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 March 27, 2004.

[ ] 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
incorporation or organization)	Identification 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

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

Yes

The number of common shares of the Registrant outstanding on May 11, 2004 was 13,335,564.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

ASSETS	Mar. 27, 2004			Jun. 28, 2003
Current Assets
Cash and cash equivalents	$	8,057		$	4,743
Accounts receivable, net		71,477			71,049
Inventories, net		40,735			39,792
Direct mail advertising materials, net
and prepaid expenses		18,727			18,710
Deferred income tax asset		13,662			14,041

Total current assets		152,658			148,335

Property and Equipment, net		78,623			80,110
Property Held for Sale		--			328
Deferred Income Tax Asset		20,740			20,728
Goodwill, net		98,902			88,001
Other Intangible Assets, net		88,571			76,292
Other Assets		6,045			4,672

TOTAL ASSETS	$	445,539		$	418,466

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	21,540		$	22,937
Accrued expenses		69,730			65,192
Obligations under capital lease-current portion		479			764
Current portion of long-term debt		10,000			--

Total current liabilities		101,749			88,893

Long-Term Debt		157,344			157,025

Deferred Income Tax Liability		21,391			21,377

Stockholders' Equity
Common stock		15,947			15,889
Additional paid-in capital		61,865			59,111
Unamortized value of restricted stock awards		(2,893	)		(487	)
Accumulated other comprehensive loss		(1,150	)		(2,626	)
Retained earnings		145,374			135,634
Treasury stock, at cost		(54,088	)		(56,350	)

Total stockholders' equity		165,055			151,171

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	445,539		$	418,466

See Notes to Condensed Consolidated Financial Statements

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

	Three Months Ended						Nine Months Ended
	Mar. 27, 2004			Mar. 29, 2003			Mar. 27, 2004			Mar. 29, 2003
Net Sales	$	173,488		$	127,267		$	537,642		$	408,717
Cost of Sales (including shipping costs)		73,773			54,765			224,633			172,182

Gross Profit		99,715			72,502			313,009			236,535

Operating Expenses:
Selling and advertising		63,222			44,519			196,837			140,117
General and administrative		28,147			17,393			76,812			55,908
Exit costs		1,480			--			3,280			--
Other intangible asset impairment		646			--			646			--

Total operating expenses		93,495			61,912			277,575			196,025

Income from Operations		6,220			10,590			35,434			40,510

Other (Expense) Income:

Interest income		83			35			235			110
Interest expense		(2,215	)		(1,622	)		(5,757	)		(6,677	)
Loss on settlement of interest rate swaps		--			--			--			(3,277	)
Gain on sale of long-term investment		--			1,027			--			11,424

Total other (expense)/income		(2,132	)		(560	)		(5,522	)		1,580

Income Before Income Taxes		4,088			10,030			29,912			42,090

Provision for Income Taxes		1,704			4,144			12,034			16,309

Net Income	$	2,384		$	5,886		$	17,878		$	25,781

See Notes to Condensed Consolidated Financial Statements

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

	Three Months Ended				Nine Months Ended
	Mar. 27, 2004		Mar. 29, 2003		Mar. 27, 2004		Mar. 29, 2003
Per Share Amounts:

Basic Earnings Per Share	$	0.18	$	0.46	$	1.36	$	1.98

Diluted Earnings Per Share	$	0.17	$	0.44	$	1.31	$	1.93

Dividends Paid	$	0.22	$	0.20	$	0.62	$	0.60

Basic Weighted Average Shares Outstanding		13,132		12,932		13,098		12,991

Plus incremental shares from assumed
conversion of stock options and
contingently returnable shares		567		342		559		333

Diluted Weighted Average Shares Outstanding		13,699		13,274		13,657		13,324

See Notes to Condensed Consolidated Financial Statements

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

	Nine Months Ended
	Mar. 27, 2004			Mar. 29, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	17,878		$	25,781
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		17,622			14,774
Amortization		5,921			5,342
Deferred income taxes		(53	)		(79	)
Tax benefit from equity transactions		1,493			233
Exit costs		3,280			--
Loss on disposal of equipment		73			52
Gain on sale of long-term investment		--			(11,424	)
Accrued cost of minimum royalty payments		3,200			--
Other intangible asset impairment		646			--
Provision for losses on accounts receivable		3,522			4,267
Deferred grants		(7	)		(6	)
Employee benefit charges		1,369			694
Changes in assets and liabilities (net of acquisition of businesses):
Accounts receivable, net		(718	)		(1,124	)
Inventories, net		(88	)		(831	)
Direct mail advertising materials, net and prepaid expenses		1,462			287
Other assets		(285	)		527
Accounts payable		(2,854	)		(4,123	)
Income taxes payable		(5,104	)		1,492
Other accrued expenses		(272	)		(1,418	)


