**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

**For the quarterly periodended June 24, 2006**

**OR**

**[   ]**                          TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition periodfrom           to**

**Commission file number 0-7597**

**COURIERCORPORATION**

(Exact name of registrant as specified in its charter)

**Massachusetts**

(State or other jurisdiction of incorporation ororganization)

**04-2502514**

(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 telephone number, including area code)

**NO CHANGE**

(Formername, former address 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                                    Acceleratedfiler x                                             Non-acceleratedfiler o

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

Yes   o   No x

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

| **Class**                   |   | **Outstanding  at July 31, 2006** |
|-----------------------------|--------|-----------------------------------|
| Common Stock, $1  par value |   | 12,378,289  shares                |

 

 

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COURIER CORPORATIONCONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(Dollars in thousands except per share amounts)
| ** **                              | ** ** | **QUARTER ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|-----------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **June 24,**      | ** ** | **June 25,**               | ** ** | **June 24,** | ** ** | **June 25,** | ** ** |
| ** **                              | ** ** | **2006**               | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Net sales                               |       | $                      | 70,424     |                            | $          | 58,758 |   | $ | 185,635 |   | $ | 163,522 |   |
| Cost of sales                           |       | 48,310                 |       | 39,343                          |       | 127,115 |   | 111,053 |   |
| Gross profit                            |       | 22,114                 |       | 19,415                          |       | 58,520 |   | 52,469 |   |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Selling and  administrative expenses    |       | 12,560                 |       | 10,892                          |       | 35,363 |   | 31,857 |   |
| Interest expense  (income), net         |       | 168                    |       | (113                            | )          | (80 | ) | (182 | ) |
| Pretax income                           |       | 9,386                  |       | 8,636                           |       | 23,237 |   | 20,794 |   |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Provision for  income taxes (Note C)    |       | 3,330                  |       | 3,087                           |       | 8,301 |   | 7,618 |   |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Net income                              |       | $                      | 6,056      |                            | $          | 5,549 |   | $ | 14,936 |   | $ | 13,176 |   |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Net income per share  (Note D):         |       |                   |       |                            |       |   |   |   |   |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Basic                                   |       | $                      | 0.49       |                            | $          | 0.46 |   | $ | 1.21 |   | $ | 1.09 |   |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Diluted                                 |       | $                      | 0.48       |                            | $          | 0.44 |   | $ | 1.19 |   | $ | 1.06 |   |
|                                    |       |                   |       |                            |       |   |   |   |   |
| Cash dividends paid per  share (Note A) |       | $                      | 0.12       |                            | $          | 0.10 |   | $ | 0.36 |   | $ | 0.234 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

2

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COURIER CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)(Dollars in thousands)

|                                                                                                                              | ** ** | **June 24,** | ** ** | **September 24,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                   | ** ** | **2006**          | ** ** | **2005**               | ** ** |
|                                                                                                                         |       |              |       |                   |       |
| Current assets:                                                                                                              |       |              |       |                   |       |
| Cash and cash equivalents                                                                                                    |       | $                 | 1,710      |                   | $          | 34,038 |   |
| Accounts receivable, less allowance                                                                                          |       |              |       |                   |       |
| for uncollectible accounts of $1,591                                                                                         |       |              |       |                   |       |
| at June 24, 2006 and $1,139                                                                                                  |       |              |       |                   |       |
| at September 24, 2005                                                                                                        |       | 41,872            |       | 34,207                 |       |
| Inventories (Note B)                                                                                                         |       | 29,974            |       | 25,451                 |       |
| Deferred income taxes                                                                                                        |       | 3,167             |       | 2,945                  |       |
| Other current assets                                                                                                         |       | 1,134             |       | 962                    |       |
| Total current assets                                                                                                         |       | 77,857            |       | 97,603                 |       |
|                                                                                                                         |       |              |       |                   |       |
| Property, plant  and equipment, less accumulated depreciation: $127,556 at June 24, 2006 and  $118,285 at September 24, 2005 |       | 73,569            |       | 59,115                 |       |
|                                                                                                                         |       |              |       |                   |       |
| Goodwill and  other intangibles (Note A)                                                                                     |       | 69,090            |       | 33,255                 |       |
|                                                                                                                         |       |              |       |                   |       |
| Prepublication  costs (Note A)                                                                                               |       | 8,093             |       | 5,399                  |       |
|                                                                                                                         |       |              |       |                   |       |
| Other assets                                                                                                                 |       | 1,667             |       | 1,593                  |       |
|                                                                                                                         |       |              |       |                   |       |
| Total assets                                                                                                                 |       | $                 | 230,276    |                   | $          | 196,965 |   |

 

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

3

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COURIER CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)(Dollars in thousands)
| ** **                                                                                                                              | ** ** | **June 24,** | ** ** | **September 24,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                            | ** ** | **2006**          | ** ** | **2005**               | ** ** |
|                                                                                                                                    |       |              |       |                   |       |
| Current liabilities:                                                                                                                    |       |              |       |                   |       |
| Current maturities of long-term debt                                                                                                    |       | $                 | 85         |                   | $          | 85 |   |
| Accounts payable                                                                                                                        |       | 13,449            |       | 10,534                 |       |
| Accrued payroll                                                                                                                         |       | 7,824             |       | 7,799                  |       |
| Accrued taxes                                                                                                                           |       | 4,768             |       | 5,770                  |       |
| Other current liabilities                                                                                                               |       | 6,994             |       | 6,474                  |       |
|                                                                                                                                    |       |              |       |                   |       |
| Total current liabilities                                                                                                               |       | 33,120            |       | 30,662                 |       |
|                                                                                                                                    |       |              |       |                   |       |
| Long-term debt                                                                                                                          |       | 17,218            |       | 425                    |       |
| Deferred income  taxes (Note F)                                                                                                         |       | 8,203             |       | 6,398                  |       |
| Other  liabilities                                                                                                                      |       | 2,921             |       | 3,020                  |       |
|                                                                                                                                    |       |              |       |                   |       |
| Total liabilities                                                                                                                       |       | 61,462            |       | 40,505                 |       |
|                                                                                                                                    |       |              |       |                   |       |
| Stockholders’ equity  (Notes A and F):                                                                                             |       |              |       |                   |       |
| Preferred stock,  $1 par value—authorized 1,000,000 shares; none issued                                                            |       |              |       |                   |       |
| Common stock, $1 par value—authorized 18,000,000  shares; issued 12,378,000 at June 24, 2006 and 12,313,000 at September 24,  2005 |       | 12,378            |       | 12,313                 |       |
| Additional paid-in capital                                                                                                              |       | 7,103             |       | 5,311                  |       |
| Retained earnings                                                                                                                       |       | 149,333           |       | 138,836                |       |
|                                                                                                                                    |       |              |       |                   |       |
| Total stockholders’ equity                                                                                                         |       | 168,814           |       | 156,460                |       |
|                                                                                                                                    |       |              |       |                   |       |
| Total liabilities and  stockholders’ equity                                                                                        |       | $                 | 230,276    |                   | $          | 196,965 |   |

 

