Critical Accounting Policies and Estimates:

The Company's consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments, including those related to collectibility of accounts receivable, recovery of inventories, impairment of goodwill and other intangibles, prepublication costs and income taxes. Management bases its estimates and judgments on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates. The significant accounting policies which management believes are most critical to aid in fully understanding and evaluating the Company's reported financial results include the following:

Accounts Receivable Management performs ongoing credit evaluations of the Company's customers and adjusts credit limits based upon payment history and the customer's current creditworthiness. Collections and payments from customers are continuously monitored. A provision for estimated credit losses is determined based upon historical experience and any specific customer collection issues that have been identified. If the financial condition of the Company's customers were to deteriorate, it may result in their inability to make payments, and such events could possibly lead to their insolvency, and therefore additional allowances may be required.

Inventories Management records reductions in the cost basis of inventory for excess and obsolete inventory based primarily upon historical and forecasted product demand. If actual market conditions are less favorable than those projected by management, additional inventory charges may be required.

Goodwill and Other Intangibles Other intangibles include customer lists which are amortized on a straight-line basis over periods ranging from ten to fifteen years. The Company evaluates possible impairment of goodwill and other intangibles at the reporting unit level, which is the operating segment or one level below the operating segment, on an annual basis or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company completed its annual impairment test at September 27, 2008 resulting in no change to the nature or carrying amounts of its intangible assets in the book manufacturing segment. In the second quarter of fiscal 2009, the Company performed an interim impairment test for Dover Publications, Inc. ("Dover"), a reporting unit within the specialty publishing segment, due to the continued downturn in the economic environment and in consumer spending. As a result of the impairment test, the Company concluded that the carrying value of Dover's goodwill exceeded its estimated fair value and a pre-tax impairment charge of $15.6 million, representing 100% of Dover's goodwill, was recorded at the end of the second quarter. The Company continues to monitor the value of its intangible assets closely in each of its segments. Changes in market conditions, further declines in operating results or cash flows, or deterioration in the market value of the Company or its peers, could result in an impairment charge in the future. Continued disruption in the credit markets may contribute to possible future impairment charges.

Prepublication Costs The Company capitalizes prepublication costs, which include the costs of acquiring rights to publish a work and costs associated with bringing a manuscript to publication such as artwork and editorial efforts. Prepublication costs are amortized on a straight-line basis over periods ranging from three to five years. Management regularly evaluates the sales and profitability of the products based upon historical and forecasted demand. If actual market conditions are less favorable than those projected by management, additional amortization expense may be required.

Income Taxes The income tax provision and related accrued taxes are based on amounts reported on the Company's tax returns and changes in deferred taxes. Deferred income tax liabilities and assets are determined based upon the differences between the financial statement and tax bases of assets and liabilities. Changes in the recoverability of the Company's deferred tax assets or audits by tax authorities could result in future charges or credits to income tax expense, and related accrued and deferred taxes.

Overview:

Courier Corporation, founded in 1824, is one of America's leading book manufacturers and specialty publishers. The Company has two business segments:
book manufacturing and specialty publishing. The book manufacturing segment streamlines the process of bringing books from the point of creation to the point of use. Based on sales, Courier is the third largest book manufacturer in the United States, offering services from prepress and production, through storage and distribution. The specialty publishing segment consists of Dover Publications, Inc. ("Dover"), Research & Education Association, Inc. ("REA"), and Federal Marketing Corporation, d/b/a Creative Homeowner ("Creative Homeowner"). Dover publishes over 9,000 titles in more than 30 specialty categories ranging from literature to paper dolls, and from music scores to clip art. REA publishes test preparation and study-guide books and software for high school, college and graduate students, as well as professionals. Creative Homeowner publishes books on home design, decorating, landscaping, and gardening, and sells home plans.

