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, and prepublication costs. 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 risks that have been identified. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, 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 and technology, which are amortized on a straight-line basis over periods ranging from five to ten years, and an indefinite-lived trade name. 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 24, 2011, which resulted in no change to the nature or carrying amounts of its intangible assets in its book manufacturing segment. At the end of the third quarter of fiscal 2011, the Company recorded a pre-tax impairment charge of $8.4 million, which represented 100% of REA's goodwill. Changes in market conditions or poor operating results could result in a decline in value of the Company's goodwill and other intangible assets thereby potentially requiring an additional impairment charge in the future.

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 four years. At the end of the third quarter of fiscal 2011, an impairment charge of approximately $200,000 was recorded for REA's underperforming titles. 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.

Overview:

Courier Corporation, founded in 1824, is one of America's leading book manufacturers and specialty publishers. The Company has two operating 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, as well as state-of-the-art digital print capabilities. 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 including children's books, literature, art, music, crafts, mathematics, science, religion and architecture. REA publishes test preparation and study-guide books and software for high school, college and graduate students, and 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                        Six Months Ended
                         March 24,     March 26,       %       March 24,    March 26,       %
                           2012          2011        Change       2012         2011       Change

Net sales               $    62,388   $    62,662       -0.4 % $  125,324   $  123,814        1.2 %
Cost of sales                50,190        57,488      -12.7 %     97,528      103,335       -5.6 %
Gross profit                 12,198         5,174      135.8 %     27,796       20,479       35.7 %
As a percentage of
sales                          19.6 %         8.3 %                  22.2 %       16.5 %
Selling and
administrative
expenses                     11,317        12,589      -10.1 %     24,942       25,111       -0.7 %
Operating income
(loss)                          881        (7,415 )                 2,854       (4,632 )
Interest expense, net           193           248      -22.2 %        453          451        0.4 %
Other income                      -             -                    (587 )          -
Pretax income (loss)            688        (7,663 )                 2,988       (5,083 )
Income tax provision
(benefit)                       248        (2,856 )                 1,094       (1,932 )
Net income (loss)       $       440   $    (4,807 )            $    1,894   $   (3,151 )
Net income (loss) per
diluted share           $      0.04   $     (0.40 )            $     0.16   $    (0.26 )

Revenues in the second quarter of fiscal 2012 were $62.4 million, down slightly from the same period last year. Book manufacturing segment sales were $55.5 million, comparable to the second quarter of fiscal 2011, with gains in the specialty trade and education markets offset by a decline in sales to the religious market. For the first six months of fiscal 2012, book manufacturing segment revenues increased 3% to $111.5 million, with growth in each of the three key markets the segment serves. In the specialty publishing segment, revenues were $9.6 million in the second quarter and $19.1 million for the first six months, down 5% and 9%, respectively, compared to the corresponding periods of last year. The first half of fiscal 2011 included approximately $0.6 million of sales to Borders Group, Inc. ("Borders"). In February 2011, Borders filed for bankruptcy and completed the liquidation of its store inventories in September, which temporarily saturated the trade book market and eliminated a major outlet for books.

Net income for the second quarter was $440,000, compared to a net loss of $4.8 million in the corresponding period of fiscal 2011. Last year's second quarter included $7.5 million of pre-tax restructuring costs associated with the closing of a manufacturing facility in Stoughton, Massachusetts and the write-down of $750,000 in receivables from Borders. For the first six months of fiscal 2012, net income was $1.9 million compared to a net loss of $3.2 million in the same period last year. In the first half of fiscal 2012, the Company's net income included a pre-tax restructuring charge of $1.6 million related to severance and post-retirement benefit costs and a pre-tax gain of $0.6 million from the sale of certain non-operating assets.

Restructuring Costs

In the first half of fiscal 2012, the Company recorded a pre-tax charge of $1.6 million for severance and post-retirement benefit costs related to cost reduction measures taken in the specialty publishing segment as well as the retirement of the Company's Chief Operating Officer. Approximately $0.9 million and $0.7 million of these costs were included in selling and administrative expenses in the Company's book manufacturing segment and specialty publishing segment, respectively. In the aggregate, these events are expected to reduce selling and administrative expenses by over $2 million annually. At March 24, 2012, approximately $0.8 million of the restructuring payments were included in "Other current liabilities" and approximately $0.3 million, which will be paid by December 2013, were included in "Other liabilities" in the accompanying consolidated balance sheet.

