UNITED STATES SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2003.

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

For the transition period from _____ to _____

Commission file number 1-11427

NEW ENGLAND BUSINESS SERVICE, INC.

(Exact name of the registrant as specified in its charter)


Delaware	04-2942374
(State or other jurisdiction of	(I.R.S. Employer Identification
incorporation or organization)	No.)

500 Main Street
Groton, Massachusetts, 01471

(Address of principal executive offices)
(Zip Code)

(978) 448-6111

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes	X		No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


Yes	X		No

The number of common shares of the Registrant outstanding on February 10, 2004 was 13,297,671.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

ASSETS	Dec. 27, 2003			June 28, 2003
Current Assets
Cash and cash equivalents	$	3,703		$	4,743
Accounts receivable, net		76,502			71,049
Inventories, net		41,653			39,792
Direct mail advertising materials, net
and prepaid expenses		19,670			18,710
Deferred income tax asset		13,779			14,041

Total current assets		155,307			148,335

Property and Equipment		79,140			80,110
Property Held for Sale		--			328
Deferred Income Tax Asset		20,748			20,728
Goodwill, net		92,344			88,001
Other Intangible Assets, net		71,194			76,292
Other Assets		5,928			4,672

TOTAL ASSETS	$	424,661		$	418,466

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	21,788		$	22,937
Accrued expenses		69,341			65,192
Obligations under capital lease-current portion		565			764
Current portion of long-term debt		10,000			--

Total current liabilities		101,694			88,893

Long-Term Debt		137,274			157,025
Deferred Income Taxes		21,397			21,377
		21,397			21,377
Stockholders' Equity
Common stock		15,947			15,889
Additional paid-in capital		61,305			59,111
Unamortized value of restricted stock awards		(1,850	)		(487	)
Accumulated other comprehensive loss		(1,093	)		(2,626	)
Retained earnings		145,885			135,634
Treasury stock, at cost		(55,898	)		(56,350	)

Total stockholders' equity		164,296			151,171

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	424,661		$	418,466

See Notes to Condensed Consolidated Financial Statements

NEW ENGLAND BUSINESS SERVICE, INC.STATEMENTS
OF CONSOLIDATED INCOME
(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	Dec. 27, 2003			Dec. 28, 2002			Dec. 27, 2003			Dec. 28, 2002

Net Sales	$	196,866		$	152,599		$	364,154		$	281,450
Cost of Sales (including shipping costs)		81,718			63,138			150,860			117,417

Gross Profit		115,148			89,461			213,294			164,033
Operating Expenses:
Selling and advertising		71,721			51,599			133,615			95,598
General and administrative		24,557			19,198			48,665			38,515
Exit costs		1,009			--			1,800			--

Total operating expenses		97,287			70,797			184,080			134,113

Income from Operations		17,861			18,664			29,214			29,920

Other Income (Expense):
Interest income		69			43			152			75
Interest expense		(1,792	)		(1,978	)		(3,542	)		(5,055	)
Loss on settlement of interest rate swaps		--			(66	)		--			(3,277	)
Gain on sale of long-term investment		--			4,075			--			10,397

Total other income/(expense)		(1,723	)		2,074			(3,390	)		2,140

Income Before Income Taxes		16,138			20,738			25,824			32,060

Provision for Income Taxes		6,456			7,817			10,330			12,165

Net Income	$	9,682		$	12,921		$	15,494		$	19,895

See Notes to Condensed Consolidated Financial Statements

	Three Months Ended				Six Months Ended
	Dec. 27, 2003		Dec. 28, 2002		Dec. 27, 2003		Dec. 28, 2002

Per Share Amounts:

Basic Earnings Per Share	$	.74	$	.99	$	1.18	$	1.53

Diluted Earnings Per Share	$	.71	$	.97	$	1.14	$	1.49

Dividends Paid	$	.20	$	.20	$	.40	$	.40

Basic Weighted Average Shares Outstanding		13,099		13,025		13,082		13,025
Plus incremental shares from assumed conversion of stock options and contingently returnable shares		491		323		519		336

Diluted Weighted Average Shares Outstanding		13,590		13,348		13,601		13,361

See Notes to Condensed Consolidated Financial Statements

NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)

	Six Months Ended
	Dec. 27, 2003			Dec. 28, 2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	15,494		$	19,895
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation		11,848			9,957
Amortization		5,125			3,567
Exit costs		1,800			--
Loss on disposal of equipment		23			50
Gain on sale of long-term investment		--			(10,397	)
Provision for losses on accounts receivable		2,453			2,925
Deferred grants		--			(3	)
Employee benefit charges		975			543
Changes in assets and liabilities:
Accounts receivable, net		(7,561	)		(5,537	)
Inventories, net		(1,745	)		(566	)
Direct mail advertising materials, net and prepaid expenses		(731	)		(1,226	)
Other assets		(333	)		539
Accounts payable		(1,402	)		(875	)
Income taxes payable		772			4,701
Other accrued expenses		(363	)		(1,257	)


Net cash provided by operating activities		26,355			22,316

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(10,543	)		(8,160	)
Purchase of long-term investment		--			(5,421	)
Proceeds from sale of long-term investment		--			46,339
Proceeds from sale of property, plant & equipment		364			12
Acquisition of business		(2,178	)		--


Net cash (used)/provided by investing activities		(12,357	)		32,770

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt		(37,450	)		(76,816	)
Proceeds from borrowings - net of issuance costs		27,477			26,498
Proceeds from issuance of common stock		3,828			323
Acquisition of treasury stock		(3,946	)		(1,553	)
Dividends paid		(5,244	)		(5,218	)


Net cash used by financing activities		(15,335	)		(56,766	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		297			(139	)


NET CHANGE IN CASH AND CASH EQUIVALENTS		(1,040	)		(1,819	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		4,743			6,112


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,703		$	4,293

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation/Accounting Policies

The condensed consolidated financial statements contained in this report are unaudited, but reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods reflected. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto, and the Independent Auditors’ Report in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003. Reference is made to the accounting policies of the Company described in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003. The Company has followed those policies in preparing this report. The results from operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year.

Certain reclassifications have been made to the comparative periods so as to be in conformity with the current period’s presentation. All amounts are in thousands, except per share data.

2. Acquisitions

In June 2003, the Company acquired all the outstanding shares of Safeguard Business Systems, Inc. (“SBS”). The purchase price totaled approximately $73,636 (net of cash and restricted cash acquired) for the shares. The Company incurred fees of approximately $1,379 in connection with the acquisition which are included in the purchase price above. The Company acquired SBS in order to expand its customer base in the small business market. The SBS distributor channel and product set are highly complementary to the Company’s business model. The acquisition was accounted for using the purchase method of accounting. Accordingly, SBS’s results from operations are included in the accompanying financial statements from the date of acquisition. The purchase price, including acquisition costs, was allocated to the net tangible assets acquired based on the fair value of such assets and liabilities. The excess cost over fair value of the net tangible assets acquired was $67,595, of which $34,560 was allocated to long-term contracts and the balance of $33,035 to goodwill. These allocations are still subject to final fixed and intangible asset valuations. These valuations will be completed no later than the end of the Company’s third fiscal quarter. These valuations could result in a significantly different allocation to long-term contracts than previously estimated as well as a different estimated useful life. The Company has amortized approximately $2,000 of this intangible asset through December 27, 2003 however, and believes that the net adjustment of amortization expense that will result from the final valuations will not be material. The long-term contracts are currently being amortized over their estimated respective useful lives which is 10 years.

The cost to acquire SBS has been allocated to the assets acquired and liabilities assumed according to estimated fair values. The valuation method used to determine the amount allocated to long-term contracts related to the acquisition of SBS was based upon an analysis of the expected future cash flows from these contracts. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed for SBS at the date of acquisition:

		SBS
Current Assets		$25,633
Deferred tax asset		1,533
Property and equipment		8,789
Intangible assets		34,560
Goodwill		33,035
Current liabilities		(29,914)
Total purchase price		$73,636

Changes in the carrying value of goodwill for the SBS acquisition are described in Note 6.