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

4

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COURIER CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)(Dollars in thousands)
| ** **                                                                       | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **June 24,**               | ** ** | **June 25,** | ** ** |
| ** **                                                                       | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Operating Activities:                                                            |       |                            |       |   |   |
| Net income                                                                       |       | $                               | 14,936     |   | $ | 13,176 |   |
| Adjustments to  reconcile net income to cash provided from operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                    |       | 10,857                          |       | 8,904 |   |
| Stock based compensation                                                         |       | 1,055                           |       | 1,388 |   |
| Deferred income taxes                                                            |       | 1,236                           |       | (132 | ) |
| Changes in  assets and liabilities:                                              |       |                            |       |   |   |
| Accounts receivable                                                              |       | 1,497                           |       | 2,095 |   |
| Inventory                                                                        |       | (1,205                          | )          | (1,516 | ) |
| Accounts payable                                                                 |       | (2,110                          | )          | (3,455 | ) |
| Accrued taxes                                                                    |       | (1,002                          | )          | (2,168 | ) |
| Other elements of working capital                                                |       | (2,007                          | )          | 119 |   |
| Other, net                                                                       |       | (153                            | )          | (112 | ) |
|                                                                             |       |                            |       |   |   |
| Cash provided  from operating activities                                         |       | 23,104                          |       | 18,299 |   |
|                                                                             |       |                            |       |   |   |
| Investment Activities:                                                           |       |                            |       |   |   |
| Capital expenditures                                                             |       | (14,821                         | )          | (9,810 | ) |
| Business acquisition, net of cash acquired                                       |       | (51,164                         | )          | — |   |
| Prepublication costs                                                             |       | (2,737                          | )          | (2,183 | ) |
| Cash used for  investment activities                                             |       | (68,722                         | )          | (11,993 | ) |
|                                                                             |       |                            |       |   |   |
| Financing Activities:                                                            |       |                            |       |   |   |
| Long-term borrowings (repayments), net                                           |       | 16,793                          |       | (62 | ) |
| Cash dividends                                                                   |       | (4,439                          | )          | (2,838 | ) |
| Proceeds from stock plans                                                        |       | 936                             |       | 1,182 |   |
| Excess tax benefits from stock-based compensation                                |       | —                          |       | 343 |   |
| Cash provided  from (used for) financing activities                              |       | 13,290                          |       | (1,375 | ) |
|                                                                             |       |                            |       |   |   |
| (Decrease)  Increase in cash and cash equivalents                                |       | (32,328                         | )          | 4,931 |   |
|                                                                             |       |                            |       |   |   |
| Cash and cash  equivalents at the beginning of the period                        |       | 34,038                          |       | 23,965 |   |
|                                                                             |       |                            |       |   |   |
| Cash and cash  equivalents at the end of the period                              |       | $                               | 1,710      |   | $ | 28,896 |   |

 

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

5

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** **

**COURIER CORPORATION**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

**A.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Unaudited Financial Statements**

The balance sheet as of June 24, 2006, thestatements of income for the three-month and nine-month periods ended June 24,2006 and June 25, 2005, and the statements of cash flows for the nine-monthperiods ended June 24, 2006 and June 25, 2005 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 amounts for fiscal 2005 have beenreclassified in the accompanying financial statements in order to reflect theadoption of SFAS 123R, as discussed below.

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States (“generally accepted accountingprinciples”) have been condensed or omitted. The balance sheet data as of September 24, 2005 was derived from auditedyear-end financial statements, as adjusted for the adoption of SFAS 123R, butdoes not include disclosures required by generally accepted accountingprinciples.  It is suggested that theseinterim financial statements be read in conjunction with the Company’s mostrecent Form 10-K and Annual Report for the year ended September 24, 2005.

**PrepublicationCosts**

Prepublication costs, associated with the specialty publishing segment, areamortized using the straight-line method over an estimated useful life of fouryears for Dover Publications, Inc. (“Dover”), three years for Research &Education Association, Inc. (“REA”), and five years for the recently acquiredFederal Marketing Corporation (Note G), d/b/a Creative Homeowner (“CreativeHomeowner”).

**Goodwill and Other Intangibles**

The Companyevaluates possible impairment annually or whenever events or circumstancesindicate that the carrying value of the assets may not be recoverable. Therewere no such events or circumstances in the period presented.  In fiscal 2006, goodwill increased byapproximately $5.3 million for the acquisition of Moore-Langen PrintingCompany, Inc. (“Moore Langen”) and by approximately $18.8 million for the acquisitionof Creative Homeowner (Note G).  Customerlists for Moore Langen and Creative Homeowner were valued at approximately$200,000 and $11.5 million, respectively, and are being amortized over 10-yearand 15-year periods, respectively. Amortization expense related to customer lists was approximately$120,000 in the third quarter of fiscal 2006.

**Stock Split and Dividend Increase**

On March 10, 2005, the Company announced a three-for-two stock split,effected in the form of a 50% stock dividend, which was distributed on May 27,2005. Simultaneously, the quarterly cash dividend was increased to $.10 perpost-split share of common stock, 50% higher than the $.067 per post-splitshare declared in January 2005. It was the second cash dividend declared in theCompany’s second fiscal quarter and, therefore, no dividend was declared in thethird quarter of fiscal 2005.  Previouslyauthorized but unissued shares were used to effect the stock dividend.  Weighted average shares outstanding and pershare amounts presented in the accompanying financial statements for periodsprior to the stock split have been restated to give effect to the stock split.

**Adoptionof New Accounting Principle**

As more fullydiscussed in Note F below, the Company adopted Statement of FinancialAccounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”). Theeffective date of this new standard was the beginning of the Company’s 2006fiscal year. The Company implemented this new standard on a retrospective basis(Note F). Under this new standard, companies are required to account forstock-based compensation transactions using a fair-value method and torecognize the expense over the service period.

6

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**New AccountingPronouncement**

In July 2006, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (“FIN No. 48”), an interpretation of FASB StatementNo. 109, “Accounting for Income Taxes.” FIN No. 48 applies to fiscalyears beginning after December 15, 2006; the Company’s 2008 fiscal year.The Company is currently evaluating the impact of this new pronouncement.

**B.   INVENTORIES**

Inventories are valued at the lower of cost or market. Cost is determinedusing the last-in, first-out (LIFO) method for approximately 37% and 41% of theCompany’s inventories at June 24, 2006 and September 24, 2005, respectively.Other inventories, primarily in the specialty publishing segment, aredetermined on a first-in, first-out (FIFO) basis. The acquisitions of MooreLangen and Creative Homeowner increased inventories by approximately $3.3million. Inventories consisted of the following:

|                 | ** ** | **(000’s Omitted)** | ** ** |
|-----------------|------------|-------------------------------|------------|
| ** **      | ** ** | **June 24,  2006**       | ** ** | **September 24,  2005** | ** ** |
| Raw materials   |       | $                             | 3,382      |   | $ | 2,319 |   |
| Work in process |       | 7,247                         |       | 6,276 |   |
| Finished goods  |       | 19,345                        |       | 16,856 |   |
| Total           |       | $                             | 29,974     |   | $ | 25,451 |   |

 