Results of Operations:



                                               FINANCIAL HIGHLIGHTS
                                  (dollars in thousands except per share amounts)
                                 Quarter Ended                    Nine Months Ended
                        June 27,     June 28,       %      June 27,     June 28,       %
                          2009         2008      Change      2009         2008      Change

Net sales               $  61,390    $  73,378     -16.3 % $ 180,397    $ 204,028     -11.6 %
Cost of sales              47,313       54,364     -13.0 %   141,269      148,904      -5.1 %
Gross profit               14,077       19,014     -26.0 %    39,128       55,124     -29.0 %
As a percentage of
sales                        22.9 %       25.9 %                21.7 %       27.0 %
Selling and
administrative
expenses                   11,305       13,600     -16.9 %    36,462       41,490    - 12.1 %
Impairment charge               -       23,850                15,607       23,850
Operating income
(loss)                      2,772      (18,436 )             (12,941 )    (10,216 )
Interest expense, net         153          322     -52.5 %       574          889     -35.4 %
Pretax income (loss)        2,619      (18,758 )             (13,515 )    (11,105 )
Income tax provision
(benefit)                   1,007       (6,386 )              (4,657 )     (3,532 )
Net income (loss)       $   1,612    $ (12,372 )           $  (8,858 )  $  (7,573 )

Net income (loss) per
diluted share           $    0.14    $   (1.01 )           $   (0.75 )  $   (0.61 )

Revenues in the third quarter and first nine months of fiscal 2009 decreased in both of the Company's segments compared to the same periods last year. Book manufacturing segment revenues in the third quarter of fiscal 2009 were down 17% from the same period last year. On a year-to-date basis, sales in this segment were down 8% compared to the corresponding period last year, with growth in sales of four-color books offset by reduced demand for one- and two-color books. In the specialty publishing segment, revenues were down 15% in the third quarter and down 23% in the first nine months of fiscal 2009, compared to the same periods last year, primarily due to the weak economy and reduced consumer spending. The winding down of Creative Homeowner's book distribution services early in the second quarter also contributed to the segment's sales decline compared to prior year periods.

The Company recorded net income in the third-quarter of $1.6 million, or $.14 per diluted share, and a net loss of $8.9 million, or $.75 per diluted share, for the first nine months of the year. These results include restructuring costs related to cost saving initiatives in both of the Company's segments of $3.8 million year to date. In addition, the Company recorded a pre-tax impairment charge of $15.6 million at the end of the second quarter related to Dover's goodwill. For the first nine months of fiscal 2009, these restructuring and impairment charges totaled $19.4 million, or $1.05 per diluted share. The third quarter of fiscal 2008 included a pre-tax impairment charge related to Creative Homeowner's goodwill and other intangibles of $23.9 million or $1.27 per diluted share.

Impairment Charges

The Company evaluates possible impairment of goodwill and other intangibles at the reporting unit level, which is an operating segment or one level below an operating segment, on an annual basis or whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. Due to a decline in sales and profits at Dover, resulting from the continued downturn in the economic environment and in consumer spending, the Company performed an interim test of Dover's goodwill in the second quarter of fiscal 2009. As a result of the impairment test, the Company concluded that the carrying value of Dover's goodwill exceeded its estimated fair value and recorded a pre-tax impairment charge of $15.6 million, representing 100% of Dover's goodwill, at the end of the second quarter. On an after-tax basis, the impairment charge was $10.1 million, or $.86 per diluted share. In the third quarter of fiscal 2008, a pre-tax impairment charge of $23.9 million was recorded related to goodwill and other intangible assets of Creative Homeowner. On an after-tax basis, this impairment charge was $15.5 million, or $1.27 per diluted share.

Restructuring Costs

The Company recorded restructuring costs of $3.8 million in the first nine months of the year. Restructuring costs included employee severance expenses related to cost savings initiatives in both of the Company's segments as well as ceasing Creative Homeowner's distribution services within the specialty publishing segment. Restructuring costs also included expenses related to closing and consolidating the Book-mart Press manufacturing facility within the book manufacturing segment during the second quarter of fiscal 2009. The following tables detail restructuring costs by segment and by classification in the accompanying consolidated statements of operations.