Net cash provided by operating activities		47,085			34,444

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(15,454	)		(11,501	)
Purchase of long-term investment		--			(5,421	)
Proceeds from sale of long-term investment		--			47,366
Proceeds from sale of property, plant and equipment		386			11
Acquisition of businesses - net of cash acquired		(30,374	)		--

Net cash (used in)/provided by investing activities		(45,442	)		30,455

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt		(116,665	)		(90,769	)
Proceeds from borrowings - net of issuance costs		126,396			37,309
Proceeds from issuance of common stock		6,699			619
Acquisition of treasury stock		(6,893	)		(4,894	)
Dividends paid		(8,138	)		(7,811	)

Net cash provided by/(used in) financing activities		1,399			(65,546	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		272			263

NET CHANGE IN CASH AND CASH EQUIVALENTS		3,314			(384	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		4,743			6,112

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	8,057		$	5,728

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 $73,655 (net of cash and restricted cash acquired) for the shares. The Company incurred fees of approximately $1,398 in connection with the acquisition, which are included in the purchase price above. The current year increase to the purchase price of $2,196 resulted from a change in the post-closing working capital adjustment to the selling shareholders, which had been estimated at June 28, 2003, and additional fees associated with the acquisition. 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. During the quarter ended March 27, 2004, the final intangible asset valuations were established for SBS resulting in the creation of a tradename intangible asset and adjustments to the carrying value of long-term contracts and goodwill. 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 $68,679, of which $30,700 and $15,800 were allocated to long-term contracts and tradenames, respectively, and the balance of $22,179 to goodwill. The Company has amortized approximately $1,706 of long-term contracts through March 27, 2004. The long-term contracts are being amortized over their estimated respective useful lives, which is 15 years. SBS is being reported as part of the Direct and Distributor Sales segment.

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	$	25,611
Deferred tax asset		1,535
Property and equipment		8,789
Other intangible assets		46,500
Goodwill		22,179
Current liabilities		(30,959	)

Total purchase price	$	73,655

Changes in the carrying value of goodwill for the SBS acquisition are described in Note 5.

In January 2004, the Company acquired certain assets of Stephen Fossler Company, Inc. and its affiliates (collectively, “Fossler”), for $28,178. 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 United States, Canada, and the United Kingdom. This acquisition expands the Company’s leadership position in the small business marketplace. Fossler’s direct mail channel, customers, and products align closely to the Company’s business model. The acquisition was accounted for using the purchase method of accounting. Accordingly, Fossler’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. The excess cost over fair value of the net tangible assets acquired was $24,081, of which $3,600 was allocated to customer lists, $2,500 to tradenames, $500 to a covenant not to compete and the remaining $17,481 to goodwill. These allocations are still subject to final fixed and intangible asset valuations. These valuations will be completed no later than the Company’s second fiscal quarter of 2005. These valuations could result in a significantly different allocation to intangible assets than previously estimated as well as different estimated useful lives. The Company has amortized approximately $200 of intangible assets through March 27, 2004 and believes that the net adjustment of amortization expense that will result from the final valuations will not be material. The customer lists and covenant not to compete are being amortized over their estimated respective useful lives, which is 5 years. Fossler is being reported as part of the Direct Marketing-US segment.

The following table summarizes the estimated fair values of the assets acquired for Fossler at the date of acquisition:

	Fossler
Current assets	$	5,010
Property and equipment		440
Other intangible assets		6,600
Goodwill		17,481
Current liabilities		(1,353	)

Total purchase price	$	28,178

3. Restructuring

Pursuant to previously announced restructuring actions, the following charges and payments have been accrued and recorded:

Three months ended Mar. 27, 2004	Balance Dec. 27, 2003		Change/ (credit) for the period			Restructuring costs related to SBS acquisition			Payments for the period			Balance Mar. 27, 2004
2001 Restructurings
Facility closure costs	$	9	$	28		$	--		$	(37	)	$	--

2003 Restructurings
Facility closure costs		460		(11	)		(16	)		(133	)		300
Employee termination
benefit costs		1,792		(18	)		923			(1,097	)		1,600

2004 Restructurings
Employee termination
benefit costs		1,316		477			--			(654	)		1,139

Total	$	3,577	$	476		$	907		$	(1,921	)	$	3,039

Nine months ended Mar. 27, 2004	Balance Jun. 28, 2003		Change/ (credit) for the period			Restructuring costs related to SBS acquisition			Payments for the period			Balance Mar. 27, 2004
2001 Restructurings
Facility closure costs	$	511	$	19		$	--		$	(530	)	$	--
Employee termination
benefit costs		62		(35	)		--			(27	)		--

