##### Table of Contents

---

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 31, 2003



OR



| ̈ | 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 000-12954



---



CADMUS COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 54-1274108                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1801 Bayberry Court,
Suite 200

Richmond, Virginia 23226

(Address of principal executive offices including zip code)



---



(804) 287-5680

(Registrants telephone number, including area code)



---



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 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 ̈No  x



Indicate the number of shares outstanding of
each of the registrants classes of common stock, as of the latest practicable date.



|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at January 31, 2004
|Common Stock, $0.50 Par Value |  | 9,084,591                      



---



---

##### Table of Contents

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

INDEX



|           |  |                                                                                                                |  |                                                                                       |  |            
|---------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | -----------
|           |  |                                                                                                                |  |                                                                                       |  | Page Number
|Part I.    |  | Financial Information                                                                                          |  |                                                                                      
|           |  |                                                                                                                | 
|           |  | Item 1.                                                                                                        |  | Financial Statements                                                                  |  |            
|           |  |                                                                                                               
|           |  | Condensed Consolidated Balance Sheets December 31, 2003 (unaudited) and June 30, 2003                         |  | 3                                                                                    
|           |  |                                                                                                               
|           |  | Condensed Consolidated Statements of Income (unaudited) Three and Six Months Ended December 31, 2003 and 2002 |  | 4                                                                                    
|           |  |                                                                                                               
|           |  | Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended December 31, 2003 and 2002       |  | 5                                                                                    
|           |  |                                                                                                               
|           |  | Condensed Consolidated Statements of Shareholders Equity December 31, 2003 (unaudited) and June 30, 2003     |  | 6                                                                                    
|           |  |                                                                                                               
|           |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |  | 7                                                                                    
|           |  |                                                                                                                | 
|           |  | Item 2.                                                                                                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13         
|           |  |                                                                                                                | 
|           |  | Item 3.                                                                                                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 21         
|           |  |                                                                                                                | 
|           |  | Item 4.                                                                                                        |  | Controls and Procedures                                                               |  | 21         
|           |  |                                                                                                               
|Part II.   |  | Other Information                                                                                              |  |                                                                                      
|           |  |                                                                                                                | 
|           |  | Item 1.                                                                                                        |  | Legal Proceedings                                                                     |  | 22         
|           |  |                                                                                                                | 
|           |  | Item 4.                                                                                                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 22         
|           |  |                                                                                                                | 
|           |  | Item 6.                                                                                                        |  | Exhibits and Reports on Form 8-K                                                      |  | 23         
|           | 
|Signatures |  | 24                                                                                                            



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                  |  | December 31,2003 |         |   | June 30,2003 |  
|                                                                                                                                                                  |  | (Unaudited)      |         |   |              |  
|ASSETS                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Current assets:                                                                                                                                                   |  |                  |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                         |  | $                | 981     |   |              | $ | 566     |  
|Accounts receivable (net of allowance for doubtful accounts of $1,959 at December 31, 2003 and $2,089 at June 30, 2003)                                           |  |                  | 32,028  |   |              |   | 30,123  |  
|Inventories                                                                                                                                                       |  |                  | 20,419  |   |              |   | 22,347  |  
|Deferred income taxes                                                                                                                                             |  |                  | 2,112   |   |              |   | 1,981   |  
|Prepaid expenses and other                                                                                                                                        |  |                  | 4,791   |   |              |   | 6,947   |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|Total current assets                                                                                                                                              |  |                  | 60,331  |   |              |   | 61,964  |  
|                                                                                                                                                                  |  |                 
|Property, plant, and equipment, net                                                                                                                               |  |                  | 106,074 |   |              |   | 107,853 |  
|Assets held for sale                                                                                                                                              |  |                  | 445     |   |              |   | 842     |  
|Goodwill, net                                                                                                                                                     |  |                  | 109,884 |   |              |   | 109,884 |  
|Other intangibles, net                                                                                                                                            |  |                  | 4,463   |   |              |   | 4,871   |  
|Other assets                                                                                                                                                      |  |                  | 18,589  |   |              |   | 19,512  |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|TOTAL ASSETS                                                                                                                                                      |  | $                | 299,786 |   |              | $ | 304,926 |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                              |  |                  |         |   |              |   |         |  
|Current liabilities:                                                                                                                                              |  |                  |         |   |              |   |         |  
|Current maturities of long-term debt                                                                                                                              |  | $                | 9,600   |   |              | $ | 12,800  |  
|Accounts payable                                                                                                                                                  |  |                  | 34,210  |   |              |   | 33,681  |  
|Accrued expenses and other current liabilities                                                                                                                    |  |                  | 25,132  |   |              |   | 31,255  |  
|Restructuring reserve                                                                                                                                             |  |                  | 271     |   |              |   | 1,110   |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|Total current liabilities                                                                                                                                         |  |                  | 69,213  |   |              |   | 78,846  |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|Long-term debt, less current maturities                                                                                                                           |  |                  | 133,194 |   |              |   | 134,005 |  
|Other long-term liabilities                                                                                                                                       |  |                  | 60,380  |   |              |   | 59,667  |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|Total liabilities                                                                                                                                                 |  |                  | 262,787 |   |              |   | 272,518 |  
|                                                                                                                                                                  |  |                 
|Shareholders equity:                                                                                                                                             |  |                  |         |   |              |   |         |  
|Common stock ($0.50 par value; authorized shares-16,000,000 shares; issued and outstanding shares- 9,073,925 at December 31, 2003 and
9,049,592 at June 30, 2003) |  |                  | 4,537   |   |              |   | 4,525   |  
|Capital in excess of par value                                                                                                                                    |  |                  | 68,553  |   |              |   | 68,342  |  
|Unearned compensation                                                                                                                                             |  |                  | (410    | ) |              |   | (514    | )
|Retained earnings (deficit)                                                                                                                                       |  |                  | (10,895 | ) |              |   | (15,157 | )
|Accumulated other comprehensive income (loss):                                                                                                                    |  |                  |         |   |              |   |         |  
|Foreign currency translation                                                                                                                                      |  |                  | 2       |   |              |   |        |  
|Minimum pension liability                                                                                                                                         |  |                  | (24,788 | ) |              |   | (24,788 | )
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|Total shareholders equity                                                                                                                                        |  |                  | 36,999  |   |              |   | 32,408  |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                        |  | $                | 299,786 |   |              | $ | 304,926 |  
|                                                                                                                                                                  |  |                  |         |   |              |   |         |  



See
accompanying Notes to Condensed Consolidated Financial Statements.



3



---

##### Table of Contents

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)