The following unaudited pro forma financial information reflects the consolidated results from operations of the Company for the three and six months ended December 28, 2002 as though the acquisition described above had occurred on the first day of the respective period. The pro forma operating results are presented for comparative purposes only and do not purport to present the Company’s actual operating results had the acquisitions been consummated on June 29, 2002 or results which may occur in the future:

	Three Months Ended Dec. 28, 2002		Six Months Ended Dec. 28, 2002
Net sales	$	193,288	$	360,999
Net income		13,947		21,376
Net income per diluted share		1.04		1.60

3. Restructuring

During fiscal year 2001, the Company undertook two distinct restructuring actions. The first resulted in a net restructuring charge of $4,315 in fiscal years 2001 through 2003 to provide for costs primarily associated with the Company’s decision to more closely align its direct marketing and direct sales activities. The second restructuring resulted in a net charge of $3,366 in fiscal years 2001 through 2004 to provide for costs associated with the Company’s decision to eliminate excess manufacturing capacity along with other actions to reduce the workforce in various locations. Approximately 315 employees were affected by these restructuring actions either through elimination of their positions or relocation.

During fiscal year 2003, the Company implemented a workforce reduction in specific areas of the business, affecting approximately 44 employees, resulting in a restructuring charge of $1,326 in fiscal years 2003 and 2004. In addition, as part of the purchase accounting for the SBS acquisition and included in the allocation of the acquisition costs, a liability of $3,300 was recorded to cover the anticipated costs (primarily termination benefits) related to a plan to close redundant SBS manufacturing and warehouse facilities and to reduce manufacturing and administrative personnel.

During fiscal year 2004, the Company announced its plans to close a manufacturing plant in Peterborough, New Hampshire after an extensive review of the Company’s manufacturing capacity following the SBS acquisition, resulting in a restructuring charge of $995 during the current fiscal year. The manufacturing activities will be absorbed into other existing facilities during fiscal year 2004 with operations in Peterborough, New Hampshire expected to cease by June 26, 2004. Two separate workforce reductions also took place in SBS, resulting in a restructuring charge of $333 during the current fiscal year, unrelated to ongoing integration activities.

Pursuant to these actions, the following charges and payments have been accrued and recorded:

	Balance Sept. 27, 2003		Charge/(credit) for the period		Payments for the period		Balance Dec. 27, 2003

2001 Restructurings
Facility closure costs	$	53	$	(9)	$	(35)	$	9
Employee termination
benefit costs		40		(35)		(5)		--
2003 Restructurings
Facility closure costs		496		--		(36)		460
Employee termination
benefit costs		2,710		--		(918)		1,792
2004 Restructuring
Employee termination
benefit costs		507		821		(12)		1,316


Total	$	3,806	$	777	$	(1,006)	$	3,577

	Balance June 28, 2003		Charge/(credit) for the period		Payments for the period		Balance Dec. 27, 2003

2001 Restructurings
Facility closure costs	$	511	$	(9)	$	(493)	$	9
Employee termination
benefit costs		62		(35)		(27)		--
2003 Restructurings
Facility closure costs		548		(14)		(74)		460
Employee termination
benefit costs		3,606		222		(2,036)		1,792
2004 Restructuring
Employee termination
benefit costs		--		1,328		(12)		1,316


Total	$	4,727	$	1,492	$	(2,642)	$	3,577

Additional information related to exit costs expected to be incurred and expensed during the period is as follows:

	Exit Costs expected to be incurred		Exit costs incurred/ (credited) for the three months ended Dec. 27, 2003		Exit costs incurred/ (credited) for the six months ended Dec. 27, 2003		Cumulative exit costs incurred as of Dec. 27, 2003

2001 Restructurings
Facility closure costs	$	3,115	$	(125)	$	(125)	$	3,115
Employee termination
benefit costs		4,451		(35)		(35)		4,451
2003 Restructurings
Facility closure costs		248		--		(14)		248
Employee termination
benefit costs		1,077		--		222		1,077
2004 Restructuring
Employee termination
benefit costs		2,000		839		1,384		1,384
Facility closure costs		1,300		94		102		102
Other associated costs		1,200		236		266		266


Total	$	13,391	$	1,009	$	1,800	$	10,643

The activities related to all restructuring actions identified above are anticipated to be completed by the Company during fiscal year 2004, however payments for employee termination benefits and idle facilities maintenance will extend beyond that time period.

4. Inventories, net

Inventories are carried at the lower of first-in, first-out cost or market. Inventories at December 27, 2003 and June 28, 2003 consisted of:

	Balance Dec. 27, 2003		Balance June 28, 2003
Raw Material	$	4,657	$	4,594
Finished Goods		36,996		35,198

Total	$	41,653	$	39,792

5. Long-Term Investment

In March 2000, the Company invested $12,869 in the common stock of Advantage Payroll Services, Inc. In August 2001 and July 2002, the Company invested an additional $17,652 and $5,421, respectively, in the common stock of Advantage Payroll Services, Inc. for a total investment of $35,942. As a result of the additional investments, the Company owned 2,139 and 2,567 shares, respectively, representing approximately 18% and 20%, respectively, of the Advantage common shares outstanding. The Company carried this investment at cost throughout its ownership period. In September 2002, Advantage merged with Paychex, Inc. The Company received a total of $47,366 in proceeds from the merger and recognized a gain of $11,424 in the year ended June 28, 2003.

The Company used the proceeds from the sale of the Advantage investment to pay down floating rate debt and to terminate three interest rate swap agreements with a notional amount of $75,000 with two commercial banks during fiscal year 2003. These interest rate swaps were no longer needed to hedge the reduced level of the Company’s floating rate debt. The Company was required to make termination payments equivalent to the fair value of the swaps totaling $3,277. This amount, which was reclassified from other comprehensive income to other expense, represents a loss on settlement of interest rate swaps to terminate the agreements.

6. Goodwill and Other Intangible Assets

The Company completed its annual intangible asset impairment test as of April 26, 2003 using discounted cash flow analyses and recognized an impairment charge to write-off goodwill and write-down long-term contracts in the amounts of $9,624 and $3,625, respectively, relating to its PremiumWear business within its Apparel business segment. The impairment loss is recognized in the consolidated statements of income for the fiscal year ended June 28, 2003 under “Operating Expenses”.

Intangible assets consist of the following:

	December 27, 2003				June 28, 2003
	Gross Carrying Amount		Acumulated Amortization		Gross Carrying Amount		Acumulated Amortization
Intangible assets with
Defined lives:
Customer lists	$	46,367	$	45,224	$	46,367	$	42,336
Debt issue costs		3,544		2,138		3,517		1,840
Long-term contracts		36,238		3,039		36,238		1,285
Bank referral
agreements		7,400		2,066		7,400		1,881
Intangible assets with
Indefinite lives:
Tradenames		32,839		2,727		32,839		2,727

Total intangible assets	$	126,388	$	55,194	$	126,361	$	50,069

Changes in the carrying amount of goodwill (net) for the six months ended December 27, 2003, by segment, are as follows:

	Direct Marketing-US		Direct and Distributor Sales		Apparel		Packaging and Display Products		International		Total
Balance
June 28, 2003	$	24,237	$	36,361	$	-	$	23,246	$	4,157	$	88,001

Goodwill
acquired - SBS		--		4,175	$	-		--		--		4,175

Currency
translation		--		--	$	-		--		168		168

Balance
Dec. 27, 2003	$	24,237	$	40,536	$	-	$	23,246	$	4,325	$	92,344

Changes in the carrying value of goodwill associated to the acquisition of SBS resulted from the payment of a post-closing working capital adjustment to the selling shareholders, which had been estimated at June 28, 2003 and subsequently adjusted, fees associated with the acquisition and adjustments to the income tax liability and other accrued expenses estimated on the opening balance sheet.