2003 Restructurings
Facility closure costs		548		(25	)		(16	)		(207	)		300
Employee termination
benefit costs		3,606		204			923			(3,133	)		1,600

2004 Restructurings
Employee termination
benefit costs		--		1,805			--			(666	)		1,139

Total	$	4,727	$	1,968		$	907		$	(4,563	)	$	3,039

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 Mar. 27, 2004			Exit costs incurred/ (credited) for the nine months ended Mar. 27, 2004			Cumulative exit costs incurred as of Mar. 27, 2004
2001 Restructurings
Facility closure costs	$	3,143	$	28		$	(97	)	$	3,143
Employee termination
benefit costs		4,451		--			(35	)		4,451

2003 Restructurings
Facility closure costs		237		(11	)		(25	)		237
Employee termination
benefit costs		1,059		(18	)		204			1,059

2004 Restructurings
Employee termination
benefit costs		2,500		421			1,805			1,805
Facility closure costs		1,300		188			290			290
Other associated costs		1,700		872			1,138			1,138

Total	$	14,390	$	1,480		$	3,280		$	12,123

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 March 27, 2004 and June 28, 2003 consisted of:

	Balance Mar. 27, 2004		Balance Jun. 28, 2003
Raw Material	$	4,659	$	4,594
Finished Goods		36,076		35,198

Total	$	40,735	$	39,792

5. Goodwill and Other Intangible Assets

In March 2004, the Company recognized an impairment charge to write-off a long-term contract in the amount of $646 relating to its PremiumWear subsidiary which comprises the Apparel business segment. The impairment loss is recognized in the statements of consolidated income for the quarter ended March 27, 2004 under “Operating Expenses.” Further information on the impairment charge is described in Note 10.

Intangible assets consist of the following:

	Mar. 27, 2004				Jun. 28, 2003
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets with
defined lives:
Customer lists	$	49,967	$	46,058	$	46,367	$	42,336
Debt issue costs		3,823		2,289		3,517		1,840
Long-term contracts		31,732		2,738		36,238		1,285
Bank referral
agreements		7,400		2,158		7,400		1,881
Covenant not to
compete		500		20		--		--
Intangible assets with
indefinite lives:
Tradenames		51,139		2,727		32,839		2,727

Total intangible assets	$	144,561	$	55,990	$	126,361	$	50,069

Changes in the carrying amount of goodwill (net) for the nine months ended March 27, 2004, by segment, are as follows:

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

Goodwill
acquired - SBS and Fossler		17,481		(6,681	)		--		--		--		10,800

Currency
translation		--		(11	)		--		--		112		101

Balance
Mar. 27, 2004	$	41,718	$	29,669		$	--	$	23,246	$	4,269	$	98,902

Changes in the carrying value of goodwill associated with the acquisition of SBS, included in the Direct and Distributor Sales segment, resulted from the payment of a post-closing working capital adjustment to the selling shareholders, which had been estimated at June 28, 2003 and was subsequently adjusted, fees associated with the acquisition and adjustments to the income tax liability and other accrued expenses estimated on the opening balance sheet. During the quarter ended March 27, 2004 the final intangible asset valuations were established for SBS causing adjustments to the carrying value of goodwill, tradenames and long-term contracts.

Changes in the carrying value of goodwill, included in the Direct Market –US segment, resulted from the allocation of the purchase price and post-closing working capital adjustments related to the acquisition of Fossler.

Amortization of intangible assets with defined lives was $796 and $1,775 for the three months and $5,921 and $5,342 for the nine months ended March 27, 2004 and March 29, 2003, 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 $7,332, $3,879, $3,687, $3,316 and $3,316, respectively.

6. Stock Options

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 Mar. 27, 2004			Three Months Ended Mar. 29, 2003			Nine Months Ended Mar. 27, 2004			Nine Months Ended Mar. 29, 2003
Net income:
As reported	$	2,384		$	5,886		$	17,878		$	25,781

Add total stock-based
compensation expense
determined under the intrinsic-
value method for all awards, net
of related tax effects		236			89			821			425

Deduct total stock-based
compensation expense
determined under the fair-value
method for all awards, net of
related tax effects		(558	)		(461	)		(1,649	)		(1,368	)

Pro forma	$	2,062		$	5,514		$	17,050		$	24,838

Net income per basic share:
As reported	$	0.18		$	0.46		$	1.36		$	1.98
Pro forma		0.16			0.43			1.30			1.91

Net income per diluted share:
As reported	$	0.17		$	0.44		$	1.31		$	1.93
Pro forma		0.15			0.42			1.25			1.86

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 nine months ended March 27, 2004, was $7.57 and $7.93, respectively and during the three and nine months ended March 29, 2003 was $6.00 and $5.60, respectively.