**C.   INCOMETAXES**

The provision for income taxes differs from thatcomputed using the statutory federal income tax rates for the followingreasons:     

|                                       | ** ** | **(000’s Omitted)** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Quarter Ended**        | ** ** |
| ** **                            | ** ** | **June 24, 2006**   | ** ** | **June 25, 2005** | ** ** |
| Federal taxes at statutory rates      |       | $                             | 3,284      |   | 35.0 | % | $ | 3,023 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 268                           |       | 2.9 |   | 246 |   | 2.8 |   |
| Federal manufacturers’ deduction |       | (84                           | )          | (0.9 | ) | — |   | — |   |
| Tax benefit of export related income  |       | (200                          | )          | (2.1 | ) | (240 | ) | (2.8 | ) |
| Stock-based compensation (Note F)     |       | 38                            |       | 0.4 |   | 68 |   | 0.8 |   |
| Other                                 |       | 24                            |       | 0.2 |   | (10 | ) | (0.1 | ) |
| Total                                 |       | $                             | 3,330      |   | 35.5 | % | $ | 3,087 |   | 35.7 | % |

 

|                                       | ** ** | **(000’s Omitted)**   | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                            | ** ** | **June 24, 2006**     | ** ** | **June 25, 2005** | ** ** |
| Federal taxes at statutory rates      |       | $                               | 8,133      |   | 35.0 | % | $ | 7,278 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 678                             |       | 2.9 |   | 622 |   | 3.0 |   |
| Federal manufacturers’ deduction |       | (198                            | )          | (0.9 | ) | — |   | — |   |
| Tax benefit of export related income  |       | (422                            | )          | (1.8 | ) | (524 | ) | (2.5 | ) |
| Stock-based compensation (Note F)     |       | 113                             |       | 0.5 |   | 221 |   | 1.1 |   |
| Other                                 |       | (3                              | )          | — |   | 21 |   | 0.1 |   |
| Total                                 |       | $                               | 8,301      |   | 35.7 | % | $ | 7,618 |   | 36.6 | % |

 

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#  

**D.   NETINCOME PER SHARE**

**Followingis a reconciliation of the shares used in the calculation of basic and dilutedincome per share. Potentially dilutive shares, calculated using the treasurystock method, consist of shares issued under the Company’s stock option plans.These shares have been adjusted to reflect the three-for-two stock spliteffected in the form of a dividend distributed on May 27, 2005 (Note A) and theimplementation of SFAS 123R (Note A).**
| ** **                              | ** ** | **(000’s Omitted)** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                              | ** ** | **June 24, 2006**   | ** ** | **June 25, 2005** | ** ** | **June 24, 2006** | ** ** | **June 25, 2005** | ** ** |
|                                    |       |                          |       |   |   |   |   |   |   |
| Average shares outstanding for basic    |       | 12,333                        |       | 12,158 |   | 12,309 |   | 12,089 |   |
| Effect of potentially dilutive shares   |       | 274                           |       | 325 |   | 273 |   | 370 |   |
| Average  shares outstanding for diluted |       | 12,607                        |       | 12,483 |   | 12,582 |   | 12,459 |   |

 

**E.   BUSINESSSEGMENTS**

The Company has two businesssegments: book manufacturing and specialty publishing. The book manufacturingsegment offers a full range of services from production through storage anddistribution for religious, educational and specialty trade book publishers.The specialty publishing segment consists of Dover and REA, as well as CreativeHomeowner since 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 of intersegment sales and related profitrepresents sales from the book manufacturing segment to the specialtypublishing segment. Corporate expenses that are allocated to the segmentsinclude various support functions such as information technology services,finance, human resources and engineering, and include depreciation andamortization expense related to corporate assets*.*

The followingtable provides segment information for the quarter and nine-month periods endedJune 24, 2006 and June 25, 2005.
| ** **                         | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                         | ** ** | **June 24, 2006**   | ** ** | **June 25, 2005** | ** ** | **June 24, 2006** | ** ** | **June 25, 2005** | ** ** |
|                               |       |                          |       |   |   |   |   |   |   |
| Net  sales:                        |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 57,700     |   | $ | 50,586 |   | $ | 155,365 |   | $ | 138,787 |   |
| Specialty publishing               |       | 15,243                        |       | 9,936 |   | 36,426 |   | 29,943 |   |
| Elimination of intersegment sales  |       | (2,519                        | )          | (1,764 | ) | (6,156 | ) | (5,208 | ) |
| Total                              |       | $                             | 70,424     |   | $ | 58,758 |   | $ | 185,635 |   | $ | 163,522 |   |
|                               |       |                          |       |   |   |   |   |   |   |
| Income  before taxes:              |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 8,731      |   | $ | 8,411 |   | $ | 21,232 |   | $ | 19,873 |   |
| Specialty publishing               |       | 1,120                         |       | 727 |   | 3,269 |   | 2,603 |   |
| Stock-based compensation           |       | (359                          | )          | (448 | ) | (1,055 | ) | (1,388 | ) |
| Elimination of intersegment profit |       | (106                          | )          | (54 | ) | (209 | ) | (294 | ) |
| Total                              |       | $                             | 9,386      |   | $ | 8,636 |   | $ | 23,237 |   | $ | 20,794 |   |

 

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** **

**F.   STOCK-BASEDCOMPENSATION**

In the first quarter of fiscal 2006, the Companyadopted the provisions of SFAS 123R. All prior periods presented have beenrestated on a retrospective basis consistent with the pro forma disclosuresrequired for those periods by SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”). Prior to the adoption of SFAS 123R, the Companyapplied APB 25 to account for its stock-based awards. Under APB 25, the Companygenerally only recorded stock-based compensation expense for the vesting ofstock grants as well as shares issued to directors in lieu of cash for annualretainer fees. Under the provisions of APB 25, the Company was not required torecognize compensation expense for the cost of stock options or for sharesissued under the Company’s Employee Stock Purchase Plan (“ESPP”). Beginningwith its 2006 fiscal year, with the adoption of SFAS 123R, the Company recordedstock-based compensation expense for the cost of stock options, stock grants,and shares issued under the ESPP. The fair value of each option awarded wascalculated on the date of grant using the Black-Scholes option-pricing model.

Stock-basedcompensation recognized in selling and administrative expenses in the accompanyingfinancial statements, and the related tax benefit, were as follows:
| ** **                     | ** ** | **(000’s Omitted)** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Quarter Ended**        | ** ** |
| ** **                     | ** ** | **June 24, 2006**   | ** ** | **June 25, 2005** | ** ** |
| ** **                     | ** ** | **Stock-Based  Compensation** | ** ** | **Tax Benefit** | ** ** | **After-Tax Cost** | ** ** | **Stock-Based  Compensation** | ** ** | **Tax Benefit** | ** ** | **After-Tax Cost** | ** ** |
| Stock grants                   |       | $                             | 112        |   | $ | 39 |   | $ | 73 |   | $ | 89 |   | $ | 31 |   | $ | 58 |   |
| Incremental                    |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| SFAS 123R costs                |       | 247                           |       | 48 |   | 199 |   | 359 |   | 55 |   | 304 |   |
| Total stock-based compensation |       | $                             | 359        |   | $ | 87 |   | $ | 272 |   | $ | 448 |   | $ | 86 |   | $ | 362 |   |

 
| ** **                     | ** ** | **(000’s Omitted)**   | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **Nine Months Ended** | ** ** |
| ** **                     | ** ** | **June 24, 2006**     | ** ** | **June 25, 2005** | ** ** |
| ** **                     | ** ** | **Stock-Based  Compensation**   | ** ** | **Tax Benefit** | ** ** | **After-Tax Cost** | ** ** | **Stock-Based  Compensation** | ** ** | **Tax Benefit** | ** ** | **After-Tax Cost** | ** ** |
| Stock grants                   |       | $                               | 321        |   | $ | 112 |   | $ | 209 |   | $ | 262 |   | $ | 91 |   | $ | 171 |   |
| Incremental                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| SFAS 123R costs                |       | 734                             |       | 143 |   | 591 |   | 1,126 |   | 164 |   | 962 |   |
| Total stock-based compensation |       | $                               | 1,055      |   | $ | 255 |   | $ | 800 |   | $ | 1,388 |   | $ | 255 |   | $ | 1,133 |   |

