**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**Form10-K**

**(MARKONE)**
| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------|

 

**For thefiscal year ended September 30, 2006**

**OR**
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------|

 

**For thetransition period from                                   to                                  **

**Commissionfile number 0-7597**

**CourierCorporation**

 

**AMassachusetts corporation**

I.R.S.Employer Identification No.**04-2502514**

**15Wellman Avenue, North Chelmsford, Massachusetts 01863**

TelephoneNo.**978-251-6000**

Securitiesregistered pursuant to Section 12(b) of the Act:**    None**

Securities registeredpursuant to Section 12(g) of the Act:**  Common Stock, $1 par value**

**Indicate by check mark whether theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.**

**Yes            ****o            No           ****x**

**Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Act.**

**Yes            ****o            No           ****x**

**Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.   Yes  ****x   No  ****o**

**Indicate by check mark if disclosureof delinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the registrant’s knowledge,in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.   ****o**

**Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).**
| **Large accelerated  filer          ****o** | ** ** | **Accelerated  filer          ****x** | ** ** | **Non-accelerated  filer          ****o** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|

** **

**Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   ****o   No   ****x**

**State the aggregate market value ofthe voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter(March 25, 2006).**

**CommonStock, $1 par value - $355,459,141**

**Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock as of December4, 2006.**

**CommonStock, $1 par value - 12,461,610**

**DOCUMENTSINCORPORATED BY REFERENCE**

**Portions of the registrant’s proxy statement datedDecember 8, 2006 for the Annual Meeting of Stockholders to be held on January17, 2007 are incorporated by reference to Part III of this Form 10-K.**

 

 

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**PART I**

**Item1.  Business.**

**INTRODUCTION**

Courier Corporation and its subsidiaries (“Courier” or the “Company”)are among America’s leading book manufacturers and specialty publishers.Courier Corporation, founded in 1824, was incorporated under the laws of Massachusettson June 30, 1972.  The Company has twobusiness segments: book manufacturing and specialty book publishing.

The bookmanufacturing segment focuses on streamlining and enhancing the process ofbringing 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. Courier’sprincipal book manufacturing markets are religious, educational and specialtytrade books with products including Bibles, educational texts and consumerbooks. On October 17, 2005, the Company acquired Moore-Langen Printing Company,Inc. (“Moore Langen”), an Indianapolis-based printer specializing inmanufacturing book covers, which is included in this segment.  Revenues from this segment accounted forapproximately 82% of Courier’s consolidated revenues in 2006.

The specialty publishing segment consists of DoverPublications, Inc. (“Dover”) and Research & Education Association, Inc. (“REA”),which was acquired on January 6, 2004. On April 28, 2006, the Company acquired Federal Marketing Corporation,d/b/a Creative Homeowner (“Creative Homeowner”), a New Jersey-based publisherand distributor of books, home plans and related products for the home andgarden retail book market.  The resultsof Creative Homeowner were included in the specialty publishing segment fromthe date of acquisition.  Dover publishesover 9,000 titles in more than 30 specialty categories ranging from literatureto paper dolls, and from music scores to clip art. REA publishes testpreparation and study-guide books for high school, college and graduatestudents, and professionals.  The combinationof Dover’s, REA’s, and Creative Homeowner’s publishing, sales and distributionskills with Courier’s book manufacturing, digital content conversion, ande-commerce skills are providing a powerful end-to-end publishing solution forCourier.  Revenues in this segment wereapproximately 21% of consolidated sales in 2006.
| **Sales by segment  (in thousands)** | ** ** | **2006** | ** ** | **%**  | ** ** | **2005** | ** ** | **%**   | ** ** | **2004** | ** ** | **%**  | ** ** |
|-----------------------------------------------------|------------|----------|------------|--------|------------|----------|------------|---------|------------|----------|------------|--------|------------|
|                                                |       |     |       |   |       |     |       |    |       |     |       |   |       |
| Book Manufacturing                                  |       | $        | 220,115    |   | 82         | %        | $          | 193,623 |       | 85       | %          | $      | 177,225    |   | 84 | % |
| Specialty Publishing                                |       | 57,549   |       | 21     | %          | 40,254   |       | 18      | %          | 40,787   |       | 19     | %          |
| Intersegment sales                                  |       | (8,613   | )          | (3     | )%         | (6,838   | )          | (3      | )%         | (6,833   | )          | (3     | )%         |
| Total                                               |       | $        | 269,051    |   | 100        | %        | $          | 227,039 |       | 100      | %          | $      | 211,179    |   | 100 | % |

 

Additional segment information, including the amounts ofearnings before taxes and total assets, for each of the last three fiscalyears, is contained in Note I in the Notes to Consolidated Financial Statementson pages F-19 to F-21 included in this Annual Report on Form 10-K.

On December 17, 2002, the Company sold the assets of itswholly owned subsidiary, Courier Custom Publishing, Inc., which comprised allof the remaining activities of the customized education segment.  Courier Custom Publishing provided customizedcoursepacks and textbooks.  Thedisposition was accounted for as a discontinued operation.

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**BUSINESS SEGMENTS**

**BOOK MANUFACTURING SEGMENT**

Courier’s book manufacturing segment produces hard andsoftcover books, as well as related services involved in managing the processof creating and distributing these products for publishers, religiousorganizations and other information providers. Courier provides book manufacturing and related services from sevenfacilities in Westford, Stoughton and North Chelmsford, Massachusetts;Philadelphia, Pennsylvania; North Bergen, New Jersey; and Kendallville andTerre Haute, Indiana.

In October 2005, the Company acquired Moore Langen, anIndianapolis-based printer specializing in book covers and known for innovativeproduction techniques. The acquisition, a $15 million cash transactioncompleted on October 17, 2005, was accounted for as a purchase and,accordingly, Moore Langen’s financial results were included in the consolidatedfinancial statements from the date of acquisition.

Courier’s book manufacturing operations consist of bothelectronic and conventional film processing, platemaking and printing andbinding of soft and hard cover books. Each of Courier’s seven facilities have certain specialties adapted tothe needs of the market niches Courier serves, such as short-run bookmanufacturing, printing on lightweight paper, book cover production, andfour-color book manufacturing.  Theseservices are primarily sold to publishers of educational, religious andconsumer books.  During 2004, the Companyexpanded its four-color book manufacturing capabilities with the addition of amajor new four-color press at its Kendallville, Indiana facility. A secondidentical press was installed in December 2005, with another four-color pressscheduled for installation in December 2006.

Courier’s book manufacturing sales force of 23****people is responsible for all of the Company’s sales toover 500 book-manufacturing customers. Courier’s salespeople operate out of sales offices located in New York,New York; Chicago, Illinois; Philadelphia, Pennsylvania; Indianapolis, Indiana;Hayward, California; North Chelmsford, Massachusetts; and North Bergen andNorth Caldwell, New Jersey.

Sales to The Gideons International aggregated approximately23%****of consolidated sales in 2006, 28% in2005, and 27% in 2004.  Sales to Pearsonplc aggregated approximately 16% of consolidated sales in 2006, 19% in 2005,and 17% in 2004.  A significant reductionin order volumes or price levels from either of these customers could have amaterial adverse effect on the Company. No other customer accounted for more than 10% of consolidatedsales.  The Company distributes productsaround the world; export sales, as a percentage of consolidated sales, wereapproximately 19% in 2006 and 21% in both 2005 and 2004.  Approximately 90% of the export sales were inthe book manufacturing segment in each of these years.

All phases of Courier’s business are highly competitive.  The printing industry, exclusive ofnewspapers, includes approximately 43,000 establishments.  While most of these establishments arerelatively small, several of the Company’s competitors are considerably largeror are affiliated with companies that are considerably larger and have greaterfinancial resources than Courier.  Inrecent years, consolidation of both customers and competitors within theCompany’s markets has increased pricing pressures.  The major competitive factors in Courier’sbook manufacturing business in addition to price are product quality, speed ofdelivery, customer service, availability of appropriate printing capacity andpaper, related services and technology support.

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**SPECIALTY PUBLISHING SEGMENT**

Dover, acquired by the Company in September 2000, is apublisher of books in over 30 specialty categories, including fine andcommercial arts, children’s books, crafts, music scores, graphic design,mathematics, physics and other areas of science, puzzles, games, socialscience, stationery items, and classics of literature for both juvenile andadult markets, including the Dover Thrift Editions.  In 2002, a new line of scholarly hardcoverbooks valuable to scientists and mathematicians was launched under the name ofDover Phoenix Editions.

Dover sells its products through most American bookstorechains, independent booksellers, children’s stores, craft stores and giftshops, as well as a diverse range of distributors around the world.  Dover has also sold its books directly toconsumers for over 50 years through its specialty catalogs and, since 2001,over the Internet at www.doverpublications.com. Dover mails its proprietary catalogs to over 400,000 consumers.  In 2002, Dover launched www.DoverDirect.com,which is a business-to-business site for its retailers and distributors*.*

REA, acquired by the Company in January 2004, publishes morethan 900 test preparation and study-guide titles.  Product lines include Problem Solvers®,Essentials®, Super Reviews® and Test Preparation books.  REA sells its products around the worldthrough major bookseller chains, college bookstores, and teachers’ supplystores, as well as directly to teachers and other consumers through catalogs andover the Internet at www.REA.com.

In April 2006, the Company acquired Creative Homeowner, a NewJersey-based publisher and distributor of books, home plans, and relatedproducts for the $340-million home and garden retail book market.  The Company purchased 100% of the stock ofCreative Homeowner in a $37 million cash transaction.  The acquisition was accounted for as apurchase and accordingly, Creative Homeowner’s financial results were includedin the consolidated financial statements from the date of acquisition.  Creative Homeowner’s 120 titles include bookson home decoration, design and improvement, gardening and landscaping, homearts, and hunting and fishing.  Itsproducts are sold primarily through home and garden centers, as well as bookstoresand direct to consumers over the Internet at www.creativehomeowner.com.  Creative Homeowner also manages thedistribution of its own titles and books from third-party publishers toselected home centers.  From its line ofhome plan books, Creative Homeowner offers over 5,000 home plans from whichconsumers can order blueprints directly over the Internet atwww.ultimatehomeplans.com.

The U.S. publishing market is comprised of over 80,000publishers.  Many of these publishers arevery small, but a few are much larger than Dover, REA, or Creative Homeowner,or are part of organizations that are much larger.  In addition, newer sources of competitionhave emerged with large retailers launching or expanding publishing operationsand new web-based publishing businesses starting up, which compete in thespecialty book publishing market, including publishing of electronicbooks.  Dover distinguishes its productsby offering an extremely wide variety of high quality books at modestprices.  REA offers high editorial qualitystudy guides and test preparation books and software products in almost everyacademic area including many specialized areas such as teacher certification,adult education, and professional licensing. Creative Homeowner provides books on home improvement and landscapingthat include high-quality photographs, illustrations and written content, aswell as full-service book distribution at competitive prices.

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**MATERIALS AND SUPPLIES**

Courier purchases its principal raw materials, primarilypaper, but also plate materials, ink, adhesives, cover stock, casebindingmaterials and cartons, from numerous suppliers, and is not dependent upon anyone source for its requirements.  Many ofCourier’s book manufacturing customers purchase their own paper and furnish itat no charge to Courier for book production. Dover and REA purchase a significant portion of their books from Courier’sbook manufacturing operations.  CreativeHomeowner purchases most of its books under a contractual agreement, whichexpires in December 2007.  Paper pricesincreased slightly in each of the years 2006, 2005 and 2004.

**ENVIRONMENTAL REGULATIONS**

The Company’s operations are subject to federal, state andlocal environmental laws and regulations relating to, among other things: airemissions; waste generation, handling, management and disposal; wastewatertreatment and discharge; and remediation of soil and groundwatercontamination.  The Company periodicallymakes capital expenditures so that its operations comply, in all materialrespects, with applicable environmental laws and regulations.  No significant expenditures for this purposeare anticipated in 2007.  The Companydoes not believe that its compliance with applicable environmental laws andregulations will have a material impact on the Company’s earnings orcompetitive position.

**EMPLOYEES**

The Company employed 1,724 persons at September 30, 2006compared to 1,479 a year ago.

**OTHER**

Courier’s overall business is not significantly seasonal innature, although demand is normally highest in the Company’s fourthquarter.  Educational publishers in thebook manufacturing segment and Dover’s business all contribute to this higherfourth quarter demand. There is no portion of Courier’s business subject tocancellation of government contracts or renegotiation of profits.

Courier holds no material patents, licenses, franchises orconcessions that are important to its operations, but does have trademarks,service marks, and Universal Resource Locators (URL’s) on the World Wide Web inconnection with each of its business segments. Substantially all of Dover’s, REA’s, and Creative Homeowner’spublications are protected by copyright, either in its own name, in the name ofthe author of the work, or in the name of a predecessor publisher from whom rightswere acquired.

The Company makes available free of charge (as soon asreasonably practicable after they are filed or furnished to the SEC) copies ofits Annual Report on Form 10-K, as well as all other reports required to befiled by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, via theInternet at www.courier.com or upon written request to Peter M. Folger, SeniorVice President and Chief Financial Officer, Courier Corporation, 15 WellmanAvenue, North Chelmsford, MA 01863.

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** **

**Item1A.  Risk Factors.**

The Company’s consolidated results of operations, financialcondition and cash flows can be adversely affected by various risks.  Our business is influenced by many factorsthat are difficult to predict, involve uncertainties that may materially affectactual results and are often beyond our control.  These risks include, but are not limited to,the principal factors listed below and the other matters set forth in thisAnnual Report on Form 10-K.  You shouldcarefully consider all of these factors. For other factors that may cause actual results to differ materiallyfrom those indicated in any forward-looking statement contained in this report,see *Forward-Looking Information* in *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*.

**Highlycompetitive markets for our products and industry consolidation may createincreased pricing pressures.**

The printing industry is extremely competitive.  In the book manufacturing segment,consolidation over the past few years of both customers and competitors withinthe markets the Company competes has caused downward pricing pressures.  In addition, excess capacity and competitionfrom printing companies in lower cost countries may increase competitivepricing pressures.  Furthermore, some ofour competitors have greater sales, assets and financial resources than us andothers, particularly those in foreign countries, may derive significantadvantages from local governmental regulation, including tax holidays and othersubsidies.  All or any of thesecompetitive pressures could affect prices or customers’ demand for ourproducts, impacting our profit margins and/or resulting in a loss of customersand market share.

**Wehave a high degree of customer concentration.**

We derived approximately40% of our 2006 revenues, 47% of our 2005 revenues, and 44% of our 2004revenues from two major customers.  Asignificant reduction in order volumes or price levels from either of themcould have a material adverse effect on the Company.

**Weneed to keep pace with rapid industry and technological change.**

The printing industry is in a period of rapid technologicalevolution.  Our future financialperformance will depend, in part, upon the ability to anticipate and adapt torapid industry and technological changes occurring in the industry and upon theability to offer, on a timely basis, services that meet evolving industrystandards.  We cannot assure investorsthat we will be able to adapt to such technological changes or offer theseservices on a timely basis or establish or maintain a competitiveposition.  We are unable to predict whichof the many possible future product and service offerings will be important toestablish and maintain competitive position or what expenditures will berequired to develop and provide these products and services.  We cannot assure investors that one or moreof these factors will not vary unpredictably, which could have a materialadverse effect on us. In addition, we cannot assure investors, even if thesefactors turn out as we anticipate, that we will be able to implement ourstrategy or that the strategy will be successful in this rapidly evolvingmarket.

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** **

**Fluctuationsin the cost and availability of paper and other raw materials may causedisruption and impact margins.**

Purchases of paper and other raw materials represent a largeportion of our costs.  Historically, wehave generally been able to pass on these cost increases to customers throughhigher prices.  However, if we are unableto continue to pass on these increases, our margins and profits could beadversely affected.  In addition,increases in the costs of materials may adversely impact our book manufacturingcustomers’ demand for products.

Availability of paper is important to both the bookmanufacturing and specialty publishing segments of the Company.  Although we generally have not experienceddifficulty in obtaining adequate supplies of paper, unexpected changes in thepaper markets could result in a shortage of supply.  If this were to occur in the future, it couldcause disruption to the business or increase paper costs, adversely impactingeither or both net sales or profits.

Fluctuations in the costs and availability of raw materialscould adversely affect operating costs or customer demand and therebynegatively impact our operating results, financial condition or cash flows.

**Energycosts and availability may negatively impact our financial results.**

Energy costs are incurred directly to run productionequipment and facilities and indirectly through expenses such as freight andraw materials such as ink.  In acompetitive market environment, increases to these direct and indirect energyrelated costs might not be able to be passed through to customers through priceincreases or mitigated through other means. In such instances, increased energy costs could adversely impactoperating costs or customer demand.  Inaddition, interruption in the availability of energy could disrupt operations,adversely impacting operating results.

**Wemay not be able to continue to improve our operating efficiencies.**

Because the markets in which we operate are highlycompetitive, we must continue to improve our operating efficiency in order tomaintain or improve our profitability. Although we have been able to expand our capacity, improve ourproductivity and reduce costs in the past, there is no assurance that we willcontinue to be able to do so in the future. In addition, reducing operating costs in the future may require significantinitial costs to reduce headcount, close or consolidate operations, or upgradeequipment and technology.

**Protection of intellectual property rightscritical to publishing segment.**

Certain of ourpublications are protected by copyright, primarily held in the Company’sname.  Such copyrights protect theCompany’s exclusive right to publish the work in the United States and in manyother countries for specified periods. The ability of the Company to continue to achieve anticipated resultsdepends in part on our ability to defend our intellectual property againstinfringement.  The Company’s operatingresults may be adversely affected by inadequate legal and technologicalprotections for intellectual property and proprietary rights in somejurisdictions and markets.

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** **

**Declinesin general economic conditions may adversely impact our business.**

Economic conditions have the potential to impact ourfinancial results significantly.  Withinthe book manufacturing and specialty publishing segments, a change in economicconditions can impact many areas of spending, including government, businessand individual spending.  Examples of thechanges in spending that could affect our financial results include:

·      Fluctuations in federal or stategovernment spending on education could lead to a corresponding decrease orincrease in the demand for educational materials, which are produced in ourbook manufacturing segment and comprise a portion of our publishing products.

·      Consumer demand for books can be impactedby reductions in disposable income when costs such as electricity and gasolinereduce discretionary spending.

·      Changes in the housing market may impactthe sale of Creative Homeowner’s products.

Thesechanges may adversely impact our business.

**Thesubstitution of electronic delivery for printed materials may adversely affectour business.**

Electronic delivery of documents and data, including theonline distribution and hosting of media content, offers alternatives totraditional delivery of printed documents. Consumer acceptance of electronic delivery is uncertain, as is theextent to which consumers are replacing print materials with online hostedmedia content.  To the extent that ourcustomers accept these electronic alternatives, demand for our printed productsmay be adversely affected.

**Changesin postal rates and postal regulations may adversely impact our business.**

Postal costs are a significant component of our directmarketing cost structure and postal rate changes can influence the number ofcatalogs that we may mail.  In addition,increased postal rates can impact the cost of delivering our products tocustomers.  Either of these results couldadversely affect consumer demand and results of operations.