7. Benefit Plans

In accordance with FASB Statement No. 132 (Revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” the components of net periodic benefit cost for the Company’s retirement plans for the three and nine months ended March 27, 2004 and March 29, 2003 are as follows:

Supplemental Executive Retirement Plan	Three Months Ended Mar. 27, 2004		Three Months Ended Mar. 29, 2003		Nine Months Ended Mar. 27, 2004		Nine Months Ended Mar. 29, 2003
Service cost	$	99	$	50	$	298	$	151
Interest cost		101		78		302		233
Amortization of prior service cost		21		21		63		63
Recognized actuarial loss		62		38		186		115

Net periodic benefit cost	$	283	$	187	$	849	$	562

Defined Benefit Postretirement Plan	Three Months Ended Mar. 27, 2004			Three Months Ended Mar. 29, 2003			Nine Months Ended Mar. 27, 2004			Nine Months Ended Mar. 29, 2003
Service cost	$	30		$	15		$	60		$	45
Interest on accumulated postretirement benefit
obligation		53			37			105			90
Amortization of gain		(1	)		(3	)		(2	)		(4	)

Net periodic benefit cost	$	82		$	49		$	163		$	131

The Company’s aggregate contributions to 401(k) plans were $2,064 and $1,880 for the three months and $5,998 and $5,566 for the nine months ended March 27, 2004 and March 29, 2003, respectively. Included in the fiscal year 2004 contributions to 401(k) plans is the effect of the SBS acquisition of $132 and $387 for the three months and nine months ended March 27, 2004.

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 Mar. 27, 2004			Three Months Ended Mar. 29, 2003			Nine Months Ended Mar. 27, 2004		Nine Months Ended Mar. 29, 2003
Net income	$	2,384		$	5,886		$	17,878	$	25,781

Changes in:

Unrealized gains/(losses) on
investments, net of tax		65			(101	)		222		110

Foreign currency translation
adjustments		(234	)		1,090			890		746

Unrealized gains on
derivatives held for hedging
purposes, net of tax		112			283			364		2,710

Comprehensive income	$	2,327		$	7,158		$	19,354	$	29,347

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

	Balance Mar. 27, 2004			Balance Jun. 28, 2003
Unrealized gains/(losses)
on investments, net of tax	$	207		$	(15	)

Foreign currency translation
adjustments		(183	)		(1,073	)

Pension adjustments, net of tax		(1,055	)		(1,055	)

Unrealized losses on derivatives
held for hedging purposes, net of tax		(119	)		(483	)


Total	$	(1,150	)	$	(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 and embossed foil seals 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 and Display Products		Inter- national			Total
Three months ended
Mar. 27, 2004

Net sales	$	65,060	$	67,648	$	10,242		$	19,904	$	10,634		$	173,488

Profit (loss) from
operations		13,956		6,803		(1,329	)		272		(104	)		19,598

Less adjustments
noted above														15,510

Income before
income taxes													$	4,088

Three months ended
Mar. 29, 2003

Net sales	$	62,626	$	27,439	$	9,319		$	18,577	$	9,306		$	127,267

Profit (loss) from
operations		13,126		2,815		(1,347	)		278		152			15,024

Less adjustments
noted above														4,994

Income before
income taxes													$	10,030

	Direct Marketing- US		Direct and Distributor Sales		Apparel			Packaging and Display Products		Inter- national		Total
Nine months ended
Mar. 27, 2004

Net sales	$	205,589	$	203,130	$	32,282		$	62,833	$	33,808	$	537,642

Profit (loss) from
operations		46,873		19,552		(1,780	)		2,465		1,209		68,319

Less adjustments
noted above													38,407

Income before
income taxes												$	29,912

Nine months ended
Mar. 29, 2003

Net sales	$	207,406	$	82,350	$	28,924		$	60,891	$	29,146	$	408,717

Profit (loss) from
operations		47,060		8,824		(2,440	)		1,863		1,758		57,065

Less adjustments
noted above													14,975

Income before
income taxes												$	42,090

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 April 2004, the Company agreed to settle the complaint with the plaintiff. Under the settlement the Company paid $500 in cash, and will pay certain minimum royalties related to the license agreements between the parties through the remaining lives of the agreements which expire in 2010. As a result of this settlement, the Company incurred an impairment charge of $646 related to a long-term contract intangible asset (see Note 5); the impairment loss is recognized in the statements of consolidated income for the quarter ended March 27, 2004 under “Operating Expenses.” Additionally, the Company incurred $500 for legal fees and $3,200 to recognize costs on minimum royalty payments in excess of anticipated sales which will be paid over the next six years; these charges are recognized in the statements of consolidated income for the quarter ended March 27, 2004 under “Operating Expenses-General and Administrative.”

