluates the sales and profitability of theproducts based upon historical and forecasted demand.  Based upon this evaluation, adjustments maybe required to amortization expense.

Income Taxes  The income tax provision and related accruedtaxes are based on amounts reported on the Company’s tax returns and changes indeferred taxes.  Deferred income tax liabilities and assets are determined based uponthe differences between the financial statement and tax bases of assets andliabilities.  Changes in therecoverability of the Company’s deferred tax assets or audits by tax authoritiescould result in future charges or credits to income tax expense, and relatedaccrued and deferred taxes.

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**Overview:**

Courier Corporation, founded in 1824, is one ofAmerica’s leading book manufacturers and specialty publishers.  The Company has two business segments: bookmanufacturing and specialty publishing. The book manufacturing segment streamlines the process of bringing booksfrom the point of creation to the point of use. Based on sales, Courier is the third largest book manufacturer in theUnited States offering services from prepress and production through storageand distribution.  The specialtypublishing segment consists of Dover Publications, Inc. (“Dover”), Research& Education Association, Inc. (“REA”), and Federal Marketing Corporationd/b/a Creative Homeowner (“Creative Homeowner”), acquired in April 2006.  Dover publishes over 9,000 titles in morethan 30 specialty categories ranging from literature and poetry classics topaper dolls, and from music scores to clip art. REA publishes test preparation and study-guide books and software forhigh school, college and graduate students, as well as professionals.  Creative Homeowner publishes and distributesbooks, home plans and related products to the home and garden market.

**Results of Operations:**
| ** **                           | ** ** | **FINANCIAL HIGHLIGHTS**                                                     | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 30, 2007**                                                       | ** ** | **June 24, 2006** | ** ** | **% Change** | ** ** | **June 30, 2007** | ** ** | **June 24, 2006** | ** ** | **% Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 73,411     |   | $ | 70,424 |   | 4.2 | % | $ | 214,059 |   | $ | 185,635 |   | 15.3 | % |
| Cost of sales                        |       | 48,986                                                                            |       | 48,310 |   | 1.4 | % | 145,860 |   | 127,115 |   | 14.7 | % |
| Gross profit                         |       | 24,425                                                                            |       | 22,114 |   | 10.5 | % | 68,199 |   | 58,520 |   | 16.5 | % |
| As a percentage of sales             |       | 33.3                                                                              | %          | 31.4 | % |   |   | 31.9 | % | 31.5 | % |   |   |
| Selling and administrative  expenses |       | 13,402                                                                            |       | 12,560 |   | 6.7 | % | 41,106 |   | 35,363 |   | 16.2 | % |
| Interest expense (income), net       |       | 419                                                                               |       | 168 |   |   |   | 1,117 |   | (80 | ) |   |   |
| Pretax income                        |       | 10,604                                                                            |       | 9,386 |   | 13.0 | % | 25,976 |   | 23,237 |   | 11.8 | % |
| Net income                           |       | $                                                                                 | 6,681      |   | $ | 6,056 |   | 10.3 | % | $ | 16,313 |   | $ | 14,936 |   | 9.2 | % |
| Net income per diluted share         |       | $                                                                                 | 0.53       |   | $ | 0.48 |   | 10.4 | % | $ | 1.29 |   | $ | 1.19 |   | 8.4 | % |

 

Revenues in the third quarter and first nine months offiscal 2007 increased in both of the Company’s operating segments compared tothe same periods last year. Book manufacturing revenues were up 1% for thethird quarter and 9% year to date compared to the corresponding periods lastyear, including strong growth in sales to the education market.  Sales in the specialty publishing segmentwere up 18% in the third quarter and 45% for the first nine months compared tothe same periods last year, reflecting incremental sales from the April 2006acquisition of Creative Homeowner as well as strength in sales oftest-preparation books.

***Business Acquisitions***

On April 28, 2006, the Companyacquired Creative Homeowner, a New Jersey-based publisher and distributor ofbooks, home plans and related products for the home and garden retail bookmarket.  The acquisition was accountedfor as a purchase, and accordingly, Creative Homeowner’s financial results wereincluded in the specialty publishing segment in the consolidated financialstatements from the date of acquisition. On October 17, 2005, theCompany acquired Moore-Langen Printing Company, Inc. (“Moore Langen”), anIndianapolis-based printer specializing in book covers.  The acquisition was accounted for as apurchase, and accordingly, Moore Langen’s financial results were included inthe book manufacturing segment from the date of acquisition.