|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | ---- |  | ---- | ------- |  | - | ------- | -
|                                                                                            |  | Three Months EndedDecember 31, |         |   | Six Months EndedDecember 31, |  
|                                                                                            |  | 2003                           |         |   | 2002                         |   |         | 2003 |  | 2002 |        
|Net sales                                                                                   |  | $                              | 115,319 |   |                              | $ | 113,696 |      |  | $    | 222,228 |  | $ | 219,121 |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Operating expenses:                                                                         |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Cost of sales                                                                               |  |                                | 94,512  |   |                              |   | 92,434  |      |  |      | 182,255 |  |   | 177,916 |  
|Selling and administrative                                                                  |  |                                | 12,019  |   |                              |   | 12,962  |      |  |      | 23,984  |  |   | 25,709  |  
|Restructuring and other charges                                                             |  |                                | (13     | ) |                              |   | 8,921   |      |  |      | 101     |  |   | 8,921   |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|                                                                                            |  |                                | 106,518 |   |                              |   | 114,317 |      |  |      | 206,340 |  |   | 212,546 |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Operating income (loss)                                                                     |  |                                | 8,801   |   |                              |   | (621    | )    |  |      | 15,888  |  |   | 6,575   |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Interest and other expenses:                                                                |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Interest                                                                                    |  |                                | 3,608   |   |                              |   | 3,692   |      |  |      | 7,051   |  |   | 7,455   |  
|Securitization costs                                                                        |  |                                | 134     |   |                              |   | 176     |      |  |      | 255     |  |   | 364     |  
|Other, net                                                                                  |  |                                | 109     |   |                              |   | 69      |      |  |      | 151     |  |   | 131     |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|                                                                                            |  |                                | 3,851   |   |                              |   | 3,937   |      |  |      | 7,457   |  |   | 7,950   |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Income (loss) before income taxes and cumulative effect of a change in accounting principle |  |                                | 4,950   |   |                              |   | (4,558  | )    |  |      | 8,431   |  |   | (1,375  | )
|                                                                                            |  |                                |         |  
|Income tax expense (benefit)                                                                |  |                                | 1,880   |   |                              |   | (1,376  | )    |  |      | 3,261   |  |   | (166    | )
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Income (loss) before cumulative effect of a change in accounting principle                  |  |                                | 3,070   |   |                              |   | (3,182  | )    |  |      | 5,170   |  |   | (1,209  | )
|                                                                                            |  |                                |         |  
|Cumulative effect of a change in accounting principle                                       |  |                                |        |   |                              |   |        |      |  |      |        |  |   | (56,301 | )
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Net income (loss)                                                                           |  | $                              | 3,070   |   |                              | $ | (3,182  | )    |  | $    | 5,170   |  | $ | (57,510 | )
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Earnings per common share - basic                                                           |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Income (loss) before cumulative effect of a change in accounting principle                  |  | $                              | 0.34    |   |                              | $ | (0.35   | )    |  | $    | 0.57    |  | $ | (0.14   | )
|Cumulative effect of a change in accounting principle                                       |  |                                |        |   |                              |   |        |      |  |      |        |  |   | (6.25   | )
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Net income (loss) per share                                                                 |  | $                              | 0.34    |   |                              | $ | (0.35   | )    |  | $    | 0.57    |  | $ | (6.39   | )
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Weighted-average common shares outstanding                                                  |  |                                | 9,071   |   |                              |   | 9,007   |      |  |      | 9,065   |  |   | 9,006   |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Earnings per common share - diluted                                                         |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Income (loss) before cumulative effect of a change in accounting principle                  |  | $                              | 0.33    |   |                              | $ | (0.35   | )    |  | $    | 0.56    |  | $ | (0.14   | )
|Cumulative effect of a change in accounting principle                                       |  |                                |        |   |                              |   |        |      |  |      |        |  |   | (6.25   | )
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Net income (loss) per share                                                                 |  | $                              | 0.33    |   |                              | $ | (0.35   | )    |  | $    | 0.56    |  | $ | (6.39   | )
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Weighted-average common shares outstanding                                                  |  |                                | 9,220   |   |                              |   | 9,007   |      |  |      | 9,171   |  |   | 9,006   |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  
|Cash dividends per common share                                                             |  | $                              | 0.05    |   |                              | $ | 0.05    |      |  | $    | 0.10    |  | $ | 0.10    |  
|                                                                                            |  |                                |         |   |                              |   |         |      |  |      |         |  |   |         |  



See
accompanying Notes to Condensed Consolidated Financial Statements.



4



---

##### Table of Contents

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                         |  |                              |        |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                         |  | Six Months EndedDecember 31, |       
|                                                                                         |  | 2003                         |        |   | 2002 |  
|Operating Activities                                                                     |  |                              |        |   |      |   |         |  
|Net income (loss)                                                                        |  | $                            | 5,170  |   |      | $ | (57,510 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                              |        |   |      |   |         |  
|Depreciation and amortization                                                            |  |                              | 9,916  |   |      |   | 9,734   |  
|Cumulative effect of a change in accounting principle for goodwill                       |  |                              |       |   |      |   | 56,301  |  
|Restructuring and other                                                                  |  |                              | 101    |   |      |   | 8,921   |  
|Other, net                                                                               |  |                              | (703   | ) |      |   | (1,795  | )
|                                                                                         |  |                              |        |   |      |   |         |  
|                                                                                         |  |                              | 14,484 |   |      |   | 15,651  |  
|                                                                                         |  |                              |        |   |      |   |         |  
|Changes in operating assets and liabilities:                                             |  |                              |        |   |      |   |         |  
|Accounts receivable                                                                      |  |                              | (4,558 | ) |      |   | 755     |  
|Inventories                                                                              |  |                              | 1,928  |   |      |   | (3,100  | )
|Accounts payable and accrued expenses                                                    |  |                              | 2,193  |   |      |   | 2,601   |  
|Restructuring payments                                                                   |  |                              | (940   | ) |      |   | (2,080  | )
|Contributions to defined benefit pension plans                                           |  |                              | (8,426 | ) |      |   | (4,011  | )
|Other, net                                                                               |  |                              | 4,416  |   |      |   | 2,851   |  
|                                                                                         |  |                              |        |   |      |   |         |  
|                                                                                         |  |                              | (5,387 | ) |      |   | (2,984  | )
|                                                                                         |  |                              |        |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                              | 9,097  |   |      |   | 12,667  |  
|                                                                                         |  |                              |        |   |      |   |         |  
|Investing Activities                                                                     |  |                              |        |   |      |   |         |  
|Purchases of property, plant, and equipment                                              |  |                              | (8,140 | ) |      |   | (6,224  | )
|Proceeds from sales of property, plant, and equipment                                    |  |                              | 687    |   |      |   | 280     |  
|                                                                                         |  |                              |        |   |      |   |         |  
|Net cash used in investing activities                                                    |  |                              | (7,453 | ) |      |   | (5,944  | )
|                                                                                         |  |                              |        |   |      |   |         |  
|Financing Activities                                                                     |  |                              |        |   |      |   |         |  
|Proceeds from (payments on) receivables securitization program                           |  |                              | 2,656  |   |      |   | (3,222  | )
|Payments on long-term revolving credit facility                                          |  |                              | (3,200 | ) |      |   | (2,600  | )
|Dividends paid                                                                           |  |                              | (908   | ) |      |   | (902    | )
|Proceeds from exercise of stock options                                                  |  |                              | 223    |   |      |   | 45      |  
|                                                                                         |  |                              |        |   |      |   |         |  
|Net cash used in financing activities                                                    |  |                              | (1,229 | ) |      |   | (6,679  | )
|                                                                                         |  |                              |        |   |      |   |         |  
|Increase in cash and cash equivalents                                                    |  |                              | 415    |   |      |   | 44      |  
|                                                                                         |  |                             
|Cash and cash equivalents at beginning of period                                         |  |                              | 566    |   |      |   | 1,196   |  
|                                                                                         |  |                              |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                               |  | $                            | 981    |   |      | $ | 1,240   |  
|                                                                                         |  |                              |        |   |      |   |         |  



See
accompanying Notes to Condensed Consolidated Financial Statements.



5



---

##### Table of Contents

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(In thousands, except per share data)



|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ------------ |  | ---------------------------- | ----- | -------------------- | - | ------ | ------------------------- | - | ---- | --------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | Common Stock |  | Capital inExcess ofPar Value |       | UnearnedCompensation |   |        | RetainedEarnings(Deficit) |   |      | AccumulatedOtherComprehensiveLoss |  |   | Total   |  
|                                                                     |  | Shares       |  | ParValue                     |       |                      |   |        |                          
|Balance at June 30, 2002                                             |  | 8,992        |  | $                            | 4,496 |                      | $ | 67,805 |                           | $ | (77  | )                                 |  | $ | 40,282  |   |  | $ | (992    | ) |  | $ | 111,514 |  
|Net loss                                                             |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | (53,634 | ) |  |   |        |   |  |   | (53,634 | )
|Change in minimum pension liability net of $12,448 in deferred taxes |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   |        |   |  |   | (23,796 | ) |  |   | (23,796 | )
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                                   |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   | (77,430 | )
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  
|Cash dividends - $0.20 per share                                     |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | (1,805  | ) |  |   |        |   |  |   | (1,805  | )
|Shares issued upon exercise of stock options                         |  | 5            |  |                              | 2     |                      |   | 43     |                           |   |     |                                   |  |   |        |   |  |   |        |   |  |   | 45      |  
|Restricted stock award                                               |  | 53           |  |                              | 27    |                      |   | 494    |                           |   | (437 | )                                 |  |   |        |   |  |   |        |   |  |   | 84      |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at June 30, 2003(the following data is unaudited)            |  | 9,050        |  |                              | 4,525 |                      |   | 68,342 |                           |   | (514 | )                                 |  |   | (15,157 | ) |  |   | (24,788 | ) |  |   | 32,408  |  
|Net income                                                           |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | 5,170   |   |  |   |        |   |  |   | 5,170   |  
|Foreign currency translation                                         |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   |        |   |  |   | 2       |   |  |   | 2       |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  
|Comprehensive income                                                 |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   | 5,172   |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  
|Cash dividends - $0.10 per share                                     |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | (908    | ) |  |   |        |   |  |   | (908    | )
|Shares issued upon exercise of stock options                         |  | 24           |  |                              | 12    |                      |   | 211    |                           |   |     |                                   |  |   |        |   |  |   |        |   |  |   | 223     |  
|Amortization of unearned compensation                                |  |             |  |                              |      |                      |   |       |                           |   | 104  |                                   |  |   |        |   |  |   |        |   |  |   | 104     |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                         |  | 9,074        |  | $                            | 4,537 |                      | $ | 68,553 |                           | $ | (410 | )                                 |  | $ | (10,895 | ) |  | $ | (24,786 | ) |  | $ | 36,999  |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |   |  |   |         |   |  |   |         |  



See
accompanying Notes to Condensed Consolidated Financial Statements.