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 Event

On March 31, 2004, Intuit Canada commenced an action by statement of claim issued in the Court of Queen’s Bench of Alberta, Judicial District of Edmonton, against NEBS Business Products Ltd. (“NEBS Canada”), the Company’s wholly-owned subsidiary, with respect to certain agreements between Intuit Canada and NEBS Canada related to the marketing and sale of computer compatible checks and forms to users of Intuit Canada’s software products (the “Agreements”). In its statement of claim, Intuit Canada alleges that NEBS Canada withheld funds due to Intuit Canada under the terms of the Agreements, and that Intuit Canada suffered additional damages as a result of NEBS Canada’s alleged repudiation of the Agreements. Intuit Canada is seeking damages in the amount of $7,800 Canadian dollars, or such other amount as may be proven at trial. The Company believes that NEBS Canada has meritorious defenses to the statement of claim, and intends to defend the lawsuit vigorously. At this time, the Company cannot predict the outcome of this litigation and, therefore, it is not possible to estimate the amount of loss, if any, or the range of potential losses that might result from an adverse judgment or settlement of this matter. However, an adverse resolution of this litigation could have an adverse effect on the Company’s consolidated financial position or results of operations in the period in which the litigation is resolved. No costs have been accrued for this possible loss contingency.

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, embossed foil seals 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 and embossed foil seals 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 Stephen Fossler Company, Inc. and its affiliates (collectively, “Fossler”), for $28.2 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 United States, Canada, and the United Kingdom. The Company is presently undertaking an allocation of this purchase price, and anticipates that approximately $24 million will be allocated to certain intangible assets, a portion of which are anticipated to be amortized over 5 years.* Fossler is 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 impacts to the Company were the June 2, 2003 acquisition of Safeguard Business Systems, Inc. (“SBS”) and the January 6, 2004 acquisition of certain assets of Stephen Fossler Company, Inc. and its affiliates (collectively, “Fossler”) which are reported in the Direct and Distributor Sales and Direct Marketing – US segments, respectively. The Company acquired SBS and Fossler 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 and Display segments. Additionally, 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 ad specialty dealers while expanding its golf sales. The Company expects these initiatives will provide future growth in revenues for the Apparel segment. Net sales in the International segment benefited from the weaker US dollar this past quarter, however profit from operations was unfavorably impacted by employee severance charges.

In April 2004, the Company settled a lawsuit arising from the Company’s purchase of PremiumWear, Inc. Under the settlement the Company paid $.5 million in cash, and will pay certain minimum royalties related to the license agreements between the parties through the remaining lives of the agreements which expire in 2010. As a result of this settlement, the Company incurred an impairment charge of $.6 million related to a long-term contract intangible asset (see Note 5 to the Condensed Consolidated Financial Statements); the impairment loss is recognized in the statements of consolidated income for the quarter ended March 27, 2004 under “Operating Expenses.” Additionally, the Company incurred $.5 million for legal fees and $3.2 million to recognize costs on minimum royalty payments in excess of anticipated sales which will be paid over the next six years; these charges are recognized in the statements of consolidated income for the quarter ended March 27, 2004 under “Operating Expenses-General and Administrative.”

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, 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.

The Company’s 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 $28.2 million. This acquisition expands the Company’s leadership position in the small business marketplace. Fossler’s 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						Nine Months Ended
	Mar. 27, 2004			Mar. 29, 2003			Mar. 27, 2004			Mar. 29, 2003

Net Sales	$	173,488		$	127,267		$	537,642		$	408,717
Cost of Sales		73,773			54,765			224,633			172,182
Percentage of Net Sales		42.5	%		43.0	%		41.8	%		42.1	%

Selling and Advertising		63,222			44,519			196,837			140,117
Percentage of Net Sales		36.4	%		35.0	%		36.6	%		34.3	%

General and Administrative		28,147			17,393			76,812			55,908
Percentage of Net Sales		16.2	%		13.7	%		14.3	%		13.7	%

Interest Expense		2,215			1,622			5,757			6,677
Percentage of Net Sales		1.3	%		1.3	%		1.1	%		1.6	%