                                                                (000's Omitted)
                                          Quarter Ended                                 Nine Months Ended
                                          June 27, 2009                                   June 27, 2009
                               Book            Specialty                        Book          Specialty
                          Manufacturing       Publishing        Total       Manufacturing     Publishing      Total
                             Segment            Segment        Company         Segment         Segment       Company

Employee severance
costs                    $             65                -   $        65   $         1,193   $        484   $    1,677
Write down of
property, plant and
equipment                               -                -             -               591              -          591
Inventory write downs                   -                -             -               778              -          778
Lease termination and
other facility closure
costs                                   -                -             -               748              -          748
Total restructuring
costs                    $             65    $           0   $        65   $         3,310   $        484   $    3,794

Included in cost of
sales                    $             65                -   $        65   $         2,819   $        107   $    2,926
Included in selling
and administrative
expenses                                -                -             -               491            377          868
Total restructuring
costs                    $             65    $           0   $        65   $         3,310   $        484   $    3,794

Employee severance costs in the specialty publishing segment included centralizing back office and order fulfillment operations in addition to ceasing Creative Homeowner's distribution services. Within the book manufacturing segment, the Company closed its Book-mart Press manufacturing facility during the second quarter in order to reduce redundant capacity and to lower costs and is consolidating its operations into the Company's other manufacturing facilities. The Book-mart Press facility, located in North Bergen, New Jersey, was dedicated to short-run, single-color production. The Book-mart Press facility had 72 employees and sales of approximately $7 million annually. Also during the second quarter, a voluntary severance program was offered throughout the Company, which was followed by additional workforce reductions in the book manufacturing segment due primarily to reduced one- and two-color capacity utilization. Overall, total headcount has been reduced by approximately 12% during fiscal 2009. At June 27, 2009, approximately $235,000 of severance costs remained accrued and the Company anticipates that payments associated with employee terminations will be substantially completed by September 2009. Annual savings from the reduction in staffing are projected to be approximately $5 million in the book manufacturing segment and approximately $3 million in the specialty publishing segment.

In connection with the closing and consolidation of the Book-mart Press facility, the Company wrote down the carrying value of assets that will not be utilized at other locations and for which the carrying value exceeded the fair value. Where applicable, the fair value of such assets was determined by estimating the proceeds that would be received based on the market value of similar assets. Lease termination and other Book-mart Press facility closure costs accrued at June 27, 2009 were approximately $420,000. Payments related to the lease obligation are scheduled to continue until July 2010. The Company anticipates additional expenses of approximately $300,000 related to consolidating and moving equipment from the Book-mart Press facility to the Company's other manufacturing facilities over the next six months.

Book Manufacturing Segment



                                                SEGMENT HIGHLIGHTS
                                              (dollars in thousands)
                                 Quarter Ended                    Nine Months Ended
                        June 27,    June 28,       %       June 27,    June 28,       %
                          2009        2008       Change      2009        2008       Change

Net sales               $  52,691   $  63,187      -16.6 % $ 153,472   $ 166,253       -7.7 %
Cost of sales              42,824      47,536       -9.9 %   126,964     127,415        0.4 %
Gross profit                9,867      15,651      -37.0 %    26,508      38,838      -31.7 %
As a percentage of
sales                        18.7 %      24.8 %                 17.3 %      23.4 %
Selling and
administrative
expenses                    6,127       7,547      -18.8 %    19,832      23,037      -13.9 %
Operating income        $   3,740   $   8,104      -53.8 % $   6,676   $  15,801      -57.7 %

Within the book manufacturing segment, the Company focuses on three key markets:
education, religious and specialty trade. Sales to the education market were down 18% to $23 million in the third quarter and down 8% to $62 million for the first nine months compared to the same periods last year. Higher education sales were up for the quarter and year to date, particularly growth in sales of four-color college textbooks, while sales of elementary and high school textbooks were down, largely due to continued pressure on state and local school budgets. Sales to the specialty trade market were down 10% to $13 million in the quarter compared to last year's third quarter. On a year-to-date basis, sales to this market were flat at $41 million when compared to the corresponding prior year period as growth in sales of four-color specialty trade books, as well as a number of new customers, was offset by declines in one- and two-color sales. Sales to the religious market were down 18% to $15 million in the third quarter and were down 10% to $44 million in the first nine months compared to the same periods last year, reflecting a difficult fundraising environment in recent months.