Amortization of intangible assets with defined lives for the six months ended December 27, 2003 and December 28, 2002 was $5,125 and $3,567, respectively. Estimated amortization of intangible assets for fiscal years 2004, 2005, 2006, 2007 and 2008, without consideration of any other increases or decreases in the balance of the assets, is $8,450, $4,484, $4,296, $3,932 and $3,932, respectively.

7. Stock Options

SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic-value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation costs of stock-based employee compensation is measured as the excess, if any, of the fair value of the stock at the date of the grant over the option exercise price and is charged to operations over the vesting period.

If the fair-value-based accounting method was utilized for stock-based compensation, the Company’s pro forma net earnings would have been as follows:

	Three Months Ended				Six Months Ended
	Dec. 27, 2003		Dec. 28, 2002		Dec. 27, 2003		Dec. 28, 2002
Net Income:
As reported	$	9,682	$	12,921	$	15,494	$	19,895

Add total stock-based compensation expense determined under the intrinsic- value method for all awards, net of related tax effects		316		205		585		337

Deduct total stock-based compensation expense determined under the fair-value method for all awards, net of related tax effects		(747)		(544)		(1,091)		(908)

Pro forma	$	9,251	$	12,582	$	14,988	$	19,324


Net Income per basic share:
As reported	$	.74	$	.99	$	1.18	$	1.53
Pro forma		.71		.96		1.15		1.48
Net Income per diluted share:
As reported	$	.71	$	.97	$	1.14	$	1.49
Pro forma		.68		.94		1.10		1.45

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The weighted-average grant date fair value of options granted during the three and six months ended December 27, 2003 was $7.46 and $7.94, respectively and during the three and six months ended December 28, 2002 was $5.61 and $5.67, respectively. It should be noted that the Black-Scholes option pricing model used in the calculation was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of up to ten years. Management believes that the assumptions used and the model applied to value the awards yield a reasonable estimate of the fair value of the grants made under the circumstances.

8. Other Comprehensive Income

Other Comprehensive Income consists of foreign currency translation adjustments, pension adjustments, unrealized gains and losses on investments and changes in the fair market value of cash flow hedges. The Company’s comprehensive income is set forth below:

	Three Months Ended Dec. 27, 2003		Three Months Ended Dec. 28, 2002		Six Months Ended Dec. 27, 2003		Six Months Ended Dec. 28, 2002

Net income	$	9,682	$	12,921	$	15,494	$	19,895
Changes in:
Unrealized gains on
investments, net of tax		93		52		157		211
Foreign currency translation
adjustments		1,096		422		1,123		(345	)
Unrealized gains on
derivatives held for
hedging		138		351		253		2,427
purposes, net of tax

Comprehensive income	$	11,009	$	13,746	$	17,027	$	22,188

The Company’s accumulated other comprehensive loss is set forth below:

	Balance Dec. 27, 2003			Balance June 28, 2003

Unrealized gains/(losses)
on investments, net of tax	$	142		$	(15	)
Foreign currency translation
adjustments		50			(1,073	)
Pension adjustments, net of tax		(1,055	)		(1,055	)
Unrealized losses on derivatives
held for hedging purposes, net of tax		(230	)		(483	)


Total	$	(1,093	)	$	(2,626	)

9. Financial Information by Business Segment

The Company has identified five reportable segments. The first segment is “Direct Marketing-US” and represents those business operations that sell principally printed products such as checks and business forms to small businesses through direct marketing in the United States. The second segment, “Direct and Distributor Sales”, also sells primarily checks and business forms to small businesses; however, they sell through a direct sales force to the customer and through both independent and local, dedicated distributors in the United States and Canada. The third segment, “Apparel”, utilizes independent sales representatives to market its specialty apparel products and to solicit orders from customers in the promotional products/advertising specialty industry. “Packaging and Display Products”, the fourth segment, primarily resells packaging and shipping supplies and retail signage marketed through a combination of direct marketing and direct selling efforts. The fifth segment, “International”, sells principally printed products such as checks and business forms to small businesses in Canada, the United Kingdom and France through direct marketing, independent distributors or by directly selling to the customer.

The Company evaluates segment performance and allocates resources based on a profit from operations measure. This measure is similar to income from operations as reported on the statements of consolidated income in that it excludes interest and other income and expense. This measure, however, also excludes certain items that are reported within income from operations. These include management incentive compensation, amortization, integration charges, restructuring charges, impairment charges and corporate expenses. The chief operating decision-maker, in assessing segment results, does not consider these items.

Net sales and profit from operations for each of the Company’s business segments are set forth below:

	Direct Marketing-US		Direct and Distributor Sales		Apparel			Packaging & Display Products		Inter- national		Total
Three months ended
December 27, 2003
Net Sales	$	78,916	$	68,895	$	12,644		$	23,311	$	13,100	$	196,866
Profit (loss) from
operations		18,237		6,955		(53	)		1,568		1,265		27,972
Less adjustments
noted above													11,834
Income before
income taxes												$	16,138

Three months ended
December 28, 2002
Net Sales	$	80,894	$	28,365	$	9,847		$	22,685	$	10,808	$	152,599
Profit (loss) from
operations		18,967		3,653		(385	)		1,166		1,156		24,557
Less adjustments
noted above													3,819
Income before
income taxes												$	20,738

	Direct Marketing-US		Direct and Distributor Sales		Apparel		Packaging & Display Products		Inter- national		Total
Six months ended
December 27, 2003
Net Sales	$	140,529	$	135,482	$	22,040	$	42,929	$	23,174	$	364,154
Profit (loss) from
operations		32,917		12,749		(451)		2,193		1,313		48,721
Less adjustments
noted above												22,897
Income before
income taxes											$	25,824

Six months ended
December 28, 2002
Net Sales	$	144,780	$	54,911	$	19,605	$	42,314	$	19,840	$	281,450
Profit (loss) from
operations		33,934		6,009		(1,093)		1,585		1,606		42,041
Less adjustments
noted above												9,981
Income before
income taxes											$	32,060

10. Contingencies

On June 30, 2000, a complaint entitled “Perry Ellis International, Inc. v. PremiumWear Inc.”, was filed. The Company was subsequently named a co-defendant. The amended complaint relates to a Right of First Refusal Agreement dated as of May 22, 1996 (the “RFR Agreement”) between the plaintiff and PremiumWear, Inc., and to the Company’s acquisition of all the outstanding shares of PremiumWear in July 2000. In the amended complaint, the plaintiff alleges breach of the RFR Agreement and breach of an implied covenant of good faith and fair dealing against PremiumWear as a result of PremiumWear’s alleged failure to notify the plaintiff of certain discussions between PremiumWear and the Company preceding the Company’s agreement to purchase all of the outstanding shares of PremiumWear. The amended complaint also alleges that the Company tortiously interfered with the plaintiff’s rights under the RFR Agreement by allegedly inducing PremiumWear to breach its obligations to the plaintiff under the RFR Agreement. The plaintiff is seeking damages in an unspecified amount, attorneys’ fees, interest and costs.

On February 2, 2004, the defendants’ motion for summary judgment was granted in part and denied in part. The court dismissed the claim against PremiumWear alleging breach of an implied covenant of good faith and fair dealing, but declined to dismiss the claim against PremiumWear alleging breach of the RFR Agreement and the claim against the Company alleging tortious interference with the plaintiff’s rights under the RFR Agreement. The Company continues to believe the allegations in the amended complaint are without merit and intends to defend the lawsuit vigorously.