In the second quarter of fiscal 2011, the Company recorded restructuring costs of $7.5 million in its book manufacturing segment associated with closing and consolidating its Stoughton, Massachusetts manufacturing facility in March 2011 due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specialized. Remaining payments of approximately $3.9 million will be made over periods ranging from 3 years for a building lease obligation to 19 years for a liability related to a multi-employer pension plan. At March 24, 2012, approximately $0.8 million of the restructuring payments were included in "Other current liabilities" and $3.5 million were included in "Other liabilities" in the accompanying consolidated balance sheet.

The following table depicts the remaining accrual balances for these restructuring costs.

                                                               (000's omitted)
                                           Accrual at         Charges        Costs       Accrual at
                                          September 24,         or          Paid or      March 24,
                                              2011           Reversals      Settled         2012
Employee severance, post-retirement
and other benefit costs                  $           285    $     1,579    $    (493 )  $      1,371
Early withdrawal from multi-employer
pension plan                                       2,119              -          (64 )         2,055
Lease termination, facility closure
and other costs                                    2,345              -         (340 )         2,005
Total                                    $         4,749    $     1,579    $    (897 )  $      5,431

In April 2012, the Company further consolidated its one-color operations by transferring work from its Westford, Massachusetts facility to its Kendallville, Indiana facility, which had redundant one-color capacity. Severance and other cash related costs associated with the workforce reduction are expected to be approximately $350,000 in the Company's book manufacturing segment in the third quarter. Annualized pre-tax savings from this consolidation are projected to be approximately $1 million.

Book Manufacturing Segment



                                                    SEGMENT HIGHLIGHTS
                                                  (dollars in thousands)
                                     Quarter Ended                      Six Months Ended
                           March 24,     March 26,       %      March 24,    March 26,       %
                             2012          2011       Change       2012         2011      Change

Net sales                 $    55,454   $    55,587      -0.2 % $  111,450   $  108,630       2.6 %
Cost of sales                  46,306        53,711     -13.8 %     89,815       95,365      -5.8 %
Gross profit                    9,148         1,876     387.6 %     21,635       13,265      63.1 %
As a percentage of
sales                            16.5 %         3.4 %                 19.4 %       12.2 %
Selling and
administrative expenses         6,799         6,968      -2.4 %     15,080       14,516       3.9 %
Operating income (loss)   $     2,349   $    (5,092 )           $    6,555   $   (1,251 )

Within the book manufacturing segment, the Company focuses on three key publishing markets: education, religious and specialty trade. In fiscal 2012, sales to the education market grew 2% to $22

million in the second quarter and increased 3% to $43 million in the first six months compared to the corresponding periods last year due to increased sales of elementary and high school textbooks as well as growing demand for customized college textbooks. This sales growth was also driven by the Company's multi-year arrangement with its largest educational customer that was expanded and extended in December 2011. Sales to the religious market were down 4% to $18 million compared to a particularly strong second quarter in fiscal 2011. For the first six months, sales to the religious market were up 1% to $34 million reflecting the benefit associated with the growth incentive arrangement with the Company's largest religious customer; growth with this customer was 4% in the first half of fiscal 2012. Sales to the specialty trade market increased 8% in both the quarter and year to date to $14 million and $31 million, respectively, reflecting an increase in digital print orders as well as sales of four-color trade books. This improvement in sales to the specialty trade market also reflects a return to more traditional ordering patterns as the marketplace continues to assimilate the loss of Borders.

Cost of sales in the book manufacturing segment decreased by $7.4 million to $46.3 million in the second quarter and decreased by $5.6 million to $89.8 million in the first six months of fiscal 2012 compared to the same periods last year, which had included $7.1 million of restructuring costs. Correspondingly, the increase in gross profit for the second quarter and first half of fiscal 2012 was attributable in part to the restructuring costs in fiscal 2011. The improvement in gross profit was achieved despite a highly competitive pricing environment and a decline in recycling income. These improvements reflect a favorable sales mix, gains in operating efficiencies from recent technology investments, and savings from the closing of the Stoughton one-color manufacturing plant in March 2011.

Selling and administrative expenses for the segment decreased $0.2 million to $6.8 million in the second quarter of fiscal 2012 compared to the same period last year, which included $0.4 million of restructuring costs. For the first half of fiscal 2012, selling and administrative expenses increased $0.6 million to $15.1 million compared to the first six months of fiscal 2011, largely due to $0.9 million of severance and post-retirement benefit costs in the first quarter of this year. These cost reductions are expected to generate savings of approximately $750,000 annually.