 

Unrecognized stock-based compensation cost at June 24,2006 was $1.5 million to be recognized over a weighted-average period of 0.9****years.

9

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The followingtable provides information on the impact on the accompanying income statementsof adopting SFAS 123R on a retrospective basis.
| ** **                     | ** ** | **(000’s Omitted)** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                     | ** ** | **June 24, 2006**   | ** ** | **June 25, 2005** | ** ** | **June 24, 2006** | ** ** | **June 25, 2005** | ** ** |
| Reported net income            |       | $                             | 6,056      |   | $ | 5,549 |   | $ | 14,936 |   | $ | 13,176 |   |
| Add: Total  Stock-Based        |       |                          |       |   |   |   |   |   |   |
| Compensation                   |       | 272                           |       | 362 |   | 800 |   | 1,133 |   |
| Less: Stock  grants            |       | (73                           | )          | (58 | ) | (209 | ) | (171 | ) |
|                           |       |                          |       |   |   |   |   |   |   |
| Pro forma net  income          |       | $                             | 6,255      |   | $ | 5,853 |   | $ | 15,527 |   | $ | 14,138 |   |
|                           |       |                          |       |   |   |   |   |   |   |
| Net income per  diluted share: |       |                          |       |   |   |   |   |   |   |
| As reported                    |       | $                             | 0.48       |   | $ | 0.44 |   | $ | 1.19 |   | $ | 1.06 |   |
| Pro forma                      |       | $                             | 0.50       |   | $ | 0.47 |   | $ | 1.23 |   | $ | 1.13 |   |

 

The cumulative effect of the adoption of SFAS 123R onthe Company’s consolidated balance sheet at September 24, 2005 resulted in an increasein additional paid-in capital of $3,858,000, a reduction in retained earningsof $3,909,000, elimination of unearned compensation of $577,000, and areduction in deferred income tax liabilities of $526,000.

**Stock Incentive Plan:** The Company’s stock incentive plan provides for the granting of stockoptions and stock grants up to a total of 2,064,375 shares.  Under the plan provisions, both non-qualifiedand incentive stock options to purchase shares of the Company’s common stockmay be granted to key employees.  Theoption price per share may not be less than the fair market value of stock atthe time the option is granted and incentive stock options must expire notlater than ten years from the date of grant. The Company annually issues a combination of stock options and stockgrants to its key employees.  Prior to2004, stock-based awards to key employees consisted primarily of stockoptions.  Beginning in 2004, the Companyreduced the number of stock options granted and added restricted stock awards.Stock options awarded in 2004 vested in one year.  Stock options awarded in 2005 vest over threeyears. Stock grants generally vest over 3 years.  In the third quarter of 2006, 8,000restricted stock grants were awarded in connection with the acquisition ofCreative Homeowner (Note G) with a grant-date fair value of $43.17.  At June24, 2006 non-vested stock grants outstanding were 34,078 shares with aweighted-average grant-date fair value of $30.53. Stock options outstanding atJune 24, 2006 were 378,822 shares with a weighted-average exercise price of$19.43 per share, a weighted-average remaining life of 3.4 years, and anaggregate intrinsic value of $6,005,000. Of these options, 306,739 shares were exercisable at June 24, 2006 witha weighted-average exercise price of $17.21 per share, a weighted-averageremaining life of 3.1 years, and an aggregate intrinsic value of $5,533,000. Noawards were issued by the Company under this plan in the first six months offiscal 2006.

**Directors’ Option Plan:** In January 2005, stockholders approved the Courier Corporation 2005Stock Equity Plan for Non-Employee Directors (the “2005 Plan”). Under the planprovisions, 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

10

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market value of stock at the time the option isgranted.  The options are immediatelyexercisable and have a term of five years. The 2005 Plan replaced the previous non-employeedirectors’ plan which had been adopted in 1989 (the “1989 Plan”).  The 1989 Plan allowed directors to make anelection to apply their annual retainer fee toward the granting of stockoptions at a price per share that was $5 below the fair market value at thetime of the option award.  In the firstquarter of fiscal 2005, 9,000 options were granted under the 1989 Plan. Nofurther options will be granted under the 1989 Plan. During the second quarterof fiscal 2006, non-employee directors, as part of their 2006 compensationplan, were awarded 43,752 options.  Thekey assumptions used to value these options were a risk-free interest rate of4.3%, an expected volatility of 23%, an expected dividend yield of 1.3%, and anexpected term of 5 years, resulting in a fair-value per share of $9.14 forthese options.  At June 24, 2006, 217,928options were outstanding and exercisable under the directors’ optionplans.  These options had aweighted-average exercise price of $22.99 per share, a weighted-averageremaining life of 2.5 years and an aggregate intrinsic value of $2,719,000.

**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 forissuance under the plan.  Eligibleemployees may purchase shares of Company common stock at not less than 85% offair market value at the end of the grant period. Prior to 2005, the purchaseprice was determined based upon 85% of fair market value at the beginning or endof the grant period.

**G.   BUSINESSACQUISITIONS**

On October 17, 2005, the Companyacquired Moore-Langen Printing Company, Inc. (“Moore Langen”), anIndianapolis-based printer specializing in book covers, in a $15 million cashtransaction.  The acquisition wasaccounted for as a purchase, and accordingly, Moore Langen’s financial resultswere included in the book manufacturing segment in the consolidated financialstatements from the date of acquisition. The initial allocation of the purchase price to assets acquiredincluded, in the accompanying financial statements, approximately $5.3 millionto goodwill and $200,000 to customer lists. This allocation will be finalized later in this fiscal year.

On April 28, 2006, the Companyacquired Federal Marketing Corporation, d/b/a Creative Homeowner (“CreativeHomeowner”), a New Jersey-based publisher and distributor of books, houseplans, and related products for the home and garden retail book market. TheCompany purchased 100% of the stock of Creative Homeowner in a $37 million cashtransaction. The acquisition was accounted for as a purchase, and accordingly,Creative Homeowner’s financial results were included in the specialtypublishing segment in the consolidated financial statements from the date ofacquisition.  The initial allocation ofthe purchase price to assets acquired included, in the accompanying financialstatements, approximately $18.8 million to goodwill and $11.5 million tocustomer lists.  This allocation will befinalized later in this fiscal year.