6



---

##### Table of Contents

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | The accompanying unaudited condensed consolidated financial statements of Cadmus Communications Corporation and Subsidiaries (the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial reporting, and with applicable quarterly reporting regulations of the Securities and Exchange Commission. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements and, accordingly, should be read in conjunction with the consolidated financial statements and related footnotes included in the Companys annual report on
Form 10-K for the fiscal year ended June 30, 2003.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of interim financial information have been included. The results of operations for the period ended December 31, 2003, are not
necessarily indicative of results for the entire fiscal year.



Certain previously reported amounts have been reclassified to conform to the current-year presentation.



|2. | The Company entered into a joint venture agreement with Datamatics Technologies Limited (Datamatics) on June 30, 2003, resulting in an increase in intangible assets of
$3.3 million, which will be amortized using the straight-line method over a five year period. Annual amortization expense for these assets is expected to be approximately $0.7 million per year. Other intangibles totaling $1.5 million at December 31,
2003 and June 30, 2003, respectively, relate to assets recognized in connection with the Companys adjustment of its minimum pension liability.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | Basic earnings per share is computed on the basis of weighted-average common shares outstanding from the date of issue. Diluted earnings per share is computed on the basis of
weighted-average common shares outstanding plus common shares contingently issuable upon the exercise of dilutive stock options. Incremental shares for dilutive stock options (computed under the treasury stock method) were 150,000 and 106,000 for
the three and six months ended December 31, 2003, respectively. In fiscal 2003, incremental shares for dilutive stock options (computed under the treasury stock method) were not included in the computation of diluted earnings per share as their
effect would have been anti-dilutive. These shares totaled 51,000 and 38,000 for the three and six months ended December 31, 2002, respectively.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | Components of net inventories at December 31, 2003 and June 30, 2003, were as follows (in thousands):
|-- | -----------------------------------------------------------------------------------------------------



|                           |  |                              |        |              |   |       
|-------------------------- |  | ---------------------------- | ------ | ------------ | - | ------
|                           |  | December 31,2003 (unaudited) |        | June 30,2003
|Raw materials and supplies |  | $                            | 7,131  |              | $ | 10,242
|Work in process            |  |                              | 11,047 |              |   | 9,431 
|Finished goods             |  |                              | 2,241  |              |   | 2,674 
|                           |  |                              |        |              |   |       
|                           |  | $                            | 20,419 |              | $ | 22,347
|                           |  |                              |        |              |   |       



|5. | Long-term debt at December 31, 2003 and June 30, 2003, consisted of the following (in thousands):
|-- | -------------------------------------------------------------------------------------------------



|                                                  |  |                              |         |   |              |   |         |  
|------------------------------------------------- |  | ---------------------------- | ------- | - | ------------ | - | ------- | -
|                                                  |  | December 31,2003 (unaudited) |         |   | June 30,2003 |  
|Senior bank credit facility, due 3/31/04          |  | $                            | 9,600   |   |              | $ | 12,800  |  
|9.75% Senior subordinated notes, due 6/1/09       |  |                              | 125,000 |   |              |   | 125,000 |  
|11.5% Subordinated promissory notes, due 3/31/10  |  |                              | 6,415   |   |              |   | 6,415   |  
|Fair market value of interest rate swap agreement |  |                              | 1,779   |   |              |   | 2,590   |  
|                                                  |  |                              |         |   |              |   |         |  
|Total debt                                        |  |                              | 142,794 |   |              |   | 146,805 |  
|Less current maturies of long-term debt           |  |                              | (9,600  | ) |              |   | (12,800 | )
|                                                  |  |                              |         |   |              |   |         |  
|Total long-term debt                              |  | $                            | 133,194 |   |              | $ | 134,005 |  
|                                                  |  |                              |         |   |              |   |         |  



7



---

##### Table of Contents

On January 28, 2004, the Company refinanced its senior bank credit facility, which was to mature on March
31, 2004, and terminated its accounts receivable securitization program (see Note 9). The new senior bank credit facility provides for a $100 million revolving credit facility that will mature in January, 2008. The facility, with a group of seven
banks, is secured by substantially all of the Companys real, personal and mixed property, is jointly and severally guaranteed by each of the Companys present and future significant subsidiaries, and is secured by a pledge of the capital
stock of present and future significant subsidiaries. The senior bank credit facility contains certain covenants regarding total leverage, senior leverage, fixed charge coverage and net worth, and contains other restrictions, including limitations
on additional borrowings, and the acquisition, disposition and securitization of assets. The interest rate spreads for the senior bank credit facility range from 2.25% to 3.00% for LIBOR loans and from 1.00% to 1.75% for prime rate loans. The
commitment fee rate ranges from 0.375% to 0.625%. Applicable interest rate spreads and commitment fees paid by the Company will fluctuate, within the ranges above, based upon the Companys performance as measured by the total leverage ratio.
From January 28, 2004 through the fee determination date next following the fiscal quarter ending June 30, 2004, the applicable interest rate spreads will be 2.75% for LIBOR loans and 1.50% for prime rate loans and the commitment fee will be 0.500%.



Both the senior bank credit facility and the senior
subordinated notes contain a covenant that places restrictions on the ability of the Company to pay dividends. The senior bank credit facility that was in place at December 31, 2003 limited the Companys payment of dividends to an aggregate
amount per annum of $0.20 per share when the Companys total debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio exceeded 3.0 to 1.0. At December 31, 2003, the Companys total debt-to-EBITDA ratio exceeded
3.0 to 1.0 and, therefore, the Company was limited under this agreement to an annual dividend rate of $0.20 per share. The senior bank credit facility entered into on January 28, 2004 does not contain a per annum restriction on the payment of
dividends, but includes dividends as a component of the fixed charge coverage ratio. The Company will be able to make dividend payments under the senior bank credit facility entered into on January 28, 2004 as long as it is in compliance with the
fixed charge coverage ratio in effect at the time. The senior subordinated notes include a computation for a restricted payments pool out of which dividends may be paid. The balance of the restricted payments pool is increased based on net income,
cash proceeds from the issuance of stock and cash proceeds from the receipt of equity contributions and is reduced based on payment of dividends or other restricted payments. The Company may continue to pay dividends to the extent there is a
positive balance in the restricted payments pool in excess of the scheduled dividend. At December 31, 2003, the Companys restricted payments pool was sufficient to cover expected dividends and, therefore, the Company was not impacted by the
limitation of this covenant.



|6. | The Company is focused on two segments. The Publisher Services segment provides products and services to both not-for-profit and commercial publishers in two primary product lines:
scientific, technical and medical (STM) journals and special interest and trade magazines. Publisher Services provides a full range of content management, editorial, prepress, printing, reprinting, warehousing and distribution services
under the division names of Cadmus Professional Communications and Cadmus Specialty Publications. Certain shared services and other expenses have been allocated to the Publisher Services segment. The Specialty Packaging segment provides high quality
specialty packaging and promotional printing, assembly, fulfillment and distribution services to consumer product and other customers.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The accounting policies for the segments conform to those described in Note 1 Significant Accounting Policies in the Companys fiscal
2003 Annual Report on Form 10-K. The Company primarily evaluates the performance of its operating segments based on operating income, excluding gains/losses on sales of assets and restructuring charges. Intersegment sales are not significant. The
Company manages income taxes on a consolidated basis.