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*Book Manufacturing Segment*
| ** **                           | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 30, 2007**                                                       | ** ** | **June 24, 2006** | ** ** | **% Change** | ** ** | **June 30, 2007** | ** ** | **June 24, 2006** | ** ** | **% Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 58,497     |   | $ | 57,700 |   | 1.4 | % | $ | 168,923 |   | $ | 155,365 |   | 8.7 | % |
| Cost of sales                        |       | 41,254                                                                            |       | 42,139 |   | -2.1 | % | 122,951 |   | 113,076 |   | 8.7 | % |
| Gross profit                         |       | 17,243                                                                            |       | 15,561 |   | 10.8 | % | 45,972 |   | 42,289 |   | 8.7 | % |
| As a percentage of sales             |       | 29.5                                                                              | %          | 27.0 | % |   |   | 27.2 | % | 27.2 | % |   |   |
| Selling and administrative  expenses |       | 7,144                                                                             |       | 6,972 |   | 2.5 | % | 22,318 |   | 21,543 |   | 3.6 | % |
| Interest expense (income)            |       | (48                                                                               | )          | (142 | ) |   |   | (261 | ) | (486 | ) |   |   |
| Pretax  income                       |       | $                                                                                 | 10,147     |   | $ | 8,731 |   | 16.2 | % | $ | 23,915 |   | $ | 21,232 |   | 12.6 | % |

 

Within this segment, the Companyfocuses on three key markets: education, religious and specialty trade.  Sales to the education market increased $5.4million, or 23%, to $28.9 million in the third quarter of fiscal 2007 comparedto the same period last year, with the greatest growth in four-colortextbooks.  For the first nine months,sales to this market increased by $10.8 million, or 18%, to $70.6 millioncompared to the corresponding period last year. Textbook demand started very slowly in the beginning of the fiscal year,but picked up strongly starting in December. The start up of the Company’sthird new four-color press was completed at the end of the first quarter offiscal 2007 and provided the necessary capacity to meet the increasing demandfor educational books.  Sales to thereligious market were down 27% to $13.3 million in the third quarter comparedto last year, following a 22% increase in the second quarter, reflecting timingissues as well as reduced orders from a large customer.  On a year-to-date basis, sales to thereligious market were $45.9 million, a decrease of 5% compared to the same periodof fiscal 2006.  Sales to the specialtytrade market were up $2.5 million, or 26%, to $12.3 million for the thirdquarter and were up $7.3 million, or 22%, to $40.7 million for the first ninemonths compared to the corresponding periods last year as a result of severallarge one-time orders combined with share increases across a range ofcustomers.

Cost of sales in this segmentdecreased by 2.1% to $41.3 million for the quarter, reflecting the efficiencyof the new four-color press as well as other gains in productivity.  The new press, which began operation in theKendallville, Indiana plant in December 2006, had a smooth start up withoutsignificant additional costs. On a year-to-date basis, cost of sales increased8.7% to $123.0 million compared to the same period last year, reflecting highersales volume and higher health care costs. Gross profit in this segment increased by 10.8% to $17.2 million for thequarter, and as a percentage of sales increased to 29.5% from 27.0% in lastyear’s third quarter, reflecting high capacity utilization and the productivitygains achieved which more than offset continued pricing pressure in thissegment.  Gross profit for the first ninemonths of fiscal 2007 increased 8.7% to $46.0 million and, as a percentage ofsales, was comparable to the corresponding period last year at 27.2%.

Selling and administrativeexpenses for the segment increased 2.5% in the third quarter to $7.1 millionand as a percentage of sales was 12.2%, comparable to last year’s thirdquarter.  For the first nine months offiscal 2007, such expenses increased 4% to $22.3 million and, as a percentageof sales, decreased to 13.2% from 13.9% in the same period last year.

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Intercompany interest incomeallocated to the book manufacturing segment was $48,000 in the third quartercompared to $142,000 in the same period last year with the change resultingfrom the high level of capital expenditures in the past year associated withthe expansion of the Kendallville facility. For the first nine months, intercompany interest income allocated to thissegment decreased to $261,000 compared to $486,000 last year.