11

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**Item 2.**

**COURIER CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION 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 performsongoing credit evaluations of the Company’s customers and adjusts credit limitsbased upon payment 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’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, 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 whichare amortized on a straight-line basis over periods ranging from ten to fifteenyears. The Company evaluates possible impairment annually or whenever events orcircumstances indicate that the carrying value of goodwill and other intangibleassets may not be recoverable.  TheCompany completed the annual impairment test at September 24, 2005 resulting inno change to the nature or carrying amounts of its intangible assets.  Changes in market conditions or pooroperating results could result in a decline in value thereby potentiallyrequiring an impairment charge in the future.

Prepublication Costs   The Company capitalizes prepublicationcosts, 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 of America’s leading book manufacturers and specialtypublishers.  The Company has two businesssegments: book manufacturing and specialty publishing.  The book manufacturing segment streamlinesthe process of bringing books from the point of creation to the point of use.  Based on sales, Courier is the fifth largestbook manufacturer in the United States and largest in the Northeast, offeringservices from prepress and production through storage and distribution.  The specialty publishing segment consists ofDover Publications, Inc. (“Dover”) and Research & Education Association,Inc. (“REA”), as well as the recent acquisition of Federal MarketingCorporation, d/b/a Creative Homeowner (“Creative Homeowner”).  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 for high school,college and graduate students, and professionals.  Creative Homeowner publishes and distributesbooks, house plans and related products to the home and garden retail market.

**Results of Operations:**
| ** **                          | ** ** | **FINANCIAL HIGHLIGHTS**                                                     | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                          | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **June 24,  2006**                                                           | ** ** | **June 25,  2005** | ** ** | **% Change** | ** ** | **June 24,  2006** | ** ** | **June 25,  2005** | ** ** | **% Change** | ** ** |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                           |       | $                                                                                 | 70,424     |   | $ | 58,758 |   | 19.9 | % | $ | 185,635 |   | $ | 163,522 |   | 13.5 | % |
| Gross profit                        |       | 22,114                                                                            |       | 19,415 |   | 13.9 | % | 58,520 |   | 52,469 |   | 11.5 | % |
| As a percentage of sales            |       | 31.4                                                                              | %          | 33.0 | % |   |   | 31.5 | % | 32.1 | % |   |   |
| Selling and administrative expenses |       | 12,560                                                                            |       | 10,892 |   | 15.3 | % | 35,363 |   | 31,857 |   | 11.0 | % |
| Interest expense (income), net      |       | 168                                                                               |       | (113 | ) |   |   | (80 | ) | (182 | ) |   |   |
| Pretax income                       |       | 9,386                                                                             |       | 8,636 |   | 8.7 | % | 23,237 |   | 20,794 |   | 11.7 | % |
| Net income                          |       | $                                                                                 | 6,056      |   | $ | 5,549 |   | 9.1 | % | $ | 14,936 |   | $ | 13,176 |   | 13.4 | % |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income per diluted share        |       | $                                                                                 | 0.48       |   | $ | 0.44 |   | 9.1 | % | $ | 1.19 |   | $ | 1.06 |   | 12.3 | % |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |

 

Revenues in the third quarter and first nine months offiscal 2006 increased in both of the Company’s operating segments compared tothe same periods last year.  Two recentacquisitions contributed to the revenue growth in both the third-quarter andnine-month periods.  Excluding the impactof the acquisitions, sales increased 9% in the quarter and 7% year to date.Book manufacturing revenues were up 14% for the third quarter and 12% for thefirst nine months of the year compared to the corresponding periods last year,reflecting higher textbook sales and the Moore Langen acquisition discussedbelow.  Sales in the specialty publishingsegment were up 53% in the third quarter and 22% year to date compared to thesame periods last year, reflecting growth in both of the segment’s existingbusinesses as well as the acquisition during the quarter of Creative Homeownerdiscussed below.

# ***Business Acquisitions***

On October 17, 2005, the Company acquired Moore-LangenPrinting Company, Inc. (“Moore Langen”) an Indianapolis-based printerspecializing in book covers.  Thisacquisition was accounted for as a purchase, and accordingly, Moore Langen’sfinancial results were included in the book manufacturing segment from the dateof acquisition. On April 28, 2006, the Company acquired Creative Homeowner, aNew Jersey-based publisher and distributor of books, house plans, and relatedproducts for the $340-million home and garden retail book market. Thisacquisition was also accounted for as a purchase, and accordingly, CreativeHomeowner’s financial results were included in the specialty publishing segmentfrom the date of acquisition.

# ***Stock-Based Compensation***

In the first quarter of fiscal 2006, the Companyadopted the provisions of Statement of Financial Accounting Standards 123R, “Share-BasedPayment” (“SFAS 123R”), an accounting rule requiring the expensing of stockoptions.  All prior periods presentedhave been restated on a retrospective basis consistent with the pro forma

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disclosuresrequired for those periods by SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”).  Prior to theadoption of SFAS 123R, the Company applied APB 25 to account for itsstock-based****awards.  Under APB 25, the Company generally onlyrecorded stock-based compensation expense for the vesting of stock grants aswell as shares issued to directors in lieu of cash for annual retainerfees.  Under the provisions of APB 25,the Company was not required to recognize compensation expense for the cost ofstock options or for shares issued under the Company’s Employee Stock PurchasePlan (“ESPP”).  Beginning with its 2006fiscal year, with the adoption of SFAS 123R, the Company recorded stock-basedcompensation****expense for the cost of stockoptions (using the Black-Scholes option-pricing model), stock grants, andshares issued under the ESPP. The incremental impact of adoption of thisstandard was a reduction of third-quarter net income by approximately $199,000and $304,000 in fiscal 2006 and 2005, respectively, and by approximately$591,000 and $962,000 for the first nine months of fiscal 2006 and 2005,respectively. The following table provides information on the impact on theaccompanying income statements of adopting SFAS 123R on a retrospective basis.
| ** **                     | ** ** | **(000’s Omitted)** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                     | ** ** | **June 24, 2006**   | ** ** | **June 25, 2005** | ** ** | **June 24, 2006** | ** ** | **June 25, 2005** | ** ** |
| Reported net  income           |       | $                             | 6,056      |   | $ | 5,549 |   | $ | 14,936 |   | $ | 13,176 |   |
| Add: Total  Stock-Based        |       |                          |       |   |   |   |   |   |   |
| Compensation                   |       | 272                           |       | 362 |   | 800 |   | 1,133 |   |
| Less: Stock  grants            |       | (73                           | )          | (58 | ) | (209 | ) | (171 | ) |
|                           |       |                          |       |   |   |   |   |   |   |
| Pro forma net  income          |       | $                             | 6,255      |   | $ | 5,853 |   | $ | 15,527 |   | $ | 14,138 |   |
|                           |       |                          |       |   |   |   |   |   |   |
| Net income per  diluted share: |       |                          |       |   |   |   |   |   |   |
| As reported                    |       | $                             | 0.48       |   | $ | 0.44 |   | $ | 1.19 |   | $ | 1.06 |   |
| Pro forma                      |       | $                             | 0.50       |   | $ | 0.47 |   | $ | 1.23 |   | $ | 1.13 |   |

 

Unrecognized compensation cost at June 24, 2006 was$1.5 million to be recognized over a weighted-average period of 0.9 years.  The cumulative effect of adoption of SFAS123R on the Company’s consolidated balance sheet at September 24, 2005 resultedin an increase in additional paid-in capital of $3,858,000, a reduction inretained earnings of $3,909,000, elimination of unearned compensation of$577,000, and a reduction in deferred income tax liabilities of $526,000.