**Ourfacilities are subject to environmental laws and regulations, which may subjectus to liability or increase costs.**

We use various materials in our operations which containsubstances considered hazardous or toxic under environmental laws.  In addition, our operations are subject tofederal, state, and local environmental laws relating to, among other things,air emissions, waste generation, handling, management and disposal, waste watertreatment and discharge and remediation of soil and groundwatercontamination.  Permits are required forthe operation of certain of our businesses and these permits are subject torenewal, modification and in some circumstances, revocation.  Under certain environmental laws, includingthe Comprehensive Environmental Response, Compensation and Liability Act, asamended (“CERCLA,” commonly referred to as “Superfund”), and similar state lawsand regulations, we may be liable for costs and damages relating to soil andgroundwater contamination at off-site disposal locations or at our ownfacilities.  Future changes toenvironmental laws and regulations may give rise to additional costs orliabilities that could have a material adverse impact on our financial positionand results of operations.

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** **

**Wemay not be able to successfully integrate acquired businesses.**

Over the last three years, we have completed three acquisitions,including Moore Langen and Creative Homeowner in fiscal year 2006, and maycontinue to make acquisitions in the future. We believe that these acquisitions provide strategic growthopportunities for the Company.  Achievingthe anticipated benefits of these acquisitions will depend in part upon ourability to integrate these businesses in an efficient and effectivemanner.  The challenges involved insuccessfully integrating acquisitions include:

·      we may find that the acquired company orassets do not further our business strategy, or that we overpaid for thecompany or assets, or that economic conditions have changed, all of which mayresult in a future impairment charge;

·      we may have difficulty integrating theoperations and personnel of the acquired business and may have difficultyretaining the customers and/or the key personnel of the acquired business;

·      we may have difficulty incorporating andintegrating acquired technologies into our business;

·      our ongoing business and management’sattention may be disrupted or diverted by transition or integration issues andthe complexity of managing diverse locations;

·      we may have difficulty maintaining uniformstandards, controls, procedures and policies across locations;

·      an acquisition may result in litigationfrom terminated employees of the acquired business or third parties; and

·      we may experience significant problems orliabilities associated with technology and legal contingencies of the acquiredbusiness.

These factors could have a material adverse effect onour business, results of operations and financial condition or cash flows,particularly in the case of a larger acquisition or multiple acquisitions in ashort period of time.  From time to time,we may enter into negotiations for acquisitions that are not ultimatelyconsummated.  Such negotiations couldresult in significant diversion of management time from our business as well assignificant out-of-pocket costs.

The consideration that we pay in connection with anacquisition could affect our financial results. If we were to proceed with one or more significant acquisitions in whichthe consideration included cash, we could be required to use a substantialportion of our available cash to consummate such acquisitions.  To the extent we issue shares of stock orother rights to purchase stock, including options or other rights, our existingstockholders may experience dilution in their share ownership in our companyand their earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, largeone-time write-offs and restructuring charges. They may also result in goodwill and other intangible assets that aresubject to impairment tests, which could result in future impairmentcharges.  Any of these factors may materiallyand adversely affect our business and operations.

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** **

**Ourability to hire and train key executives and other qualified employees iscrucial.**

Our success depends, in part, on our ability to continue toretain our executive officers and key management personnel.  Our business strategy also depends on ourability to attract, develop, motivate and retain employees who have relevantexperience in the printing and publishing industries.  There can be no assurance that we cancontinue to attract and retain the necessary talented employees, includingexecutive officers and other key members of management.  If that were to occur, it could adverselyaffect our business.

**Compliance with changing regulation of corporate governance, publicdisclosure and accounting matters may result in additional expenses.**

##### Changing laws, regulations and standards relating to corporategovernance and public disclosure, including the Sarbanes-Oxley Act of 2002 andnew rules subsequently implemented by the Securities and Exchange Commissionand The NASDAQ Stock Market, as well as new accounting pronouncements, arecreating uncertainty and additional complexities for companies.  To maintain high standards of corporategovernance and public disclosure, we continue to invest resources to complywith evolving standards.  This investmentmay result in increased general and administrative expenses and a diversion ofmanagement time and attention from revenue generating and cost managementactivities.

**Item1B.  Unresolved Staff Comments.**

None.

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**Item2.  Properties.**

**REAL PROPERTIES**

The following schedule lists the facilities owned or leasedby Courier at September 30, 2006. Courier considers its plants and otherfacilities to be well maintained and suitable for the purposes intended.
|                                                                                 | ** ** | **Owned/** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|
| **Principal Activity and Location (Year Constructed)** | ** ** | **Leased** | ** ** | **Sq. Ft.** | ** ** |
| **Corporate  headquarters and executive offices**                               |       |       |       |             |       |
| North Chelmsford, MA (1973, 1996)                                               |       | Owned      |       | 69,000           | (1)        |
| **Book  manufacturing and warehousing**                                         |       |       |       |             |       |
| Westford plant, Westford, MA  (1922, 1959, 1963, 1966, 1967, 1980, 1990)        |       | Owned      |       | 303,000          | (2)        |
| Kendallville plant, Kendallville, IN (1978, 2004,  2006)                        |       | Owned      |       | 205,000          |       |
| Kendallville warehouse, IN (1973, 1988)                                         |       | Leased     |       | 140,000          |       |
| National plant, Philadelphia, PA (1974, 1997)                                   |       | Owned      |       | 229,000          |       |
| Stoughton plant, Stoughton, MA (1980)                                           |       | Leased     |       | 169,000          |       |
| Book-mart plant, North Bergen, NJ (1917, 1935, 1997)                            |       | Leased     |       | 75,000           |       |
| Moore Langen plant, Terre Haute, IN (1969, 1987)                                |       | Owned      |       | 43,000           |       |
| **Dover  offices and warehouses**                                               |       |       |       |             |       |
| Mineola, New York (1948-1983)                                                   |       | Leased     |       | 106,000          |       |
| Westford, MA (1922, 1963, 1966)                                                 |       | Owned      |       | 90,000           |       |
| **REA  offices and warehouse**                                                  |       |       |       |             |       |
| Piscataway, New Jersey (1987)                                                   |       | Leased     |       | 39,000           |       |
| **Creative  Homeowner offices and warehouse**                                   |       |       |       |             |       |
| Upper Saddle  River, New Jersey (1987)                                          |       | Leased     |       | 42,000           |       |

 

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(1)                              Also houses warehousing and end-userfulfillment operations supporting the book manufacturing segment.

(2)                              In May 2004, the Company completedthe sale of approximately 200,000 square feet of unoccupied and underutilizedportions of its multi-building manufacturing complex in Westford, MA for $1.7million.

**EQUIPMENT**

The Company’s products aremanufactured on equipment that in most cases is owned by the Company, althoughit leases computers, image setters and other electronic prepress equipment,which are subject to more rapid obsolescence. In addition, one printing press is leased whereby the lessor holds titleand the Company has an option to purchase the equipment upon expiration of thelease in 2008 at a price of $161,658. Capital expenditures amounted to approximately $29.4 million in 2006,$19.7 million in 2005, and $13.4 million in 2004. Capital expenditures in 2006included approximately $21 million for new four-color presses and relatedequipment and an expansion of the Kendallville, Indiana facility.  A four-color press was installed in December2005 and deposits were made on another four-color press to be installed inDecember 2006.  This press is identicalto the presses installed in April 2004 and December 2005. Capital expendituresin 2006 also included investments to increase productivity, lower costs, andimprove employee safety.  Fiscal 2007capital expenditures are expected to be approximately $25 to $28 million. Thisamount includes completing the current four-color expansion program, as well asexpanding capacity in the religious book manufacturing operation.  Courier considers its equipment to be in goodoperating condition and adequate for its present needs.

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**ENCUMBRANCES AND RENTALOBLIGATIONS**

For a description of encumbrances oncertain properties and equipment, see Note D of Notes to Consolidated FinancialStatements on page F-11 of this Annual Report on Form 10-K. Informationconcerning leased properties and equipment is disclosed in Note E of Notes toConsolidated Financial Statements, which appears on page F-12 of this AnnualReport on Form 10-K.

**Item 3.  Legal Proceedings.**

In the ordinary course of business,the Company is subject to various legal proceedings and claims.  The Company believes that the ultimateoutcome of these matters will not have a material adverse effect on itsfinancial statements.

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

There were no matters submitted to avote of security holders during the quarter ended September 30, 2006.

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**PART II**

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

The information required by this Itemis contained in the section captioned “Selected Quarterly Financial Data (Unaudited)”which appears on page F-23 of this Annual Report on Form 10-K.

**Item 6.  Selected Financial Data.**

The information required by this Itemis contained in the section captioned “Five-Year Financial Summary” appearingon page F-22 of this Annual Report on Form 10-K.

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

The information required by this Itemis contained in the section captioned “Management’s Discussion and Analysis” onpages F-24 through F-33 of this Annual Report on Form 10-K.

**Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

TheCompany does not hold any derivative financial instruments, derivativecommodity instruments or other financial instruments except as noted in Notes Aand L of Notes to Consolidated Financial Statements, which appear on pages F-7through F-9 and F-21 of this Annual Report on Form 10-K.  The Company engages neither in speculativenor derivative trading activities. The Company is exposed to market risk forchanges in interest rates on invested funds as well as borrowed funds.  The Company’s revolving bank credit facilitybears interest at a floating rate, with further information contained in Note Don page F-11 of this Annual Report on Form 10-K.

**Item 8.  Financial Statements and Supplementary Data.**

The information required by this Itemis contained on pages F-1 through F-21 of this Annual Report on Form 10-K.

**Item 9.  Changes in and Disagreements With Accountantson Accounting and Financial Disclosure.**

None.

**Item 9A.  Controls and Procedures**

**(a)          Disclosure Controls and Procedures**

As of the end of the period coveredby this Annual Report on Form 10-K, we carried out an evaluation under thesupervision and with the participation of our management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant toExchange Act Rules 13a-15(e) and 15d-15(e). Disclosure controls areprocedures that are designed to ensure that information required to bedisclosed in our reports filed under the Securities Exchange Act of 1934 (the “ExchangeAct”) is recorded, processed, summarized and reported within the time periodsspecified by the Securities and Exchange Commission. Disclosure controls arealso designed to ensure that such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this report.

12

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**(b)          Changes in Internal Controls over Financial Reporting**

There were no changes in the Company’sinternal control over financial reporting during the fourth quarter of fiscalyear 2006 that have materially affected, or that are reasonably likely tomaterially affect, the Company’s internal control over financialreporting.  As set forth below, weexcluded our fiscal year 2006 acquisitions from our assessment of internalcontrol over financial reporting for the quarter and year ended September 30,2006.  We are in the process ofintegrating the internal control procedures of these acquired companies intoour internal control structure.

**(c)****                             ****Management’s Responsibility forFinancial Statements**

Management of the Company isresponsible for the preparation, integrity and objectivity of the Company’sconsolidated financial statements and other financial information contained inits Annual Report to Stockholders.  Thoseconsolidated financial statements were prepared in conformity with accountingprinciples generally accepted in the United States.  In preparing those consolidated financialstatements, the Company’s management was required to make certain estimates andjudgments, which are based upon currently available information and management’sview of current conditions and circumstances.

The Audit Committee of the Board ofDirectors, which consists solely of independent directors, oversees the Company’sprocess of reporting financial information and the audit of its consolidatedfinancial statements.  The AuditCommittee stays informed of the financial condition of the Company andregularly reviews management’s financial policies and procedures, theindependence of the independent auditors, the Company’s internal control andthe objectivity of its financial reporting. The independent registered publicaccounting firm has free access to the Audit Committee and to meet with theAudit Committee periodically, both with and without management present.

The Company has retained Deloitte& Touche LLP, an independent registered public accounting firm, to auditits consolidated financial statements found in this Annual Report on Form 10-Kfor the year ended September 30, 2006. The Company has made available to Deloitte & Touche LLP all of itsfinancial records and related data in connection with their audit of theconsolidated financial statements.

The Company has filed with theSecurities and Exchange Commission the required certifications related to itsconsolidated financial statements as of and for the year ended September 30,2006.  These certifications are attachedas exhibits to this Annual Report on Form 10-K for the year ended September 30,2006.

**(d)****                             ****Management’s Report on InternalControl Over Financial Reporting.**

Management has responsibility forestablishing and maintaining adequate internal control over financialreporting.  Internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external reporting purposes in accordance withaccounting principles generally accepted in the United States.  Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Management has assessed the effectiveness ofthe Company’s internal control over financial reporting as of September 30,2006. As discussed in Item 1 of this Annual Report under the caption “Business”and in Note H to our consolidated financial statements included in this AnnualReport, the Company acquired Moore Langen and Creative Homeowner during fiscalyear 2006. The total assets and revenues of these acquisitions were 12% and 9%,respectively, as of and for the year ended September 30, 2006. As permitted bythe rules and regulations of the SEC, we excluded these two acquired companiesfrom the assessment of internal control over financial reporting as ofSeptember 30, 2006.

In making its assessment of theCompany’s internal control over financial reporting, the Company’s managementhas utilized the criteria set forth by the Committee of SponsoringOrganizations (“COSO”) of the Treadway Commission in InternalControl-Integrated Framework. Management concluded that based on itsassessment, the Company’s internal control over financial reporting waseffective as of September 30, 2006. Deloitte & Touche LLP, an independentregistered public accounting firm that audited our financial statementsincluded in this Annual Report, has issued an attestation report onmanagement’s assessment of internal control over financial reporting.  Such attestation, which expresses unqualifiedopinions on management’s assessment and on the effectiveness of internalcontrol over financial reporting as of September 30, 2006, which appears belowin this Annual Report on Form 10-K.

** **

13

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**(e)          Limitations on Design and Effectiveness of Controls.**

**TheCompany’s management, including our Chief Executive Officer and Chief FinancialOfficer, believes that our disclosure controls and procedures and internalcontrol over financial reporting are effective at the reasonable assurancelevel. However, the Company’s management does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willprevent all errors and all fraud. A control system, no matter how well conceivedand operated, can provide only reasonable, not absolute, assurance that theobjective of the control system are met. In addition, the design of a controlsystem must take into consideration resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected in a timely manner. These inherentlimitations include the fact that controls can be circumvented by individualacts, by collusion of two or more people or by management override of thecontrols. The design of any system of controls also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Finally, over time, controls may become inadequatebecause of changes in conditions, or the degree of compliance with policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders of CourierCorporation*North Chelmsford, Massachusetts*

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over Financial Reporting,that Courier Corporation and subsidiaries (the “Company”) maintained effectiveinternal control over financial reporting as of September 30, 2006, based oncriteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. As described in Management’s Reporton Internal Control Over Financial Reporting, management excluded from theirassessment the internal control over financial reporting at Moore-LangenPrinting Company, Inc. (“Moore Langen”) and Federal Marketing Corp. d/b/aCreative Homeowner (“Creative Homeowner”), which were acquired onOctober 17, 2005 and April 28, 2006, respectively, and whosefinancial statements reflect total assets (excluding intangibles) and revenues constituting12 and 9 percent, respectively, of the related consolidated financial statementamounts as of and for the year ended September 30, 2006. Accordingly, ouraudit did not include the internal control over financial reporting at MooreLangen and Creative Homeowner. The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control

14

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over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles.  A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis.  Also,projections of any evaluation of the effectiveness of the internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as ofSeptember 30, 2006, is fairly stated, in all material respects, based on thecriteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of September 30, 2006, based on the criteria establishedin *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements as of and for the year ended September 30,2006 of the Company and our report dated December 7, 2006 expressed anunqualified opinion on those financial statements and included an explanatoryparagraph concerning the adoption of SFAS 123R “Share-Based Payments” byapplication of the modified retrospective transition method on those financialstatements and financial statement schedule.
| */s/ DELOITTE & TOUCHE LLP* | * * |
|---------------------------------|----------|

 

*Boston, Massachusetts*December 7, 2006

15

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**Item 9B. Other Information**

The following table sets forth information concerningthe granting on September 25, 2006 of restricted stock awards and stock optionsunder the Courier Corporation 1993 Stock Incentive Plan to each of theExecutive Officers.
|                    | ** ** | **Number of Shares Underlying** | ** ** |
|--------------------|------------|------------------------------------------------|------------|
| **Name**           | ** ** | **Options  Granted**                           | ** ** | **Restricted  Stock Awards** | ** ** |
| ** **         |       |                                           |       |   |   |
| J. F. Conway,  III |       | 7,089                                          |       | 1,672 |   |
| R. P. Story, Jr.   |       | 6,203                                          |       | 1,463 |   |
| G. Q. Nichols      |       | —                                         |       | — |   |
| P. D. Tobin        |       | 2,038                                          |       | 481 |   |
| P. M. Folger       |       | 1,418                                          |       | 334 |   |
| E. J. Zimmerman    |       | 2,525                                          |       | 596 |   |

 

16

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**PART III**

**Item 10.  Directors and Executive Officers of theRegistrant.**

Courier’s executive officers,together with their ages and all positions and offices with the Companypresently held by each person named, are as follows:
| James F. Conway III  | 54     | Chairman, President and Chief   |   |
|----------------------|--------|---------------------------------|--------|
|                 |   | Executive Officer               |   |
|                 |   |                            |   |
| George Q. Nichols    | 77     | Corporate Senior Vice President |   |
|                 |   | and Chairman of National        |   |
|                 |   | Publishing Company              |   |
|                 |   |                            |   |
| Robert P. Story, Jr. | 55     | Executive Vice President and    |   |
|                 |   | Chief Operating Officer         |   |
|                 |   |                            |   |
| Peter M. Folger      | 53     | Senior Vice President and       |   |
|                 |   | Chief Financial Officer         |   |
|                 |   |                            |   |
| Peter D. Tobin       | 51     | Corporate Vice President and    |   |
|                 |   | Executive Vice President of     |   |
|                 |   | Courier Companies and National  |   |
|                 |   | Publishing Company              |   |
|                 |   |                            |   |
| Eric J. Zimmerman    | 41     | Vice President, Publishing      |   |

 

The terms of office of all of theabove executive officers continue until the first meeting of the Board ofDirectors following the next annual meeting of stockholders and the election orappointment and qualification of their successors, unless any officer soonerdies, resigns, is removed or becomes disqualified.

Mr. Conway III was elected Chairmanof the Board in September 1994 after serving as acting Chairman since December1992.  He has been Chief Executive Officersince December 1992 and President since July 1988.

Mr. Nichols became an executiveofficer of Courier in June 1989.  He waselected a Director of the Company in March 1995 and became Senior VicePresident of the Company in November 1996. He became Chairman of National Publishing Company in December 1999.  He had previously been President of NationalPublishing Company since 1976.

Mr. Story became Executive VicePresident and Chief Operating Officer in November 2006. He had previously beenSenior Vice President and Chief Financial Officer since April 1989.  He joined Courier in November 1986 as VicePresident and Treasurer.  He was electeda Director of the Company in February 1995.

Mr. Folger became Senior VicePresident and Chief Financial Officer in November 2006.  He had previously been Controller since 1982and Vice President since November 1992.

Mr. Tobin became Vice President ofCourier Corporation and Executive Vice President of

17

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Courier Companies in October 2000, and Executive VicePresident of National Publishing Company in March 2002.  He joined Courier Companies as National SalesManager in 1994 and became Vice President of Sales and Marketing in 1997.

Mr. Zimmerman became Vice President,Publishing and an executive officer of Courier Corporation in October2004.  He joined Courier in December 1994as General Manager of its former Copyright Management Services operation andbecame Vice President of e-Commerce for Courier in September 2000.

The Company has adopted a code ofethics entitled “Courier Corporation Business Conduct Guidelines,” which isapplicable to all of the Company’s directors, officers, and employees.  These Business Conduct Guidelines areavailable on the Company’s Internet website, located at www.courier.com.

All other information called for byItem 10 is contained in the definitive Proxy Statement, under the captions “Item1: Election of Directors” and “Section 16(a) Beneficial Ownership ReportingCompliance,” to be delivered to stockholders in connection with the AnnualMeeting of Stockholders scheduled to be held on Wednesday, January 17,2007.  Such information is incorporatedherein by reference.