Provision for Income Taxes		1,704			4,144			12,034			16,309
Percentage of Income Before
Income Taxes		41.7	%		41.3	%		40.2	%		38.7	%

Net sales increased $46.2 million or 36.3% to $173.5 million in the third quarter of fiscal year 2004 from $127.3 million in last year’s third quarter. The increase in sales was primarily the result of the acquisitions of SBS and Fossler, which were acquired on June 2, 2003 and January 6, 2004, respectively. SBS contributed $39.4 million in net sales to the quarter’s performance in the Direct and Distributor Sales segment while Fossler contributed an additional $4.8 million to the quarter’s performance in the Direct Marketing – US segment. Excluding the effect of the acquisitions, consolidated net sales increased $2.0 million or 1.6%. The sales change included a decrease of approximately $2.4 million, excluding the effect of the Fossler acquisition, in the Direct Marketing-US segment, which is primarily attributable to declines in standardized forms sales due to product obsolescence and higher discounting associated with a year-to-year increase in new customers. Net sales in the Company’s Direct and Distributor Sales segment rose $.9 million, excluding the effect of the SBS acquisition, from expanded bank relationships at McBee Systems, Inc. Net sales in the International segment increased $1.3 million primarily as a result of foreign currencies strengthening against the U.S. dollar. The sales increases of $1.3 million in the Packaging and Display and $.9 million in the Apparel segment are the result of an improving economy and, with respect to the Apparel segment, a change in a supplier relationship which resulted in a previously commission-based outsourcing arrangement now to be reported as a full customer sale, offset by a decline in the wholesaler market.

Net sales increased $128.9 million or 31.5% to $537.6 million for the first nine months of fiscal year 2004 from $408.7 million in last year’s comparable period. The increase in sales was primarily the result of the acquisitions of SBS and Fossler. SBS contributed $118.1 million in net sales to the period’s performance in the Direct and Distributor Sales segment while Fossler contributed $4.8 million to the periods performance in the Direct Marketing – US segment. Excluding the effect of these acquisitions, net sales increased $6.0 million or 1.5%. The sales change included a decrease of approximately $6.7 million in the Direct Marketing-US segment, excluding the effect of the Fossler acquisition, which is primarily attributable to declines in standardized forms sales due to product obsolescence and higher discounting associated with a year-to-year increase in new customers. Net sales of the Company’s Direct and Distributor Sales segment, excluding the effect of the SBS acquisition, increased $2.7 million from expanded bank relationships at McBee Systems, Inc.. Net sales in the International segment increased $4.7 million primarily as a result of foreign currencies strengthening against the U.S. dollar. The sales increases of $1.9 million in the Packaging and Display and $3.4 million in the Apparel segment are the result of an improving economy and, with respect to the Apparel segment, a change in a supplier relationship which resulted in a previously commission-based outsourcing arrangement now reported as a full customer sale, offset by a decline in the wholesaler market.

For the third quarter of fiscal year 2004, cost of sales decreased to 42.5% of sales from 43.0% in last year’s comparable period. For the first nine months of fiscal year 2004, cost of sales decreased to 41.8% of sales from 42.1%. The inclusion of SBS and Fossler lowered cost of sales as a percent of sales by 1.2% points in the quarter and .7% points for the nine month period versus the prior year. Cost of sales as a percent of sales is expected to be consistent with the third quarter for the remainder of the fiscal year.*

Selling and advertising expense increased to 36.4% of sales in the third quarter of fiscal year 2004 as compared to 35.0% 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. Amortization expense for the third quarter of fiscal year 2004 was favorably impacted by adjustments relating to the final intangible assets valuations relating to the acquisition of SBS. For the first nine months of fiscal year 2004, selling and advertising expense increased to 36.6% of sales as compared to 34.3% of sales in last year’s comparable period due to higher amortization expense from the acquisitions and the addition of SBS which has a higher selling and advertising expense as a percentage of sales than in the Company’s other segments. Excluding SBS and Fossler, selling and advertising expense decreased for the quarter ended March 27, 2004 to 34.5% from 35.0% in the prior comparable quarter while selling and advertising expense increased to 34.5% for the nine months ended March 27, 2004 from 34.3% of sales in last year’s comparable period . 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 increased to 16.2% of sales in the third quarter of fiscal year 2004 from 13.7% of sales in last year’s comparable quarter. For the first nine months of fiscal year 2004, general and administrative expense increased to 14.3% of sales as compared to 13.7% of sales in last year’s comparable period. The increase is due to costs related to the settlement of a lawsuit. Net of the lawsuit settlement, general and administrative expense as a percent of sales was approximately 13.8% and 13.5% of sales, respectively, for the three and nine month periods of fiscal year 2004. General and administrative expense as a percent of sales is expected to decrease slightly for the remainder of the fiscal year.*

In the third quarter of fiscal year 2004, the Company recognized an impairment charge to write-off a long-term contract in the amount of $.6 million relating to its PremiumWear subsidiary which comprises the Apparel business segment.