Second quarter operating income in the book manufacturing segment was $2.3 million compared with an operating loss in the corresponding period last year of $5.1 million, primarily attributable to $7.5 million of restructuring costs in fiscal 2011. For the first half of fiscal 2012, operating income was $6.6 million compared to an operating loss of $1.3 million in the first six months of fiscal 2011. Operating results included $0.9 million of restructuring costs in fiscal 2012 and $7.5 million last year. The remaining improvement in operating income reflects increased sales and a favorable sales mix, improvements in operating efficiencies, and savings from closing the Company's one-color Stoughton, Massachusetts facility in March 2011.

Specialty Publishing Segment



                                                     SEGMENT HIGHLIGHTS
                                                   (dollars in thousands)
                                     Quarter Ended                       Six Months Ended
                           March 24,     March 26,       %       March 24,     March 26,       %
                             2012          2011       Change       2012          2011       Change

Net sales                 $     9,635   $    10,136      -4.9 % $    19,087   $    20,888      -8.6 %
Cost of sales                   6,596         6,867      -3.9 %      12,953        13,793      -6.1 %
Gross profit                    3,039         3,269      -7.0 %       6,134         7,095     -13.5 %
As a percentage of
sales                            31.5 %        32.3 %                  32.1 %        34.0 %
Selling and
administrative expenses         4,175         5,255     -20.6 %       9,097         9,890      -8.0 %
Operating loss            $    (1,136 ) $    (1,986 )           $    (2,963 ) $    (2,795 )

Within the Company's specialty publishing segment, sales in the second quarter were down 5% to $9.6 million and down 9% for the first six months to $19.1 million, compared to the corresponding periods in fiscal 2011. Approximately $0.6 million of the decline in sales in this segment for the first six months of fiscal 2012 was attributable to the loss of Borders as a customer, whose bankruptcy and liquidation in 2011 eliminated an important retail channel and also temporarily flooded the book market with low-priced inventory. Sales at REA were down 5% in the quarter to $1.4 million and down 16% year to date to $2.4 million, compared to the same periods last year, when Borders had been one of REA's largest customers. At Dover, sales were up 5% to $6.8 million for the second quarter, and for the first six months of fiscal 2012 decreased 1% to $14.5 million compared to the corresponding prior year periods. Dover's sales growth for the quarter reflects an increase in sales to online retailers. For Creative Homeowner, sales were down 34% in the second quarter to $1.4 million and down 35% to $2.2 million for the first six months of this year compared to the same periods of fiscal 2011 as demand for books on home improvement continued to be depressed amid the weak housing market as well as the availability of information online. In March 2012, Home Depot announced it will be discontinuing the sale of books in its home centers; in fiscal 2011, Home Depot stores accounted for 16% of Creative Homeowner's sales. During the second quarter of fiscal 2012, the Company expanded its e-book sales channel with the March signing of an agreement with Amazon, in addition to existing arrangements with Apple and Google.

Cost of sales in the specialty publishing segment decreased 4% to $6.6 million for the second quarter and decreased 6% to $13.0 million for the first half of fiscal 2012, compared to the same periods last year, reflecting lower sales and an improved cost structure in the segment. Gross profit in this segment decreased 7% to $3.0 million in the second quarter and, as a percentage of sales, decreased to 31.5% from 32.3% in the corresponding period last year. For the first six months of fiscal 2012, gross profit decreased 14% to $6.1 million and, as a percentage of sales, decreased to 32.1% from 34.0% in the first half of last year. These declines in gross profit resulted from the lower sales volume as well as changes in product and sales mix.

Selling and administrative expenses in this segment decreased $1.1 million to $4.2 million in the second quarter and decreased $0.8 million to $9.1 million for the first six months compared to the same periods last year. Selling and administrative expenses in the second quarter and first six months of fiscal 2012 included $0.1 million and $0.6 million, respectively, of restructuring charges for severance and post-retirement benefit costs, while last year included a second quarter additional bad-debt provision of $750,000 for Borders. These recent cost reduction measures are expected to reduce selling and administrative expenses by approximately $1.5 million on an annual basis.

The operating loss for the specialty publishing segment for the quarter was $1.1 million, compared to $2.0 million in last year's second quarter, as the impact of the Borders' receivable write-down in the prior year more than offset the benefit of recent cost reduction measures. For the first six months of fiscal 2012, the operating loss was $3.0 million compared with $2.8 million in the first half of last year, reflecting the decline in sales.