On July 24, 2002, a class action lawsuit entitled “OLDAPG, Inc. v. New England Business Service, Inc.” was filed in the Court of Common Pleas of the Ninth Judicial Circuit in and for Charleston County, South Carolina. The named plaintiff in the lawsuit sought to represent a class consisting of all persons who allegedly received facsimiles containing unsolicited advertising from the Company in violation of the Telephone Consumer Protection Act of 1991 (the “TCPA”). The litigation was settled by agreement between the parties in December 2003 on terms which are not material to the Company’s consolidated financial position or results of operations.

The Company is also involved in a number of other legal matters related to the business and in the opinion of management the outcome of these matters will not have a material effect on the Company’s consolidated financial position or results of operations.

11. Subsequent Events

On January 6, 2004, the Company acquired certain assets of the Stephen Fossler Company, Inc. and its affiliates (collectively, “Fossler”), for $27,000. The purchase price is subject to a post closing working capital adjustment estimated to be approximately $925. Fossler manufactures and markets a broad line of embossed foil seals, and distributes retail store signage and commemorative specialty products through direct mail in the U.S., Canada, and the U.K. The Company is presently undertaking an allocation of this purchase price, and anticipates that approximately $23,000 will be allocated to certain intangible assets, a portion of which are anticipated to be amortized over 10 years. It is anticipated that Fossler will be reported as part of the Direct Marketing-US segment.

On January 20, 2004, the Company issued senior notes in the aggregate principal amount of $50,000 pursuant to a Note Purchase Agreement with The Prudential Insurance Company of America and its affiliates. The amortization of long-term debt under the notes will be $10,000 per year from January 2010 through January 2014 and interest is at a fixed rate of 5.62%. The notes are subject to various restrictive covenants, which, among other things, require the Company to maintain certain minimum levels of consolidated net worth and specific consolidated debt and fixed charge ratios. Debt issuance costs incurred in connection with the issuance of these notes will be amortized over the term of the notes. The proceeds from these notes was applied against the outstanding balance under the revolving credit agreement, which gives the Company more flexibility to use its revolving credit agreement for future business needs.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

New England Business Service, Inc. (the “Company”) was founded in 1952, incorporated in Massachusetts in 1955 and reincorporated in Delaware in 1986. The Company designs, produces and distributes business forms, checks, envelopes, labels, greeting cards, signs, stationery and related printed products, and distributes packaging, shipping and warehouse supplies, software, work and promotional apparel, advertising specialties and other business products through direct mail, direct sales, telesales, dealers, dedicated distributors and the Internet to small businesses throughout the United States, Canada, the United Kingdom and France. The Company also markets and sells payroll services provided by a payroll services company on a private label basis in the United States and in Canada through a wholly-owned subsidiary. The Company also designs, embroiders and sells specialty apparel products through distributors and independent sales representatives to the promotional products/advertising specialty industry, primarily in the United States.

The Company has identified five reportable segments. The first segment is “Direct Marketing-US” and represents those business operations that sell principally printed products such as checks and business forms to small businesses through direct marketing in the United States. The second segment, “Direct and Distributor Sales”, also sells primarily checks and business forms to small businesses; however, they sell through a direct sales force to the customer and through both independent and local, dedicated distributors in the United States and Canada. The third segment, “Apparel”, utilizes independent sales representatives to market its specialty apparel products and to solicit orders from customers in the promotional products/advertising specialty industry. “Packaging and Display Products”, the fourth segment, primarily resells packaging and shipping supplies and retail signage marketed through a combination of direct marketing and direct selling efforts. The fifth segment, “International”, sells principally printed products such as checks and business forms to small businesses in Europe and Canada through direct marketing, independent distributors or by directly selling to the customer.

On January 6, 2004, the Company acquired certain assets of the Stephen Fossler Company, Inc. and its affiliates (collectively, “Fossler”), for $27 million. The purchase price is subject to a post closing working capital adjustment estimated to be approximately $.9 million. Fossler manufactures and markets a broad line of embossed foil seals, and distributes retail store signage and commemorative specialty products through direct mail in the U.S., Canada, and the U.K. The Company is presently undertaking an allocation of this purchase price, and anticipates that approximately $23 million will be allocated to certain intangible assets, a portion of which are anticipated to be amortized over 10 years.* It is anticipated that Fossler will be reported as part of the Direct Marketing-US segment.*

Any sentence followed by an asterisk (*) in this section constitutes a forward-looking statement which reflects the Company’s current expectations. There can be no assurance the Company’s actual performance will not differ materially from those projected in such forward-looking statements due to the important factors described in the section to this Management’s Discussion and Analysis of Financial Condition and Results of Operations titled “Certain Factors That May Affect Future Results.”

Results of Operations

Executive Summary

The Company earns revenues and income and generates cash from the sale of standardized business forms, checks and related products by mail order, telesales and direct and distributor sales to a target market consisting mainly of small businesses. The critical success factors to the Company are competitive pricing, breadth of product offering, product service and quality and the ability to attract and retain customers. In the Direct Marketing-US segment the Company is investing more heavily in acquiring first time buyers and customer retention activities in addition to refining its direct mail approach with more targeted mailing pieces. The most significant fiscal year 2004 financial impact to the Company was the June 2, 2003 acquisition of Safeguard Business Systems, Inc. (“SBS”) which is reported in the Direct and Distributor Sales segment. The Company acquired SBS in order to expand its customer base in the small business market. The SBS distributor channel and product set are highly complementary to the Company’s business model. McBee Systems, Inc., which is reported in the Direct and Distributor Sales segment, is expanding its bank relationships and implementing direct marketing strategies to drive additional sales. The improvement to the US economy has had a positive impact on the Apparel and Packaging & Display segments. The Apparel segment has changed its relationship with a supplier, favorably impacting reported sales, and has seen a dramatic reduction in demand from wholesalers, and as a result is focusing on the ad specialty dealer while expanding its golf sales. The Company expects these initiatives will provide future growth in revenues for the Apparel segment.* The International segment benefited from the weaker US dollar this past quarter, which increased sales and profits in US dollars.

The Company’s vision is to help small business people build thriving businesses by anticipating and delivering product and service solutions for their unique needs. The Company enjoys a large and loyal customer base, strong brand recognition, direct marketing expertise as well as a large direct sales force, along with numerous other strengths. The Company’s major opportunities include developing new customer acquisition techniques as well as installing additional products to its established customer base and leveraging specific product opportunities. Holiday cards, custom printed products and checks are specific areas of focus due to their growth potential. The same is true of opportunities to provide services to small businesses such as payroll processing.

Our growth strategy also includes the acquisition of complementary businesses. As mentioned above, the Company purchased certain assets of Stephen Fossler Company, Inc. and its affiliates in January 2004 for $27 million. The purchase price is subject to a post closing working capital adjustment. This acquisition expands the Company’s leadership position in the small business marketplace. Their direct mail channel, customers, and products align closely to the Company’s business model.

One of the primary challenges the Company faces comes from new technologies that are resulting in a decline in various high margin products such as continuous checks and forms. Computerization of small businesses has changed the way many of them now do business. The Company’s goal is to find new products and services to counteract this trend. Other challenges the Company faces particularly in the direct mail channel are the risks from potential privacy laws and increasing postal rates either of which could have an adverse impact on our ability to contact customers and prospects. These matters receive significant management attention when planning for the future.