**Item 11.  Executive Compensation.**

Information called for by Item 11 iscontained in the definitive Proxy Statement, under the caption “ExecutiveCompensation,” to be delivered to stockholders in connection with the AnnualMeeting of Stockholders scheduled to be held on Wednesday, January 17,2007.  Such information is incorporatedherein by reference.

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

**Thefollowing table provides information as of September 30, 2006 regardingshares of common stock of the Company that may be issued under its existingcompensation plans, including the Courier Corporation Amended and Restated1993 Stock Incentive Plan (the “1993 Plan”), the Courier Corporation2005 Stock Equity Plan for Non-Employee Directors (the “2005 Plan”), andthe Courier Corporation 1989 Deferred Income Stock Option Plan for Non-EmployeeDirectors, which was replaced by the 2005 Plan.**
| **Plan category**                                      | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights (1)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected  in column (a))(2)(3)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                                                   | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                                            | ** ** |
| Equity compensation  plans approved by security holders     |       | 587,018                                                                                                                                                   |       | $                                                                                                           | 22.98      |                                                                                                                                                                                                               | 509,285    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                                    |       | —                                                                                                      |       | —                                                                                                                                                                                                             |       |
| Total                                                       |       | 587,018                                                                                                                                                   |       | $                                                                                                           | 22.98      |                                                                                                                                                                                                               | 509,285    |   |

----

(1)    Does not include any restricted stock assuch shares are already reflected in the Company’s outstanding shares.

(2)    101,176 shares of these 509,285 shares werereserved for future issuance under the Company’s Employee Stock Purchase Plan.

(3)    Includesup to 272,425 securities that may be issued in the form of restricted stock.

All other information called for byItem 12 is contained in the definitive Proxy Statement, under the captions “SecurityOwnership of Certain Beneficial Owners and Management” and “ExecutiveCompensation,” to be delivered to stockholders in connection with the AnnualMeeting of Stockholders scheduled to be held on Wednesday, January 17,2007.  Such information is incorporatedherein by reference.

**Item 13.  Certain Relationships and RelatedTransactions.**

Information called for by Item 13 iscontained in the definitive Proxy Statement to be delivered to stockholders inconnection with the Annual Meeting of Stockholders scheduled to be held onWednesday, January 17, 2007.  Suchinformation is incorporated herein by reference.

**Item 14.  Principal Accounting Fees and Services**

Information called for by Item 14 iscontained in the definitive Proxy Statement, under the caption “Item 2:Ratification and Approval of Selection of Independent Auditors,” to bedelivered to stockholders in connection with the Annual Meeting of Stockholdersscheduled to be held on Wednesday, January 17, 2007.  Such information is incorporated herein byreference.

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**PART IV**

**Item 15.  Exhibits and Financial Statement Schedules.**

**(a)         Documents filed as part of this report**
| **1.      *Financial  statements***        |   | ** **                                                                                                                           |
|---------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|                                                                |   |                                                                                                                                 |   |   |
| ·                                                              |   | Report of  Independent Registered Public Accounting Firm                                                                             |   |   |
| ·                                                              |   | Consolidated  Statements of Income for each of the three years in the period ended  September 30, 2006                               |   |   |
| ·                                                              |   | Consolidated  Balance Sheets as of September 30, 2006 and September 24, 2005                                                         |   |   |
| ·                                                              |   | Consolidated  Statements of Cash Flows for each of the three years in the period ended  September 30, 2006                           |   |   |
| ·                                                         |   | Consolidated  Statements of Changes in Stockholders’ Equity for each of the three years in  the period ended September 30, 2006 |   |   |
| ·                                                              |   | Notes to  Consolidated Financial Statements                                                                                          |   |   |
|                                                                |   |                                                                                                                                 |   |   |
| **2.      *Financial statement schedule*** |   |                                                                                                                                 |
|                                                                |   |                                                                                                                                 |   |   |
|                                                                |   | Schedule II  - Consolidated Valuation and Qualifying Accounts                                                                        |   |   |
|                                                                |   |                                                                                                                                 |   |   |
| **3.      *Exhibits***                     |   |                                                                                                                                 |

 
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                             |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                   |
| 3A-1        |       | Articles of Organization of Courier Corporation, as  of June 29, 1972 (filed as Exhibit 3A-1 to the Company’s Annual Report on  Form 10-K for the fiscal year ended September 26, 1981, and incorporated  herein by reference).                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                   |
| 3A-2        |       | Articles of Amendment of Courier Corporation  (changing stockholder vote required for merger or consolidation), as of  January 20, 1977 (filed as Exhibit 3A-2 to the Company’s Annual Report on  Form 10-K for the fiscal year ended September 26, 1981, and incorporated  herein by reference). |
|        |       |                                                                                                                                                                                                                                                                                                   |
| 3A-3        |       | Articles of Amendment of Courier Corporation  (providing for staggered election of directors), as of January 20, 1977 (filed  as Exhibit 3A-3 to the Company’s Annual Report on Form 10-K for the fiscal  year ended September 26, 1981, and incorporated herein by reference).                   |
|        |       |                                                                                                                                                                                                                                                                                                   |
| 3A-4        |       | Articles of Amendment of Courier Corporation  (authorizing class of Preferred Stock), as of February 15, 1978 (filed as  Exhibit 3A-4 to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 26, 1981, and incorporated herein by reference).                           |
|        |       |                                                                                                                                                                                                                                                                                                   |
| 3A-5        |       | Articles of Amendment of Courier Corporation  (increasing number of shares of authorized Common Stock), as of January 16,  1986 (described in item #2 of the                                                                                                                                           |

 

19

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|        |   | Company’s Proxy Statement for the Annual Meeting of  Stockholders held on January 16, 1986, and incorporated herein by reference).                                                                                                                                                                                                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3A-6   |   | Articles of Amendment of Courier Corporation  (providing for fair pricing procedures for stock to be sold in certain  business combinations), as of January 16, 1986 (filed as Exhibit A to the Company’s  Proxy Statement for the Annual Meeting of Stockholders held on January 16,  1986, and incorporated herein by reference).                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3A-7   |   | Articles of Amendment of Courier Corporation  (limiting personal liability of directors to the Corporation or to any of its  stockholders for monetary damages for breach of fiduciary duty), as of  January 28, 1988 (filed as Exhibit 3A-7 to the Company’s Annual Report on  Form 10-K for the fiscal year ended September 24, 1988, and incorporated  herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3A-8   |   | Articles of Amendment of Courier Corporation  (establishing Series A Preferred Stock), as of November 8, 1988 (filed as  Exhibit 3A-8 to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 24, 1988, and incorporated herein by reference).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3A-9   |   | Articles of Amendment of Courier Corporation  (increasing number of shares of authorized Common Stock), as of January 17,  2002 (filed as Exhibit 3 to the Company’s Quarterly Report on Form 10-Q for  the period ended March 30, 2002, and incorporated herein by reference).                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 3B     |   | By-Laws of Courier Corporation, amended and restated  as of March 24, 2005 (filed as Exhibit 3 to the Company’s Current Report on  Form 8-K, dated March 24, 2005, and incorporated herein by reference).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10A-1+ |   | Courier Corporation Stock Grant Plan (filed as  Exhibit C to the Company’s Proxy Statement for the Annual Meeting of  Stockholders held on January 20, 1977, and incorporated herein by reference).                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10A-2+ |   | Amendment, effective January 19, 1989, to the  Courier Corporation Stock Grant Plan (described in Item 4 of the Company’s  Proxy Statement for the Annual Meeting of Stockholders held January 19, 1989,  and incorporated herein by reference).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10B+   |   | Letter Agreement, dated February 8, 1990, of Courier  Corporation relating to supplemental retirement benefit and consulting  agreement with James F. Conway, Jr. (filed as Exhibit 10B to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 29, 1990, and  incorporated herein by reference).                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10C-1+ |   | Courier Corporation 1989 Deferred Income Stock  Option Plan for Non-employee Directors, effective September 28, 1989 (filed  as Exhibit A to the Company’s Proxy Statement for the Annual Meeting of  Stockholders held January 18, 1990, and incorporated herein by reference).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10C-2+ |   | Amendment, effective November 4, 1993, to the 1989  Deferred Income Stock Option Plan for Non-employee Directors (filed as  Exhibit 10C-2 to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 25, 1993, and incorporated herein by reference).                                                                                                     |

 

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| 10C-3+ |   | Amendment, effective September 24, 1998, to the 1989  Deferred Income Stock Option Plan for Non-employee Directors (filed as  Exhibit 10C-3 to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 26, 1998, and incorporated herein by reference).                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                              |
| 10C-4+ |   | Amendment, effective January 21, 1999, to the 1989  Deferred Income Stock Option Plan for Non-employee Directors (described in Item  3 of the Company’s Proxy Statement for the Annual Meeting of Stockholders  held January 21, 1999, and incorporated herein by reference).                |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10D-1+ |   | Courier Corporation 1983 Stock Option Plan (filed as  Exhibit A to the Company’s Proxy Statement for the Annual Meeting of  Stockholders held on January 20, 1983, and incorporated herein by reference).                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10D-2+ |   | Amendment, effective January 17, 1985, to the  Courier Corporation 1983 Stock Option Plan (described in Item 2 of the  Company’s Proxy Statement for the Annual Meeting of Stockholders held on  January 17, 1985, and incorporated herein by reference).                                    |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10D-3+ |   | Amendment, effective January 19, 1989, to the  Courier Corporation 1983 Stock Option Plan (described in Item 3 of the  Company’s Proxy Statement for the Annual Meeting of Stockholders held January  19, 1989, and incorporated herein by reference).                                       |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10E-1+ |   | The Courier Executive Compensation Program, as  amended and restated on December 5, 2005 (filed as Exhibit 10.2 to the  Company’s Current Report on Form 8-K on December 7, 2005, and incorporated  herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10E-2+ |   | The Management Incentive Compensation Program,  effective October 4, 1993 (filed as Exhibit 10E-3 to the Company’s Annual  Report on Form 10-K for the fiscal year ended September 25, 1993, and  incorporated herein by reference).                                                         |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10F+   |   | Courier Corporation Senior Executive Severance  Program, as amended and restated on December 5, 2005 (filed as Exhibit 10.3  to the Company’s Current Report on Form 8-K on December 7, 2005, and  incorporated herein by reference).                                                        |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10G-1  |   | Rights Agreement between Courier Corporation and  State Street Bank and Trust Company dated March 18, 1999 (filed as Exhibit  4.1 to the Company’s Current Report on Form 8-K, dated March 18, 1999, and  incorporated herein by reference).                                                 |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10G-2  |   | Amendment, dated November 8, 2001, to Rights  Agreement between Courier Corporation and EquiServe Trust Company NA dated  March 18, 1999 (filed as Exhibit 10.2 to the Company’s Quarterly Report on  Form 10-Q for the period ended March 26, 2005, and incorporated herein by  reference). |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10H+   |   | Courier Corporation 1999 Employee Stock Purchase  Plan (filed as Exhibit A to the Company’s Proxy Statement for the Annual  Meeting of Stockholders held on January 21, 1999, and incorporated herein by  reference).                                                                        |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10I-1+ |   | Agreement, as of March 3, 1993, of Courier  Corporation relating to employment contract and supplemental retirement  benefit with George Q. Nichols (filed as Exhibit                                                                                                                             |

 

21

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|        |   | 10J to the Company’s Annual Report on Form 10-K for  the fiscal year ended September 25, 1993, and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10I-2+ |   | Amendment, as of April 16, 1997, to supplemental  retirement benefit agreement with George Q. Nichols (filed as Exhibit 10J-2  to the Company’s Annual Report on Form 10-K for the fiscal year ended  September 27, 1997, and incorporated herein by reference).                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10I-3+ |   | Amendment, as of November 9, 2000, to supplemental  retirement benefit agreement with George Q. Nichols (filed as Exhibit 10I-3  to the Company’s Annual Report on Form 10-K for the fiscal year ended  September 29, 2001, and incorporated herein by reference).                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10J-1  |   | Amended and Restated Revolving Credit Agreement,  dated as of March 31, 2003, between Courier Corporation, Fleet National Bank,  KeyBank National Association, Citizens Bank of Massachusetts and Sovereign  Bank, providing for a $60 million revolving credit facility (filed as Exhibit  10 to the Company’s Quarterly Report on Form 10-Q for the period ended June  28, 2003, and incorporated herein by reference).                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10J-2  |   | Amendment, dated March 31, 2004, to Amended and  Restated Revolving Credit Agreement, dated as of March 31, 2003, between  Courier Corporation, Fleet National Bank, KeyBank National Association,  Citizens Bank of Massachusetts and Sovereign Bank, providing for a $60  million revolving credit facility (filed as Exhibit 10 to the Company’s  Quarterly Report on Form 10-Q for the period ended March 27, 2004, and  incorporated herein by reference).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10J-3  |   | Amendment, dated April 29, 2005, to Amended and  Restated Revolving Credit Agreement, dated as of March 31, 2003, between  Courier Corporation, KeyBank National Association, Citizens Bank of  Massachusetts and Sovereign Bank, providing for a $45 million revolving  credit facility (filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q for the period ended March 26, 2005, and incorporated herein by  reference).                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10J-4  |   | Amendment, dated May 11, 2006, to Amended and  Restated Revolving Credit Agreement, dated as of March 31, 2003, between  Courier Corporation, KeyBank National Association, Citizens Bank of  Massachusetts and Sovereign Bank, providing for a $60 million revolving credit  facility (filed as Exhibit 10 to the Company’s Current Report on Form 8-K on  May 17, 2006, and incorporated herein by reference).                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10J-5  |   | Amendment, dated November 9, 2006, to Amended and  Restated Revolving Credit Agreement, dated as of March 31, 2003, between  Courier Corporation, KeyBank National Association, Citizens Bank of  Massachusetts, Sovereign Bank, JP Morgan Chase Bank, N.A., and Wells Fargo  Bank, N.A. providing for a $100 million revolving credit facility (filed as  Exhibit 10 to the Company’s Current Report on Form 8-K on November 15, 2006,  and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10K-1+ |   | Courier Corporation Amended and Restated 1993 Stock  Incentive Plan (filed January 19, 2005 as Exhibit 10.5 to the Company’s  Registration Statement No. 333-122136 and incorporated herein by reference).                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10K-2+ |   | Form of Incentive Stock Option Agreement for the  Courier Corporation 1993 Stock                                                                                                                                                                                                                                                                                                                                                                                                     |

 

22

----

 
|         |   | Incentive Plan (filed as Exhibit 10.1 to the  Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).                                                                                                                              |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-3+  |   | Form of Non-Qualified Stock Option Agreement for the  Courier Corporation 1993 Stock Incentive Plan (filed as Exhibit 10.2 to the  Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).                                         |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-4+  |   | Form of Stock Grant Agreement for the Courier  Corporation 1993 Stock Incentive Plan (filed as Exhibit 10.3 to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 25, 2004, and  incorporated herein by reference).                                                        |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-5+  |   | Non-Qualified Stock Option Agreement for the Courier  Corporation 1993 Stock Incentive Plan for J. F. Conway, III dated September  23, 2004 (filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 25, 2004, and incorporated herein by  reference). |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-6+  |   | Stock Grant Agreement for the Courier Corporation  1993 Stock Incentive Plan for J. F. Conway, III dated September 23, 2004  (filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the  fiscal year ended September 25, 2004, and incorporated herein by reference).                 |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-7+  |   | Non-Qualified Stock Option Agreement for the Courier  Corporation 1993 Stock Incentive Plan for R. P. Story, Jr. dated September  23, 2004 (filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 25, 2004, and incorporated herein by  reference).  |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-8+  |   | Stock Grant Agreement for the Courier Corporation  1993 Stock Incentive Plan for R. P. Story, Jr. dated September 23, 2004  (filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the  fiscal year ended September 25, 2004, and incorporated herein by reference).                  |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-9+  |   | Non-Qualified Stock Option Agreement for the Courier  Corporation 1993 Stock Incentive Plan for P. D. Tobin dated September 23,  2004 (filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for  the fiscal year ended September 25, 2004, and incorporated herein by  reference).       |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-10+ |   | Stock Grant Agreement for the Courier Corporation  1993 Stock Incentive Plan for P. D. Tobin dated September 23, 2004 (filed as  Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 25, 2004, and incorporated herein by reference).                       |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-11+ |   | Non-Qualified Stock Option Agreement for the Courier  Corporation 1993 Stock Incentive Plan for P. M. Folger dated September 23,  2004 (filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for  the fiscal year ended September 25, 2004, and incorporated herein by  reference).     |
|    |   |                                                                                                                                                                                                                                                                                                       |
| 10K-12+ |   | Stock Grant Agreement for the Courier Corporation  1993 Stock Incentive Plan for P. M. Folger dated September 23, 2004 (filed as  Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 25, 2004, and incorporated                                           |

 

23

----

 
|         |   | herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10K-13+ |   | Non-Qualified Stock Option Agreement for the Courier  Corporation 1993 Stock Incentive Plan for E. J. Zimmerman dated September 23,  2004 (filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for  the fiscal year ended September 25, 2004, and incorporated herein by  reference).                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10K-14+ |   | Stock Grant Agreement for the Courier Corporation  1993 Stock Incentive Plan for E. J. Zimmerman dated September 23, 2004 (filed  as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal  year ended September 25, 2004, and incorporated herein by reference).                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10K-15+ |   | Incentive Stock Option Agreement for the Courier  Corporation 1993 Stock Incentive Plan for E. J. Zimmerman dated September 23,  2004 (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for  the fiscal year ended September 25, 2004, and incorporated herein by  reference).                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10L-1+  |   | Courier Corporation 2005 Stock Equity Plan for  Non-Employee Directors (filed January 19, 2005 as Exhibit 10.1 to the Company’s  Registration Statement No. 333-122137 and incorporated herein by reference).                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10L-2+  |   | Form of Non-Qualified Stock Option Agreement for the  Courier Corporation 2005 Stock Equity Plan for Non-employee Directors (filed  as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal  year ended September 25, 2004, and incorporated herein by reference).                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10L-3+  |   | Form of Stock Unit Agreement for the Courier  Corporation 2005 Stock Equity Plan for Non-employee Directors (filed as  Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 25, 2004, and incorporated herein by reference).                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10M     |   | Stock Purchase Agreement by and among Courier  Corporation and the stockholders of Book-mart Press, Inc., dated as of July  21, 1997 (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K  dated July 21, 1997, and incorporated herein by reference).                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10N-1+  |   | Courier Corporation Deferred Compensation Program  dated November 6, 1997 including Messrs. Conway III, Nichols, and Story  (filed as Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the  period ended December 27, 1997, and incorporated herein by reference).                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10N-2+  |   | Amendment to Courier Corporation Deferred  Compensation Program, effective January 1, 2005 (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K on  December 7, 2005, and incorporated herein by reference).                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10O     |   | Master Lease Finance Agreement, dated as of  September 23, 1998 between Courier Corporation and General Electric Capital  Corporation (filed as Exhibit 10R to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 26, 1998, and incorporated herein by  reference).                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10P     |   | Stock Purchase Agreement by and among Courier  Corporation, Mrs. Blanche Cirker, individually, the Estate of Hayward Francis  Cirker, by Blanche Cirker, executrix, and each of the stockholders of Dover  Publications, Inc., Dover Book Store Inc. and Transfolio Express, Inc. dated  as of August 14, 2000 (filed as Exhibit 2.1 to the Company’s Current Report  on Form 8-K dated September 22, 2000, and incorporated herein by reference). |

 

24

----

 
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10Q    |   | Master Lease Finance Agreement, dated as of  September 25, 2000 between Courier Corporation and Eastern Bank (filed as  Exhibit 10T to the Company’s Annual Report on Form 10-K for the fiscal year  ended September 30, 2000, and incorporated herein by reference).                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10R+   |   | Amendment, effective March 1, 2005, to the Courier  Corporation 1999 Employee Stock Purchase Plan (filed as Exhibit 10.1 to the  Company’s Annual Report on Form 10-K for the fiscal year ended September 24,  2005, and incorporated herein by reference).                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10S    |   | Stock Purchase Agreement, dated April 27, 2006, by  and among Courier Corporation, Federal Marketing Corporation, d/b/a Creative  Homeowner (“Creative Homeowner”), and the stockholders of Creative Homeowner  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on May 3,  2006, and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10T    |   | Lease Agreement, dated April 27, 2006, between  Courier Corporation and Thomas Minor Associates, LLC (filed as Exhibit 10.2  to the Company’s Current Report on Form 8-K on May 3, 2006, and incorporated  herein by reference).                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 21*    |   | Schedule of Subsidiaries.                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 23*    |   | Consent of Deloitte & Touche LLP, independent  registered public accounting firm.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 31.1*  |   | Certification of Chief Executive Officer pursuant to  15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 31.2*  |   | Certification of Chief Financial Officer pursuant to  15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 32.1*  |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 32.2*  |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                      |

 

----

* Exhibit is furnished herewith.