8



---

##### Table of Contents

Summarized segment data is as follows:



|                                      |  |                   |         |                    |   |        |  |   |        
|------------------------------------- |  | ----------------- | ------- | ------------------ | - | ------ |  | - | -------
|(in thousands)                        |  | PublisherServices |         | SpecialtyPackaging |   | Total 
|Three Months Ended December 31, 2003: |  |                   |         |                    |   |        |  |   |        
|Net sales                             |  | $                 | 97,320  |                    | $ | 17,999 |  | $ | 115,319
|Operating income                      |  |                   | 9,767   |                    |   | 995    |  |   | 10,762 
|                                      |  |                   |        
|Three Months Ended December 31, 2002: |  |                   |         |                    |   |        |  |   |        
|Net sales                             |  | $                 | 98,164  |                    | $ | 15,532 |  | $ | 113,696
|Operating income                      |  |                   | 10,563  |                    |   | 411    |  |   | 10,974 
|                                      |  |                   |        
|Six Months Ended December 31, 2003:   |  |                   |         |                    |   |        |  |   |        
|Net sales                             |  | $                 | 189,629 |                    | $ | 32,599 |  | $ | 222,228
|Operating income                      |  |                   | 18,446  |                    |   | 1,349  |  |   | 19,795 
|                                      |  |                   |        
|Six Months Ended December 31, 2002:   |  |                   |         |                    |   |        |  |   |        
|Net sales                             |  | $                 | 191,320 |                    | $ | 27,801 |  | $ | 219,121
|Operating income                      |  |                   | 20,050  |                    |   | 684    |  |   | 20,734 



A reconciliation of
segment data to consolidated data is as follows:



|                                                                                            |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                            |  | Three Months EndedDecember 31, |        |   | Six Months EndedDecember 31, |  
|(in thousands)                                                                              |  | 2003                           |        |   | 2002                         |   |        | 2003 |  |   | 2002   |  
|Earnings from operations:                                                                   |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Reportable segment operating income                                                         |  | $                              | 10,762 |   |                              | $ | 10,974 |      |  | $ | 19,795 |   |  | $ | 20,734 |  
|Unallocated shared services and other expenses                                              |  |                                | (1,959 | ) |                              |   | (2,624 | )    |  |   | (3,782 | ) |  |   | (5,187 | )
|Loss on sale of fixed assets                                                                |  |                                | (15    | ) |                              |   | (50    | )    |  |   | (24    | ) |  |   | (51    | )
|Restructuring and other charges                                                             |  |                                | 13     |   |                              |   | (8,921 | )    |  |   | (101   | ) |  |   | (8,921 | )
|                                                                                            |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total operating income (loss)                                                               |  |                                | 8,801  |   |                              |   | (621   | )    |  |   | 15,888 |   |  |   | 6,575  |  
|Interest expense                                                                            |  |                                | (3,608 | ) |                              |   | (3,692 | )    |  |   | (7,051 | ) |  |   | (7,455 | )
|Securitization costs                                                                        |  |                                | (134   | ) |                              |   | (176   | )    |  |   | (255   | ) |  |   | (364   | )
|Other expenses                                                                              |  |                                | (109   | ) |                              |   | (69    | )    |  |   | (151   | ) |  |   | (131   | )
|                                                                                            |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes and cumulative effect of a change in accounting principle |  | $                              | 4,950  |   |                              | $ | (4,558 | )    |  | $ | 8,431  |   |  | $ | (1,375 | )
|                                                                                            |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  



|7. | Over the course of the past several years, the Company has focused its operations around the Publisher Services and Specialty Packaging segments. As a result, the Company has exited
non-strategic businesses and concentrated its resources on these two segments in an attempt to develop targeted solutions for its customers and to differentiate its products and services from its competitors. The information that follows will
further describe the specific actions the Company took during fiscal 2003 and subsequently.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In fiscal 2003, the Company announced several actions to rationalize capacity and improve utilization within the Publisher Services segment, particularly
in its special-interest magazine operation. These actions included closure of the special interest magazine facility in East Stroudsburg, Pennsylvania, closure of the reprint department in Easton, Pennsylvania and relocation of certain manufacturing
equipment to other facilities within the Company.



9



---

##### Table of Contents

The Company also announced changes in the operating and management structure of the Company. In
connection with these fiscal 2003 actions, the Company recorded pre-tax charges of $(0.01) million ($(0.01) million net of tax) and $0.1 million ($0.1 million net of tax) for the three and six months ended December 31, 2003, respectively, and $8.9
million ($5.9 million net of tax) for the three and six months ended December 31, 2002. These charges are included in restructuring and other charges in the Condensed Consolidated Statements of Income.



A summary of the restructuring and other charges, and activities against
these charges follows:



|                          |  |                          |        |   |                        |   |        |                |  |   |        |   |  |   |         |  
|------------------------- |  | ------------------------ | ------ | - | ---------------------- | - | ------ | -------------- |  | - | ------ | - |  | - | ------- | -
|(in thousands)            |  | Loss onDisposalof Assets |        |   | EmployeeSeveranceCosts |   |        | OtherExitCosts |  |   | Total  |  
|June 30, 2002 Accrual     |  | $                        |       |   |                        | $ | 451    |                |  | $ | 676    |   |  | $ | 1,127   |  
|                          |  |                          |        |  
|FY 2003 provision         |  |                          | 7,831  |   |                        |   | 2,363  |                |  |   | 1,152  |   |  |   | 11,346  |  
|Costs incurred            |  |                          | (7,831 | ) |                        |   | (1,979 | )              |  |   | (1,553 | ) |  |   | (11,363 | )
|                          |  |                          |        |   |                        |   |        |                |  |   |        |   |  |   |         |  
|June 30, 2003 Accrual     |  | $                        |       |   |                        | $ | 835    |                |  | $ | 275    |   |  | $ | 1,110   |  
|                          |  |                          |        |  
|FY 2004 provision         |  |                          |       |   |                        |   | 11     |                |  |   | 90     |   |  |   | 101     |  
|Costs incurred            |  |                          |       |   |                        |   | (660   | )              |  |   | (280   | ) |  |   | (940    | )
|                          |  |                          |        |   |                        |   |        |                |  |   |        |   |  |   |         |  
|December 31, 2003 Accrual |  | $                        |       |   |                        | $ | 186    |                |  | $ | 85     |   |  | $ | 271     |  
|                          |  |                          |        |   |                        |   |        |                |  |   |        |   |  |   |         |  



Fiscal 2003
Restructuring actions:



Loss on impairment or disposal of
assets for fiscal 2003 totaled $7.8 million and included a $6.2 million loss on assets to be disposed of primarily due to the closure of the East Stroudsburg, Pennsylvania facility and a $1.6 million loss on impairment of assets related to a former
operating facility in Richmond, Virginia, which has been sold. Write-downs were measured by the difference between the fair value of the assets, as determined by appraisal or best current market value information available, and the net book value of
the asset.



Employee severance costs for fiscal 2003 totaled
$2.4 million and related to approximately 190 associates whose positions were eliminated as a result of the closure of the East Stroudsburg facility and Easton reprint operations and changes in the operating and management structure of the Company.
As of June 30, 2003, all of these associates had been terminated and severance payments related to these restructuring actions totaled $1.6 million. Severance costs remaining at June 30, 2003 related to fiscal 2003 restructuring actions.



Other exit costs for fiscal 2003 totaled $1.2 million and included
contract termination costs and other costs incurred to close the East Stroudsburg facility. Other exit costs remaining at June 30, 2003 that related to fiscal 2003 restructuring actions totaled $0.1 million.



Additional employee severance costs in fiscal 2004 totaled $0.01 million and
related to fiscal 2003 restructuring actions. The Company paid $0.6 million in severance payments. The remaining balance of severance costs at December 31, 2003 relates to fiscal 2003 restructuring actions.