Summary of Results of Operations:

In thousands

	Three Months Ended						Six Months Ended
	Dec. 27, 2003			Dec. 28, 2002			Dec. 27, 2003			Dec. 28, 2002
Net Sales	$	196,866		$	152,599		$	364,154		$	281,450
Cost of Sales		81,718			63,138			150,860			117,417
Percentage of Net Sales		41.5	%		41.4	%		41.4	%		41.8	%

Selling and advertising		71,721			51,599			133,615			95,598
Percentage of Net Sales		36.4	%		33.8	%		36.7	%		34.0	%

General and administrative		24,557			19,198			48,665			38,515
Percentage of Net Sales		12.5	%		12.6	%		13.4	%		13.7%

Interest Expense		1,792			1,978			3,542			5,055
Percentage of Net Sales		1.0	%		1.3	%		1.0	%		1.8	%

Provision for Income Taxes		6,456			7,817			10,330			12,165
Percentage of Income Before Income Taxes		40.0	%		37.7	%		40.0	%		37.9	%

Net sales increased $44.3 million or 29.0% to $196.7 million in the second quarter of fiscal year 2004 from $152.6 million in last year’s second quarter. The increase in sales was primarily the result of the acquisition of Safeguard Business Systems, Inc. (SBS), which was acquired on June 2, 2003. SBS contributed $39.6 million in net sales to the quarter’s performance in the Direct and Distributor Sales segment. Excluding the effect of the acquisition, consolidated net sales increased $4.6 million or 3.0%. The sales change included a decrease of approximately $1.9 million in the Direct Marketing-US segment, which is primarily attributable to declines in standardized forms sales due to product obsolescence offset partially by an increase in seasonal greeting card sales in the quarter. Net sales in the Company’s Direct and Distributor Sales segment rose $.9 million, net of the SBS acquisition, from expanded bank relationships and the implementation of direct marketing strategies at McBee Systems, Inc. Net sales in the International segment increased $2.2 million primarily as a result of foreign currencies strengthening against the U.S. dollar. The sales increases of $.6 million in the Packaging and Display and $2.8 million in the Apparel segment are the result of an improving economy and, with respect to the Apparel segment, a change in a contractual relationship which resulted in a previously commission-based outsourcing arrangement now to be reported as a full customer sale.

Net sales increased $82.7 million or 19.4% to $364.2 million for the first six months of fiscal year 2004 from $281.5 million in last year’s comparable period. The increase in sales was primarily the result of the acquisition of SBS. SBS contributed $78.7 million in net sales to the period’s performance in the Direct and Distributor Sales segment. Excluding the effect of the acquisition, net sales increased $4.0 million or 1.4%. The sales change included a decrease of approximately $4.3 million in the Direct Marketing-US segment which is primarily attributable to declines in standardized forms sales due to product obsolescence partially offset by an increase in seasonal greeting card sales. Net sales of the Company’s Direct and Distributor Sales segment rose $1.9 million, net of the SBS acquisition, from expanded bank relationships and the implementation of direct marketing strategies at McBee Systems, Inc. Net sales in the International segment increased $3.3 million primarily as a result of foreign currencies strengthening against the U.S. dollar. The sales increases of $.7 million in the Packaging and Display and $2.4 million in the Apparel segment are the result of an improving economy and, with respect to the Apparel segment, a change in a contractual relationship which resulted in a previously commission-based outsourcing arrangement now to be reported as a full customer sale.

For the second quarter of fiscal year 2004, cost of sales remained essentially unchanged at 41.5% of sales from 41.4% in last year’s comparable period. For the first six months of fiscal year 2004, cost of sales declined to 41.4% of sales from 41.7%. The inclusion of SBS lowered cost of sales as a percent of sales by .6% points in the quarter and .4% points for the six month period versus the prior year. Cost of sales as a percent of sales is expected to increase slightly for the remainder of the fiscal year.*

Selling and advertising expense increased to 36.4% of sales in the second quarter of fiscal year 2004 as compared to 33.8% of sales in last year’s comparable quarter as a result of the addition of SBS, which, consistent with the other businesses in the Direct and Distributor Sales segment, has a higher selling and advertising expense as a percentage of sales than in the Company’s other segments and due to higher amortization expense from the acquisition. For the first six months of fiscal year 2004, selling and advertising expense increased to 36.7% of sales as compared to 34.0% of sales in last year’s comparable period for the same reasons as noted for the quarter. Excluding SBS, selling and advertising expense was 34.3% in the second quarter of fiscal year 2004 as compared to 33.8% of sales in last year’s comparable quarter, due to an increased investment in the seasonal greeting card business. For the first six months of fiscal year 2004 selling and advertising expense remained essentially unchanged at 34.0% of sales. Selling and advertising expense as a percentage of sales is expected to decrease slightly for the remainder of the fiscal year.*

General and administrative expense decreased to 12.5% of sales in the second quarter of fiscal year 2004 from 12.6% of sales in last year’s comparable quarter. For the first six months of fiscal year 2004, general and administrative expense decreased to 13.4% of sales as compared to 13.7% of sales in last year’s comparable period. The decrease is due to lower legal costs and deferred compensation expenses. General and administrative expense as a percent of sales is expected to increase slightly for the remainder of the fiscal year.*

During fiscal year 2001, the Company undertook two distinct restructuring actions. The first resulted in a net restructuring charge of $4.3 million in fiscal years 2001 through 2003 to provide for costs primarily associated with the Company’s decision to more closely align its direct marketing and direct sales activities. The second restructuring resulted in a net charge of $3.4 million in fiscal years 2001 through 2003 to provide for costs associated with the Company’s decision to eliminate excess manufacturing capacity along with other actions to reduce the workforce in various locations. Approximately 315 employees were affected by these restructuring actions either through elimination of their positions or relocation.

During fiscal year 2003, the Company implemented a workforce reduction in specific areas of the business, affecting approximately 44 employees, resulting in a restructuring charge of $1.3 million in fiscal years 2003 and 2004. In addition, as part of the purchase accounting for the SBS acquisition and included in the allocation of the acquisition costs, a liability of $3.3 million was recorded to cover the anticipated costs (primarily termination benefits) related to a plan to close redundant SBS manufacturing and warehouse facilities and to reduce manufacturing and administrative personnel.

During fiscal year 2004, the Company announced its plans to close a manufacturing plant in Peterborough, New Hampshire after an extensive review of the Company’s manufacturing capacity following the SBS acquisition, resulting in a restructuring charge of $1.0 million, during the current fiscal year. The manufacturing activities will be absorbed into other existing facilities during fiscal year 2004 with operations in Peterborough, New Hampshire expected to cease by June 26, 2004. Two separate workforce reductions also took place in SBS, resulting in a restructuring charge of $.3 million, during the current fiscal year, unrelated to ongoing integration activities.

Pursuant to these plans, the following charges and payments have been accrued and recorded:

	Balance Sept. 27, 2003		Charge/(credit) for the period		Payments for the period		Balance Dec. 27, 2003

2001 Restructurings
Facility closure costs	$	53	$	(9)	$	(35)	$	9
Employee termination
benefit costs		40		(35)		(5)		--
2003 Restructurings
Facility closure costs		496		--		(36)		460
Employee termination
benefit costs		2,710		--		(918)		1,792
2004 Restructuring
Employee termination
benefit costs		507		821		(12)		1,316


Total	$	3,806	$	777	$	(1,006)	$	3,577

	Balance June 28, 2003		Charge/(credit) for the period		Payments for the period		Balance Dec. 27, 2003

2001 Restructurings
Facility closure costs	$	511	$	(9)	$	(493)	$	9
Employee termination
benefit costs		62		(35)		(27)		--
2003 Restructurings
Facility closure costs		548		(14)		(74)		460
Employee termination
benefit costs		3,606		222		(2,036)		1,792
2004 Restructuring
Employee termination
benefit costs		--		1,328		(12)		1,316


Total	$	4,727	$	1,492	$	(2,642)	$	3,577

Additional information related to exit costs expected to be incurred and expensed during the period is as follows:

	Exit Costs expected to be incurred		Exit costs incurred/ (credited) for the three months ended Dec. 27, 2003		Exit costs incurred/ (credited) for the six months ended Dec. 27, 2003		Cumulative exit costs incurred as of Dec. 27, 2003

2001 Restructurings
Facility closure costs	$	3,115	$	(125)	$	(125)	$	3,115
Employee termination
benefit costs		4,451		(35)		(35)		4,451
2003 Restructurings
Facility closure costs		248		--		(14)		248
Employee termination
benefit costs		1,077		--		222		1,077
2004 Restructuring
Employee termination
benefit costs		2,000		839		1,384		1,384
Facility closure costs		1,300		94		102		102
Other associated costs		1,200		236		266		266


Total	$	13,391	$	1,009	$	1,800	$	10,643

Interest expense was 1.0% of sales in the second quarter of fiscal year 2004 as compared to 1.3% of sales in the prior year’s comparable period. In the first six months of fiscal year 2004, interest expense was 1.0% of sales as compared to 1.8% of sales in the prior year’s comparable period. The decrease is the result of lower effective interest rates on the Company’s debt as compared to the same period last year.