A continuing decline in demand for one- and two-color books resulted in reduced capacity utilization at some of the Company's manufacturing plants. In response, faced with the weak economy and the need to reduce redundant capacity and lower costs, the Company closed its Book-mart Press manufacturing facility in the second quarter of fiscal 2009 and reduced one-color capacity in other manufacturing facilities. Cost of sales in this segment decreased 10% to $42.8 million in the third quarter and was comparable to the first nine months of last year at $127.0 million, but increased as a percentage of sales for the third quarter and year to date, reflecting the impact of restructuring costs and lower capacity utilization. Gross profit in the book manufacturing segment in the third quarter decreased to $9.9 million, or 19% of sales, down from $15.7 million, or 25% of sales, in the prior year's third quarter. Gross profit for the first nine months decreased to $26.5 million, or 17% of sales, compared to $38.8 million, or 23% of sales, in the same period last year. In addition to the impact of lower sales and of restructuring costs of $2.8 million, the decline in gross profit year to date also reflects continued industry-wide competitive pricing pressures and reduced revenues from recycling programs.

Selling and administrative expenses for the book manufacturing segment decreased 19% in the third quarter to $6.1 million. On a year-to-date basis, such expenses decreased 14% to $19.8 million, and, as a percentage of sales, decreased to 13% from 14%. These decreases resulted from reductions in staffing and other cost saving initiatives implemented in the past year along with reduced variable compensation and were obtained despite restructuring costs of approximately $0.5 million in the second quarter of fiscal 2009.

Operating income in the book manufacturing segment in the third quarter was $3.7 million compared to operating income of $8.1 million in the same period last year. Year to date, operating income was $6.7 million compared to $15.8 million in the first nine months of last year. The decline in operating income includes restructuring costs of $3.3 million in the first nine months of fiscal 2009.

Specialty Publishing Segment



                                                SEGMENT HIGHLIGHTS
                                              (dollars in thousands)
                                 Quarter Ended                    Nine Months Ended
                        June 27,    June 28,       %       June 27,    June 28,       %
                          2009        2008       Change      2009        2008       Change

Net sales               $  11,327   $  13,362      -15.2 % $  34,888   $  45,376      -23.1 %
Cost of sales               7,120      10,041      -29.1 %    22,447      29,268      -23.3 %
Gross profit                4,207       3,321       26.7 %    12,441      16,108      -22.8 %
As a percentage of
sales                        37.1 %      24.9 %                 35.7 %      35.5 %
Selling and
administrative
expenses                    4,831       5,837      -17.2 %    15,558      17,497      -11.1 %
Operating loss          $    (624 ) $  (2,516 )            $  (3,117 ) $  (1,389 )

The Company's specialty publishing segment reported second quarter sales of $11.3 million, down 15% from last year's third quarter, primarily due to the impact of reduced consumer spending and book retailers managing inventory levels tightly. Year-to-date segment sales decreased to $34.9 million, 23% below the first nine months of fiscal 2008. Sales at Creative Homeowner decreased 38% in the third quarter to $2.3 million and 46% in the first nine months to $8.5 million, compared to the corresponding periods last year. These decreases reflect the persistent weakness in the nation's housing sector, which has reduced store traffic and sales in the home center market, its largest channel, as well as the impact of ceasing its distribution services. In November 2008, the Company announced that Creative Homeowner would cease its book distribution services for one nationwide retailer, which was accomplished at the beginning of January, allowing Creative Homeowner to focus on its core publishing business. Dover's sales decreased 8% to $7.3 million in the third quarter and decreased 10% to $21.6 million year to date, compared to the same periods last year. Revenues for REA were flat in the third quarter at $1.7 million and were down 12% to $4.8 million on a year-to-date basis compared to the corresponding periods last year. Revenues for Dover and REA were also impacted by the drop in consumer spending as well as continued inventory reductions by major book retailers and distributors in the first nine months of fiscal 2009.