Pursuant to previously announced restructuring actions, the following charges and payments have been accrued and recorded:

Three months ended Mar. 27, 2004	Balance Dec. 27, 2003		Change/ (credit) for the period			Restructuring costs related to SBS acquisition			Payments for the period			Balance Mar. 27, 2004
2001 Restructurings
Facility closure costs	$	9	$	28		$	--		$	(37	)	$	--

2003 Restructurings
Facility closure costs		460		(11	)		(16	)		(133	)		300
Employee termination
benefit costs		1,792		(18	)		923			(1,097	)		1,600

2004 Restructurings
Employee termination
benefit costs		1,316		477			--			(654	)		1,139

Total	$	3,577	$	476		$	907		$	(1,921	)	$	3,039

Nine months ended Mar. 27, 2004	Balance Jun. 28, 2003		Change/ (credit) for the period			Restructuring costs related to SBS acquisition			Payments for the period			Balance Mar. 27, 2004
2001 Restructurings
Facility closure costs	$	511	$	19		$	--		$	(530	)	$	--
Employee termination
benefit costs		62		(35	)		--			(27	)		--

2003 Restructurings
Facility closure costs		548		(25	)		(16	)		(207	)		300
Employee termination
benefit costs		3,606		204			923			(3,133	)		1,600

2004 Restructurings
Employee termination
benefit costs		--		1,805			--			(666	)		1,139

Total	$	4,727	$	1,968		$	907		$	(4,563	)	$	3,039

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 Mar. 27, 2004			Exit costs incurred/ (credited) for the nine months ended Mar. 27, 2004			Cumulative exit costs incurred as of Mar. 27, 2004
2001 Restructurings
Facility closure costs	$	3,143	$	28		$	(97	)	$	3,143
Employee termination
benefit costs		4,451		--			(35	)		4,451

2003 Restructurings
Facility closure costs		237		(11	)		(25	)		237
Employee termination
benefit costs		1,059		(18	)		204			1,059

2004 Restructurings
Employee termination
benefit costs		2,500		421			1,805			1,805
Facility closure costs		1,300		188			290			290
Other associated costs		1,700		872			1,138			1,138

Total	$	14,390	$	1,480		$	3,280		$	12,123

Interest expense remained consistent at 1.3% of sales in the third quarter of fiscal year 2004 as compared the prior year’s comparable period. In the first nine months of fiscal year 2004, interest expense was 1.1% of sales as compared to 1.6% 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 41.7% and 40.2%, respectively, for the third quarter and first nine months of fiscal year 2004 as compared to 41.3% and 38.7%, 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 nine 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 nine months ended March 27, 2004 was $47.1 million and represented an increase of $12.7 million from the $34.4 million provided in the comparable period last year. This increase in cash provided by operating activities was due to an increase in non-cash charges contained in net income, offsetting a net income decrease, 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, however, overall timing of tax payments caused a decrease in cash in 2004.

Working capital at March 27, 2004 totaled $50.9 million, including $8.0 million of cash and short-term investments. This represents a decrease of $8.5 million from the working capital balance of $59.4 million, including cash and short term investments of $4.7 million, at June 28, 2003. The decrease in working capital is primarily the result of the classification of scheduled amortization of the Company’s 7.23% Senior Notes into the current portion of long-term debt offset by an increase in product inventory in the apparel businesses.

Capital expenditures for the nine months ended March 27, 2004 were $15.4 million as compared to $11.5 million during last year’s comparable period. Capital expenditures in the first nine months of fiscal year 2004 included improvements to enhance information systems’ infrastructure and manufacturing capability which includes the integration of SBS and Fossler. 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.*

During the nine months ended March 27, 2004 and March 29, 2003, $6.9 million and $4.9 million, respectively, were spent to repurchase 230,000 and 221,000 shares, respectively, of the Company’s common stock.

During the nine months ended March 27, 2004 and March 29, 2003, the Company declared and paid dividends of $.62 and $.60 per share, respectively, in the amounts of $8.1 million and $7.8 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 March 27, 2004, the Company had $67.2 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 Note Purchase Agreements 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 March 27, 2004, 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 Note Purchase Agreements 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 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. 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. The Company is in compliance with these covenants and at March 27, 2004, had $50 million outstanding under this arrangement. Debt issuance costs incurred in connection with these notes are amortized over the term of the notes.