The provision for income taxes as a percentage of pretax income was 40.0% for the second quarter and first six months of fiscal year 2004 as compared to 37.7% and 37.9%, respectively, in the prior year’s comparable period. The change is the result of an increase in the state tax provision due to recently enacted tax legislation and changes in the mix of anticipated earnings among different subsidiaries. The provision for income taxes as a percentage of pretax income is expected to remain consistent with the first six months of fiscal year 2004 for the remainder of the current year.*

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, bad debts, inventories, intangible assets, and incomes taxes. Estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. The Company believes the following accounting policies are the most critical due to their affect on the Company’s more significant estimates and judgments used in preparation of its consolidated financial statements.

Revenue is recognized on product sales at the point in time when persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price and considers delivery to have occurred at the point of shipment. While the Company does provide its customers with a right of return, revenue is not deferred. Rather, a reserve for sales returns is provided based on significant historical experience.

Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, inventories, property, plant and equipment, investments, capitalized software, goodwill, deferred mail costs and intangible and other assets. Asset valuation is governed by various accounting principles, including Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, SFAS No. 141, “Business Combinations”, SFAS No. 142 “Goodwill and Other Intangible Assets” and Accounting Research Bulletin No. 43, among others. Management uses a variety of factors to assess valuation depending on the asset. For example, accounts receivable are evaluated based upon an aging schedule. The recoverability of inventories is based upon the types and levels of inventory held. Property, plant and equipment, capitalized software and intangible and other assets are evaluated utilizing various factors, including the expected period the asset will be utilized, forecasted cash flows, the cost of capital and customer demand. Investments are evaluated for impairment based upon market conditions and the viability of the investment. Deferred mail is capitalized and amortized over its expected period of future benefit in accordance with AICPA Statement of Position 93-7. Changes in any of these factors could impact the value of the asset resulting in an impairment charge.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each jurisdiction in which we operate that imposes a tax on income. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, we must include an expense within the tax provision in the consolidated statements of income. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted.

Liquidity and Capital Resources

Cash provided by operating activities for the six months ended December 27, 2003 was $26.4 million and represented an increase of $4.1 million from the $22.3 million provided in the comparable period last year. This increase in cash provided by operating activities was due to increases in depreciation, amortization and exit accruals from year to year, as well as the gain on the sale of a long-term investment in the prior year which is removed from cash provided by operations in the statements of cash flows. The effect of income taxes paid as a result of the gain last year remains as a reduction of net cash provided by operations in 2003.

Working capital at December 27, 2003 totaled $53.7 million, including $3.7 million of cash and short-term investments. At June 28, 2003, working capital was $59.4 million, including cash and short term investments of $4.7 million. The decrease in working capital is primarily the result of the classification of scheduled amortization of the Prudential Insurance Company of America in the current portion of long-term debt offset by an increase in accounts receivable due to the seasonal sales of the greeting card and personalized apparel businesses.

Capital expenditures for the six months ended December 27, 2003 were $10.5 million as compared to $8.2 million during last year’s comparable period. Capital expenditures in the first six months of fiscal year 2004 included improvements to enhance information systems’ infrastructure and manufacturing capability which includes the integration of SBS. The Company anticipates that total capital outlays will approximate $21.0 million in fiscal year 2004, which will include additional planned improvements in our information systems capabilities and investments to enhance manufacturing capability.*

In March 2000, the Company invested $12.9 million in the common stock of Advantage Payroll Services, Inc. In August 2001 and July 2002, the Company invested an additional $17.6 and $5.4 million, respectively, in the common stock of Advantage Payroll Services, Inc. for a total investment of $35.9 million. As a result of the additional investments, the Company owned 2.1 thousand and 2.6 thousand shares, respectively, approximately 18% and 20%, respectively, of the Advantage common shares outstanding. The Company carried this investment at cost throughout its ownership period. In September 2002, Advantage merged with Paychex, Inc. The Company received a total of $47.3 million in proceeds from the merger and recognized a gain of $11.4 million in the year ended June 28, 2003.

The Company used the proceeds from the sale of the Advantage investment to pay down floating rate debt and to terminate three interest rate swap agreements with a notional amount of $75.0 million with two commercial banks. These interest rate swaps were no longer needed to hedge the reduced level of the Company’s floating rate debt. The Company was required to make termination payments equivalent to the fair value of the swaps totaling $3.3 million. This amount, which was reclassified from other comprehensive income to other expense, represents a loss on settlement of interest rate swaps.

During the six months ended December 27, 2003 and December 28, 2002, $3.9 million and $1.6 million, respectively, were spent to repurchase 134 thousand and 71 thousand shares, respectively, of the Company’s common stock.

During the six months ended December 27, 2003 and December 28, 2002, the Company declared and paid dividends of $.40 per share in the amount of $5.2 million in each of the aforementioned periods.

In addition to its present cash and short-term investment balances, the Company has historically generated sufficient cash internally to fund its needs for working capital, dividends and capital expenditures. The Company has a committed, unsecured, revolving credit agreement for $200 million with a maturity date of February 2006. The credit agreement contains various restrictive covenants which, among other things, require the Company to maintain certain minimum levels of consolidated net worth and to comply with specific consolidated debt and fixed charge ratios. The Company is in compliance with these covenants and at December 27, 2003, the Company had $97.0 million outstanding under this arrangement. Debt issue costs incurred in connection with this facility are amortized over the term of the agreement.

In November 2001, the Company issued senior notes in the aggregate principal amount of $50 million pursuant to a Note Purchase Agreement with The Prudential Insurance Company of America. Under the terms of the notes, interest accrued at the Eurodollar rate plus a spread for the first year, after which the interest rate became fixed at 7.23%. The amortization of long-term debt under the notes will be $10 million per year from November 2004 through November 2008. The notes are subject to various restrictive covenants, which, among other things, require the Company to maintain certain minimum levels of consolidated net worth and to comply with specific consolidated debt and fixed charge ratios. The Company is in compliance with these covenants and at December 27, 2003, had $50 million outstanding under this arrangement, of which $10 million is classified as short-term. Debt issuance costs incurred in connection with these notes are amortized over the term of the notes.

On January 20, 2004, the Company issued senior notes in the aggregate principal amount of $50 million pursuant to a Note Purchase Agreement with The Prudential Insurance Company of America and its affiliates. The amortization of long-term debt under the notes will be $10 million per year from January 2010 through January 2014 and interest is at a fixed rate of 5.62%. The notes are subject to various restrictive covenants, which, among other things, require the Company to maintain certain minimum levels of consolidated net worth and specific consolidated debt and fixed charge ratios. Debt issuance costs incurred in connection with the issuance of these notes will be amortized over the term of the notes. The proceeds from these notes were applied against the outstanding balance under the revolving credit agreement, which gives the Company more flexibility to use its revolving credit agreement for future business needs.