+ Designates a Company compensation plan or arrangement.

25

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, on December 7, 2006.

COURIERCORPORATION
| By:    | * * | *    s/James F. Conway III*                | * * |
|--------|----------|----------------------------------------------------------------|----------|
|   |     | James F. Conway III                                            |
|   |     |   Chairman, President and Chief Executive  Officer   |
|   |     |                                                           |
| By:    | * * | *    s/Peter M. Folger*                    | * * |
|   |     | Peter M. Folger                                                |
|   |     |   Senior Vice President and Chief  Financial Officer |
|   |     |                                                           |
| By:    | * * | *    s/Kathleen M. Leon*                   | * * |
|   |     | Kathleen M. Leon                                               |
|   |     |   Controller                                         |
|        |          |                                                                |          |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities indicated, on December 7, 2006.
| *    **s/James F. Conway III* | * * | * *              | *    s/George Q. Nichols*     | * * |
|---------------------------------------------------|----------|-----------------------|---------------------------------------------------|----------|
| James F. Conway III                               |     | George Q. Nichols     |
|   Chairman, President and               |     |   Director  |
|   Chief Executive Officer               |     |                  |
|                                              |     |                  |
| *    s/Kathleen Foley Curley* | * * | * *              | *    s/Ronald L. Skates*      | * * |
| Kathleen Foley Curley                             |     | Ronald L. Skates      |                                              |
|   Director                              |     |   Director  |                                              |
|                                              |     |                  |                                              |
| *    s/Richard K. Donahue*    | * * | * *              | *    s/Robert P. Story, Jr.*  | * * |   |
| Richard K. Donahue                                |     | Robert P. Story, Jr.  |                                              |     |
|   Director                              |     |   Director  |                                              |     |
|                                              |     |                  |                                              |     |
| *    s/Edward J. Hoff*        | * * | * *              | *    s/W. Nicholas Thorndike* | * * |   |
| Edward J. Hoff                                    |     | W. Nicholas Thorndike |                                              |     |
|   Director                              |     |   Director  |                                              |     |
|                                              |     |                  |                                              |     |
| *    s/Arnold S. Lerner*      | * * | * *              | *    s/Susan L. Wagner*       | * * |   |
| Arnold S. Lerner                                  |     | Susan L. Wagner       |                                              |     |
|   Director                              |     |   Director  |                                              |     |
|                                              |     |                  |                                              |     |
| *    s/Peter K. Markell*      | * * | * *              | * *                                          | * * |   |
| Peter K. Markell                                  |     |                  |                                              |     |
|   Director                              |     |                  |                                              |     |
|                                                   |          |                       |                                                   |          |  |  |

 

26

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of Courier Corporation*North Chelmsford, Massachusetts*

We have audited the accompanying consolidated balance sheets of CourierCorporation and subsidiaries (the “Company”) as of September 30, 2006 andSeptember 24, 2005, and the related consolidated statements of income,stockholders’ equity, and cash flows for each of the three years in the periodended September 30, 2006.  Our audits also included the financialstatement schedule listed in the Index at Item 15(a)2.  These financial statements and financialstatement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position Courier Corporation andsubsidiaries as of September 30, 2006 and September 24, 2005, and the resultsof their operations and their cash flows for each of the three years in theperiod ended September 30, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of theCompany’s internal control over financial reporting as of September 30, 2006,based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated December 7, 2006expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

As discussed in Note F, in fiscal 2006 the Company adopted SFAS 123R “ShareBased Payments” applying the modified retrospective method to all priorperiods.

*DELOITTE & TOUCHE LLP*

Boston, MassachusettsDecember 7, 2006

F-1

----

 

**COURIERCORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                             | ** ** | **For the Years Ended** | ** **  |
|----------------------------------------|------------|----------------------------------------|-------------|
| ** **                             | ** ** | **September 30, 2006**       | ** **  | **September 24, 2005** | ** ** | **September 25, 2004** | ** ** |
| ** **                             | ** ** | ** **                             | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net sales (Note  A)                    |       | $                                      | 269,051,000 |   | $ | 227,039,000 |   | $ | 211,179,000 |   |
| Cost of sales                          |       | 180,535,000                            |        | 151,853,000 |   | 142,609,000 |   |
|                                   |       |                                   |        |   |   |   |   |
| Gross profit                           |       | 88,516,000                             |        | 75,186,000 |   | 68,570,000 |   |
|                                   |       |                                   |        |   |   |   |   |
| Selling and  administrative expenses   |       | 50,144,000                             |        | 42,823,000 |   | 38,732,000 |   |
| Interest  (income) expense, net        |       | 182,000                                |        | (388,000 | ) | (23,000 | ) |
| Other income  (Note J)                 |       | —                                 |        | — |   | 250,000 |   |
|                                   |       |                                   |        |   |   |   |   |
| Pretax income                          |       | 38,190,000                             |        | 32,751,000 |   | 30,111,000 |   |
|                                   |       |                                   |        |   |   |   |   |
| Provision for  income taxes (Note C)   |       | 9,810,000                              |        | 11,883,000 |   | 10,877,000 |   |
|                                   |       |                                   |        |   |   |   |   |
| Net income                             |       | $                                      | 28,380,000  |   | $ | 20,868,000 |   | $ | 19,234,000 |   |
|                                   |       |                                   |        |   |   |   |   |
| Net income per  share (Notes A and K): |       |                                   |        |   |   |   |   |
|                                   |       |                                   |        |   |   |   |   |
| Basic                                  |       | $                                      | 2.30        |   | $ | 1.72 |   | $ | 1.61 |   |
|                                   |       |                                   |        |   |   |   |   |
| Diluted                                |       | $                                      | 2.25        |   | $ | 1.67 |   | $ | 1.56 |   |
|                                   |       |                                   |        |   |   |   |   |
| Cash dividends declared  per share     |       | $                                      | 0.48        |   | $ | 0.33 |   | $ | 0.23 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

*Fiscal year 2006 was a 53-weekperiod.  Prior year amounts have beenretroactively adjusted to reflect adoption of SFAS 123R (Notes A and F).*

F-2

----

 

**COURIERCORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                            | ** ** | **September 30, 2006** | ** **  | **September 24, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|----------------------------------|------------|
| ASSETS                                                                                                                |       |                             |        |                             |       |
|                                                                                                                  |       |                             |        |                             |       |
| Current assets:                                                                                                       |       |                             |        |                             |       |
| Cash and cash equivalents (Note A)                                                                                    |       | $                                | 1,483,000   |                             | $          | 34,038,000 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,593,000 in 2006 and $1,139,000 in 2005 (Note A) |       | 46,002,000                       |        | 34,207,000                       |       |
| Inventories (Note B)                                                                                                  |       | 29,565,000                       |        | 25,451,000                       |       |
| Deferred income taxes (Note C)                                                                                        |       | 3,703,000                        |        | 2,945,000                        |       |
| Other current assets                                                                                                  |       | 1,110,000                        |        | 962,000                          |       |
|                                                                                                                  |       |                             |        |                             |       |
| Total current assets                                                                                                  |       | 81,863,000                       |        | 97,603,000                       |       |
|                                                                                                                  |       |                             |        |                             |       |
| Property, plant  and equipment (Note A):                                                                              |       |                             |        |                             |       |
| Land                                                                                                                  |       | 1,296,000                        |        | 1,059,000                        |       |
| Buildings and improvements                                                                                            |       | 29,539,000                       |        | 26,877,000                       |       |
| Machinery and equipment                                                                                               |       | 163,395,000                      |        | 134,222,000                      |       |
| Furniture and fixtures                                                                                                |       | 1,973,000                        |        | 1,850,000                        |       |
| Construction in progress                                                                                              |       | 18,368,000                       |        | 13,392,000                       |       |
|                                                                                                                  |       |                             |        |                             |       |
|                                                                                                                  |       | 214,571,000                      |        | 177,400,000                      |       |
|                                                                                                                  |       |                             |        |                             |       |
| Less-Accumulated depreciation and amortization                                                                        |       | (129,323,000                     | )           | (118,285,000                     | )          |
|                                                                                                                  |       |                             |        |                             |       |
| Property, plant and equipment, net                                                                                    |       | 85,248,000                       |        | 59,115,000                       |       |
|                                                                                                                  |       |                             |        |                             |       |
| Goodwill, net  (Notes A, H and I)                                                                                     |       | 55,406,000                       |        | 33,255,000                       |       |
| Other  intangibles, net (Notes A and H)                                                                               |       | 13,691,000                       |        | —                           |       |
| Prepublication  costs (Note A)                                                                                        |       | 9,327,000                        |        | 5,399,000                        |       |
| Other assets  (Note G)                                                                                                |       | 1,653,000                        |        | 1,593,000                        |       |
|                                                                                                                  |       |                             |        |                             |       |
| Total assets                                                                                                          |       | $                                | 247,188,000 |                             | $          | 196,965,000 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

*Prior year amounts have beenretroactively adjusted to reflect adoption of SFAS 123R (Notes A and F).*

F-3

----

**COURIERCORPORATION**

**CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                          | ** ** | **September 30, 2006** | ** **  | **September 24, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|----------------------------------|------------|
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                          |       |                             |        |                             |       |
|                                                                                                                |       |                             |        |                             |       |
| Current  liabilities:                                                                                               |       |                             |        |                             |       |
| Current maturities of long-term debt (Note D)                                                                       |       | $                                | 88,000      |                             | $          | 85,000 |   |
| Accounts payable (Note A)                                                                                           |       | 15,778,000                       |        | 10,534,000                       |       |
| Accrued payroll                                                                                                     |       | 9,534,000                        |        | 7,799,000                        |       |
| Accrued taxes (Note C)                                                                                              |       | 3,362,000                        |        | 5,770,000                        |       |
| Other current liabilities                                                                                           |       | 6,928,000                        |        | 6,474,000                        |       |
|                                                                                                                |       |                             |        |                             |       |
| Total current liabilities                                                                                           |       | 35,690,000                       |        | 30,662,000                       |       |
|                                                                                                                |       |                             |        |                             |       |
| Long-term debt  (Notes A and D)                                                                                     |       | 17,222,000                       |        | 425,000                          |       |
| Deferred income  taxes (Notes C and F)                                                                              |       | 8,913,000                        |        | 6,398,000                        |       |
| Other  liabilities                                                                                                  |       | 3,037,000                        |        | 3,020,000                        |       |
|                                                                                                                |       |                             |        |                             |       |
| Total liabilities                                                                                                   |       | 64,862,000                       |        | 40,505,000                       |       |
|                                                                                                                |       |                             |        |                             |       |
| Commitments and  contingencies (Note E)                                                                             |       |                             |        |                             |       |
|                                                                                                                |       |                             |        |                             |       |
| 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 12,445,000 shares in 2006 and 12,313,000 in 2005 |       | 12,445,000                       |        | 12,313,000                       |       |
| Additional paid-in capital                                                                                          |       | 8,592,000                        |        | 5,311,000                        |       |
| Retained earnings                                                                                                   |       | 161,289,000                      |        | 138,836,000                      |       |
|                                                                                                                |       |                             |        |                             |       |
| Total stockholders’ equity                                                                                     |       | 182,326,000                      |        | 156,460,000                      |       |
|                                                                                                                |       |                             |        |                             |       |
| Total  liabilities and stockholders’ equity                                                                    |       | $                                | 247,188,000 |                             | $          | 196,965,000 |   |

 

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

*Prior year amounts have been retroactively adjustedto reflect adoption of SFAS 123R (Notes A and F).*

F-4

----

 

**COURIERCORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                       | ** ** | **For the Years Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                       | ** ** | **September 30, 2006**       | ** ** | **September 24, 2005** | ** ** | **September 25, 2004** | ** ** |
|                                                                             |       |                                   |       |   |   |   |   |
| Operating  Activities:                                                           |       |                                   |       |   |   |   |   |
| Net income                                                                       |       | $                                      | 28,380,000 |   | $ | 20,868,000 |   | $ | 19,234,000 |   |
| Adjustments to reconcile net income to cash provided  from operating activities: |       |                                   |       |   |   |   |   |
| Depreciation and amortization                                                    |       | 14,804,000                             |       | 11,660,000 |   | 10,929,000 |   |
| Stock-based compensation (Notes A and F)                                         |       | 1,431,000                              |       | 1,835,000 |   | 1,730,000 |   |
| Deferred income taxes (Note C)                                                   |       | 1,093,000                              |       | (830,000 | ) | 2,195,000 |   |
| Gain on sale of asset (Note J)                                                   |       | —                                 |       | — |   | (163,000 | ) |
| Changes in assets and liabilities:                                               |       |                                   |       |   |   |   |   |
| Accounts receivable                                                              |       | (2,845,000                             | )          | (135,000 | ) | (3,843,000 | ) |
| Inventory                                                                        |       | (895,000                               | )          | (343,000 | ) | (2,459,000 | ) |
| Accounts payable                                                                 |       | 219,000                                |       | 475,000 |   | 2,775,000 |   |
| Accrued taxes                                                                    |       | (2,408,000                             | )          | 35,000 |   | (786,000 | ) |
| Other elements of working capital                                                |       | (204,000                               | )          | 486,000 |   | (245,000 | ) |
| Other long-term, net                                                             |       | (351,000                               | )          | 111,000 |   | (1,561,000 | ) |
|                                                                             |       |                                   |       |   |   |   |   |
| Cash provided  from operating activities                                         |       | 39,224,000                             |       | 34,162,000 |   | 27,806,000 |   |
|                                                                             |       |                                   |       |   |   |   |   |
| Investment  Activities:                                                          |       |                                   |       |   |   |   |   |
| Capital expenditures                                                             |       | (29,429,000                            | )          | (19,683,000 | ) | (13,416,000 | ) |
| Business acquisitions (Note H)                                                   |       | (51,164,000                            | )          | — |   | (11,850,000 | ) |
| Prepublication costs (Note A)                                                    |       | (4,253,000                             | )          | (2,867,000 | ) | (2,818,000 | ) |
| Proceeds from sale of asset (Note J)                                             |       | —                                 |       | — |   | 1,664,000 |   |
|                                                                             |       |                                   |       |   |   |   |   |
| Cash used for  investment activities                                             |       | (84,846,000                            | )          | (22,550,000 | ) | (26,420,000 | ) |
|                                                                             |       |                                   |       |   |   |   |   |
| Financing  Activities:                                                           |       |                                   |       |   |   |   |   |
| Long-term debt borrowings (repayments)                                           |       | 16,800,000                             |       | (83,000 | ) | (81,000 | ) |
| Cash dividends                                                                   |       | (5,927,000                             | )          | (4,066,000 | ) | (2,794,000 | ) |
| Proceeds from stock plans                                                        |       | 1,691,000                              |       | 1,632,000 |   | 1,104,000 |   |
| Excess tax benefits from stock-based compensation                                |       | 503,000                                |       | 978,000 |   | 526,000 |   |
|                                                                             |       |                                   |       |   |   |   |   |
| Cash provided  from (used for) financing activities                              |       | 13,067,000                             |       | (1,539,000 | ) | (1,245,000 | ) |
|                                                                             |       |                                   |       |   |   |   |   |
| (Decrease)  increase in cash and cash equivalents                                |       | (32,555,000                            | )          | 10,073,000 |   | 141,000 |   |
|                                                                             |       |                                   |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the period                        |       | 34,038,000                             |       | 23,965,000 |   | 23,824,000 |   |
|                                                                             |       |                                   |       |   |   |   |   |
| Cash and cash  equivalents at the end of the period                              |       | $                                      | 1,483,000  |   | $ | 34,038,000 |   | $ | 23,965,000 |   |
|                                                                             |       |                                   |       |   |   |   |   |
| Supplemental  cash flow information:                                             |       |                                   |       |   |   |   |   |
| Interest paid                                                                    |       | $                                      | 564,000    |   | $ | 219,000 |   | $ | 249,000 |   |
| Income taxes  paid (net of receipts)                                             |       | $                                      | 10,725,000 |   | $ | 11,707,000 |   | $ | 8,935,000 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

*Prioryear amounts have been retroactively adjusted to reflect adoption of SFAS 123R(Notes A and F).*

F-5

----

 

**COURIERCORPORATION**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 
| ** **                            | ** ** | **Total**              | ** **  | ** ** | ** ** | ** **               | ** ** | ** **   | ** ** | ** **   | ** ** |
|---------------------------------------|------------|------------------------|-------------|------------|------------|--------------------------|------------|--------------|------------|--------------|------------|
| ** **                            | ** ** | **Stockholders’** | ** **  | **Common** | ** ** | **Additional**           | ** ** | **Retained** | ** ** | **Treasury** | ** ** |
| ** **                            | ** ** | **Equity**             | ** **  | **Stock**  | ** ** | **Paid-In Capital** | ** ** | **Earnings** | ** ** | **Stock**    | ** ** |
|                                  |       |                   |        |       |       |                     |       |         |       |         |       |
| Balance,  September 27, 2003 (Note F) |       | $                      | 115,714,000 |       | $          | 8,088,000                |       | $            | 3,827,000  |         | $          | 105,594,000 |   | $ | (1,795,000 | ) |
|                                  |       |                   |        |       |       |                     |       |         |       |         |       |
| Net income                            |       | 19,234,000             |        | —     |       | —                   |       | 19,234,000   |       | —       |       |
| Cash dividends                        |       | (2,794,000             | )           | —     |       | —                   |       | (2,794,000   | )          | —       |       |
| Stock-based compensation (Note F)     |       | 1,730,000              |        | —     |       | 1,730,000                |       | —       |       | —       |       |
| Other stock plan activity             |       | 1,499,000              |        | —     |       | 514,000                  |       | —       |       | 985,000      |       |
| Retire treasury stock                 |       | —                 |        | (57,000    | )          | (753,000                 | )          | —       |       | 810,000      |       |
|                                  |       |                   |        |       |       |                     |       |         |       |         |       |
| Balance,  September 25, 2004          |       | 135,383,000            |        | 8,031,000  |       | 5,318,000                |       | 122,034,000  |       | —       |       |
|                                  |       |                   |        |       |       |                     |       |         |       |         |       |
| Net income                            |       | 20,868,000             |        | —     |       | —                   |       | 20,868,000   |       | —       |       |
| Cash dividends                        |       | (4,066,000             | )           | —     |       | —                   |       | (4,066,000   | )          | —       |       |
| Stock dividend (Note A)               |       | —                 |        | 4,061,000  |       | (4,061,000               | )          | —       |       | —       |       |
| Stock-based compensation (Note F)     |       | 1,835,000              |        | 8,000      |       | 1,827,000                |       | —       |       | —       |       |
| Other stock plan activity             |       | 2,440,000              |        | 213,000    |       | 2,227,000                |       | —       |       | —       |       |
|                                  |       |                   |        |       |       |                     |       |         |       |         |       |
| Balance,  September 24, 2005          |       | 156,460,000            |        | 12,313,000 |       | 5,311,000                |       | 138,836,000  |       | —       |       |
|                                  |       |                   |        |       |       |                     |       |         |       |         |       |
| Net income                            |       | 28,380,000             |        | —     |       | —                   |       | 28,380,000   |       | —       |       |
| Cash dividends                        |       | (5,927,000             | )           | —     |       | —                   |       | (5,927,000   | )          | —       |       |
| Stock-based compensation (Note F)     |       | 1,431,000              |        | 6,000      |       | 1,425,000                |       | —       |       | —       |       |
| Other stock plan activity             |       | 1,982,000              |        | 126,000    |       | 1,856,000                |       | —       |       | —       |       |
|                                  |       |                   |        |       |       |                     |       |         |       |         |       |
| Balance, September 30,  2006          |       | $                      | 182,326,000 |       | $          | 12,445,000               |       | $            | 8,592,000  |         | $          | 161,289,000 |   | $ | — |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

*Prioryear amounts have been retroactively adjusted to reflect adoption of SFAS 123R(Notes A and F).*

F-6

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**A.  Summary of SignificantAccounting Policies**

**Business:**  Courier Corporation and its subsidiaries(“Courier” or the “Company”) print, publish and sell books.  Courier has two business segments: bookmanufacturing and specialty book publishing. On April 28, 2006, the Company acquired Federal MarketingCorporation, d/b/a Creative Homeowner (“Creative Homeowner”), a NewJersey-based publisher and distributor of books, home plans, and relatedproducts for the home and garden retail book market. On October 17, 2005, theCompany acquired Moore-Langen Printing Company, Inc. (“Moore Langen”) anIndianapolis-based printer specializing in manufacturing book covers.  OnJanuary 6, 2004, Courier purchased substantially all of the assets of Research& Education Association, Inc. (“REA”). Both Creative Homeowner and REA are included in the specialty publishingsegment and Moore Langen is included in the Book Manufacturing segment (seeNote H).