Other exit costs for fiscal 2004 totaled $0.1 million and included $0.3
million in additional contract termination and other costs incurred to close the East Stroudsburg facility offset by a $0.2 million reversal of the remaining balance related to consolidation of the Companys backcopy operations. Other exit
costs remaining at December 31, 2003 relate to fiscal 2003 restructuring actions.



The Company anticipates that it will incur additional other exit costs of up to $0.3 million in fiscal 2004 related to fiscal 2003 restructuring actions, which are expected to be completed in fiscal 2004.



10



---

##### Table of Contents

|8. | At December 31, 2003, the Company had one fixed-to-floating fair value interest rate swap agreement outstanding with a notional amount of $35.0 million. This swap was entered into
to convert $35.0 million of the Companys 9.75% senior subordinated notes due in 2009 to floating rate debt. The initial term of this swap agreement expires in 2009, and the counterparty has an option to terminate the agreement beginning in
June 2004. Under the swap agreement, the Company receives interest payments at a fixed rate of 9.75% and pays interest at a variable rate that is based on six-month LIBOR plus a spread. The six-month LIBOR rate is reset each December 1 and June 1.
The swap agreement is an effective hedge. The fair value of the Companys interest rate swap agreement was $1.8 million and $2.6 million at December 31, 2003 and June 30, 2003, respectively, which is recorded in the Condensed Consolidated
Balance Sheets in other assets with an offset in long-term debt in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Companys strategy to effectively convert fixed rate financing to
variable rate financing through the swap agreement resulted in a reduction of interest expense of $0.3 million and $0.3 million for the three-month periods ended December 31, 2003 and 2002, respectively, and a reduction of $0.7 million and $0.6
million for the six-month periods ended December 31, 2003 and 2002, respectively.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. | The Company used an accounts receivable securitization program to fund some of its working capital requirements. At December 31, 2003 and June 30, 2003, approximately $29.3 million
and $26.7 million, respectively, of net accounts receivable had been sold by the Companys wholly owned, bankruptcy-remote subsidiary without recourse to an unrelated third party purchaser under the securitization program. The sales were
reflected in the Condensed Consolidated Balance Sheets as a reduction of accounts receivable with the proceeds used to repay a corresponding amount of borrowing under the Companys senior bank credit facility. On January 28, 2004, the Company
terminated its accounts receivable securitization program concurrently with the refinancing of its senior bank credit facility resulting in an increase in borrowing under the senior bank credit facility. Effective January 28, 2004, the accounts
receivable are no longer sold to the wholly-owned, bankruptcy-remote subsidiary or to an unrelated third-party purchaser. Therefore, the amount of reported accounts receivable and borrowings under the senior bank credit facility on the Condensed
Consolidated Balance Sheets will increase in the future.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | Assets held for sale at December 31, 2003 and June 30, 2003 include property, plant and equipment primarily related to the Companys closure of its facility in East
Stroudsburg, Pennsylvania. All of the assets held for sale are part of the Publisher Services segment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. | Under the Companys incentive stock plans, which expired on or before June 30, 2003, selected associates and non-employee directors were granted options to purchase its common
stock at prices not less than the fair market value (or not less than 85% of the fair market value in the case of non-qualified stock options granted to associates) of the stock at the date the options were granted.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

The following information is provided solely in connection with the disclosure requirements of SFAS No.
123, Accounting for Stock-Based Compensation. If the Company had elected to recognize compensation cost related to its stock options in accordance with the provisions of SFAS No. 123, pro forma net income (loss) would be as follows:



|                                                                                                                                   |  |                                 |       |   |                               |   |        |      |  |   |       |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------- | -
|                                                                                                                                   |  | Three Months Ended December 31, |       |   | Six Months Ended December 31, |  
|(in thousands)                                                                                                                     |  | 2003                            |       |   | 2002                          |   |        | 2003 |  |   | 2002  |  
|Net income (loss) as reported                                                                                                      |  | $                               | 3,070 |   |                               | $ | (3,182 | )    |  | $ | 5,170 |   |  | $ | (57,510 | )
|                                                                                                                                   |  |                                 |       |  
|Less: Total stock-based employee compensation expense determined under fair value method of all awards, net of related tax
effects |  |                                 | (104  | ) |                               |   | (178   | )    |  |   | (249  | ) |  |   | (298    | )
|                                                                                                                                   |  |                                 |       |   |                               |   |        |      |  |   |       |   |  |   |         |  
|Pro forma net income (loss)                                                                                                        |  | $                               | 2,966 |   |                               | $ | (3,360 | )    |  | $ | 4,921 |   |  | $ | (57,808 | )
|                                                                                                                                   |  |                                 |       |   |                               |   |        |      |  |   |       |   |  |   |         |  
|Earnings (loss) per common share - basic                                                                                           |  |                                 |       |   |                               |   |        |      |  |   |       |   |  |   |         |  
|As reported                                                                                                                        |  | $                               | 0.34  |   |                               | $ | (0.35  | )    |  | $ | 0.57  |   |  | $ | (6.39   | )
|Pro forma                                                                                                                          |  | $                               | 0.33  |   |                               | $ | (0.37  | )    |  | $ | 0.54  |   |  | $ | (6.42   | )
|                                                                                                                                   |  |                                 |       |  
|Earnings (loss) per common share - diluted                                                                                         |  |                                 |       |   |                               |   |        |      |  |   |       |   |  |   |         |  
|As reported                                                                                                                        |  | $                               | 0.33  |   |                               | $ | (0.35  | )    |  | $ | 0.56  |   |  | $ | (6.39   | )
|Pro forma                                                                                                                          |  | $                               | 0.32  |   |                               | $ | (0.37  | )    |  | $ | 0.54  |   |  | $ | (6.42   | )



|12. | The Companys effective income tax rate was 38% for the second quarter and 38.7% for the first six months of fiscal 2004, respectively. For fiscal 2003, the effective income
tax rate (benefit) was (30.2)% and (12.1)% for the second quarter and first six months, respectively. The amount of tax expense differs from the amount obtained by application of the statutory United States rates primarily due to the impact of state
income taxes in fiscal years 2004 and 2003, and the impact in fiscal 2004 of foreign operations, which are excluded from taxable domestic income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



---

##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL



Headquartered in Richmond, Virginia, Cadmus Communications Corporation and Subsidiaries (Cadmus or the Company) provides end-to-end, integrated graphic communications services to professional
publishers, not-for-profit societies and corporations. Cadmus is the worlds largest provider of content management and production services to scientific, technical and medical (STM) journal publishers, the fourth largest
periodicals printer in North America, and a leading provider of specialty packaging and promotional printing services.



The Company is focused around its two business segments. The Publisher Services segment provides products and services to both not-for-profit and commercial publishers in
two primary product lines: STM journals and special interest and trade magazines. Publisher Services provides a full range of content management, editorial, prepress, printing, reprinting, warehousing and distribution services under the division
names of Cadmus Professional Communications and Cadmus Specialty Publications. In addition, the Companys Specialty Packaging segment provides high quality specialty packaging and promotional printing, assembly, fulfillment and distribution
services to consumer product and other customers.



EXECUTIVE SUMMARY



Over the past few years, the Company has narrowed its focus primarily to
niche markets where the Company sees underlying demand strength, a willingness on the part of customers to outsource non-core activities, and relatively few large and well-positioned competitors. More specifically, the Company has focused on growing
content processing services for the scholarly publishing and scientific, technical and medical (STM) markets, and other markets. The Company has a leading position in this business, represented by the Cadmus Professional Communications
division within the Publisher Services segment, and delivers customized services using state-of-the-art technologies, in addition to traditional print services.



The special interest magazine portion of the Companys business, represented by the Cadmus Specialty Publications division within the Publisher Services segment
has suffered from declining advertising pages and pricing pressures over the past several years. As a result, the Company is focused on controlling costs and improving profitability within this division, rather than focusing on top-line growth.



The Companys Specialty Packaging segment has improved financial
performance over the past few years as a result of focusing on growth markets that benefit from the customized package design services the Company offers, particularly in the health care, apparel and other consumer-oriented markets. The
Companys U.S. packaging facility is both ISO-9001 and cGMP certified as evidence of the high level of quality delivered to our customers. The Specialty Packaging segment, a growing portion of the Companys business, has also
differentiated itself by developing a proprietary network of offshore production affiliates and by linking those operations and its customers via a proprietary inventory management and fulfillment system.