In order to effectively fix the interest rate on a portion of the debt outstanding under the revolving credit agreement, the Company as of December 27, 2003 had one interest rate swap agreement with one of the banks party to the credit agreement. This swap agreement contains a notional principal amount and other terms (including rate of interest paid and received and maturity date) determined with respect to the Company’s forecasts of future cash flows and borrowing requirements. At December 27, 2003 the notional principal amount outstanding under the interest rate swap agreement totaled $20.0 million. During fiscal year 2003, the Company terminated three other interest rate swaps at a pretax cost of $3.3 million. In the first quarter of fiscal years 2004 and 2003, other than related to the interest rate swap termination, there were no amounts transferred from other comprehensive income to earnings related to the Company’s swaps as the ineffective portion of the swaps was insignificant.

The Company anticipates it will be able to meet its future liquidity requirements by using current cash on hand, cash flow from operations and availability under the revolving credit agreement. * The Company may pursue additional acquisitions from time to time, which would likely be funded through the use of available cash or credit, issuance of stock, obtaining of additional credit, or any combination thereof*.

Certain Factors That May Affect Future Results

References in this section to “we”, “us” and “our” refer to New England Business Service, Inc.

We may make forward-looking statements in this report and in other documents filed with the SEC, in press releases, and in discussions with analysts, investors and others. These statements include:

—

descriptions of our operational and strategic plans,

—

expectations about our future sales and profits,

—

views of conditions and trends in our markets, and

—

other statements that include words like “expects”, “estimates”, “anticipates”, “believes” and “intends”, and which describe opinions about future events.

You should not rely on these forward-looking statements as though they were guarantees. These statements are based on our expectations at the time the statements are made, and we are not required to revise or update these statements based on future developments. Known and unknown risks may cause our actual results, performance or achievements to be materially different from those expressed or implied by these statements.

A majority of our sales and profits come from selling standardized business forms, checks and related products by mail order, telesales and direct and distributor sales to a target market consisting mainly of small businesses. We believe that the critical success factors to compete in this market include competitive pricing, breadth of product offering, product quality, high service levels and the ability to attract and retain a large number of individual customers. These critical success factors are also applicable to the success of our packaging, shipping and warehouse supplies markets as well. Known material risks that may affect those critical success factors are described below.

A majority of the sales in our apparel business come from selling knit and woven sport shirts under labels owned by the Company or licensed from third parties to the promotional products/advertising specialty and golf industries. We believe that the critical success factors to compete in this market include product quality, timely and accurate fulfillment of customer orders and brand awareness. Known material risks that may affect those success factors are also described below.

Our printed product lines face increased competition from various sources, such as office supply superstores. Increased competition may require us to reduce prices or offer other incentives in order to attract new customers and retain existing customers, which could reduce our profits.

Low-price, high-volume office supply chain stores offer standardized business forms, checks and related products to small businesses. Because of their size, these superstores have the buying power to offer many of these products at competitive prices. These superstores also offer the convenience of “one-stop shopping” for a broad array of office supplies that we do not offer. In addition, national superstore competitors have greater financial strength to reduce prices or increase promotional discounts in order to seek or retain market share.

If these new competitors seek to gain or retain market share through price reductions or increased discounting, we may be forced to reduce our prices or match the discounts in order to stay competitive, which could reduce our profits.

Technological improvements may reduce our competitive advantage over our smaller competitors, which could reduce our profits.

Historically, our relatively greater financial strength and size have enabled us to offer a broader array of products, particularly those having a complex construction, at lower prices than the small local and regional dealers, distributors and printers who constitute our primary competition. Improvements in the cost and quality of printing technology are enabling these smaller competitors to gain access to products of complex design and functionality at competitive costs. Increased competition from local and regional competitors could force us to reduce our prices in order to attract and retain customers, which could reduce our profits.

Because our sales growth is dependent on our ability to continually attract new customers in our target small business market, economic events that adversely affect the small business economy may reduce our sales and profits.

Average annual sales per customer of our core products have remained relatively stable over time. As a result, we rely, in part, on continually attracting new customers for these products. Our sales and profits have been adversely affected by economic-related contractions in the small business economy. We expect that our sales and profits will continue to be affected by changes in the levels of small business formations and failures and from other economic events that affect the small business economy generally.

Because our sales growth is dependent on our ability to continually attract new customers in our target small business market, changes in the direct marketing industry that reduce our competitive advantage in contacting prospective customers may reduce our sales and profits.

Growth in the total number of our direct mail customers depends on continued access to high-quality lists of newly formed small businesses. In the past, our ability to compile proprietary prospect lists was a distinct competitive advantage. However, the external list compilation industry has become more sophisticated and comprehensive lists of new small business formations are now commercially available to our competitors. In addition, the Internet has the potential to eliminate our advantage of scale in direct marketing by providing all competitors, regardless of current size, with access to prospective customers.

We currently rely on the speed of our delivery of promotional materials to prospective customers to gain advantage over competitors. We are also expanding our Internet product offerings and capabilities and seeking to increase our visibility on the Internet. Notwithstanding these efforts, a deterioration in our competitive advantage in contacting prospective customers could reduce our sales and profits.

In addition, the enactment of privacy laws could constrain our ability to obtain prospect lists or to market to prospective customers via the telephone or through the use of marketing-oriented faxes.

Declining response rates to the Company’s catalogs and other direct mail promotional materials could reduce our sales and profits.

Our direct mail-based businesses have experienced declines in the response rates to our catalogs and other direct mail promotional materials from both existing customers and prospects. We believe that these declines are attributable to a number of factors, including current economic conditions, the overall increase in direct mail solicitations received by our target customers generally, and the gradual obsolescence of our standardized forms products. To the extent that we cannot compensate for reduced response rates through increases in average order value or improve response rates through new product introductions and improved direct mail contact strategies, our sales and profits may be adversely affected.

Increases in the cost of paper and in postal rates adversely impact our costs, which we may be unable to offset by reducing costs in other areas or by raising prices.

The cost of paper to produce our products, catalogs and advertising materials makes up a significant portion of our total costs. Also, we rely on the U.S. Postal Service to deliver most of our promotional materials. Prices for the various types of paper that we use have been volatile, and we expect them to continue to be so. Third class postal rates have generally increased over the past ten years, at times significantly. We are not sure that we will always be able to reduce costs in other areas or to increase prices for our products sufficiently to offset increases in paper costs and postal rates. If we are unable to offset these cost and expense increases, our profits will be adversely affected.

Disruption in the services provided by certain of our critical vendors may adversely affect our operating performance and profits.

We use a limited number of vendors to provide key services to our business. Examples of this are as follows:

—

we use MCI and Qwest Communications International to provide a majority of the toll-free telephone lines for our direct marketing business,

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we use United Parcel Service to deliver most of the products that we ship to customers in the United States,

—

we rely on the postal services of the countries in which we do business to deliver our catalogs and other advertising material to customers.

In the past, we have been adversely affected by disruption of some of these services due to labor actions, system failures, adverse weather conditions, natural disasters or other uncontrollable events. If there are future interruptions in service from one or more of these vendors, we believe that there could be a significant disruption to our business due to our inability to readily find alternative service providers at comparable rates.

Sales of our standardized forms, checks and related products face technological obsolescence and changing customer preferences, which could reduce our sales and profits.

Our standardized business forms, checks and related products provide our customers with financial and business records to manage their businesses. Continual technological improvements have provided our target customers in several market segments with alternative means to enact and record business transactions. For example, the price and performance capabilities of personal computers and related printers now provide a cost-competitive means to print lower quality versions of our business forms on plain paper. In addition, electronic transaction systems and off-the-shelf business software applications have been designed to automate several of the functions performed by our business form and check products.

In response to the gradual obsolescence of our standardized forms business, we continue to develop our capability to provide custom and full-color products. However, we have less of a cost advantage with these products than with standardized forms, due to improvements in the cost and quality of printing technology available to our smaller local and regional competitors. We are also seeking to introduce new products and services that are less susceptible to technological obsolescence. We may develop new products internally, procure them from third party vendors, or obtain them through the acquisition of a new business. We generally realize lower gross margins on outsourced products than on products that we manufacture ourselves. The risks associated with the acquisition of new businesses are described below.