Cost of sales in the specialty publishing segment decreased 29% to $7.1 million for the third quarter and decreased 23% to $22.4 million for the first nine months of fiscal 2009 reflecting the lower sales volume compared to the prior year periods. The reduction in cost of sales for this segment was offset in part by restructuring costs related to employee severance of approximately $100,000. Gross profit as a percentage of sales for the segment increased in the quarter to 37% from 25% in last year's third quarter primarily as a result of Creative Homeowner ceasing its distribution services earlier this year and from approximately $1 million in charges last year to increase inventory reserves and write down the investment in underperforming titles. On a year-to-date basis, gross profit as a percentage of sales was comparable to the prior year at 36% as the impact of lower volume was offset by cost savings initiatives, including cessation of Creative Homeowner's distribution activities.

Selling and administrative expenses in this segment decreased 17% to $4.8 million and 11% to $15.6 million in the third quarter and first nine months, respectively, when compared to the same periods last year. The decline in such expenses reflect reduced expenses related to Creative Homeowner's former distribution services as well as cost savings initiatives throughout the segment. These savings were offset in part by severance costs of approximately $400,000 for restructuring charges earlier in the year related to centralizing back office and order fulfillment operations in the segment in order to reduce costs and improve efficiency.

The operating loss for the specialty publishing segment for the third quarter was $624,000, compared to $2.5 million in last year's third quarter, reflecting the impact of Creative Homeowner ceasing its distribution services earlier in this year as well as approximately $1 million in charges in last year's third quarter to increase inventory reserves and write down the investment in underperforming titles. On a year-to-date basis, the operating loss for this segment was $3.1 million compared to $1.4 million in the first nine months of fiscal 2008, reflecting the sales shortfall resulting from reduced spending by both retailers and consumers, as well as the restructuring charges incurred earlier in the year and losses incurred prior to winding down Creative Homeowner's distribution services in January.

Total Consolidated Company

Interest expense, net of interest income, was $153,000 in the third quarter of fiscal 2009, compared to $322,000 of net interest expense in the same quarter last year. For the first nine months, interest expense, net of interest income, was $574,000 compared to $889,000 of net interest expense in the first nine months of fiscal 2008. Average debt under the revolving credit facility in the third quarter of fiscal 2009 was approximately $27.2 million at an average annual interest rate of 0.9%, generating interest expense of approximately $62,000. Average debt under the revolving credit facility in the third quarter of last year was approximately $29.8 million at an average annual interest rate of 3.2%, generating interest expense of approximately $240,000. Average debt under the revolving credit facility for the first nine months of fiscal 2009 was approximately $26.4 million at an average annual interest rate of 1.6%, generating interest expense of approximately $320,000. For the first nine months of fiscal 2008, average debt under this facility was approximately $24.0 million at an average annual interest rate of 4.3%, generating interest expense of approximately $770,000. Interest expense also includes commitment fees and other costs associated with maintaining the Company's $100 million revolving credit facility. Interest capitalized in the first nine months of fiscal 2008 was approximately $123,000; no interest was capitalized in the first nine months of fiscal 2009.

The income tax provision for the third quarter was $1.0 million compared to an income tax benefit of $6.4 million in the same quarter last year. On a year-to-date basis, the income tax benefit was $4.7 million compared to a benefit of $3.5 million for the first nine months of fiscal 2008. The tax benefits related to the impairment charges in both fiscal 2009 and 2008 were recognized at 35%; no state tax benefits were recognized as the Company fully provided valuation allowances on the related deferred state tax assets. The effective tax rate in the quarter was 38.4% compared to 38.6% last year after excluding the effect of the tax benefit of Creative Homeowner's impairment charge in the prior year's third quarter. Excluding the impairment charges in both years, the effective tax rate for the first nine months was 38.5% in fiscal 2009 compared to 37.8% last year, primarily because of a higher effective state tax rate.

Weighted average shares outstanding used to compute net income (loss) per diluted share decreased by 381,000 shares and 553,000 from last year's third quarter and first nine months, respectively, primarily due to the Company's repurchase of approximately 856,000 shares during fiscal 2008.

Liquidity and Capital Resources:

During the first nine months of fiscal 2009, operations provided $14.9 million of cash. The year-to-date net loss of $8.9 million included a non-cash, after-tax impairment charge of $10.1 million. Depreciation and amortization was $15.8 million, slightly lower than the first nine months of last year. Working capital used $4.7 million compared to $9.6 million in the same period last year. The improvement in working capital was primarily from a reduction in . . .