**Principles of Consolidation and Presentation:** The consolidated financial statements, preparedon a fiscal year basis, include the accounts of Courier Corporation and itssubsidiaries after elimination of all significant intercompanytransactions.  Such financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States of America (“generally accepted accountingprinciples”).  Fiscal year 2006 was a53-week period compared with fiscal years 2005 and 2004, which were 52-weekperiods.

**Financial Instruments:** Financial instruments consist primarily of cash, accounts receivable,accounts payable and debt obligations. The Company classifies as cash and cash equivalents amounts on depositin banks and cash invested temporarily in various instruments with maturitiesof three months or less at time of purchase. At September 30, 2006 and September 24, 2005, the fair market value ofthe Company’s financial instruments approximated their carrying values.  Interest income from these instruments was$450,000 in 2006, $666,000 in 2005, and $230,000 in 2004 and is included in thecaption “Interest (income) expense, net” in the accompanying ConsolidatedStatements of Income.

**Property, Plant and Equipment:** Property, plant and equipment are recorded at cost, including intereston funds borrowed to finance the acquisition or construction of major capitaladditions.  No interest was capitalizedin 2006 and 2005; interest capitalized in 2004 was $74,000.  The Company provides for depreciation ofproperty, plant and equipment on a straight-line basis over periods rangingfrom 10 to 40 years on buildings and improvements and from 3 to 11 years onequipment and furnishings.

Leasehold improvementsare amortized on a straight-line basis over the shorter of their useful life orthe term of the lease.  Expenditures formaintenance and repairs are charged against income as incurred; bettermentsthat increase the value or materially extend the life of the related assets arecapitalized.  When assets are sold orretired, the cost and accumulated depreciation are removed from the accountsand any gain or loss is included in income.

F-7

----

**Goodwill and Other Intangibles:** The Company evaluates possible impairmentannually or whenever events or circumstances indicate that the carrying valueof the assets may not be recoverable. There were no such events orcircumstances in the periods presented. In fiscal 2006, goodwill and other intangibles increased as a result ofthe acquisitions of Moore Langen and Creative Homeowner (Note H).  The following table reflects the fiscal 2006changes in both goodwill and other intangibles:
| ** **                                    | ** ** | **Book**          | ** ** | **Specialty**  | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|----------------|------------|------------|------------|
| ** **                                    | ** ** | **Manufacturing** | ** ** | **Publishing** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Segment**       | ** ** | **Segment**    | ** ** | **Total**  | ** ** |
|                                          |       |              |       |           |       |       |       |
| Goodwill, net*  at September 24, 2005         |       | $                 | 9,240,000  |           | $          | 24,015,000 |       | $ | 33,255,000 |   |
| Goodwill acquired                             |       | 5,532,000         |       | 16,619,000     |       | 22,151,000 |       |
| Goodwill, net*  at September 30, 2006         |       | $                 | 14,772,000 |           | $          | 40,634,000 |       | $ | 55,406,000 |   |
|                                          |       |              |       |           |       |       |       |
| Other  intangibles:                           |       |              |       |           |       |       |       |
| Trade name acquired                           |       | $                 | 931,000    |           | $          | 1,370,000  |       | $ | 2,301,000 |   |
| Customer lists acquired                       |       | 231,000           |       | 11,502,000     |       | 11,733,000 |       |
| Total other  intangibles                      |       | 1,162,000         |       | 12,872,000     |       | 14,034,000 |       |
| Amortization of  other intangibles            |       | (324,000          | )          | (19,000        | )          | (343,000   | )          |
| Other intangibles, net  at September 30, 2006 |       | $                 | 838,000    |           | $          | 12,853,000 |       | $ | 13,691,000 |   |

 

----

* Net of accumulatedamortization of $2.1 million in the book manufacturing segment and $0.9 millionin the specialty publishing segment.

Customer lists for MooreLangen and Creative Homeowner are being amortized over 10-year and 15-yearperiods, respectively.  Annualamortization expense for the next five years will be approximately $800,000.

**Long-Lived Assets:**Management periodically reviews long-lived assets for impairment and doesnot believe that there is any material impairment of any asset of the Company.

**Prepublication Costs:**Prepublication costs, associated with the creating new titles in thespecialty publishing segment, are amortized to cost of sales using thestraight-line method over estimated useful lives of three years for REA, fouryears for Dover Publications, Inc. (“Dover”), and five years for CreativeHomeowner.

**Income Taxes:**Deferred income tax liabilities and assets are determined based upon thedifferences between the financial statement and tax bases of assets andliabilities, and are measured by applying enacted tax rates and laws for thetaxable years in which these differences are expected to reverse.

**Revenue Recognition:**Revenue is recognized upon shipment of goods to customers or upon thetransfer of ownership for those customers for whom the Company providesmanufacturing and distribution services. Revenue for distribution services is recognized as services areprovided.  Shipping and handling feesbilled to customers are classified as revenue.

F-8

----

**Use of Estimates:**Theprocess of preparing financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts at the date of the financial statements.  Actual results may differ from theseestimates.

**Net Income per Share:** Basic net income per share is based on the weighted average number ofcommon shares outstanding each period. Diluted net income per share also includes potentially dilutive itemssuch as stock options (Note K).

**Stock Split:**OnMay 27, 2005, the Company distributed a three-for-two stock split, effected inthe form of a 50% stock dividend. Previously authorized but unissued shares were used to effect the stockdividend.  Weighted average sharesoutstanding and per share amounts presented in the accompanying financialstatements for periods prior to the stock split reflect the effect of the stocksplit.

**Adoption of New AccountingPrinciple: **As more fully discussed in Note F below, theCompany adopted Statement of Financial Accounting 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 implementedthis new standard on a retrospective basis.** **Under this new standard, companiesare required to account for stock-based compensation transactions using afair-value method and to recognize the expense over the service period.

**New Accounting Pronouncements:** In July 2006, the FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN No. 48”), an interpretation of FASB Statement No. 109, “Accounting forIncome Taxes.”  FIN No. 48 applies tofiscal years beginning after December 15, 2006; the Company’s 2008 fiscalyear.  The Company does not believe theadoption of FIN No. 48 will have a material effect on its consolidatedfinancial position, results of operations or cash flows.

## **B.Inventories**

Inventories are valued atthe lower of cost or market. Cost is determined using the last-in, first-out(LIFO) method for approximately 37% and 41% of the Company’s inventories atSeptember 30, 2006 and September 24, 2005, respectively.  Other inventories, primarily in the specialtypublishing segment, are determined on a first-in, first-out (FIFO) basis.

F-9

----

The acquisitions of MooreLangen and Creative Homeowner increased inventories by approximately $3.3million.  Inventories consisted of thefollowing at September 30, 2006 and September 24, 2005:
|                 | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------|------------|------------|------------|------------|------------|
|            |       |       |       |       |       |
| Raw materials   |       | $          | 3,910,000  |       | $          | 2,319,000 |   |
| Work in process |       | 6,295,000  |       | 6,276,000  |       |
| Finished goods  |       | 19,360,000 |       | 16,856,000 |       |
| Total           |       | $          | 29,565,000 |       | $          | 25,451,000 |   |

 

Ona FIFO basis, reported year-end inventories would have been higher by $5.5million in fiscal 2006 and $5.4 million in fiscal 2005.

**C.  Income Taxes**

The provision for income taxes differs from that computed using thestatutory federal income tax rates for the following reasons:
|                                         | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|------------|------------|
|                                    |       |       |       |     |       |       |       |
| Federal taxes at statutory rate         |       | $          | 13,367,000 |     | $          | 11,463,000 |       | $ | 10,539,000 |   |
| State taxes, net of federal tax benefit |       | 1,168,000  |       | 947,000  |       | 837,000    |       |
| Federal manufacturer’s deduction   |       | (335,000   | )          | —   |       | —     |       |
| Tax benefit of export related income    |       | (674,000   | )          | (805,000 | )          | (882,000   | )          |
| Stock based compensation (Note F)       |       | 148,000    |       | 300,000  |       | 370,000    |       |
| Reversal of tax reserves                |       | (3,800,000 | )          | —   |       | —     |       |
| Other                                   |       | (64,000    | )          | (22,000  | )          | 13,000     |       |
| Total                                   |       | $          | 9,810,000  |     | $          | 11,883,000 |       | $ | 10,877,000 |   |

 

During the fourthquarter of fiscal 2006, the Company reversed an income tax reserve for $3.8million pursuant to receipt of a state tax audit report and the expiration ofcertain statutory limitations.

The provision for income taxes consisted of the following:
|                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|
| Currently payable:       |       |       |       |       |       |       |       |
| Federal                  |       | $          | 10,930,000 |       | $          | 11,371,000 |       | $ | 7,467,000 |   |
| State                    |       | 1,587,000  |       | 1,342,000  |       | 1,215,000  |       |
| Reversal of tax reserves |       | (3,800,000 | )          | —     |       | —     |       |
|                     |       | 8,717,000  |       | 12,713,000 |       | 8,682,000  |       |
| Deferred:                |       |       |       |       |       |       |       |
| Federal                  |       | 906,000    |       | (945,000   | )          | 2,122,000  |       |
| State                    |       | 187,000    |       | 115,000    |       | 73,000     |       |
|                     |       | 1,093,000  |       | (830,000   | )          | 2,195,000  |       |
| Total                    |       | $          | 9,810,000  |       | $          | 11,883,000 |       | $ | 10,877,000 |   |

 

F-10

----

The following is asummary of the significant components of the Company’s deferred tax assets andliabilities as of September 30, 2006 and September 24, 2005:
|                                              | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|
| Deferred tax assets:                         |       |      |       |      |       |
| Vacation accrual not currently  deductible   |       | $         | 886,000    |      | $          | 732,000 |   |
| Other accruals not currently  deductible     |       | 497,000   |       | 516,000   |       |
| Non-deductible reserves                      |       | 2,073,000 |       | 1,110,000 |       |
| Other                                        |       | 247,000   |       | 587,000   |       |
| Classified as current                        |       | 3,703,000 |       | 2,945,000 |       |
| Deferred compensation arrangements           |       | 1,854,000 |       | 1,649,000 |       |
| Tax benefits of stock option activity        |       | 375,000   |       | 826,000   |       |
| Other                                        |       | 47,000    |       | 152,000   |       |
| Total deferred tax assets                    |       | $         | 5,979,000  |      | $          | 5,572,000 |   |
|                                         |       |      |       |      |       |
| Deferred tax liabilities:                    |       |      |       |      |       |
| Accelerated depreciation                     |       | 7,772,000 |       | 6,595,000 |       |
| Goodwill and other intangibles  amortization |       | 3,417,000 |       | 2,430,000 |       |
| Total deferred tax liabilities               |       | $         | 11,189,000 |      | $          | 9,025,000 |   |

 

The Company also has deferred tax assets for state net operating losscarryforwards of approximately $660,000 and $480,000 as of September 30, 2006and September 24, 2005, respectively, for which the Company has fully providedvaluation allowances.

Non-current deferred tax assets have been netted against non-currentdeferred tax liabilities for balance sheet classification purposes.

**D.  Long-Term Debt**

At September 30, 2006, the Company had $16.9 million in borrowings underits long-term revolving credit facility; no such debt was outstanding atSeptember 24, 2005.  Other long-term debtat September 30, 2006 and September 24, 2005 consisted of an obligation underan industrial development bond arrangement totaling $425,000 and $510,000,respectively, including current maturities of $88,000 and $85,000,respectively.  This industrial bondarrangement bears interest at 3%. At September 30, 2006, scheduledaggregate principal payments of these obligations were $88,000 in 2007, $91,000in 2008, $16,978,000 in 2009, $96,000 in 2010, and $57,000 in 2011.  The industrial bond arrangement provides fora lien on the assets acquired with the proceeds.

The Company has a $60 million long-term revolving credit facility inplace under which the Company can borrow at a rate not to exceed LIBOR plus1.5%; such rate was 5.8% at September 30, 2006. During 2006, the Companyincreased the amount available under this facility from $45 million to $60million and extended the maturity date of this facility to March 2009.  The revolving credit facility is available tothe Company for both its long-term and short-term financing needs.

F-11

----

The revolving credit facility contains restrictive covenants includingprovisions relating to the maintenance of working capital, the level of capitalexpenditures, the incurring of additional indebtedness and a quarterly test ofEBITDA to debt service.  It also providesfor a commitment fee not to exceed 3/8% per annum on the unused portion.  These fees are included in the caption “Interest(income) expense, net” in the accompanying Consolidated Statements of Income.

**E.  Commitments and Contingencies**

The Company is committed under various operating leases to make annualrental payments for certain buildings and equipment. Amounts charged tooperations under such leases approximated $3,108,000 in 2006, $3,363,000 in2005 and $3,902,000 in 2004.  As of September30, 2006, minimum annual rental commitments under the Company’s long-termoperating leases were approximately $3,103,000 in 2007, $2,282,000 in 2008,$1,445,000 in 2009, $1,433,000 in 2010, $623,000 in 2011, and $1,546,000 in theaggregate thereafter.  The Company leasesone of its facilities from a corporation owned in part by an executive of oneof the Company’s subsidiaries.  The leaseagreement requires annual payments of approximately $276,000 through July2007.  At September 30, 2006 andSeptember 24, 2005, the Company had letters of credit outstanding of $1,270,000and $1,318,000, respectively.

In the ordinary course of business, the Company is subject to variouslegal proceedings and claims.  TheCompany believes that the ultimate outcome of these matters will not have amaterial adverse effect on its consolidated financial statements.

## **F. Stock Arrangements**

In the first quarter offiscal 2006, the Company adopted 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”), as amended by SFAS No. 148.  Prior to the adoption of SFAS 123R, theCompany applied APB 25 to account for its stock-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 retainer fees.  Under the provisions of APB 25, the Companywas not required to recognize compensation expense for the cost of stockoptions or for shares issued under the Company’s Employee Stock Purchase Plan (“ESPP”).  Beginning with its 2006 fiscal year, with theadoption of SFAS 123R, the Company recorded stock-based compensation expensefor the cost of stock options, stock grants, and shares issued under the ESPP.The fair value of each option awarded was calculated on the date of grant usingthe Black-Scholes option-pricing model.

F-12

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Incrementalstock-based compensation recognized in selling and administrative expenses inthe accompanying financial statements, and the related tax benefit, were asfollows:
| ** **                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Incremental SFAS 123R  costs                            |       | $        | 978,000    |     | $          | 1,485,000 |       | $ | 1,440,000 |   |
| Related tax benefit                                     |       | (194,000 | )          | (219,000 | )          | (134,000  | )          |
| Incremental SFAS 123R costs, net of related tax effects |       | $        | 784,000    |     | $          | 1,266,000 |       | $ | 1,306,000 |   |

 

The following tableprovides information on the impact on the accompanying income statements ofadopting SFAS 123R on a retrospective basis.
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income per share as  reported: |       |     |       |     |       |     |       |
| Basic                              |       | $        | 2.30       |     | $          | 1.72     |       | $ | 1.61 |   |
| Diluted                            |       | 2.25     |       | 1.67     |       | 1.56     |       |
|                               |       |     |       |     |       |     |       |
| Pro forma net income  per share:   |       |     |       |     |       |     |       |
| Basic                              |       | $        | 2.37       |     | $          | 1.83     |       | $ | 1.72 |   |
| Diluted                            |       | 2.31     |       | 1.77     |       | 1.66     |       |

 

Unrecognized stock-basedcompensation cost at September 30, 2006 was $1.7 million to be recognized overa weighted-average period of 2.3****years.

The cumulative effect ofthe adoption of SFAS 123R on the Company’s consolidated balance sheet atSeptember 27, 2003 resulted in an increase in additional paid-in capital of$3,177,000, a reduction in retained earnings of $3,233,000, elimination ofunearned compensation of $350,000, and a reduction in deferred income taxliabilities of $294,000.