Total Consolidated Company

Interest expense, net of interest income, was $193,000 in the second quarter of fiscal 2012, compared to $248,000 of net interest expense in the same period last year. For the first six months, interest expense, net of interest income, was $453,000, comparable to the first half of last year. Average debt under the revolving credit facility in the second quarter of fiscal 2012 was approximately $16.1 million at an average annual interest rate of 0.8%, generating interest expense of approximately $30,000. Average debt under the revolving credit facility in the second quarter of last year was approximately $21.6 million at an average annual interest rate of 0.8%, generating interest expense of approximately $41,000. Average debt under the revolving credit facility in the first six months of fiscal 2012 was approximately $16.8 million at an average annual interest rate of 0.9%, generating interest expense of approximately $73,000. Average debt under the revolving credit facility in the first half of last year was approximately $21.1 million at an average annual interest rate of 0.8%, generating interest expense of approximately $81,000. At March 24, 2012, $3.9 million was borrowed under the Company's term loan with related interest expense of $37,000 in the second quarter and $74,000 in the first six months of fiscal 2012 compared to $53,000 and $107,000 in the second quarter and first half of last year, respectively. In addition, approximately $63,000 of interest expense was amortized in the first six months of this fiscal year associated with the restructuring costs incurred in fiscal 2011. 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 quarter of last year was approximately $26,000; no interest was capitalized the first six months of fiscal 2012.

In the first quarter of fiscal 2012, the Company recorded other income of $587,000 from the sale of its interests in non-operating real property relating to cell towers.

The effective tax rates for the first six months of fiscal years 2012 and 2011 were 36.6% and 38.0%, respectively. The higher rate in fiscal 2011 resulted in part from the state tax benefit of the restructuring charges being realized at lower effective rates.

For purposes of computing net income or loss per diluted share, weighted average shares outstanding increased by approximately 182,000 shares and 162,000 shares from last year's second quarter and first six months, respectively. In the second quarter and first half of fiscal 2011, approximately 37,000 and 31,000 potentially dilutive shares, respectively, were excluded due to the Company incurring a loss in those periods. The remaining increase in weighted average shares outstanding for the quarter and year to date reflects shares issued under the Company's stock plans.

Liquidity and Capital Resources:

During the first six months of fiscal 2012, operations provided $14.4 million of cash, compared to $11.8 million in the first half of last year. Net income was $1.9 million and depreciation and amortization were $11.9 million.

Investment activities in the first six months of fiscal 2012 used $4.3 million of cash. Capital expenditures were $2.4 million. For the entire fiscal year, capital expenditures are expected to be approximately $8 to $10 million, compared to $16 million for fiscal 2011. Prepublication costs were $2.3 million in the first half of fiscal 2012, comparable to the first six months of last year. For the full fiscal year, prepublication costs are projected to be approximately $5 million with the $1 million increase over fiscal 2011 attributable to accelerated investment in digital offerings.

Financing activities for the first six months of fiscal 2012 used approximately $10.2 million of cash. Cash dividends of $5.1 million were paid and borrowings decreased by $4.9 million during the first half of fiscal 2012. At March 24, 2012, borrowings under a term loan used to finance the purchase of the Company's new digital print assets were $3.9 million, with $1.6 million at a fixed annual interest rate of 3.9% and $2.3 million at a fixed annual interest rate of 3.6%. The Company also has a $100 million long-term revolving credit facility in place under which the Company can borrow at a rate not to exceed LIBOR plus 2.25%. On March 22, 2012, the Company amended this credit facility and extended the maturity date by three years to March 31, 2016. The Company also added TD Bank, N.A. to the bank group, replacing Wells Fargo, N.A.. At March 24, 2012, the Company had $12.7 million in borrowings under this facility at an interest rate of 0.7%. The revolving credit facility contains restrictive covenants including provisions relating to the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service. The Company was in compliance with all such covenants at March 24, 2012. The facility also provides for a commitment fee not to exceed 3/8% per annum on the unused portion. The revolving credit facility is used by the Company for both its long-term and short-term financing needs. The Company believes that its cash on hand, cash from operations and the available credit facility will be sufficient to meet its cash requirements through 2012.

On April 19, 2012, the Company announced the approval by its Board of Directors for the repurchase of up to $10 million of the Company's outstanding common stock from time to time on the open market or in privately negotiated transactions. Such repurchases may be made pursuant to a Rule 10b5-1 nondiscretionary trading plan. This stock repurchase authorization is effective for a period of twelve months.

The following table summarizes the Company's contractual obligations and commitments at March 24, 2012 to make future payments as well as its existing commercial commitments.

                                                     (000's Omitted)
                                                Payments due by period (1)
                                       Less than    1 to 3     3 to 5     More than
Contractual Payments:       Total       1 Year       Years     Years       5 Years
Long-term debt (2)         $ 16,598   $     1,838   $ 2,070   $ 12,690   $         -
Operating leases (3)          7,843         1,289     2,088      1,495         2,971
. . .