The focus on the more stable and profitable services within Cadmus Professional
Communications and on the Specialty Packaging segment has permitted the Company to achieve more stable operating results and reduce leverage in a challenging economic and industry environment.



APPLICATION OF CRITICAL ACCOUNTING POLICIES



There have been no material changes to the information concerning the Companys
Application of Critical Accounting Policies as previously reported in the Companys Report on Form 10-K for the year ended June 30, 2003.



13



---

##### Table of Contents

RESULTS OF OPERATIONS



The following table presents the major components from the Condensed Consolidated Statements of Income as a percent of net sales for the
three and six-month periods ended December 31, 2003 and 2002, respectively.



|                                                                                            |  |                                 |   |  |                               |    |  |       |   |  |       |   
|------------------------------------------------------------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | -- |  | ----- | - |  | ----- | --
|                                                                                            |  | Three Months Ended December 31, |   |  | Six Months Ended December 31, |   
|                                                                                            |  | 2003                            |   |  | 2002                          |    |  | 2003  |   |  | 2002  |   
|Net sales                                                                                   |  | 100.0                           | % |  | 100.0                         | %  |  | 100.0 | % |  | 100.0 | % 
|Cost of sales                                                                               |  | 82.0                            |   |  | 81.3                          |    |  | 82.0  |   |  | 81.2  |   
|Selling and administrative                                                                  |  | 10.4                            |   |  | 11.4                          |    |  | 10.8  |   |  | 11.7  |   
|Restructuring and other charges                                                             |  |                                |   |  | 7.8                           |    |  |      |   |  | 4.1   |   
|                                                                                            |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Operating income (loss)                                                                     |  | 7.6                             |   |  | (0.5                          | )  |  | 7.2   |   |  | 3.0   |   
|Interest expense                                                                            |  | 3.1                             |   |  | 3.3                           |    |  | 3.2   |   |  | 3.4   |   
|Securitization costs                                                                        |  | 0.1                             |   |  | 0.2                           |    |  | 0.1   |   |  | 0.2   |   
|Other, net                                                                                  |  | 0.1                             |   |  |                              |    |  | 0.1   |   |  |      |   
|                                                                                            |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Income (loss) before income taxes and cumulative effect of a change in accounting principle |  | 4.3                             |   |  | (4.0                          | )  |  | 3.8   |   |  | (0.6  | ) 
|Income tax expense (benefit)                                                                |  | 1.6                             |   |  | (1.2                          | )  |  | 1.5   |   |  | (0.1  | ) 
|                                                                                            |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Income (loss) before cumulative effect of a change in accounting principle                  |  | 2.7                             |   |  | (2.8                          | )  |  | 2.3   |   |  | (0.5  | ) 
|Cumulative effect of a change in accounting principle                                       |  |                                |   |  |                              |    |  |      |   |  | (25.7 | ) 
|                                                                                            |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Net income (loss)                                                                           |  | 2.7                             | % |  | (2.8                          | )% |  | 2.3   | % |  | (26.2 | )%
|                                                                                            |  |                                 |   |  |                               |    |  |       |   |  |       |   



Net sales



Net sales for the second quarter of fiscal 2004 were $115.3 million compared to $113.7
million in the same period last year. Net sales for the first six months of fiscal 2004 totaled $222.2 million compared to $219.1 million for the same period of fiscal 2003. The increase was primarily attributable to growth in content services, STM
journal services and specialty packaging sales.



Net sales in the Publisher
Services segment were $97.3 million in the second quarter of fiscal 2004 compared to $98.2 million in the comparable period of the prior year. For the six months ended December 31, 2003, net sales in the Publisher Services segment were $189.6
million compared to $191.3 million in the corresponding period of the prior year. The decline of less than 1% was a result of continued softness in pricing and volume in the special interest magazine business partially offset by continued growth in
STM services.



Net sales in the Specialty Packaging segment totaled $18.0
million in the second quarter of fiscal 2004 compared to $15.5 million the prior year, an increase of 16%. For the six-month period ended December 31, 2003, net sales grew to $32.6 million from $27.8 million, an increase of 17%, as compared to the
corresponding period of the prior year. The increase in net sales for this segment was attributable to gaining new projects from existing customers and winning new accounts.



Cost of Sales



Cost of sales increased to 82.0% of net sales for the second quarter of fiscal 2004, compared to 81.3% of net sales in fiscal 2003, and increased to 82.0% of net sales
for the first six months of fiscal 2004, compared to 81.2% of net sales for the same period of fiscal 2003. The increase was primarily the result of continued pricing pressures, work mix changes within the Publisher Services segment and additional
costs associated with the launch of the Companys Cadmus ArticleWorksTMservice.



14



---

##### Table of Contents

Selling and Administrative Expenses



Selling and administrative expenses totaled $12.0 million, or 10.4% of net sales, for the second quarter of fiscal 2004, compared to $13.0
million, or 11.4% of net sales, for the same period of fiscal 2003. For the first six months of fiscal 2004, selling and administrative expenses totaled $24.0 million, or 10.8% of net sales, compared to $25.7 million, or 11.7% of net sales, in the
corresponding period of the prior year. The decrease in selling and administrative expenses in fiscal 2004 was primarily attributable to lower payroll costs associated with the reduction in the number of associates, expense reduction associated with
an increase in the cash surrender value of company owned life insurance and the favorable impact of a $0.3 million gain from the demutualization of one of the Companys insurance carriers. The year-over-year improvement in selling and
administrative costs was partially offset by increases to the Companys bad debt reserve and amortization of a license agreement related to the Companys joint venture.



Restructuring and Other Charges



During fiscal 2003, the Company announced several actions to rationalize capacity and improve utilization within the Publisher Services segment, particularly in its
special-interest magazine operation. These included closure of the special interest magazine facility in East Stroudsburg, Pennsylvania, closure of the reprint department in Easton, Pennsylvania and relocation of certain manufacturing equipment to
other facilities within the Company.



Also during fiscal 2003, the Company
announced changes in the operating and management structure of the Company. In connection with these fiscal 2003 actions, the Company recorded pre-tax charges of $(0.01) million ($(0.01) million net of tax) and $0.1 million ($0.1 million net of tax)
for the three and six months ended December 31, 2003, respectively, and $8.9 million ($5.9 million net of tax) for the three and six months ended December 31, 2002, which are included in restructuring and other charges in the Condensed Consolidated
Statements of Income.



Operating Income



The Company had operating income of $8.8 million and $15.9 million for the three- and
six-months periods ended December 31, 2003, respectively, compared to an operating loss of $0.6 million and operating income of $6.6 million in the comparable periods of fiscal 2003. Operating results for the first six months of fiscal 2004 included
$0.1 million in restructuring and other charges, while fiscal 2003 results included $8.9 million in restructuring and other charges for the comparable time period. In order to provide consistent comparisons of year-over-year operating results, the
following reconciliation is provided:



|                                     |  |                                 |       |   |                               |     |   |      |   |       |             |  |      |      |  |            |        |  |      |   |            |   |        |  |     |  
|------------------------------------ |  | ------------------------------- | ----- | - | ----------------------------- | --- | - | ---- | - | ----- | ----------- |  | ---- | ---- |  | ---------- | ------ |  | ---- | - | ---------- | - | ------ |  | --- | -
|(in thousands)                       |  | Three Months Ended December 31, |       |   | Six Months Ended December 31, |    
|                                     |  | 2003                            |       |   | % NetSales                    |     |   | 2002 |   |       | % Net Sales |  |      | 2003 |  | % NetSales |        |  | 2002 |   | % NetSales |  
|Operating income (loss), as reported |  | $                               | 8,801 |   |                               | 7.6 | % |      | $ | (621  | )           |  | (0.5 | )%   |  | $          | 15,888 |  | 7.2  | % |            | $ | 6,575  |  | 3.0 | %
|Restructuring and other charges      |  |                                 | (13   | ) |                               |    |   |      |   | 8,921 |             |  | 7.8  |      |  |            | 101    |  |     |   |            |   | 8,921  |  | 4.1 |  
|                                     |  |                                 |       |   |                               |     |   |      |   |       |             |  |      |      |  |            |        |  |      |   |            |   |        |  |     |  
|Operating income, as adjusted        |  | $                               | 8,788 |   |                               | 7.6 | % |      | $ | 8,300 |             |  | 7.3  | %    |  | $          | 15,989 |  | 7.2  | % |            | $ | 15,496 |  | 7.1 | %
|                                     |  |                                 |       |   |                               |     |   |      |   |       |             |  |      |      |  |            |        |  |      |   |            |   |        |  |     |  



Interest and Other Expenses



Interest expense and securitization costs in the second quarter of
fiscal 2004 declined to $3.7 million from $3.9 million in the prior year. For the first six months of fiscal 2004, interest expense and securitization costs declined to $7.3 million from $7.8 million in the prior year. The decrease in interest
expense was due primarily to lower debt levels in the first half of fiscal 2004 and lower year-over-year short-term interest rates.