The Company annually issues acombination of stock options and stock grants to its key employees under itsstock plans.  Prior to 2004, stock-basedawards to key employees consisted primarily of stock options.  Beginning in 2004, the Company reduced thenumber of stock options granted and added restricted stock awards. Stockoptions awarded in 2004 vested in one year. Stock options awarded in 2005 vest over three years. Stock grantsgenerally vest over 3 years.  In thethird quarter of 2006, 8,000 restricted stock grants were awarded in connectionwith the acquisition of Creative Homeowner with a grant-date fair value of$43.17.  Under the Company’s ESPP,eligible employees may purchase shares of stock for not less than 85% of fairmarket value at the end of the grant period. Prior to 2005, the purchase price was determined based upon 85% of fairmarket value at the beginning or end of the grant period. In January 2005,stockholders approved a new stock equity plan for non-employee directors (the “2005Plan”).  The option price per share isthe fair market value at the time the option is granted.  The 2005 Plan replaced a plan that hadallowed directors to make an election to apply their annual retainer fee towardthe granting of stock options at a price per share that was $5 below the fairmarket value at the time of the option award. During the second quarterof fiscal 2006 and 2005, 43,752 and 36,000 options, respectively, were grantedunder the non-employee directors’ option plan; 9,000 shares were issued in the first quarter of fiscal 2005 tonon-employee directors under the previous Directors Option Plan. No otherawards were issued under any of the Company’s plans in the first nine months offiscal 2006 and 2005.

* *

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* *

*Book Manufacturing Segment*
| ** **                          | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                          | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **June 24, 2006**                                                       | ** ** | **June 25, 2005** | ** ** | **% Change** | ** ** | **June 24,  2006** | ** ** | **June 25, 2005** | ** ** | **% Change** | ** ** |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                           |       | $                                                                                 | 57,700     |   | $ | 50,586 |   | 14.1 | % | $ | 155,365 |   | $ | 138,787 |   | 12.0 | % |
| Gross profit                        |       | 15,563                                                                            |       | 15,045 |   | 3.4 | % | 42,291 |   | 38,843 |   | 8.9 | % |
| As a percentage of sales            |       | 27.0                                                                              | %          | 29.7 | % |   |   | 27.2 | % | 28.0 | % |   |   |
| Selling and administrative expenses |       | 6,972                                                                             |       | 6,815 |   | 2.3 | % | 21,543 |   | 19,403 |   | 11.0 | % |
| Interest income                     |       | (142                                                                              | )          | (179 | ) |   |   | (486 | ) | (433 | ) |   |   |
| Pretax income                       |       | $                                                                                 | 8,731      |   | $ | 8,411 |   | 3.8 | % | $ | 21,232 |   | $ | 19,873 |   | 6.8 | % |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |

 

Within this segment, the Companyfocuses on three key markets: education, religious and specialty trade.  Sales in this segment grew in all markets,particularly within the education market, and by the October 2005 acquisitionof Moore Langen, which focuses on printing book covers for the educationmarket.  Sales to the education market(excluding Moore Langen sales) rose 10% in the quarter and 12% in the firstnine months of fiscal 2006 compared to last year, with the greatest growth infour-color elementary and high school textbooks. The newest four-color pressstart-up and related bindery expansion provided the necessary capacity to meetthe growing demand for educational books. Sales to the religious market were up 6% for the quarter and 1% for thefirst nine months compared to the same periods last year, reflecting a decisionlast year to discontinue manufacturing certain low-priced religious tradework.  Sales to the specialty trademarket were up 12% for the quarter and 9% year to date compared to the sameperiods in fiscal 2005.  Excluding salesto Dover, the increase in the quarter was 5% compared to the same quarter lastyear when Dover was reducing inventories in advance of their warehouserelocation. Year-to-date sales for fiscal 2006 also benefited from a few largeone-time orders in the first quarter.

Gross profit in this segmentincreased by 3% to $15.6 million for the quarter, but as a percentage of salesdecreased to 27.0% from 29.7% in last year’s third quarter. The benefit ofgrowing sales volume was offset in part by pricing pressures both in thequarter and the first nine months compared to the corresponding periods lastyear.  Additional costs related to thenewest four-color press and plant expansion in Kendallville were offset in partby continued gains in productivity in both the quarter and year-to-date periodscompared to last year.  Also, risingenergy costs adversely impacted fiscal 2006 results with increased utilitycosts of approximately $400,000 in the third quarter and $1.5 million for thefirst nine months compared to the same periods of fiscal 2005.

Selling and administrativeexpenses for the segment increased 2% in the third quarter to $7.0 million and11% for the first nine months to $21.5 million compared to the correspondingperiods last year.  The increase both forthe quarter and the first nine months of the year, was the result of theacquisition of Moore Langen as well as costs associated with the increasedsales volume, such as selling and customer service expenses, and increases ininformation technology expenses.

Intercompany interest incomeallocated to the book manufacturing segment was $142,000 in the third quartercompared to $179,000 in the same period last year and for the first ninemonths, increased to $486,000 compared to $433,000 last year.  The increase in allocated interest income wasprimarily the result of higher interest rates offset in part by interestexpense allocated to Moore Langen.

Pretax income in this segmentfor the third quarter was $8.7 million, or $.45 per diluted share, up 4% from$8.4 million, or $.44 per diluted share in the corresponding quarter lastyear.  For the first nine months offiscal 2006, pretax income in this segment was $21.2 million or $1.10 perdiluted share, up 7% from last year’s $19.9 million or $1.03 per diluted share.

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* *

*Specialty Publishing Segment*
| ** **                          | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                          | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **June 24, 2006**                                                       | ** ** | **June 25, 2005** | ** ** | **% Change** | ** ** | **June 24, 2006** | ** ** | **June 25, 2005** | ** ** | **% Change** | ** ** |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                           |       | $                                                                                 | 15,243     |   | $ | 9,936 |   | 53.4 | % | $ | 36,426 |   | $ | 29,943 |   | 21.7 | % |
| Gross profit                        |       | 6,661                                                                             |       | 4,424 |   | 50.5 | % | 16,438 |   | 13,919 |   | 18.1 | % |
| As a percentage of sales            |       | 43.7                                                                              | %          | 44.5 | % |   |   | 45.1 | % | 46.5 | % |   |   |
| Selling and administrative expenses |       | 5,231                                                                             |       | 3,631 |   | 44.1 | % | 12,763 |   | 11,065 |   | 15.3 | % |
| Interest expense                    |       | 310                                                                               |       | 66 |   |   |   | 406 |   | 251 |   |   |   |
| Pretax income                       |       | $                                                                                 | 1,120      |   | $ | 727 |   | 54.1 | % | $ | 3,269 |   | $ | 2,603 |   | 25.6 | % |

 

Specialty publishing sales increased 53% over theprior year third quarter to $15.2 million, including $4.4 million of CreativeHomeowner sales for the eight-week period since its acquisition.  Sales increases of 9% at Dover and 13% at REAin the quarter also contributed to the segment’s revenue growth.  During the first quarter, Dover completed twomajor projects begun in fiscal 2005; specifically, a warehouse consolidationand the implementation of SAP, an enterprise-wide information system, resultingin significant improvements to both infrastructure and service levels. Salesthrough all of Dover’s channels continued to improve in the quarter bringingtheir year-to-date growth to 5% compared to the first nine months of last year.REA’s sales increase reflects its growing line of titles in teachercertification and high-stakes testing, as well as enhancements in its directmarketing programs, bringing their growth in revenue to 18% for the first ninemonths compared to the same period last year.