Pretax income in the bookmanufacturing segment was $10.1 million in the third quarter of fiscal 2007, a16.2% increase over the same period last year. For the first nine months of fiscal 2007, pretax income was $23.9million, up 12.6% over the corresponding period of fiscal 2006.

*Specialty Publishing Segment*
| ** **                           | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 30, 2007**                                                       | ** ** | **June 24, 2006** | ** ** | **% Change** | ** ** | **June 30, 2007** | ** ** | **June 24, 2006** | ** ** | **% Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 17,917     |   | $ | 15,243 |   | 17.5 | % | $ | 52,835 |   | $ | 36,426 |   | 45.0 | % |
| Cost of sales                        |       | 10,725                                                                            |       | 8,582 |   | 25.0 | % | 30,758 |   | 19,988 |   | 53.9 | % |
| Gross profit                         |       | 7,192                                                                             |       | 6,661 |   | 8.0 | % | 22,077 |   | 16,438 |   | 34.3 | % |
| As a percentage of sales             |       | 40.1                                                                              | %          | 43.7 | % |   |   | 41.8 | % | 45.1 | % |   |   |
| Selling and administrative  expenses |       | 5,880                                                                             |       | 5,231 |   | 12.4 | % | 17,685 |   | 12,763 |   | 38.6 | % |
| Interest expense                     |       | 468                                                                               |       | 310 |   |   |   | 1,378 |   | 406 |   |   |   |
| Pretax income                        |       | $                                                                                 | 844        |   | $ | 1,120 |   | -24.6 | % | $ | 3,014 |   | $ | 3,269 |   | -7.8 | % |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |

 

Sales for the Company’s specialty publishing segmentin the third quarter were $17.9 million, up 17.5% from $15.2 million in lastyear’s third quarter.  On a year-to-datebasis, sales increased 45% to $52.8 million compared to the first nine monthsof fiscal 2006.  Creative Homeownercontributed $6.8 million and $21.0 million of sales for the third quarter andfirst nine months of fiscal 2007, respectively. Last year, Creative Homeowner contributed $4.4 million to sales resultsfor the two months following its acquisition on April 28, 2006.  On a comparable 13-week and nine-month basis,Creative Homeowner’s sales were down from 2006, reflecting a soft housingmarket and reduced traffic at home improvement centers, which constituteCreative Homeowner’s largest sales channel. Sales at Dover Publications were comparable to the prior year’s thirdquarter and were down 3% to $26.6 million for the first nine months compared tothe same period last year.  Sales gainswere achieved among smaller retailers and certain larger retail chains, helpedby the expansion of the new “Dover Fun Kitsä”product line and by new merchandising programs, which continue to expandplacement of Dover display racks at existing and new customer locations. Salesto large booksellers however continued to fluctuate during the third quarter inresponse to the slow retail environment. Sales at REA continued their double-digit growth trend with an 18%increase in the third quarter to $1.8 million and a 15% increase for the firstnine months to $5.3 million compared to the same periods last year.  These increases reflect sales growth in theeducational testing market, including new titles for high-stakes testpreparation books, and by increases in direct marketing to teachers and schooladministrators.

Cost of sales in this segment increased by 25.0% to$10.7 million for the quarter and increased 53.9% to $30.8 million for thefirst nine months of fiscal 2007 compared to the same periods last year,reflecting the incremental impact of Creative Homeowner.  Gross profit as a percentage of sales for thesegment decreased in the quarter to 40.1% from 43.7% in the correspondingperiod last year and to 41.8% from 45.1% on a year-to-date basis compared tofiscal 2006.  Creative Homeowner reducedthe overall gross profit percentage in the segment because of theirlower-margin distribution business as well as their reduced sales to the homecenter market.

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Selling and administrative expenses in this segmentwere $5.9 million in the third quarter, an increase of 12.4% over the sameperiod last year, primarily due to the addition of Creative Homeowner in April2006.  As a percentage of sales, sellingand administrative expenses decreased to 32.8% from 34.3% in the correspondingperiod last year. Year to date, selling and administrative expenses increased38.6% to $17.7 million compared to last year, reflecting the acquisition ofCreative Homeowner, while as a percentage of sales, such expenses decreased to33.5% from 35.0% in the first nine months of fiscal 2006.