15



---

##### Table of Contents

Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle



Income before income taxes and cumulative effect of a change in accounting principle totaled
$5.0 million for the second quarter of fiscal 2004 compared to a $4.6 million loss for the same period of fiscal 2003. These results reflect the impact of $0.1 million and $8.9 million in restructuring and other charges reported for the three-month
periods ended December 31, 2003 and 2002, respectively. In order to provide consistent comparisons of year-over-year results, the following reconciliation is provided:



|                                                                                                         |  |                                 |       |   |                               |     |   |      |   |        |             |  |      |      |  |            |       |  |      |   |  |             |        |   |  |      |   
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | --- | - | ---- | - | ------ | ----------- |  | ---- | ---- |  | ---------- | ----- |  | ---- | - |  | ----------- | ------ | - |  | ---- | --
|(in thousands)                                                                                           |  | Three Months Ended December 31, |       |   | Six Months Ended December 31, |    
|                                                                                                         |  | 2003                            |       |   | % NetSales                    |     |   | 2002 |   |        | % Net Sales |  |      | 2003 |  | % NetSales |       |  | 2002 |   |  | % Net Sales |       
|Income (loss) before income taxes and cumulative effect of a change in accounting principle, as reported |  | $                               | 4,950 |   |                               | 4.3 | % |      | $ | (4,558 | )           |  | (4.0 | )%   |  | $          | 8,431 |  | 3.8  | % |  | $           | (1,375 | ) |  | (0.6 | )%
|                                                                                                         |  |                                 |       |   |                               |     |   |     
|Restructuring and other charges                                                                          |  |                                 | (13   | ) |                               |    |   |      |   | 8,921  |             |  | 7.8  |      |  |            | 101   |  |     |   |  |             | 8,921  |   |  | 4.1  |   
|                                                                                                         |  |                                 |       |   |                               |     |   |      |   |        |             |  |      |      |  |            |       |  |      |   |  |             |        |   |  |      |   
|Income before income taxes and cumulative effect of a change in accounting principle, as adjusted        |  | $                               | 4,937 |   |                               | 4.3 | % |      | $ | 4,363  |             |  | 3.8  | %    |  | $          | 8,532 |  | 3.8  | % |  | $           | 7,546  |   |  | 3.5  | % 
|                                                                                                         |  |                                 |       |   |                               |     |   |      |   |        |             |  |      |      |  |            |       |  |      |   |  |             |        |   |  |      |   



Income Taxes



The Companys effective income tax rate was 38% for the second quarter and 38.7% for
the first six months of fiscal 2004, respectively. For fiscal 2003, the effective income tax rate (benefit) was (30.2)% and (12.1)% for the second quarter and first six months, respectively. The amount of tax expense differs from the amount obtained
by application of the statutory United States rates primarily due to the impact of state income taxes in fiscal years 2004 and 2003, and the impact in fiscal 2004 of foreign operations, which are excluded from taxable domestic income.



Cumulative Effect of a Change in Accounting Principle



Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, which requires companies to discontinue amortizing goodwill and to perform annual impairment tests. In completing the transitional impairment test required by SFAS No.
142, the Company tested the net goodwill balances attributable to each of its reporting units for indications of impairment by comparing the fair value of each reporting unit to its carrying value. Fair value was determined using discounted cash
flow estimates for each reporting unit in accordance with the provisions of SFAS No. 142. The preparation of such discounted cash flow estimates requires significant management judgement with respect to operating profit, growth rates, appropriate
discount rates and residual values. Based on the impairment test as of July 1, 2002, the Company determined that goodwill related to its Specialty Publications division within the Publisher Services segment was impaired. The Specialty Publications
division primarily serves customers in the special-interest magazine market, which had been negatively impacted by the significant downturn in advertising spending (as a result of cost reduction initiatives undertaken by advertisers) resulting in
fewer page counts and correspondingly lower net sales. In addition, due to excess capacity in the magazine printing industry, volume and pricing pressures also resulted in lower operating profits and cash flows. As a result, the discounted cash flow
analysis for the Specialty Publications division provided a value that was lower than carrying value. Accordingly, the Company recorded an impairment charge of $56.3 million representing the entire balance of goodwill for this division in the first
quarter of fiscal 2003. This charge is reflected as a cumulative effect of a change in accounting principle in the accompanying Condensed Consolidated Statements of Income.



The total balance of goodwill as of December 31, 2003 and June 30, 2003, respectively, relates to the Companys Publisher Services
segment.



16



---

##### Table of Contents

Earnings Per Share



The Company recorded net income of $0.33 per diluted share for the second quarter of fiscal 2004 compared to a $(0.35) loss per diluted
share in the second quarter of fiscal 2003. For the six months ended December 31, 2003, the Company recorded net income of $0.56 per diluted share compared to a $(6.39) loss per diluted share for the six months ended December 31, 2002. In order to
provide consistent comparisons of year-over-year results, the following reconciliation is provided which reflects the impact of restructuring and other charges, and the cumulative effect of a change in accounting principle for goodwill on earnings
per share for the three and six months ended December 31, 2003 and 2002, respectively:



|                                                      |  |                                |      |      |                               |       |      |  |      |      |  |   |       |  
|----------------------------------------------------- |  | ------------------------------ | ---- | ---- | ----------------------------- | ----- | ---- |  | ---- | ---- |  | - | ----- | -
|                                                      |  | Three MonthsEnded December 31, |      |      | Six Months Ended December 31, |      
|                                                      |  | 2003                           |      | 2002 |                               |       | 2003 |  | 2002 |     
|Earnings per share, assuming dilution:                |  |                                |      |      |                               |       |      |  |      |      |  |   |       |  
|Net income (loss), as reported                        |  | $                              | 0.33 |      | $                             | (0.35 | )    |  | $    | 0.56 |  | $ | (6.39 | )
|Cumulative effect of a change in accounting principle |  |                                |     |      |                               |      |      |  |      |     |  |   | 6.25  |  
|Restructuring and other charges                       |  |                                |     |      |                               | 0.65  |      |  |      | 0.01 |  |   | 0.65  |  
|                                                      |  |                                |      |      |                               |       |      |  |      |      |  |   |       |  
|Earnings per share, assuming dilution, as adjusted    |  | $                              | 0.33 |      | $                             | 0.30  |      |  | $    | 0.57 |  | $ | 0.51  |  
|                                                      |  |                                |      |      |                               |       |      |  |      |      |  |   |       |  