**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

F-13

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in one year.  Stock options awardedin 2005 and 2006 vest over three years. Stock grants generally vest over 3years. The following is a summary of all option activity for this plan:
| ** **                         | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Aggregate **                  | ** ** |
|------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **Shares** | ** ** | **Exercise   Price** | ** ** | **Remaining   Term (yrs)** | ** ** | **Intrinsic Value** | ** ** |
| Outstanding  at September 27, 2003 |       | 682,377    |       | $                         | 12.79      |                                 |       |   |   |   |
| Issued                             |       | 40,949     |       | 27.30                     |       |                                 |       |   |   |
| Exercised                          |       | (93,564    | )          | 6.92                      |       |                                 |       |   |   |
| Cancelled                          |       | (4,500     | )          | 19.57                     |       |                                 |       |   |   |
| Outstanding  at September 25, 2004 |       | 625,262    |       | $                         | 14.57      |                                 |       |   |   |   |
| Issued                             |       | 30,131     |       | 35.61                     |       |                                 |       |   |   |
| Exercised                          |       | (222,252   | )          | 9.32                      |       |                                 |       |   |   |
| Cancelled                          |       | (7,104     | )          | 22.38                     |       |                                 |       |   |   |
| Outstanding  at September 24, 2005 |       | 426,037    |       | $                         | 18.66      |                                 |       |   |   |   |
| Issued                             |       | 40,780     |       | 37.09                     |       |                                 |       |   |   |
| Exercised                          |       | (64,926    | )          | 11.53                     |       |                                 |       | $ | 1,769,000 |   |
| Outstanding  at September 30, 2006 |       | 401,891    |       | $                         | 21.69      |                                 | 3.7        |   | $ | 6,213,000 |   |
|                               |       |       |       |                      |       |                                 |       |   |   |
| Exercisable  at September 30, 2006 |       | 340,281    |       | $                         | 19.00      |                                 | 3.1        |   | $ | 6,173,000 |   |
| Available for future grants        |       | 272,425    |       |                      |       |                                 |       |   |   |

 

There were 26,078 non-vested restricted stock grants outstanding at thebeginning of fiscal 2006 with a weighted-average fair value of $26.65 pershare.  During 2006, 16,673 restrictedstock awards were granted with a weighted-average fair value of $40.01 pershare, of which 2,000 shares were forfeited. There were 4,781 restricted stock grants that vested in 2006 with aweighted-average fair value of $12.60 per share.  At September 30, 2006, there were 35,970non-vested stock grants outstanding with a weighted-average fair value of$33.77.

**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 market value of stock at the time the option is granted.  The options are immediately exercisable andhave a term of five years. The 2005 Plan replaced the previous non-employeedirectors’ plan which had been adopted in 1989 (the “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

F-14

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fiscal 2005, 9,000 options were granted under the 1989 Plan. No furtheroptions will be granted under the 1989 Plan. The following is a summary of alloption activity for these plans:
| ** **                         | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Aggregate**                  | ** ** |
|------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **Shares** | ** ** | **Exercise  Price**       | ** ** | **Remaining  Term (yrs)** | ** ** | **Intrinsic  Value** | ** ** |
| Outstanding  at September 27, 2003 |       | 159,638    |       | $                         | 8.94       |                           |       |   |   |   |
| Issued                             |       | 60,750     |       | 21.03                     |       |                           |       |   |   |
| Exercised                          |       | (31,100    | )          | 5.83                      |       |                           |       |   |   |
| Outstanding  at September 25, 2004 |       | 189,288    |       | $                         | 13.33      |                           |       |   |   |   |
| Issued                             |       | 45,000     |       | 32.47                     |       |                           |       |   |   |
| Exercised                          |       | (60,112    | )          | 9.39                      |       |                           |       |   |   |
| Outstanding  at September 24, 2005 |       | 174,176    |       | $                         | 19.64      |                           |       |   |   |   |
| Issued                             |       | 43,752     |       | 36.34                     |       |                           |       |   |   |
| Exercised                          |       | (32,801    | )          | 7.23                      |       |                           |       | $ | 961,000 |   |
| Outstanding  at September 30, 2006 |       | 185,127    |       | $                         | 25.78      |                           | 2.6        |   | $ | 2,102,000 |   |
|                               |       |       |       |                      |       |                           |       |   |   |
| Exercisable  at September 30, 2006 |       | 185,127    |       | $                         | 25.78      |                           | 2.6        |   | $ | 2,102,000 |   |
| Available for future grants        |       | 135,684    |       |                      |       |                           |       |   |   |

 

Directors may also elect to receive their annual retainer and committeechair fees as shares of stock in lieu of cash. Such shares issued in 2006 and 2005 were 5,504 shares and 4,062 sharesat a fair market value of $36.34 and $34.49, respectively.

**Employee Stock Purchase Plan:** The Company’s 1999 Employee Stock Purchase Plan (“ESPP”), as amended,covers an aggregate of 337,500 shares of Company common stock for issuanceunder the plan.  Eligible employees maypurchase shares of Company common stock at not less than 85% of fair marketvalue at the end of the grant period. Prior to 2005, the purchase price was determined based upon 85% of fairmarket value at the beginning or end of the grant period.  During 2006, 2005, and 2004, 18,433 shares,21,439 shares, and 26,184 shares, respectively, were issued under the plan at anaverage price of $32.36 per share, $26.49 per share, and $21.25 per share,respectively.  Since inception, 236,324****shares have been issued. At September 30, 2006, an additional 101,176 shares were reserved forfuture issuances.

**Stockholders’ Rights Plan:** In March 1999, the Board of Directors adopted a ten-year stockholders’rights plan.  Under the plan, the Company’sstockholders of record at March 19, 1999 received a right to purchase a unit (“Unit”)comprised of one one-thousandth of a share of preferred stock for each share ofcommon stock held on that date at a price of $100, subject to adjustment.  Until such rights become exercisable, onesuch right will also attach to subsequently issued shares of common stock.  The rights become exercisable if a person orgroup acquires 15% or more of the Company’s common stock or after commencementof a tender or exchange offer which would result in a person or groupbeneficially owning 15% or more of the Company’s common stock.  When exercisable, under certain conditions,each right entitles the holder thereof to purchase Units of the Company’spreferred stock or shares of common stock of the acquirer, in each case havinga market value at that time of twice the right’s exercise price. 

F-15

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The Board of Directors will be entitled to redeem the rights at one centper right, under certain circumstances. The rights expire in 2009.

**Stock-Based Compensation:** The fair value of each option grant was estimated on the date of thegrant using the Black-Scholes option-pricing model.

Thefollowing key assumptions were used to value options issued:
|                                   | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**     | ** ** |
|-----------------------------------|------------|-----------|------------|-----------|------------|--------------|------------|
| Risk-free  interest rate          |       | 4.5       | %          | 4.1       | %          | 3.8          | %          |
| Expected  volatility              |       | 30        | %          | 22        | %          | 30           | %          |
| Expected  dividend yield          |       | 1.3       | %          | 1.1       | %          | 0.9          | %          |
| Estimated  life for grants under: |       |      |       |      |       |         |       |
| Stock Incentive Plans             |       | 5  years  |       | 7  years  |       | 5  - 7 years |       |
| Directors’ Option Plans      |       | 5  years  |       | 5  years  |       | 5  years     |       |
| ESPP                              |       | 0.5 years |       | 0.5 years |       | 0.5 years    |       |

 

The following is a summary of the weighted average fair value per shareof options granted during each of the past three fiscal years, based on theBlack-Scholes option-pricing model.

                 
| ** **                               | ** ** | **Stock Incentive Plan** | ** ** | **Directors’ Option Plans** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2006**                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| On  grant date:                          |       |                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Exercise  price was equal to stock price |       | $                                  | 11.19      |                                       | $          | 10.43 |   | $ | 9.81 |   | $ | 9.14 |   | $ | 10.17 |   | — |   |
| Exercise price was less than stock price |       | —                             |       | —                                     |       | — |   | — |   | $ | 10.03 |   | $ | 8.52 |   |
|                                          |            |                                    |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**G.  Retirement Plans**

The Company and its consolidated subsidiaries maintain various definedcontribution retirement plans covering substantially all of its employees.  Dover, acquired in September 2000, alsoprovides retirement benefits through a defined benefit plan (“the Dover plan”)as described below.

Retirement costs ofmulti-employer union plans consist of contributions determined in accordancewith the respective collective bargaining agreements.  Retirement benefits for non-union employeesare provided through the Courier Profit Sharing and Savings Plan, whichincludes an Employee Stock Ownership Plan (“ESOP”).  Retirement costs included in the accompanyingfinancial statements amounted to approximately $3,870,000 in 2006, $3,820,000in 2005 and $3,300,000 in 2004.

The Courier Profit Sharing and Savings Plan (“PSSP”) is qualified underSection 401(k) of the Internal Revenue Code. The plan allows eligible employees to contribute up to 100% of theircompensation, subject to IRS limitations, with the Company matching 25% of thefirst 6% of pay contributed by the employee. The Company also makes contributions to the plan annually based onprofits each year for the benefit of all eligible non-union employees.

F-16

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Shares of Company common stock may be allocated to participants’ ESOPaccounts annually based on their compensation as defined in the plan.  During 2006,****2005and 2004, no such shares were allocated to eligible participants.  At September 30, 2006, the ESOP held 397,500****shares on behalf of the participants.

Dover has a noncontributory, defined benefit pension plancovering substantially all of its employees. As of December 31, 2001, Doveremployees became eligible to participate in the PSSP.  As such, plan benefits under the Doverdefined benefit plan were frozen as of that date. No contributions have beenmade to the Dover plan for any of the past three years.  In 2007, contributions are expected to be$19,000.

The following tables provide information regarding the Doverplan for the years ended September 30, 2006 and September 24, 2005.

Change in projected benefit obligation:
|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Obligation at  beginning of year |       | $        | 3,464,000  |     | $          | 3,339,000 |   |
| Administrative cost              |       | 7,000    |       | 8,000    |       |
| Interest cost                    |       | 173,000  |       | 185,000  |       |
| Actuarial (gain) loss            |       | (123,000 | )          | 186,000  |       |
| Benefits paid                    |       | (383,000 | )          | (254,000 | )          |
| Obligation at end of  year       |       | $        | 3,138,000  |     | $          | 3,464,000 |   |

 

Benefit payments in eachof the next five years are projected to be $262,000, $255,000, $245,000,$268,000 and $264,000. Aggregate payments for the 2011-2015 period areestimated to be $1,295,000.

Change in plan assets:
|                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Fair value of plan  assets at beginning of year |       | $        | 3,559,000  |     | $          | 3,633,000 |   |
| Actual return on plan assets                    |       | 62,000   |       | 180,000  |       |
| Benefits paid                                   |       | (383,000 | )          | (254,000 | )          |
| Fair value of plan  assets at end of year       |       | $        | 3,238,000  |     | $          | 3,559,000 |   |

 

Plan assets were invested entirely in Guaranteed InsuranceContracts in 2006 and 2005.

Reconciliation of funded status:
|                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Funded status at  end of year             |       | $        | 100,000    |     | $          | 94,000 |   |
| Unrecognized net actuarial loss and other |       | 623,000  |       | 595,000  |       |
| Prepaid  pension cost                     |       | $        | 723,000    |     | $          | 689,000 |   |

 

F-17

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Components of the net periodic benefit cost:
|                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Service cost                           |       | $        | 7,000      |     | $          | 8,000 |   |
| Interest cost                          |       | 173,000  |       | 185,000  |       |
| Expected return  on plan assets        |       | (235,000 | )          | (244,000 | )          |
| Amortization of  unrecognized net loss |       | 21,000   |       | —   |       |
| Net periodic benefit  income           |       | $        | (34,000    | )        | $          | (51,000 | ) |

 

Actuarialassumptions used to determine costs and benefit obligations:
|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Discount rate                  |       | 5.8      | %          | 5.3      | %          |
| Compensation  increases        |       | None     |       | None     |       |
| Return on assets for  the year |       | 7.0      | %          | 7.0      | %          |

 

The Company’s strategy isto achieve a long-term rate of return sufficient to satisfy plan liabilitieswhile minimizing plan expenses and mitigating downside risks. Assets arecurrently allocated 100% to Guaranteed Insurance Contracts, however the Companyreviews this weighting from time to time in order to achieve overall objectivesin light of current circumstances.

The expected long-termrate of return on assets of 7% was determined based on historical returns forinvestments consistent with Plan objectives, but weighted primarily towardsinvestments in debt securities. While actual returns in 2006 and 2005 werebelow the assumed rate of return, the assumed rate gives consideration tohistorical longer-term rates.

Prepaid pension cost atSeptember 30, 2006 and September 24, 2005 is included in the accompanyingconsolidated balance sheet under the caption “Other assets.”

**H. Business Acquisitions**

OnApril 28, 2006, the Company acquired Federal Marketing Corporation, d/b/aCreative Homeowner (“Creative Homeowner”), a New Jersey-based publisher anddistributor of books, home plans, and related products for the home and gardenretail book market. The Company purchased 100% of the stock of CreativeHomeowner in a $37 million cash transaction. The acquisition was accounted foras a purchase, and accordingly, Creative Homeowner’s financial results wereincluded in the specialty publishing segment in the consolidated financialstatements from the date of acquisition. The allocation of the purchase price to assets acquired included, in theaccompanying financial statements, approximately $16.6 million to goodwill,$11.5 million to customer lists, and $1.4 million to trade name. Goodwilldeductible for tax purposes is approximately $16 million.  Other assets acquired included $7.5 millionof accounts receivable and $2.9 million of inventories.  Accounts payable and other currentliabilities assumed were $4.9 million and $2.1 million, respectively.

Thefollowing unaudited pro forma information presents a summary of consolidatedresults of operations of the Company and Creative Homeowner as if theacquisition had occurred at the 

F-18

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beginningof fiscal 2006 and 2005, with pro forma adjustments to give effect toamortization of customer lists, interest expense on acquisition debt andcertain other purchase accounting adjustments, together with related income taxeffects.
| Unaudited                     | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|-------------------------------|------------|------------|-------------|------------|------------|
| Net sales                     |       | $          | 284,014,000 |       | $          | 249,801,000 |   |
| Net income                    |       | 28,273,000 |        | 20,887,000 |       |
| Net income per diluted  share |       | 2.24       |        | 1.67       |       |
|                               |            |            |             |            |            |  |  |

 

On October 17, 2005, theCompany acquired Moore-Langen Printing Company, Inc. (“Moore Langen”), anIndianapolis-based printer specializing in manufacturing book covers, in a $15million cash transaction.  Theacquisition was accounted for as a purchase, and accordingly, Moore Langen’sfinancial results were included in the book manufacturing segment in theconsolidated financial statements from the date of acquisition.  The allocation of the purchase price toassets acquired included, in the accompanying financial statements,approximately $5.5 million to goodwill, which is tax deductible, $0.9 millionto trade name, and $230,000 to customer lists.

On January 6, 2004, theCompany purchased substantially all of the assets of Research & EducationAssociation (“REA”), a publisher of test preparation and study guide books andsoftware for high school, college and graduate students, andprofessionals.  The acquisition wasaccounted for as a purchase, and accordingly, REA’s financial results wereincluded in the specialty publishing segment in the consolidated financialstatements from the date of acquisition. The purchase price was approximately $12 million, with an allocation ofapproximately $8.4 million to goodwill and $0.7 million to prepublication costsin the accompanying financial statements. In addition, a required purchaseaccounting adjustment was made to write up inventory by approximately $1million to fair market value when REA was acquired.

**I.  Business Segments**

The Company has two business segments: book manufacturing and specialtypublishing. The book manufacturing segment offers a full range of services fromproduction through storage and distribution for religious, educational andspecialty trade book publishers.  TheCompany has aggregated its book manufacturing business into one segment becauseof strong similarities in the economic characteristics, the nature of productsand services, production processes, class of customer and distribution methodsused. Moore Langen, acquired in October 2005, was added to this segment infiscal 2006.  The specialty publishingsegment consists of Dover, REA, beginning with the second quarter of fiscal2004, and Creative Homeowner, beginning with its acquisition in April 2006 (seeNote H).

The accounting policies of the segments are the same as those describedin Note A.  In evaluating segmentperformance, management primarily focuses on income or loss before taxes,stock-based compensation, and other income. The elimination of intersegmentsales and related profit represents sales from the book manufacturing segmentto the specialty publishing segment. Interest is allocated to the specialty publishing segment based on theacquisition costs of Dover, REA, and Creative Homeowner, reduced by cashgenerated by each business since acquisition. 

F-19

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Interest allocated to the book manufacturing segment includes costsassociated with funding the Moore Langen acquisition.  Stock-based compensation is reflected as “unallocated”in the following table.  Other income,discussed in Note J, is also reflected as “unallocated.” Corporate expensesthat are allocated to the segments include various support functions such asinformation technology services, finance, human resources and engineering, andinclude depreciation and amortization expense related to corporate assets.  The corresponding corporate asset balancesare not allocated to the segments.  Unallocatedcorporate assets consist primarily of cash and cash equivalents and fixedassets used by the corporate support functions.

The following table provides segment information as requiredunder SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation.”
| ** **                                     | ** ** | **Total  Company** | ** **  | **Book  Manufacturing** | ** ** | **Specialty  Publishing** | ** ** | **Unallocated** | ** ** | **Intersegment  Elimination** | ** ** |
|------------------------------------------------|------------|--------------------|-------------|-------------------------|------------|---------------------------|------------|-----------------|------------|-------------------------------|------------|
| Fiscal 2006                                    |       |               |        |                    |       |                      |       |            |       |                          |       |
| Net sales                                      |       | $                  | 269,051,000 |                    | $          | 220,115,000               |       | $               | 57,549,000 |                          | —     |   | $ | (8,613,000 | ) |
| Earnings before income  taxes                  |       | 38,190,000         |        | 33,606,000              |       | 6,122,000                 |       | (1,431,000      | )          | (107,000                      | )          |
| Total assets                                   |       | 247,188,000        |        | 138,053,000             |       | 100,441,000               |       | $               | 8,694,000  |                          | —     |   |
| Goodwill, net                                  |       | 55,406,000         |        | 14,772,000              |       | 40,634,000                |       | —          |       | —                        |       |
| Depreciation and  amortization                 |       | 14,804,000         |        | 9,885,000               |       | 4,307,000                 |       | 612,000         |       | —                        |       |
| Capital expenditures  and prepublication costs |       | 33,682,000         |        | 28,248,000              |       | 4,557,000                 |       | 877,000         |       | —                        |       |
| Interest (income)/  expense                    |       | 182,000            |        | (733,000                | )          | 915,000                   |       | —          |       | —                        |       |
|                                           |       |               |        |                    |       |                      |       |            |       |                          |       |
| Fiscal 2005                                    |       |               |        |                    |       |                      |       |            |       |                          |       |
| Net  sales                                     |       | $                  | 227,039,000 |                    | $          | 193,623,000               |       | $               | 40,254,000 |                          | —     |   | $ | (6,838,000 | ) |
| Earnings  before income taxes                  |       | 32,751,000         |        | 31,115,000              |       | 3,883,000                 |       | $               | (1,835,000 | )                             | (412,000   | ) |
| Total  assets                                  |       | 196,965,000        |        | 99,449,000              |       | 59,160,000                |       | 38,356,000      |       | —                        |       |
| Goodwill,  net                                 |       | 33,255,000         |        | 9,240,000               |       | 24,015,000                |       | —          |       | —                        |       |
| Depreciation  and amortization                 |       | 11,660,000         |        | 8,263,000               |       | 3,029,000                 |       | 368,000         |       | —                        |       |
| Capital  expenditures and prepublication costs |       | 22,550,000         |        | 15,689,000              |       | 6,489,000                 |       | 372,000         |       | —                        |       |
| Interest  (income)/ expense                    |       | (388,000           | )           | (700,000                | )          | 312,000                   |       | —          |       | —                        |       |
|                                           |       |               |        |                    |       |                      |       |            |       |                          |       |
| Fiscal 2004                                    |       |               |        |                    |       |                      |       |            |       |                          |       |
| Net  sales                                     |       | $                  | 211,179,000 |                    | $          | 177,225,000               |       | $               | 40,787,000 |                          | $          | — |   | $ | (6,833,000 | ) |
| Earnings  before income taxes                  |       | 30,111,000         |        | 25,436,000              |       | 6,515,000                 |       | (1,480,000      | )          | (360,000                      | )          |
| Total  assets                                  |       | 175,199,000        |        | 92,004,000              |       | 55,727,000                |       | 27,468,000      |       | —                        |       |
| Goodwill,  net                                 |       | 33,255,000         |        | 9,240,000               |       | 24,015,000                |       | —          |       | —                        |       |
| Depreciation  and amortization                 |       | 10,929,000         |        | 7,911,000               |       | 2,568,000                 |       | 450,000         |       | —                        |       |
| Capital  expenditures and prepublication costs |       | 16,234,000         |        | 12,725,000              |       | 2,917,000                 |       | 592,000         |       | —                        |       |
| Interest (income)/ expense                     |       | (23,000            | )           | (330,000                | )          | 307,000                   |       | —          |       | —                        |       |

 

F-20

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Export sales as a percentage of consolidated sales were approximately 19%in 2006 and 21% in both 2005 and 2004. Approximately 90% of export sales were in the book manufacturing segmentin fiscal years 2006, 2005, and 2004. Sales to the Company’s largest customer amounted to approximately 23%****of consolidated sales in 2006, 28% in 2005 and 27% in 2004.In addition, sales to another customer amounted to 16% of consolidated sales in2006, 19% in 2005 and 17% in 2004.  Bothof these customers are in the book manufacturing segment and no other customeraccounted for more than 10% of consolidated sales.  Customers are granted credit on an unsecuredbasis.  Receivables for the two largestcustomers, as a percentage of consolidated accounts receivable, were 24% atSeptember 30, 2006 and 23% at September 24, 2005.