Intercompany interest expense is allocated to thespecialty publishing segment based on acquisition costs, reduced by cashgenerated by each business since acquisition. Interest expense for the third quarterof fiscal 2007 was $468,000 compared to $310,000 last year and for the firstnine months was $1,378,000 versus $406,000 in the corresponding period offiscal 2006.  The increase reflects the$37 million purchase of Creative Homeowner in April 2006.

Pretax income in the specialtypublishing segment for the third quarter was $0.8 million, down 25% from $1.1million last year, with a $600,000 pretax loss at Creative Homeowner offsettinga 22% increase across the Company’s other publishing businesses.  For the first nine months of fiscal 2007pretax income was $3.0 million, down 8% from the same period last year, as aresult of the loss at Creative Homeowner.

*Total Consolidated Company*

Interest expense, net ofinterest income, was $419,000 in the third quarter of fiscal 2007, compared to$168,000 in the same period of fiscal 2006. For the first nine months of fiscal 2007, interest expense, net ofinterest income, was $1,117,000 compared to net interest income of $80,000 inthe corresponding prior year period. Average debt under the revolving creditfacility in the third quarter of fiscal 2007 was approximately $25.3 million atan average annual interest rate of 5.8%, generating interest expense ofapproximately $370,000.  Average debtunder this facility for the first nine months of fiscal 2007 was approximately$23.4 million at an average annual interest rate of 5.8%, generating interestexpense of approximately $1,040,000. Interest expense also includes commitment fees and other costsassociated with maintaining this credit facility.  Interest capitalized in the first nine monthsof fiscal 2007 was approximately $140,000, related primarily to the expansionof the Kendallville facility; no interest was capitalized in fiscal 2006.  In the third quarter of the prior year, averagedebt under the revolving credit facility was approximately $17.8 million at anaverage annual interest rate of 5.6%, generating interest expense ofapproximately $250,000.  Cash investmentsin the third quarter of fiscal 2006 averaged approximately $4.5 million investedat an average annual interest rate of 2.7% generating interest income ofapproximately $30,000.  For the firstnine months of fiscal 2006, average cash investments were $14.1 millioninvested at an average interest rate of 3.7% generating interest income ofapproximately $390,000.

The Company’s effective tax rate for the third quarterand first nine months of fiscal 2007 was 37.0% and 37.2%, respectively,compared to 35.5% and 35.7% for the corresponding periods last year,respectively.  The increase in theeffective tax rate reflects the phase out of the tax benefit on export relatedincome and a slower phase in of the domestic manufacturing deduction.  In addition, there was a slight increase inthe Company’s effective state tax rate.

For purposes of computing net income per dilutedshare, weighted average shares outstanding increased by approximately 101,000shares and 102,000 shares over last year’s third quarter and first nine months,respectively.  The increases were largelydue to options exercised and shares issued under the Company’s stock plans.

**Liquidity and Capital Resources:**

During the first nine months of fiscal 2007,operations provided approximately $16.5 million of cash.  Net income was $16.3 million and depreciationand amortization was $14.2 million. Working capital used

15

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approximately $16.3 million of cash, compared to $4.8million in the same period last year. The year-to-date change in working capital includes a $10.7 millionincrease in inventories to support sales growth.

Investment activities throughthe third quarter of fiscal 2007 used approximately $22.2 million of cash.Capital expenditures were approximately $17.9 million, primarily for thefour-color press that was installed in December 2006 in the Kendallville,Indiana facility as well as a related bindery expansion. This press isidentical to the presses installed in April 2004 and December 2005.  This amount also includes payments onequipment to expand printing and binding capacity in the religious bookmanufacturing operation in Philadelphia. For the entire fiscal year, capital expenditures are expected to beapproximately $25 to $28 million. Prepublication costs in the specialty publishing segment were $4.3million compared to $2.7 million in the first nine months of last year,primarily from the addition of Creative Homeowner.  For the full fiscal year, capitalizedprepublication costs are projected to be approximately $5 million.