If new printing capabilities and new product introductions do not continue to offset the obsolescence of our standardized business forms products, there is a risk that the number of new customers we attract and existing customers we retain may diminish, which could reduce our sales and profits. Decreases in sales of our historically high margin standardized business forms and check products due to obsolescence could also reduce our gross margins. This reduction could in turn adversely impact our profits unless we are able to offset the reduction through the introduction of new high margin products and services or realize cost savings in other areas.

We source our apparel products from offshore third party manufacturers. Difficulty in securing reliable sources for these products could adversely affect our ability to maintain inventory levels that are adequate to satisfy customer demand.

We purchase a majority of our apparel products from “full package” manufacturers outside the United States. In most cases, these same manufacturers supply other apparel companies, many of which are significantly larger than our apparel business and are able, when necessary, to secure preferential treatment from the manufacturers. The availability of product from these manufacturers can also be adversely affected by social, political and economic conditions in their respective regions. Any significant disruption in our relationships with our current manufacturers could adversely affect our apparel business to the extent we cannot readily find alternative sources of supply at comparable levels of price and quality.

Inaccurate forecasting of the demand for specific apparel styles and sizes could reduce our sales and profits.

We believe that success in our apparel business depends in part on our ability to maintain in stock and immediately ship ordered products. Given the relatively long lead time in procuring inventory, we must estimate demand for specific styles and sizes well in advance of receiving firm orders from customers in order to ensure the timely availability of these products. Inaccurate forecasting of demand for specific styles and sizes can result in either lost sales due to product unavailability, or reduced margins from liquidating overstocked items.

Failure of our apparel licensors to adequately promote our licensed brands and protect those brands from infringement could reduce our sales and profits.

We believe that brand awareness is an important factor to the end-user of our apparel products, and in that regard we market and sell a majority of our apparel products under nationally-recognized brands licensed from third parties. In each case, the licensor is primarily responsible for promoting its brand and protecting its brand from infringement. The failure of one or more of our licensors to adequately promote or defend their brands could diminish the perceived value of those brands to our customers, which could lead to reduced sales and profits.

Our growth strategy depends, in part, on the acquisition of complementary businesses that address our target small business market.

The acquisition of complementary businesses that address our target small business market has been important to our growth strategy. We intend to continue this acquisition activity in the future. The success of this activity depends on the following:

—

our ability to identify suitable businesses and to negotiate agreements on acceptable terms,

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our ability to obtain financing through additional borrowings, by issuing additional shares of common stock, or through internally generated cash flow, and

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our ability to achieve anticipated savings and growth and avoid disruption to our existing businesses.

In evaluating a potential acquisition, we conduct a business, financial and legal review of the target. This review is intended to support our assumptions with respect to the projected future performance of the target and to identify the benefits and risks associated with those assumptions. We cannot be certain that our review will identify all potential risks associated with the purchase, integration or operation of acquired businesses. Unanticipated risks and/or performance inconsistent with our pre-acquisition expectations may adversely affect the benefits that we expect to obtain from any given acquisition and could result in an impairment of intangible assets, which would reduce our reported earnings for the period the impairment occurs.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to a number of market risks, primarily the effects of changes in foreign currency exchange rates and interest rates. Investments in and loans and advances to foreign subsidiaries and branches, and their resultant operations, denominated in foreign currencies, create exposures to changes in exchange rates. The Company’s utilization of its revolving line of credit (which carries a variable interest rate) creates an exposure to changes in interest rates. The effect, however, of changes in exchange rates and interest rates on the Company’s earnings generally has been small relative to other factors that also affect earnings, such as business unit sales and operating margins. For more information on these market risks and financial exposures, see the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended June 28, 2003. The Company does not hold or issue financial instruments for trading, profit or speculative purposes.

In order to effectively convert the interest rate on a portion of the Company’s debt from a Eurodollar-based floating rate to a fixed rate, the Company has entered into interest rate swap agreements with major commercial banks. Although the Company is exposed to credit and market risk in the event of future nonperformance by any of the banks, management has no reason to believe that such an event will occur.

During fiscal year 2003 as part of paying down floating rate debt, the Company terminated three interest rate swap agreements with a notional amount of $75.0 million with two commercial banks. These interest rate swaps were no longer needed to hedge the reduced level of the Company’s floating rate debt. The Company was required to make termination payments equivalent to the fair value of the swaps totaling $3.3 million. This amount, which was reclassified from other comprehensive income to other expense, represents a loss on settlement of interest rate swaps to terminate the agreements.

Upon reviewing its derivatives and other foreign currency and interest rate instruments, based on historical foreign currency rate movements and the fair value of market-rate sensitive instruments at year-end, the Company does not believe that changes in foreign currency or interest rates will have a material impact on its near-term earnings, fair values or cash flows.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934), as of the end of the Company’s second fiscal quarter. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s second fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

From time to time the Company is involved in other disputes and/or litigation encountered in the ordinary course of its business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company’s business, operating results or financial condition.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

a. The Annual Meeting of Stockholders was held on October 24, 2003.

b. See Item 4c below.

c. The stockholders elected the following ten Directors:

	For	Authority Withheld
William T. End	11,944,943	262,278
Neil S. Fox	11,946,202	261,019
Robert L. Gable	11,938,488	268,733
Thomas J. May	11,920,743	286,478
Herbert W. Moller	11,920,943	286,278
Robert J. Murray	11,887,551	319,670
Joseph R. Ramrath	11,919,927	287,294
Richard T. Riley	11,945,749	261,472
Brian E. Stern	9,551,635	2,655,586
M. Anne Szostak	9,552,528	2,654,693

The stockholders voted to ratify the selection of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending June 26, 2004.


For	Against	Abstain
12,022,861	166,324	18,036

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

Exhibit No. Description


2	Asset Purchase Agreement dated as of January 6, 2004 among Stephen Fossler Company, Inc., Stephen Fossler Special Markets Company, Inc., Fossler Sale!Signs, Inc., Embossed Label Press, Inc., Stephen G. Fossler, the Company and Stephen Fossler Company.

10.1	Amendment No. 1, dated as of January 20, 2004, to the Note Purchase Agreement dated as of November 9, 2001 by and between the Company and The Prudential Insurance Company of America.

10.2	Form of Note Purchase Agreement dated as of January 20, 2004 by and between the Company and each of the Purchasers listed in Schedule A attached thereto.

31.1	Certification pursuant to Rule 13a-14(a)/15(d)-14(a) (Principal Executive Officer)

31.2	Certification pursuant to Rule 13a-14(a)/15(d)-14(a) (Principal Financial Officer)

32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to (Principal Financial Officer)

Reports on Form 8-K.

On October 27, 2003, the Company filed a Current Report on Form 8-K announcing a new share repurchase authorization and a planned dividend increase.

On December 19, 2003, the Company filed a Current Report on Form 8-K announcing it had entered into a non-binding letter of intent to purchase certain assets of Stephen Fossler Company, Inc. and related companies.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

		NEW ENGLAND BUSINESS SERVICE,INC.
		(Registrant)
February 10, 2004
Date

/S/ Daniel M. Junius
——————————————
Daniel M. Junius
Executive Vice President-Chief
Financial Officer
Principal Financial Officer

NEW ENGLAND BUSINESS SERVICE, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands of dollars)

NEW ENGLAND BUSINESS SERVICE, INC.STATEMENTS OF CONSOLIDATED INCOME(In thousands, except per share data)

NEW ENGLAND BUSINESS SERVICE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Results of Operations

NEW ENGLAND BUSINESS SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

NEW ENGLAND BUSINESS SERVICE, INC.STATEMENTS
OF CONSOLIDATED INCOME
(In thousands, except per share data)

NEW ENGLAND BUSINESS SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)