Gross profit as a percentage of sales for the segmentdecreased in the quarter to 43.7% from 44.5% in the corresponding period lastyear, resulting from the acquisition of Creative Homeowner.  Dover and REA both showed improvement intheir gross profit percentage as a result of the growth in sales volume.  Dover’s gross profit also reflects thebenefit of cost reductions resulting from the prior year’s warehouseconsolidation as well as efficiencies gained from the implementation of the SAPsystem and other process improvements. The SAP system was also implemented at REA in the third quarter with noadverse impact on costs or customer service. Creative Homeowner’s gross profit percentage was 35% for the eight weekssince acquisition.  This margin includesthe impact of a required write-up to fair market value of approximately$370,000 in their opening inventory, with approximately $130,000 flowingthrough cost of sales in the third quarter. For the first nine months, gross profit in this segment decreased to45.1% as a percentage of sales from 46.5% in the corresponding period lastyear.

Selling and administrative expenses in this segmentwere $5.2 million in the third quarter, an increase of $1.6 million over lastyear’s third quarter, with $1.3 million attributable to the acquisition of CreativeHomeowner.  Dover and REA’s selling andadministrative expenses were up 8% in the third quarter over the correspondingprior year period, primarily related to an increase in sales compensationduring the quarter.  Amortization expenserelated to customer lists was approximately $120,000 in the third quarter.  For the first nine months, selling andadministrative expenses increased 15% to $12.8 million compared to the prioryear period, reflecting the impact of the acquisition of Creative Homeowner, butas a percentage of sales decreased to 35.0% from 37.0% in the first nine monthsof last year.

Intercompany interest expense isallocated to the specialty publishing segment based on the acquisition costs ofDover, REA, and Creative Homeowner, reduced by cash generated by each businesssince acquisition.  Such interest expensefor the third quarter of fiscal 2006 was $310,000, including $280,000 relatedto the acquisition of Creative Homeowner, compared to $66,000 last year.Interest expense allocated to Dover and REA decreased both for the quarter andthe first nine months, reflecting the benefit of cash generated by theirrespective operations over the past year. For the first nine months, interestexpense allocated to the specialty publishing segment was $406,000 in fiscal2006 compared to $251,000 in fiscal 2005.

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Pretax income in the specialtypublishing segment for the third quarter increased 54% to $1.1 million, or, onan after-tax basis, $.06 per diluted share, compared to last year’s thirdquarter.  Creative Homeowner’s pretaxresults were breakeven for their first eight weeks despite $530,000 ofadditional costs for interest expense, amortization of intangibles, and theimpact of the inventory write-up.  Forthe first nine months of the year, pretax income increased 26% over last yearto $3.3 million, or $.17 per diluted share on an after-tax basis.

*Total Consolidated Company*

Interest expense, net of interest income, was $168,000in the third quarter of fiscal 2006, compared to net interest income of$113,000 in the same period last year. For the first nine months, net interest income was $80,000 compared to$182,000 in the corresponding prior year period.  The Company borrowed approximately $20million under the revolving credit facility towards the purchase of CreativeHomeowner in April.  Average debt underthe revolving credit facility in the third quarter was approximately $17.8million at an average annual interest rate of 5.6%.  Interest expense also includes commitmentfees and other costs associated with maintaining this credit facility.  Cash investments in the third quarter offiscal 2006 averaged approximately $4.5 million invested at an average annualinterest rate of 2.7% generating interest income of approximately $30,000.  For the same period last year, the Company’saverage cash investments were $26.0 million invested at an average interestrate of 2.8% generating interest income of approximately $180,000.  For the first nine months of fiscal 2006,average cash investments were $14.1 million invested at an average interestrate of 3.7% generating interest income of approximately $390,000 compared toaverage cash investments of $24.5 million invested at an average interest rateof 2.2% generating interest income of approximately $400,000 in the first ninemonths of last year.  The reduction inaverage cash investments reflects the acquisitions of Moore Langen and CreativeHomeowner.

The Company’s effective tax rate for the third quarterof fiscal 2006 was 35.5%, comparable to 35.7% for the same period lastyear.  For the first nine months offiscal 2006, the effective tax rate was 35.7% compared to 36.6% for thecorresponding period last year.  Thedecline in the effective tax rate is in large part due to the impact of theretrospective adoption of SFAS 123R at the beginning of fiscal 2006.  Although non-deductible stock compensationcosts increased the effective tax rate by 0.5% in fiscal 2006, the impact wasconsiderably higher at 1.1% in fiscal 2005. In addition, this year’s effective rate reflects a federal tax benefitfor manufacturers associated with the American Jobs Creation Act of 2004.

For purposes of computing net income per dilutedshare, weighted average shares outstanding increased by approximately 124,000shares and 123,000 shares over last year’s third quarter and first nine months,respectively.  The increase in bothperiods was largely due to options exercised and shares issued under theCompany’s stock plans.  On March 10,2005, the Company announced a three-for-two stock split effected in the form ofa 50% stock dividend, which was distributed on May 27, 2005 to stockholders ofrecord on May 6, 2005.  Weighted averageshares outstanding and net income per share amounts have been restated to giveeffect to the stock split.

**Liquidity and Capital Resources:**

During the first nine months of fiscal 2006,operations provided approximately $23.1 million of cash, compared to $18.3million in the same period of fiscal 2005. Net income was $14.9 million for the first nine months of fiscal 2006,stock-based compensation was $1.1 million, and depreciation and amortizationwere $10.9 million.  Working capital usedapproximately $4.8 million of cash, comparable to $4.9 million in the sameperiod last year.

Investment activities in the first nine months offiscal 2006 used approximately $68.7 million of cash, including $51.2 million,net of cash acquired, for the acquisitions of Moore Langen and CreativeHomeowner.  Capital expenditures wereapproximately $14.8 million, primarily for the four-color press that wasinstalled in December 2005 and deposits on another four-color press to beinstalled in early fiscal 2007.  Thispress is identical to the presses installed in April 2004 and December 2005.  For the entire fiscal year, capital expendituresare expected to be approximately $30 million. This amount includes payments for the new four-color presses as well asbindery and warehousing expansion to support the additional four-color press

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capacity.  Prepublication costs were $2.7 million in thefirst nine months, up 25% from the same period last year as a result ofincreases in new title publishing at both Dover and REA as well as theacquisition of Creative Homeowner. Prepublication costs for the full fiscal year are projected to be approximately$4 million.