Financing activities for thefirst nine months of fiscal 2007 provided approximately $5.6 million ofcash.  Cash dividends were $6.7 million,up 52% compared to the same period last year. Borrowings increased by $10.0 million and proceeds from stock plans were$1.8 million, primarily from the exercise of stock options.  At June 30, 2007, the Company had $27.0million in borrowings under its $100 million long-term revolving creditfacility, which bears interest at a floating rate.  The revolving credit facility is used by theCompany for both its long-term and short-term financing needs.  In November 2006, the Company increased theamount available under this facility to $100 million and extended the maturitydate to March 2011.  The Company believesthat its cash on hand, cash from operations and the available credit facilitywill be sufficient to meet its cash requirements through 2007.

The following table summarizes the Company’scontractual obligations and commitments at June 30, 2007 to make futurepayments as well as its existing commercial commitments.
| ** **                  | ** ** | ** ** | ** ** | **(000’s Omitted)**                      | ** ** |
|-----------------------------|------------|------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Payments due by period (1)** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **Less than**                                 | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **After 5** | ** ** |
| ** **                  | ** ** | **Total**  | ** ** | **1 Year**                                    | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Contractual Payments:       |       |       |       |                                               |       |   |   |   |   |   |   |
| Long-Term Debt (2)          |       | $          | 27,339     |                                               | $          | 88 |   | $ | 140 |   | $ | 27,111 |   | $ | — |   |
| Operating Leases (3)        |       | 10,432     |       | 3,103                                              |       | 3,727 |   | 2,056 |   | 1,546 |   |
| Purchase Obligations (4)    |       | 6,229      |       | 6,229                                              |       | — |   | — |   | — |   |
| Other Long-Term Liabilities |       | 3,089      |       | —                                             |       | 1,371 |   | 350 |   | 1,368 |   |
| Total                       |       | $          | 47,089     |                                               | $          | 9,420 |   | $ | 5,238 |   | $ | 29,517 |   | $ | 2,914 |   |

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(1)             Amounts do not include interest expense.

(2)             Includes the Company’s revolving credit facility.

(3)             Represents amounts at September 30, 2006.

(4)             Represents capital commitments.

**New Accounting Pronouncements**

In July 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN No. 48”), an interpretation of FASB StatementNo. 109, “Accounting for Income Taxes.” FIN No. 48 applies to fiscal years beginning after December 15, 2006;the Company’s 2008 fiscal year.  InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans” (“SFAS 158”), which will be effective at the end of theCompany’s 2007 fiscal year.  The Companydoes not believe the adoption of either FIN No. 48 or SFAS 158 will have amaterial effect on its consolidated financial position, results of operationsor cash flows.

**Forward-Looking Information:**

This Quarterly Report on Form 10-Q and the Company’sAnnual Report on Form 10-K for the year ended September 30, 2006 includeforward-looking statements.  Statementsthat describe future expectations, plans or strategies are considered “forward-lookingstatements” as that term is defined under the Private Securities LitigationReform Act of 1995 and releases issued by the Securities and Exchange Commission.  The words “believe,” “expect,” “anticipate,” “intend,”“estimate” and other expressions,

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which are predictions of or indicate future events andtrends and which do not relate to historical matters identify forward-lookingstatements.  Such statements are subjectto risks and uncertainties that could cause actual results to differ materiallyfrom those currently anticipated. Factors that could affect actual results include, among others, changesin customers’ demand for the Company’s products, including seasonal changes incustomer orders and shifting orders to lower cost regions, changes in marketgrowth rates such as the housing market, changes in raw material costs andavailability, pricing actions by competitors and other competitive pressures inthe markets in which the Company competes, consolidation among customers andcompetitors, success in the execution of acquisitions and the performance andintegration of acquired businesses, changes in operating expenses includingmedical and energy costs, changes in technology including migration frompaper-based books to digital, difficulties in the start up of new equipment orinformation technology systems, changes in copyright laws, changes in taxregulations, changes in the Company’s effective income tax rate, and generalchanges in economic conditions, including currency fluctuations and changes ininterest rates.  Although the Companybelieves that the assumptions underlying the forward-looking statements are reasonable,any of the assumptions could be inaccurate, and therefore, there can be noassurance that the forward-looking statements will prove to be accurate.  The forward-looking statements includedherein are made as of the date hereof, and the Company undertakes no obligationto update publicly such statements to reflect subsequent events orcircumstances.