In order to effectively fix the interest rate on a portion of the debt outstanding under the revolving credit agreement, the Company as of March 27, 2004 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 March 27, 2004 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 third quarter of fiscal year 2004, 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. In the first nine months of fiscal year 2003, approximately $16 thousand was transferred from other comprehensive income to earnings related to the ineffective portion of the Company’s swaps

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 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,

—

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,

—

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

—

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 in which 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 third 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 third 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

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 April 2004, the Company agreed to settle the complaint with the plaintiff. Under the settlement the Company paid $.5 million in cash, and will pay certain minimum royalties related to the license agreements between the parties through the remaining lives of the agreements which expire in 2010. As a result of this settlement, the Company incurred an impairment charge of $.6 million related to a long-term contract intangible asset (see Note 5 to the Condensed Consolidated Financial Statements); the impairment loss is recognized in the statements of consolidated income for the quarter ended March 27, 2004 under “Operating Expenses.” Additionally, the Company incurred $.5 million for legal fees and $3.2 million to recognize costs on minimum royalty payments in excess of anticipated sales which will be paid over the next six years; these charges are recognized in the statements of consolidated income for the quarter ended March 27, 2004 under “Operating Expenses-General and Administrative.”

On March 31, 2004, Intuit Canada commenced an action in the Court of Queen’s Bench of Alberta, Judicial District of Edmonton, against NEBS Business Products Ltd. (“NEBS Canada”), the Company’s wholly-owned subsidiary, with respect to certain agreements between Intuit Canada and NEBS Canada related to the marketing and sale of computer compatible checks and forms to users of Intuit Canada’s software products (the “Agreements”). In its statement of claim, Intuit Canada alleges that NEBS Canada withheld funds due to Intuit Canada under the terms of the Agreements, and that Intuit Canada suffered additional damages as a result of NEBS Canada’s alleged repudiation of the Agreements. Intuit Canada is seeking damages in the amount of $7.8 million Canadian dollars, or such other amount as may be proven at trial. The Company believes that NEBS Canada has meritorious defenses to the statement of claim, and intends to defend the lawsuit vigorously. At this time, the Company cannot predict the outcome of this litigation and, therefore, it is not possible to estimate the amount of loss, if any, or the range of potential losses that might result from an adverse judgment or settlement of this matter. However, an adverse resolution of this litigation could have an adverse effect on the Company’s consolidated financial position or results of operations in the period in which the litigation is resolved. No costs have been accrued for this possible loss contingency.

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

(a)-(d) Not applicable.

(e) Issuer Purchases of Equity Securities

On October 27, 2003, the Company publicly announced that its Board of Directors had authorized the purchase of up to two million shares of the Company’s common stock, replacing the expiring October 20, 2000 two million share authorization. The program is effective from October 27, 2003 through November 30, 2006.

Period		(b) Average Price Paid per Share
Dec. 28, 2003-
Jan. 24, 2004	--		--	--	1,954,700

Jan. 25, 2004-
Feb. 21, 2004	32,900	$	30.68	32,900	1,921,800

Feb. 22, 2004-
Mar. 27, 2004	55,700	$	31.17	55,700	1,866,100

Total	88,600	$	30.99	88,600	1,866,100

The above table does not include open-market purchases of shares by the trustee of the Company's 401(k) plan for the benefit of plan participants or the surrender or withholding of shares in connection with the exercise of employee stock options.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

Exhibit No. Description

10.1	Amendment No. 2, dated as of May 10, 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 *	Change in Control Severance Agreement dated January 23, 2004 between the Company and Richard T. Riley.

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 Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer and Principal Financial Officer).

Identifies a management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates.

b. Reports on Form 8-K.

On January 7, 2004, the Company filed a Current Report on Form 8-K announcing that it has acquired certain assets of Stephen Fossler Company, Inc. and its affiliates.

On January 21, 2004, the Company filed a Current Report on Form 8-K announcing earnings for the fiscal quarter ended December 27, 2004.

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)
May 11, 2004 Date		/s/ Daniel M. Junius —————————————— Daniel M. Junius Executive Vice President, Chief Financial Officer (Principal Financial Officer)

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 27, 2004.

Commission file number 1-11427

NEW ENGLAND BUSINESS SERVICE, INC.

500 Main StreetGroton, Massachusetts, 01471

(978) 448-6111

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

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Results of Operations

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

500 Main Street
Groton, Massachusetts, 01471

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

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

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

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