**J.  Other Income**

On May 26, 2004, the Company completed the sale of approximately200,000 square feet of unoccupied and unutilized portions of its multi-buildingmanufacturing complex in Westford, Massachusetts for $1.7 million, resulting ina pretax gain of $250,000, or $.01 per diluted share.

## **K.  NetIncome per Share**

Following is a reconciliation of the shares used in thecalculation of basic and diluted net income per share.  Potentially dilutive shares, calculated usingthe treasury stock method, consist of shares issued under the Company’s stockoption plans.
|                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Average  shares outstanding for basic   |       | 12,322,000 |       | 12,125,000 |       | 11,917,000 |       |
| Effect  of potentially dilutive shares  |       | 277,000    |       | 356,000    |       | 428,000    |       |
| Average shares outstanding for dilutive |       | 12,599,000 |       | 12,481,000 |       | 12,345,000 |       |

 

**L.  Derivative Financial Instruments**

At the end of fiscal2006, the Company had a forward exchange contract to purchase approximately 800,000euros as a hedge against a foreign currency equipment purchase commitment,designated as a cash flow hedge.  TheCompany does not use financial instruments for trading or speculative purposes.

## **M.  SubsequentEvent**

On November 9, 2006, theCompany increased its revolving credit facility to $100 million.  In addition, the bank group was expanded fromthree banks to five banks and the maturity date of this facility was extendedto March 2011.

F-21

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COURIER CORPORATION

 

FIVE-YEARFINANCIAL SUMMARY
| **(Dollar amounts in millions**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **except per share data)**         | ** ** | **2006***  | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|                                              |       |       |       |       |       |       |       |       |       |       |       |
| Net sales                                         |       | $          | 269.1      |       | $          | 227.0      |       | $          | 211.2      |       | $          | 202.0 |   | $ | 201.0 |   |
| Gross profit                                      |       | 88.5       |       | 75.2       |       | 68.6       |       | 67.4       |       | 62.6       |       |
| Net income                                        |       | 28.4       |       | 20.9       |       | 19.2       |       | 18.3       |       | 15.7       |       |
| Net income per diluted  share                     |       | 2.25       |       | 1.67       |       | 1.56       |       | 1.50       |       | 1.31       |       |
| Dividends per share                               |       | 0.48       |       | 0.33       |       | 0.23       |       | 0.20       |       | 0.18       |       |
| Working capital                                   |       | 46.2       |       | 66.9       |       | 57.3       |       | 50.9       |       | 34.0       |       |
| Current ratio                                     |       | 2.3        |       | 3.2        |       | 2.9        |       | 2.9        |       | 2.2        |       |
| Capital expenditures                              |       | 29.4       |       | 19.7       |       | 13.4       |       | 10.9       |       | 4.9        |       |
| Depreciation and  amortization                    |       | 14.8       |       | 11.7       |       | 10.9       |       | 9.8        |       | 10.7       |       |
| Total assets                                      |       | 247.2      |       | 197.0      |       | 175.2      |       | 151.5      |       | 131.8      |       |
| Long-term debt                                    |       | 17.2       |       | 0.4        |       | 0.5        |       | 0.6        |       | 0.7        |       |
| Long-term debt as a  percentage of capitalization |       | 8.6        | %          | 0.3        | %          | 0.4        | %          | 0.5        | %          | 0.7        | %          |
| Stockholders’ equity                         |       | 182.3      |       | 156.5      |       | 135.4      |       | 115.7      |       | 95.9       |       |
| Return on stockholders’  equity              |       | 16.8       | %          | 14.3       | %          | 15.3       | %          | 17.3       | %          | 17.8       | %          |
| Stockholders’ equity  per share              |       | 14.65      |       | 12.71      |       | 11.24      |       | 9.73       |       | 8.18       |       |
| Shares outstanding (in  000’s)               |       | 12,445     |       | 12,313     |       | 12,047     |       | 11,897     |       | 11,732     |       |
| Number of employees                               |       | 1,724      |       | 1,479      |       | 1,465      |       | 1,420      |       | 1,455      |       |
|                                                   |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

 

*Prior year amounts have been retroactively adjusted toreflect the adoption of SFAS 123R (Notes A and F).*

*Net income per diluted share is based on weighted averageshares outstanding; stockholders’ equity per share is based on sharesoutstanding at year end. Shares outstanding and per share amounts have beenretroactively adjusted to reflect three-for-two stock splits distributed on May27, 2005 and December 5, 2003 (Note A).*

*Net sales, gross profit, net income, net income per dilutedshare and return on stockholders’ equity for 2003 and 2002 reflect continuingoperations.  Results from a discontinuedoperation were income of $848,000 (including a gain on disposal) in 2003 and aloss of $120,000 in 2002.*

----

****                **Fiscal 2006 was a 53-weekperiod.  Fiscal 2006 results include thereversal of a $3.8 million, or $.30 per diluted share, income taxreserve (Note C).*

F-22

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COURIER CORPORATION

 

SELECTED QUARTERLYFINANCIAL DATA (UNAUDITED)

 
| **Fiscal 2006**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **(Dollars in thousands except per share amounts)** | ** ** | **First**  | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** |
|                                                                              |       |       |       |       |       |       |       |       |       |
| Operating Results:                                                                |       |       |       |       |       |       |       |       |       |
| Net sales                                                                         |       | $          | 57,684     |       | $          | 57,527     |       | $          | 70,424     |   | $ | 83,416 |   |
| Gross profit                                                                      |       | 18,531     |       | 17,875     |       | 22,114     |       | 29,996     |       |
| Net income                                                                        |       | 4,487      |       | 4,393      |       | 6,056      |       | 13,444     |       |
| Net income per diluted  share                                                     |       | 0.36       |       | 0.35       |       | 0.48       |       | 1.07       |       |
| Dividends declared per  share                                                     |       | 0.12       |       | 0.12       |       | 0.12       |       | 0.12       |       |
| Stock price:                                                                      |       |       |       |       |       |       |       |       |       |
| Highest                                                                           |       | 37.66      |       | 42.15      |       | 44.90      |       | 40.02      |       |
| Lowest                                                                            |       | 32.71      |       | 34.34      |       | 35.03      |       | 33.03      |       |
|                                                                                   |            |            |            |            |            |            |            |            |            |  |  |  |  |

 
| **Fiscal 2005**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **(Dollars in thousands except per share amounts)** | ** ** | **First**  | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** |
|                                                                              |       |       |       |       |       |       |       |       |       |
| Operating Results:                                                                |       |       |       |       |       |       |       |       |       |
| Net sales                                                                         |       | $          | 51,269     |       | $          | 53,495     |       | $          | 58,758     |   | $ | 63,517 |   |
| Gross profit                                                                      |       | 16,700     |       | 16,354     |       | 19,415     |       | 22,717     |       |
| Net income                                                                        |       | 3,802      |       | 3,825      |       | 5,549      |       | 7,692      |       |
| Net income per diluted  share                                                     |       | 0.31       |       | 0.31       |       | 0.44       |       | 0.61       |       |
| Dividends declared per  share (1)                                                 |       | 0.0667     |       | 0.1667     |       | —     |       | 0.10       |       |
| Stock price:                                                                      |       |       |       |       |       |       |       |       |       |
| Highest                                                                           |       | 35.29      |       | 37.05      |       | 38.56      |       | 41.96      |       |
| Lowest                                                                            |       | 27.55      |       | 32.82      |       | 31.24      |       | 34.80      |       |
|                                                                                   |            |            |            |            |            |            |            |            |            |  |  |  |  |

 

*Dilutedshare amounts are based on weighted average shares outstanding.  Per share amounts and stock prices have been*

*retroactively adjusted to reflect a three-for-twostock split distributed on May 27, 2005 (see Notes A and K).*

*Common shares of the Company are traded over-the-counter onthe Nasdaq National Market - symbol “CRRC.”*

*There were 985 stockholders of record as of September30, 2006.*

----

*(1)**       Two cash dividends weredeclared in the second quarter of fiscal 2005. The second dividend, declared inMarch 2005, was announced in conjunction with a three-for-two stock split (seeNote A).  As such, no cash dividend wasdeclared in the third quarter of fiscal 2005.*

F-23

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###### **MANAGEMENT’S DISCUSSION AND ANALYSIS**

#### ***FORWARD-LOOKING INFORMATION***

*The AnnualReport to shareholders includes forward-looking statements.  Statements that describe future expectations,plans or strategies are considered “forward-looking statements” as that term isdefined under the Private Securities Litigation Reform Act of 1995 and releasesissued by the Securities and Exchange Commission.  The words “believe”, “expect”, “anticipate”, “intend”,“estimate” and other expressions which are predictions of or indicate futureevents and trends and which do not relate to historical matters identifyforward-looking statements.  Suchstatements are subject to risks and uncertainties that could cause actualresults 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 costsand availability, pricing actions by competitors, consolidation among customersand competitors, success in the integration of acquired businesses, changes inoperating expenses including energy costs, changes in technology, difficultiesin the start up of new equipment or information technology systems, changes incopyright laws, changes in tax regulations, changes in the Company’s effectiveincome tax rate, and general changes in economic conditions, including currencyfluctuations and changes in interest rates. Although the Company believes that the assumptions underlying theforward-looking statements are reasonable, any of the assumptions could beinaccurate, and therefore, there can be no assurance that the forward-lookingstatements will prove to be accurate. The forward-looking statements included herein are made as of the datehereof, and the Company undertakes no obligation to update publicly suchstatements to reflect subsequent events or circumstances.*

## **OVERVIEW**

CourierCorporation, founded in 1824, is one of America’s leading book manufacturersand specialty publishers.  The Companyhas two business segments: book manufacturing and specialty publishing.  The book manufacturing segment streamlinesthe process of bringing books from the point of creation to the point ofuse.  Based on sales, Courier is thefifth largest book manufacturer in the United States and largest in theNortheast, offering services from prepress and production through storage anddistribution.  The specialty publishingsegment consists of Dover Publications, Inc. (“Dover”) and Research &Education Association, Inc. (“REA”), as well as the recent acquisition ofFederal Marketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”).  Dover publishes over 9,000 titles in morethan 30 specialty categories ranging from literature to paper dolls, and musicscores to clip art.  REA publishes testpreparation and study-guide books for high school, college and graduate students,and professionals.  Creative Homeownerpublishes and distributes books, home plans and related products to the homeand garden market.

F-24

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**RESULTS OF OPERATIONS**

FINANCIALHIGHLIGHTS

(dollars inthousands except per share amounts)
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2006 vs.**       | ** ** | **2005 vs.** | ** ** |
| ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2005**                | ** ** | **2004** | ** ** |
| Net sales                            |       | $          | 269,051    |       | $          | 227,039    |       | $                       | 211,179    |   | 18.5 | % | 7.5 | % |
| Gross profit                         |       | 88,516     |       | 75,186     |       | 68,570     |       | 17.7                    | %          | 9.6 | % |
| As a percentage  of sales            |       | 32.9       | %          | 33.1       | %          | 32.5       | %          |                    |       |   |   |
| Selling and  administrative expenses |       | 50,144     |       | 42,823     |       | 38,732     |       | 17.1                    | %          | 10.6 | % |
| Interest  (income)/expense, net      |       | 182        |       | (388       | )          | (23        | )          |                    |       |   |   |
| Gain on real estate  sale            |       | —     |       | —     |       | 250        |       |                    |       |   |   |
| Pretax income                        |       | 38,190     |       | 32,751     |       | 30,111     |       | 16.6                    | %          | 8.8 | % |
| Provision for income  taxes          |       | 9,810      |       | 11,883     |       | 10,877     |       |                    |       |   |   |
| Net income                           |       | $          | 28,380     |       | $          | 20,868     |       | $                       | 19,234     |   | 36.0 | % | 8.5 | % |
|                                 |       |       |       |       |       |       |       |                    |       |   |   |
| Net income per diluted share         |       | $          | 2.25       |       | $          | 1.67       |       | $                       | 1.56       |   | 34.7 | % | 7.1 | % |

 

Fiscalyear 2006 was a 53-week period compared with 52-week periods in fiscal years2005 and 2004. The pro rata effect of the extra week contributed approximately2% to fiscal 2006 increases in comparison to fiscal 2005 results.

Revenuesin fiscal 2006 increased in both of the Company’s operating segments comparedto last year.  Acquisitions made duringfiscal 2006 contributed positively to financial results, adding $24 million tosales and $.06 to earnings per diluted share. Book manufacturing revenues were up 14% in fiscal 2006 compared to lastyear, reflecting higher textbook sales and the Moore Langen acquisition discussedbelow.  Sales in the specialty publishingsegment for fiscal 2006 were up 43% compared to the prior year as a result ofgrowth in both of the segment’s existing businesses as well as the acquisitionduring the third quarter of Creative Homeowner. Net income was $28.4 million,which included $3.8 million, or $.30 per diluted share, from the reversal oftax accruals resulting from a state tax audit report received during the fourthquarter and the expiration of certain statutory limitations.  Without the effect of this tax accrualreversal, net income was $24.6 million, or $1.95 per diluted share, up 18% overfiscal 2005. In fiscal 2005, revenues were 7.5 % higher than the prior year,primarily due to growth in four-color textbooks to the education market.

***Business Acquisitions***

# On April 28, 2006, the Company acquired CreativeHomeowner, a New Jersey-based publisher and distributor of books, home plans,and related products for the $340-million home and garden retail bookmarket.  On October 17, 2005, the Companyacquired Moore-Langen Printing Company, Inc. (“Moore Langen”) anIndianapolis-based printer specializing in manufacturing book covers.  On January 6, 2004, the Company purchasedsubstantially all of the assets of REA, a publisher of test preparation andstudy-guide books.  Each of these acquisitionswas accounted for as a purchase, and accordingly, the financial results ofCreative Homeowner and REA were included in the specialty publishing segmentfrom the date of acquisition and the financial results of Moore Langen wereincluded in the book manufacturing segment from the date of acquisition.

F-25

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***Stock-Based Compensation***

In the first quarter offiscal 2006, the Company adopted the provisions of Statement of FinancialAccounting Standards 123R, “Share-Based Payment” (“SFAS 123R”), an accountingrule requiring the expensing of stock options. All prior periods presented have been restated on a retrospective basisconsistent with the pro forma disclosures required for those periods by SFASNo. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).  Prior to the adoption of SFAS 123R, theCompany applied APB 25 to account for its stock-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 in net income of approximately $784,000, $1,266,000and $1,306,000 in fiscal 2006, 2005 and 2004, respectively.

The following tableprovides information on the impact on the accompanying income statements ofadopting SFAS 123R on a retrospective basis.
|                                                                          | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Net income as  reported                                                  |       | $         | 28,380,000 |      | $          | 20,868,000 |       | $ | 19,234,000 |   |
| Add: Total  stock-based compensation expense, net of related tax effects |       | 1,079,000 |       | 1,493,000 |       | 1,494,000  |       |
| Less: Stock  grants expense, net of related tax effects                  |       | (295,000  | )          | (227,000  | )          | (188,000   | )          |
| Pro forma net  income                                                    |       | $         | 29,164,000 |      | $          | 22,134,000 |       | $ | 20,540,000 |   |
|                                                                     |       |      |       |      |       |       |       |
| Net income per  share as reported:                                       |       |      |       |      |       |       |       |
| Basic                                                                    |       | $         | 2.30       |      | $          | 1.72       |       | $ | 1.61 |   |
| Diluted                                                                  |       | 2.25      |       | 1.67      |       | 1.56       |       |
|                                                                     |       |      |       |      |       |       |       |
| Pro forma net  income per share:                                         |       |      |       |      |       |       |       |
| Basic                                                                    |       | $         | 2.37       |      | $          | 1.83       |       | $ | 1.72 |   |
| Diluted                                                                  |       | 2.31      |       | 1.77      |       | 1.66       |       |

 

Unrecognizedstock-based compensation cost at September 30, 2006 was $1.7 million to berecognized over a weighted-average period of 2.3****years.  The cumulative effect of the adoption of SFAS123R on the Company’s consolidated balance sheet at September 27, 2003 resultedin an increase in additional paid-in capital of $3,177,000, a reduction inretained earnings of $3,233,000, elimination of unearned compensation of$350,000, and a reduction in deferred income tax liabilities of $294,000.

The Company annually issues a combination of stock options and stockgrants to its key employees under its stock plans.  Prior to 2004, stock-based awards to keyemployees consisted primarily of stock options. Beginning in 2004, the Company reduced the number of stock optionsgranted and added restricted stock awards. Stock options awarded in 2004 vestedin one year.  Stock options awarded in2005 and 2006 vest over three years. Stock grants generally vest over 3 years.Under the Company’s ESPP, eligible employees may purchase shares of stock fornot less than 85% of fair market value at the end of the grant period.  Prior to 2005, the purchase price wasdetermined based upon 85% of fair market value at the beginning or end of thegrant period. In January 2005, stockholders approved a new 

F-26

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stock equity plan for non-employee directors (the “2005 Plan”).  The option price per share is the fair marketvalue at the time the option is granted. The 2005 Plan replaced a plan that had 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. During the first quarter of fiscal 2005 priorto the adoption of the new plan, 9,000shares were issued to non-employee directors under the previous DirectorsOption Plan.

***Book Manufacturing Segment***

SEGMENT HIGHLIGHTS

(dollars inthousands)
|                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2006 vs.**       | ** ** | **2005 vs.** | ** ** |
| ** **                           | ** ** | **2006***  | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2005**                | ** ** | **2004** | ** ** |
|                                 |       |       |       |       |       |       |       |                    |       |   |   |
| Net sales                            |       | $          | 220,115    |       | $          | 193,623    |       | $                       | 177,225    |   | 13.7 | % | 9.3 | % |
| Gross profit                         |       | 63,156     |       | 57,110     |       | 49,385     |       | 10.6                    | %          | 15.6 | % |
| As a percentage of sales             |       | 28.7       | %          | 29.5       | %          | 27.9       | %          |                    |       |   |   |
| Selling and  administrative expenses |       | 30,283     |       | 26,695     |       | 24,279     |       | 13.4                    | %          | 10.0 | % |
| Interest income,  net                |       | (733       | )          | (700       | )          | (330       | )          | 4.7                     | %          | 112.1 | % |
| Pretax income                        |       | $          | 33,606     |       | $          | 31,115     |       | $                       | 25,436     |   | 8.0 | % | 22.3 | % |

 

----

*Fiscalyear 2006 was a 53-week period.