**Item 3.**                          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

There have been no materialchanges from the information concerning the Company’s “Quantitative andQualitative Disclosures About Market Risk” as previously reported in theCompany’s Annual Report on Form 10-K for the year ended September 30, 2006.

**Item 4.**                          CONTROLSAND PROCEDURES

**(a)****                                  Evaluationof disclosure controls and procedures**

As required byRule 13a-15 under the Securities Exchange Act of 1934, as of the end of theperiod covered by this Quarterly Report, the Company carried out an evaluationunder the supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed by the Company in the reports itfiles or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

**(b)****                                  Changesin internal controls over financial reporting**

There was no change in the Company’s internal controlover financial reporting that occurred during the period covered by thisQuarterly Report that has materially affected, or that is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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**COURIERCORPORATION**

**PART II.  OTHER INFORMATION**

**Item 1.**                                                           Legal Proceedings

None.

**Item 1A.**                                                  Risk Factors

There have been no material changes to the riskfactors as previously disclosed in Item 1A inthe Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

**Item 2.**                                                           Unregistered Sales of Equity Securities and Useof Proceeds

None.

**Item 3.**                                                           DefaultsUpon Senior Securities

None.

**Item 4.**                                                           Submission of Matters to a Vote of SecurityHolders

None.

**Item 5.**                                                           Other Information

None.

**Item 6.**                                                           Exhibits
| Exhibit No.                                           | ** ** | **Description**                                                                                                                         |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 10.1*                                                 |       | Amendment, dated December 7, 2006, to Courier  Corporation Amended and Restated 1993 Stock Incentive Plan.                              |
| 10.2*                                                 |       | Amendment, dated December 7, 2006, to Restated 1989  Courier Corporation Deferred Income Stock Option Plan for Non-employee  Directors. |
| 10.3*                                                 |       | Amendment, dated December 7, 2006, to Courier  Corporation 2005 Stock Equity Plan for Non-employee Directors.                           |
| 31.1*                                                 |       | Certification of Chief Executive Officer                                                                                                |
| 31.2*                                                 |       | Certification of Chief Financial Officer                                                                                                |
| 32.1*                                                 |       | Certification of Chief Executive Officer                                                                                                |
| 32.2*                                                 |       | Certification of Chief Financial Officer                                                                                                |
|                                                       |
| *       Filed herewith. |

 

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**SIGNATURES**

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Company has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

**COURIER CORPORATION(Registrant)**
| *August 8, 2007* | * * | * * | *By:*  | *s/James F. Conway III*    | * * |
|------------------|----------|----------|--------|----------------------------|----------|
| Date             |     |     |   | James F. Conway III        |     |
|             |     |     |   | Chairman, President and    |     |
|             |     |     |   | Chief Executive Officer    |     |
|             |     |     |   |                       |     |
|             |     |     |   |                       |     |
| *August 8, 2007* | * * | * * | *By:*  | * s/Peter M. Folger*  | * * |
| Date             |     |     |   | Peter M. Folger            |     |
|             |     |     |   | Senior Vice President and  |     |
|             |     |     |   | Chief Financial Officer    |     |
|             |     |     |   |                       |     |
|             |     |     |   |                       |     |
| *August 8, 2007* | * * | * * | *By:*  | * s/Kathleen M. Leon* | * * |
| Date             |     |     |   | Kathleen M. Leon           |     |
|             |     |     |   | Controller and             |     |
|             |     |     |   | Chief Accounting Officer   |     |

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                         |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 10.1*       |       | Amendment, dated December 7, 2006, to Courier  Corporation Amended and Restated 1993 Stock Incentive Plan.                              |
| 10.2*       |       | Amendment, dated December 7, 2006, to Restated 1989  Courier Corporation Deferred Income Stock Option Plan for Non-employee  Directors. |
| 10.3*       |       | Amendment, dated December 7, 2006, to Courier  Corporation 2005 Stock Equity Plan for Non-employee Directors.                           |
| 31.1*       |       | Certification of Chief Executive Officer                                                                                                |
| 31.2*       |       | Certification of Chief Financial Officer                                                                                                |
| 32.1*       |       | Certification of Chief Executive Officer                                                                                                |
| 32.2*       |       | Certification of Chief Financial Officer                                                                                                |

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*                    Filed herewith.

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