Financing activities for thefirst nine months of fiscal 2006 provided approximately $13.3 million of cash. TheCompany borrowed approximately $20 million under the revolving credit facilitytowards the purchase of Creative Homeowner in April. At June 24, 2006, the Company had $16.9 million in borrowings under its$60 million long-term revolving credit facility. Dividend payments in the firstnine months of fiscal 2006 were $4.4 million compared to $2.8 million in thesame period of fiscal 2005 as a result of a 50% increase in the dividend rate.The revolving credit facility, which bears interest at a floating rate, is usedby the Company for both its long-term and short-term financing needs.  In May 2006, the Company increased the amountavailable under this facility to $60 million and extended the maturity date toMarch 2009.  The Company believes thatits cash on hand, cash from operations and the available credit facility willbe sufficient to meet its cash requirements through 2006.

The following table summarizes the Company’scontractual obligations and commitments at September 24, 2005 to make futurepayments as well as its existing commercial commitments except, as noted, forpurchase obligations (which representamounts for capital commitments for a new four-color press and other projects)and for long-term debt (which includes the revolving credit facility), whichare as of June 24, 2006.
| ** **                     | ** ** | ** ** | ** ** | **(000’s Omitted)**             | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **Less than**                        | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **After 5** | ** ** |
| **Contractual Payments:** | ** ** | **Total**  | ** ** | **1 Year**                           | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Long-Term Debt(1)              |       | $          | 17,303     |                                      | $          | 85 |   | $ | 17,036 |   | $ | 182 |   | $ | — |   |
| Purchase Obligations(1)        |       | 24,899     |       | 24,899                                    |       |   |   |   |   |   |   |
| Operating Leases               |       | 11,535     |       | 2,836                                     |       | 4,411 |   | 2,290 |   | 1,998 |   |
| Other Long-Term Liabilities    |       | 3,020      |       | —                                    |       | 1,068 |   | 350 |   | 1,602 |   |
| Total                          |       | $          | 56,757     |                                      | $          | 27,820 |   | $ | 22,515 |   | $ | 2,822 |   | $ | 3,600 |   |

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(1)             Represent amounts at June 24, 2006.

**New AccountingPronouncement**

In July 2006, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (“FIN No. 48”), an interpretation of FASB StatementNo. 109, “Accounting for Income Taxes.” FIN No. 48 applies to fiscalyears beginning after December 15, 2006; the Company’s 2008 fiscal year.The Company is currently evaluating the impact of this new pronouncement.

**Forward-Looking Information:**

This Quarterly Report on Form 10-Q and the Company’sAnnual Report for the year ended September 24, 2005 on Form 10-K 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 ExchangeCommission.  The words “believe,” “expect,”“anticipate,” “intend,” “estimate” and other expressions which are predictionsof or indicate future events and trends and which do not relate to historicalmatters identify forward-looking statements. Such statements are subject to risks and uncertainties that could causeactual results to differ materially from those currently anticipated.  Factors that could affect actual resultsinclude, among others, changes in customers’ demand for the Company’s products,including seasonal changes in customer orders, changes in raw material andenergy costs and availability, pricing actions by competitors, consolidationamong customers and competitors, success in the integration of acquiredbusinesses, changes in operating expenses, changes in technology, difficultiesin the start up of new equipment or information technology systems, changes incopyright laws, changes in tax regulations, and general changes in economicconditions, including currency fluctuations and changes in interest rates.  Although the Company believes that theassumptions underlying the forward-looking statements are reasonable, any ofthe assumptions could be inaccurate, and therefore, there can be no assurancethat 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.

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**Item 3.**                          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 24, 2005.

**Item 4.**                          CONTROLSAND PROCEDURES

**(a)       Evaluation of disclosure controls andprocedures**

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934, as of the end of the period covered by this quarterlyreport, the Company carried out an evaluation under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by the Company in the reports it files or submitsunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.

**(b)       Changes in internal controls overfinancial 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 rexporting.

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**COURIERCORPORATION**

**PART II.  OTHER INFORMATION**
| **Item 1.**  | ** ** | **Legal Proceedings**                                                                                                                                                                                                                                                                                                                                                                         |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| **Item 1a.** | ** ** | **Risk Factors**                                                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | Not applicable.                                                                                                                                                                                                                                                                                                                                                                               |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| **Item 2.**  | ** ** | **Unregistered Sales of  Equity Securities and Use of Proceeds**                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| **Item 3.**  |       | **Defaults Upon Senior Securities**                                                                                                                                                                                                                                                                                                                                                           |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| **Item 4.**  | ** ** | **Submission of Matters to a  Vote of Security Holders**                                                                                                                                                                                                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| **Item 5.**  | ** ** | **Other Information**                                                                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
| **Item 6.**  |       | **Exhibits and Reports on Form 8-K**                                                                                                                                                                                                                                                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | (a)   Exhibits                                                                                                                                                                                                                                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       | Exhibit No.                                                                                                                                                                                                                                                                                                                                                                                   | Description |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |   |
|         |       | 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 |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |   |
|         |       | (b)   Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                           |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |   |
|         |       | Filed April 13, 2006,  reporting under Item 2.02, a press release dated April 13, 2006 reporting  financial results for the quarter ended March 25, 2006.                                                                                                                                                                                                                                     |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |   |
|         |       | Filed April 28, 2006,  reporting under Item 7.01, a press release dated April 28, 2006 announcing  the acquisition of Federal Marketing Corporation, d/b/a Creative Homeowner.                                                                                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |   |
|         |       | Filed May 3, 2006, reporting  under Items 1.01 and 2.01, the acquisition of Federal Marketing Corporation,  d/b/a Creative Homeowner, on April 28, 2006.                                                                                                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                          |   |
|         |       | Filed May 17, 2006, reporting  under Item 1.01, an amendment dated May 11, 2006 to the Amended and Restated  Revolving Credit Agreement, dated as of March 31, 2003, between Courier  Corporation, Sovereign Bank, Citizens Bank of Massachusetts, and KeyBank  National Association, increasing the revolving credit facility to $60 million  and extending the maturity date to March 2009. |

 

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
| ** **      |     |       |   | ** **                                                      |
|-----------------|----------|------------|--------|-----------------------------------------------------------------|
|                 |     |       |   | **COURIER CORPORATION**                                         |
| ** **      |     |       |   | **         (Registrant)**         |
| ** **      |     | ** ** |   |                                                            |
| *July 31, 2006* | * * | By:        |   | */s/ James F. Conway  III*                                 |
| Date            |     |       |   | James F. Conway III                                             |
|            |     |       |   | Chairman, President and     Chief Executive Officer   |
|            |     |       |   |                                                            |
| *July 31, 2006* | * * | By:        |   | */s/ Robert P. Story,  Jr.*                                |
| Date            |     |       |   | Robert P. Story, Jr.                                            |
| ** **      |     |       |   | Senior Vice President and     Chief Financial Officer |
|            |     |       |   |                                                            |
| *July 31, 2006* | * * | By:        |   | */s/ Peter M. Folger*                                      |
| Date            |     |       |   | Peter M. Folger                                                 |
| ** **      |     |       |   | Vice President and

   Chief Accounting  Officer      |

 

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