Withinthis segment, the Company focuses on three key publishing markets: education,religious and specialty trade.  Sales tothe education market rose 11% in fiscal 2006 compared with 2005, with 4% ofthis increase attributed to the addition of Moore Langen.  Sales increased in all levels of the market,with particular strength in four-color textbooks for elementary and highschools.  The newest 4-color pressinstallation in December 2005, and related bindery expansion, provided thenecessary capacity to meet the growing demand for educational books. Salesgrowth in the religious and the specialty trade markets increased 2% and 9%,respectively, compared with the prior year. In fiscal 2005, compared withfiscal 2004, sales to the education market rose 15%, with gains achieved at alllevels, from elementary and high school through college.  Growth in four-color textbooks to theeducation market was particularly strong in fiscal 2005, enabled by a newfour-color press installed in April 2004. In the religious market, sales wereflat in 2005 compared to the prior year, reflecting a decision to discontinuemanufacturing certain low-priced work. Sales to the specialty trade market were up 7% in fiscal 2005 comparedto 2004 as a result of strong demand late in the year.

Grossprofit in this segment increased 11% to $63.2 million compared with 2005,reflecting the increased sales volume. As a percentage of sales, gross profitdecreased slightly to 28.7% in fiscal 2006 from 29.5% in 2005, reflecting a$1.8 million increase in utility costs as well as the impact of a highlycompetitive industry environment. In 2005, gross profit in this segmentincreased by 16% compared with 2004 and as a percentage of sales, increased to29.5% in 2005 from 27.9% in 2004.  Growthin sales volume, especially in four-color textbooks, and continued productivitygains, more than offset the effects of increased energy and medical costs.

Sellingand administrative expenses in this segment were $30.3 million, up $3.6 millionor 13% over the prior year.  Thisincrease was primarily due to the addition of Moore Langen and the 53rd week in fiscal 2006.  As a percentage of sales, selling andadministrative expenses were 13.8% in 2006, comparable to the prior year.  In 2005, selling and administrative expenseswere $26.7 million, 10% higher than 2004, 

F-27

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reflectinghigher compensation costs of approximately $1.5 million associated withincreased sales and profitability, as well as audit, legal and other expensesrelated to compliance with the provisions of Sarbanes-Oxley. As a percentage ofsales, selling and administrative expenses increased slightly to 13.8% in 2005from 13.7% in 2004.

Intercompanyinterest income allocated to the book manufacturing segment in fiscal 2006increased to $733,000 compared to $700,000 in 2005. This increase was primarilythe result of higher interest rates offset in part by interest expenseallocated to Moore Langen. The increase in allocated interest income in fiscal2005 from $330,000 in 2004 reflects cash generated within the segment as wellas higher interest rates.

Pretaxincome in the Company’s book manufacturing segment in fiscal 2006 increased 8%to $33.6 million, or, on an after-tax basis, $1.73 per diluted share comparedto $31.1 million, or $1.62 per diluted share, in 2005.  Fiscal 2005 pretax income of $31.1 million,or $1.62 per diluted share, increased 22% compared to $25.4 million, or $1.35per diluted share, in 2004.

***Specialty Publishing Segment***

SEGMENTHIGHLIGHTS

(dollars in thousands)
|                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2006 vs.**       | ** ** | **2005 vs.** | ** ** |
| ** **                           | ** ** | **2006***  | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2005**                | ** ** | **2004** | ** ** |
|                                 |       |       |       |       |       |       |       |                    |       |   |   |
| Net sales                            |       | $          | 57,549     |       | $          | 40,254     |       | $                       | 40,787     |   | 43.0 | % | -1.3 | % |
| Gross profit                         |       | 25,468     |       | 18,487     |       | 19,545     |       | 37.8                    | %          | -5.4 | % |
| As a percentage of sales             |       | 44.3       | %          | 45.9       | %          | 47.9       | %          |                    |       |   |   |
| Selling and  administrative expenses |       | 18,431     |       | 14,292     |       | 12,723     |       | 29.0                    | %          | 12.3 | % |
| Interest  expense, net               |       | 915        |       | 312        |       | 307        |       | 193.3                   | %          | 1.6 | % |
| Pretax income                        |       | $          | 6,122      |       | $          | 3,883      |       | $                       | 6,515      |   | 57.7 | % | -40.4 | % |

 

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*Fiscal year 2006was a 53-week period.

The Company’s specialty publishing segment is comprised of Dover, REAsince its acquisition in January 2004, and Creative Homeowner since itsacquisition on April 28, 2006.  CreativeHomeowner is a New Jersey-based publisher and distributor of books, home plans,and related products for the $340-million home and garden retail bookmarket.  Fiscal 2006 sales in thissegment were $57.5 million, a 43% increase over the prior year, with approximately$12 million of the increase attributable to the addition of CreativeHomeowner.  Dover’s sales increased 12%in fiscal 2006 to $39.0 million compared to 2005, including a 17% increase intrade sales, a 16% increase in international sales, and a 6% increase indirect-to-consumer sales.  Sales at REAincreased 20% in fiscal 2006 compared to the prior year.  The sales growth at both Dover and REAreflect the success of new marketing and merchandising programs as well as thecompletion of information technology and distribution upgrades which enhancedcustomer service and accelerated deliveries. The segment reported fiscal 2005sales of $40.3 million, down 1% from $40.8 million in fiscal 2004.  REA sales totaled $5.6 million in fiscal 2005compared to $3.9 million in 2004, which was a partial year starting at the dateof acquisition in January 2004.  Doversales were down 6% in 2005 to $34.7 million compared to the prior year.  The decline at Dover reflected soft sales totrade retailers as well as fourth-quarter shipment delays and a resulting increasein order backlogs of approximately $600,000 in conjunction with a majorwarehouse relocation 

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project and the implementation of an enterprise-wide informationsystem.  Despite these difficulties,Dover’s direct-to-consumer sales for 2005 were up 12% over 2004.

Grossprofit in this segment increased 38% to $25.5 million in 2006 reflecting theimprovement in Dover’s sales and the contribution of Creative Homeowner.  As a percentage of sales, gross profit was44.3 % compared to 45.9% in 2005, resulting from costs associated with theacquisition of Creative Homeowner. Creative Homeowner’s gross profit percentage since acquisition was 32%,including the cost associated with a required purchase accounting write-up tofair market value of approximately $370,000 in their opening inventory andwhich had been sold and charged to cost of sales during 2006.  Gross profit in the specialty publishingsegment was $18.5 million in 2005 compared to $19.5 million in 2004.  Dover’s gross profit as a percentage of salesdecreased to 46.2% from 49.4% in the prior year, reflecting the reduction insales.  In addition, Dover incurred costsof approximately $500,000 in 2005 in connection with relocating a significantportion of Dover’s leased offsite warehousing space to available warehousespace owned by the Company.  REA’s grossprofit percentage for fiscal 2005 was 44.2% versus 34.4% in 2004.  This improvement was due, in large part, tothe expense related to a required purchase accounting write up of inventory tofair market value when REA was acquired. The original inventory write up was approximately $1 million and wasbeing expensed as the acquired inventory was sold.  Approximately $250,000 of the inventory writeup was expensed in 2005 compared to $600,000 in 2004.

Sellingand administrative expenses for this segment were $18.4 million in 2006, upfrom $14.3 million in 2005.  Theacquisition of Creative Homeowner represents approximately $3.0 million of theincrease.  Creative Homeowner’s sellingand administrative expenses include approximately $325,000 for amortization ofintangibles.  Selling and administrativeexpenses for Dover and REA increased by $1.1 million, or 8%, compared to theprior year, primarily as a result of increased sales and related marketing expenses.  As a percentage of sales, selling andadministrative expenses in 2006 decreased to 32.0% from 35.5% in the prioryear.  In 2005, selling andadministrative expenses in the specialty publishing segment were $14.3 million,an increase of 12% over 2004, primarily as a result of the addition of REA tothe segment in January 2004 and increases in sales and marketing activities atDover.  In addition, a project wasunderway in 2005 to replace information systems at Dover with a new fullyintegrated system.  The implementation ofthe SAP system and other process improvements began in July 2005 at Dover andadded approximately $200,000 of expenses in 2005.

Intercompanyinterest expense is allocated to the specialty publishing segment based on theacquisition cost of Dover, REA, and Creative Homeowner, reduced by cashgenerated by each business since acquisition. Such intercompany interest expense in fiscal 2006 was $915,000 comparedto $312,000 in 2005 and $307,000 in 2004. The increase in interest expense allocated to this segment in 2006reflects the $37 million acquisition of Creative Homeowner.  Intercompany interest expense for Dover andREA decreased in 2006 reflecting the benefit of cash generated by these businesses.  Intercompany interest expense for Dover andREA was comparable between fiscal 2005 and 2004.

Infiscal 2006, pretax income in the specialty publishing segment increased 58%over the prior year to $6.1 million, or, on an after-tax basis, $.31 perdiluted share.  Pretax income in fiscal2005 was $3.9 million, or, on an after-tax basis, $.19 per diluted share,compared to $6.5 million, or $.33 per diluted share in 2004.  REA contributed approximately $170,000 topretax income, or $.01 per diluted share, in 2004.

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***Total Consolidated Company***

Interestexpense, net of interest income, was $182,000 in fiscal 2006 while interestincome, net of interest expense, was $388,000 in 2005 and $23,000 in 2004.  During the past three years, the Company hadnot borrowed under its revolving credit facility until April 2006 whenapproximately $20 million was borrowed towards the purchase of CreativeHomeowner.  Average debt in 2006 underthe revolving credit facility was approximately $6.9 million at an averageannual interest rate of 5.7%.  Interestexpense also includes commitment fees and other costs associated withmaintaining this credit facility.  Cashinvestments in 2006 averaged approximately $11.6 million at an average annualinterest rate of 3.9%.  The Company’saverage cash investments for 2005 were approximately $26.5 million, earning a2.5% average annual interest rate, and approximately $17.7 million for 2004,earning at an average annual interest rate of 1.3%.  These investments generated interest incomeof approximately $450,000 in 2006, $666,000 in 2005, and $230,000 in 2004.Capitalized interest, related to a new four-color press, was $74,000 in2004.  No interest was capitalized in2006 or 2005.

Otherincome in 2004 is comprised of a pretax gain of approximately $250,000resulting from the sale of an unused portion of the Company’s multi-buildingmanufacturing complex in Westford, Massachusetts.

Duringthe fourth quarter of 2006, the Company reversed an income tax accrual pursuantto receipt of a state tax audit report and the expiration of certain statutorylimitations.  As a result, the Company’s2006 effective tax rate reflects a reduction in its income tax expense of $3.8million, or $.30 per diluted share. Without the effect of this tax accrualreversal, the effective tax rate was 35.6% compared to 36.3% in 2005.  This decline in the effective tax rate is duein large part to the impact of the retrospective adoption of SFAS 123R at thebeginning of fiscal 2006.  Althoughnon-deductible stock compensation costs increased the effective tax rate by0.4% in fiscal 2006, the impact in 2005 was higher at 0.9%.  In addition, the fiscal 2006 tax ratereflects a federal tax benefit for manufacturers associated with the AmericanJobs Creation Act of 2004. The Company’s effective tax rate for 2005 was 36.3%compared to 36.1% for 2004, reflecting a reduced federal tax benefit fromexport related income associated with the American Jobs Creation Act of 2004.

For purposes of computingnet income per diluted share, weighted average shares outstanding increased byapproximately 118,000 shares in 2006 and 136,000 shares in 2005.  These increases were primarily due to optionsexercised and shares issued under the Company’s stock plans and the impact ofpotentially dilutive shares.

### **LIQUIDITYAND CAPITAL RESOURCES**

Operatingactivities provided $39.2 million of cash in 2006 compared to $34.2 million in2005.  Net income for 2006 was $28.4million, stock-based compensation was $1.4 million, depreciation was $11.1million, amortization of prepublication costs was $3.4 million, andamortization of intangible assets was $0.3 million.  Working capital changes used approximately$6.1 million of cash, as a result of an increase in accounts receivable and areduction in accrued taxes.

Investment activities in2006 used $84.8 million of cash, including $51.2 million for the acquisitionsof Moore Langen and Creative Homeowner. Capital expenditures were approximately $29.4 million, includingapproximately $21 million for new four-color presses and related equipment andan expansion of the Kendallville, Indiana facility.  A four-color press was installed in December2005 and deposits were made on another four-color press to be installed inDecember 2006.  This press is identicalto the presses installed in April 2004 and December 2005.  Capital also included investments to increase

F-30

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productivity, lower costsand improve employee safety.  For fiscal2007, capital expenditures are expected to be approximately $25 to $28million.  This amount includes completingthe current four-color expansion program, as well as expanding capacity in thereligious book manufacturing operation. Prepublication costs in 2006 wereapproximately $4.3 million, reflecting increased investments in new titleofferings at Dover and REA as well as the acquisition of CreativeHomeowner.  These costs are expected toincrease to approximately $5 million in 2007, reflecting a full year ofCreative Homeowner publishing activity and modest growth at Dover and REA.

Financing activitiesprovided approximately $13.1 million of cash in 2006.  The Company borrowed approximately $20million under the revolving credit facility towards the purchase of CreativeHomeowner in April.  At September 30, 2006,the Company had $16.9 million in borrowings under its $60 million long-termrevolving credit facility.  Dividendpayments in 2006 were $5.9 million, 46% higher than the $4.1 million paid in2005.  Proceeds from stock plans were$1.7 million, primarily from the exercise of stock options.  The revolving credit facility, which bearsinterest at a floating rate, is used by the Company for both its long-term andshort-term financing needs.  In May 2006,the Company increased the amount available under this facility from $45 millionto $60 million and extended the maturity date to March 2009.  In November 2006, subsequent to fiscal 2006year end, the revolving credit facility was increased to $100 million, the bankgroup was expanded from three banks to five banks and the maturity date wasextended to 2011.  The Company believesthat its cash on hand, cash from operations and the available credit facilitywill be sufficient to meet its cash requirements through 2007.

The following tablesummarizes the Company’s contractual obligations and commitments at September30, 2006 to make future payments as well as its existing commercialcommitments.  Purchase obligationsrepresent amounts for capital commitments for a new 4-color press and otherprojects.
|                             | ** ** | ** ** | ** ** | **(000’s omitted)**             | ** ** |
|-----------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **Less than**                        | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **After 5** | ** ** |
| ** **                  | ** ** | **Total**  | ** ** | **1 Year**                           | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Contractual Payments:       |       |       |       |                                      |       |   |   |   |   |   |   |
| Long-Term Debt              |       | $          | 17,311     |                                      | $          | 88 |   | $ | 17,069 |   | $ | 154 |   | $ | — |   |
| Operating Leases            |       | 10,432     |       | 3,103                                     |       | 3,727 |   | 2,056 |   | 1,546 |   |
| Purchase Obligations        |       | 14,700     |       | 14,100                                    |       | 600 |   | — |   | — |   |
| Other Long-Term Liabilities |       | 3,037      |       | —                                    |       | 1,413 |   | 350 |   | 1,274 |   |
| Total                       |       | $          | 45,480     |                                      | $          | 17,291 |   | $ | 22,809 |   | $ | 2,560 |   | $ | 2,820 |   |

 

Long-term debt includes$16.9 million under the Company’s revolving credit facility, which had amaturity date of March 2009 as of September 30, 2006.  In November 2006, the maturity date of thisfacility was extended to 2011.

F-31

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### **NEWACCOUNTING PRONOUNCEMENTS**

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

### **RISKS**

Our businesses operate inmarkets that are highly competitive, and the Company faces competition on thebasis of price, product quality, speed of delivery, customer service,availability of appropriate printing capacity and paper, related services andtechnology support.  Some of ourcompetitors have greater sales, assets and financial resources than our Companyand others, particularly those in foreign countries, may derive significantadvantages from local governmental regulation, including tax holidays and othersubsidies. These competitive pressures could affect prices or customers’ demandfor our products, impacting our profit margins and/or resulting in a loss ofcustomers and market share. The Company derived approximately 40% of its 2006revenues, 47% of its 2005 revenues, and 44% of its 2004 revenues from two majorcustomers.  A significant reduction inorder volumes or price levels from either of them could have a material adverseeffect on the Company.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

TheCompany’s consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  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 and other intangibles, 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 Managementperforms ongoing credit evaluations of the Company’s customers and adjustscredit limits based upon payment history and the customer’s current creditworthiness.  Collections and paymentsfrom customers are continuously monitored. A provision for estimated credit losses is determined based uponhistorical experience and any specific customer collection issues that havebeen identified.  If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

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.

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

Prepublication CostsThe Company capitalizes prepublication costs, which include the costs ofacquiring rights to publish a work and costs associated with bringing amanuscript to publication such as artwork and editorial efforts.  Prepublication costs are amortized on astraight-line basis over periods ranging from three to five years.  Management regularly evaluates the sales andprofitability of the products 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 determinedbased upon the differences between the financial statement and tax bases ofassets and liabilities.  Changes in therecoverability of the Company’s deferred tax assets or audits by taxauthorities could result in future charges or credits to income tax expense,and related accrued and deferred taxes.

F-33

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COURIERCORPORATION

 

SCHEDULE II

CONSOLIDATEDVALUATION AND QUALIFYING ACCOUNTS

 
| ** **                             | ** ** | ** **          | ** ** | **ADDITIONS**       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** |
|----------------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|----------------|------------|--------------------|------------|
| ** **                             | ** ** | **BALANCE AT** | ** ** | **CHARGED TO** | ** ** | ** **     | ** ** | ** **     | ** ** | **BALANCE**        | ** ** |
| ** **                             | ** ** | **BEGINNING**       | ** ** | **COSTS AND**  | ** ** | ** **     | ** ** | **OTHER**      | ** ** | **AT END**    | ** ** |
| ** **                             | ** ** | **OF PERIOD**  | ** ** | **EXPENSES**        | ** ** | **DEDUCTIONS** | ** ** | **CHANGES(1)** | ** ** | **OF PERIOD** | ** ** |
|                                   |       |                |       |                |       |           |       |           |       |               |       |
| Allowance for  uncollectible accounts: |       |                |       |                |       |           |       |           |       |               |       |
|                                   |       |                |       |                |       |           |       |           |       |               |       |
| Fiscal year  ended September 30, 2006  |       | $                   | 1,139,000  |                | $          | 241,000        |       | $              | 87,000     |               | $          | 300,000 |   | $ | 1,593,000 |   |
|                                   |       |                |       |                |       |           |       |           |       |               |       |
| Fiscal year  ended September 24, 2005  |       | $                   | 1,630,000  |                | $          | 200,000        |       | $              | 691,000    |               |       |   | $ | 1,139,000 |   |
|                                   |       |                |       |                |       |           |       |           |       |               |       |
| Fiscal year  ended September 25, 2004  |       | $                   | 1,741,000  |                | $          | 75,000         |       | $              | 236,000    |               | $          | 50,000 |   | $ | 1,630,000 |   |
|                                   |       |                |       |                |       |           |       |           |       |               |       |
| Returns allowance:                     |       |                |       |                |       |           |       |           |       |               |       |
|                                   |       |                |       |                |       |           |       |           |       |               |       |
| Fiscal year ended  September 30, 2006  |       | $                   | 202,000    |                | $          | 2,363,000      |       | $              | 2,335,000  |               | $          | 1,400,000 |   | $ | 1,630,000 |   |

 

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(1)   Other changes reflect amounts related tobusiness acquisitions.

S-1

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