EBITDA



EBITDA for the three months ended December 31, 2003 was $13.7 million compared to $13.1
million in the comparable period of the prior year. For the six months ended December 31, 2003, EBITDA was $25.8 million compared to $25.1 million for the six months ended December 31, 2002. The Company defines EBITDA as earnings before interest,
taxes, depreciation, amortization and securitization costs. The Company also excludes the cumulative effect of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation. The
Company believes EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies earnings power more meaningful and providing consistent comparisons of the
Companys performance. In order to provide consistent comparisons of year-over-year EBITDA, the following reconciliation is provided:



|                                |  |                                 |        |   |            |      |   |      |   |        |            |  |      |   
|------------------------------- |  | ------------------------------- | ------ | - | ---------- | ---- | - | ---- | - | ------ | ---------- |  | ---- | --
|                                |  | Three months ended December 31, |       
|(Dollars in thousands)          |  | 2003                            |        |   | % NetSales |      |   | 2002 |   |        | % NetSales | 
|Net income (loss), as reported  |  | $                               | 3,070  |   |            | 2.7  | % |      | $ | (3,182 | )          |  | (2.8 | )%
|Income tax expense (benefit)    |  |                                 | 1,880  |   |            | 1.6  |   |      |   | (1,376 | )          |  | (1.2 | ) 
|Interest                        |  |                                 | 3,608  |   |            | 3.1  |   |      |   | 3,692  |            |  | 3.3  |   
|Securitization costs            |  |                                 | 134    |   |            | 0.1  |   |      |   | 176    |            |  | 0.2  |   
|Depreciation                    |  |                                 | 4,817  |   |            | 4.2  |   |      |   | 4,821  |            |  | 4.2  |   
|Amortization                    |  |                                 | 164    |   |            | 0.1  |   |      |   |       |            |  |     |   
|Restructuring and other charges |  |                                 | (13    | ) |            |     |   |      |   | 8,921  |            |  | 7.8  |   
|                                |  |                                 |        |   |            |      |   |      |   |        |            |  |      |   
|EBITDA                          |  | $                               | 13,660 |   |            | 11.8 | % |      | $ | 13,052 |            |  | 11.5 | % 
|                                |  |                                 |        |   |            |      |   |      |   |        |            |  |      |   



17



---

##### Table of Contents

|                                                      |  |                               |        |            |      |   |      |   |         |            |  |       |   
|----------------------------------------------------- |  | ----------------------------- | ------ | ---------- | ---- | - | ---- | - | ------- | ---------- |  | ----- | --
|                                                      |  | Six months ended December 31, |       
|(Dollars in thousands)                                |  | 2003                          |        | % NetSales |      |   | 2002 |   |         | % NetSales | 
|Net income (loss), as reported                        |  | $                             | 5,170  |            | 2.3  | % |      | $ | (57,510 | )          |  | (26.2 | )%
|Cumulative effect of a change in accounting principle |  |                               |       |            |     |   |      |   | 56,301  |            |  | 25.7  |   
|Income tax expense (benefit)                          |  |                               | 3,261  |            | 1.5  |   |      |   | (166    | )          |  | (0.1  | ) 
|Interest                                              |  |                               | 7,051  |            | 3.2  |   |      |   | 7,455   |            |  | 3.4   |   
|Securitization costs                                  |  |                               | 255    |            | 0.1  |   |      |   | 364     |            |  | 0.2   |   
|Depreciation                                          |  |                               | 9,589  |            | 4.3  |   |      |   | 9,734   |            |  | 4.4   |   
|Amortization                                          |  |                               | 327    |            | 0.2  |   |      |   |        |            |  |      |   
|Restructuring and other charges                       |  |                               | 101    |            |     |   |      |   | 8,921   |            |  | 4.1   |   
|                                                      |  |                               |        |            |      |   |      |   |         |            |  |       |   
|EBITDA                                                |  | $                             | 25,754 |            | 11.6 | % |      | $ | 25,099  |            |  | 11.5  | % 
|                                                      |  |                               |        |            |      |   |      |   |         |            |  |       |   



USE OF GAAP AND NON-GAAP
MEASURES



In addition to results presented in accordance with
generally accepted accounting principles (GAAP), the Company has included in this report the following non-GAAP financial measures: (1) operating income adjusted to exclude restructuring and other charges of $(.01) million
and $0.1 million for the three and six months ended December 31, 2003, respectively, and $8.9 million for the three and six months ended December 31, 2002, (2) income before cumulative effect of a change in accounting principle adjusted
in the same manner and for the same items as operating income, (3) earnings per share adjusted to exclude the restructuring and other charges in the same manner as operating income for the six months ended December 31, 2003, and the
three and six months ended December 31, 2002, and to exclude the impact of the $56.3 million cumulative effect of a change in accounting principle for the six months ended December 31, 2002, which was recorded upon the Companys adoption of
SFAS No. 142; and (4) EBITDA and EBITDA margin as a percent of net sales with EBITDA being defined by the Company as earnings before interest, taxes, depreciation, amortization and securitization costs. The Company also
excludes the cumulative effect of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation of EBITDA. For each non-GAAP financial measure, the Company has presented the most
directly comparable GAAP financial measure and has reconciled the non-GAAP financial measure with such comparable GAAP financial measure.



These non-GAAP financial measures provide useful information to investors to assist in understanding the underlying operational performance of the Company. Specifically,
(1) the exclusion of restructuring and other charges permits comparisons of results for on-going business facilities under the current operating structure; (2) the exclusion of the cumulative effect of a change in accounting principle permits
comparisons without the impact of financial results driven solely by the adoption of new accounting pronouncements; and (3) EBITDA and EBITDA margin as a percent of net sales are useful measures of operating performance before the impact of
investing and financing transactions, making comparisons between companies earnings power more meaningful and providing consistent period-over-period comparisons of the Companys performance. In addition, the Company uses these non-GAAP
financial measures internally to measure its on-going business performance and in reports to bankers to permit monitoring of the Companys ability to repay outstanding liabilities.



18



---

##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



Operating Activities



Net cash provided by operating activities for the first six months of fiscal 2004 totaled $9.1 million, compared to $12.7 million in fiscal 2003. This $3.6 million
decrease was primarily attributable to an increase in contributions to the Companys various defined benefit pension plans, and other working capital changes net of a decrease in restructuring payments. The Company does not anticipate making
further payments to its primary defined benefit pension plan in fiscal 2004.



Investing Activities



Net cash used in investing
activities was $7.5 million for the first six months of fiscal 2004 compared to $5.9 million in the prior year. Capital expenditures for the first six months of fiscal 2004 totaled $8.1 million compared to $6.2 million for the corresponding period
of the prior year, and included investments primarily in new business and manufacturing systems, digital prepress equipment and building and equipment improvements. Proceeds from the sale of property, plant and equipment in fiscal 2004 totaled $0.7
million, and related primarily to the sale of presses at the Companys Charlotte, North Carolina, East Stroudsburg, Pennsylvania and Easton, Pennsylvania locations. The Company estimates that capital expenditures for fiscal 2004 will be
approximately $14 to $17 million.



Financing Activities



Net cash used in financing activities was $1.2 million for the first
six months of fiscal 2004 compared to $6.7 million for the first six months of fiscal 2003. For the six months ended December 31, 2003, the Company utilized cash provided by operations and net proceeds from the sale of accounts receivable to pay
down $3.2 million on the Companys revolving credit facility and to fund $0.9 million in dividend payments. The Company also received $0.2 million in proceeds from the exercise of stock options.



At December 31, 2003, the Company had one fixed-to-floating fair value interest rate swap
agreement outstanding with a notional amount of $35.0 million. This swap was entered into to convert $35.0 million of the Companys 9.75% senior subordinated notes due in 2009 to floating rate debt. The initial term of this swap agreement
expires in 2009, and the counterparty has an option to terminate the agreement beginning in June 2004. Under the swap agreement, the Company receives interest payments at a fixed rate of 9.75% and pays interest at a variable rate that is based on
six-month LIBOR plus a spread. The six-month LIBOR rate is reset each December 1 and June 1. The swap agreement is an effective hedge. The fair value of the Companys interest rate swap agreement was $1.8 million and $2.6 million at December
31, 2003 and June 30, 2003, respectively, which is recorded in the Condensed Consolidated Balance Sheets in other assets with an offset in long-term debt in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Companys strategy to effectively convert fixed rate financing to variable rate financing through the swap agreement resulted in a reduction of interest expense of $0.3 million and $0.3 million for the three-month periods
ended December 31, 2003 and 2002, respectively, and a reduction of $0.7 million and $0.6 million for the six-month periods ended December 31, 2003 and 2002, respectively.



For the six months ended December 31, 2002, the Company utilized cash provided by operations to pay down $2.6 million on the Companys
revolving credit facility and to fund $0.9 million in dividend payments. Lower sales and funding rates at December 31, 2002 resulted in a reduction of $3.2 million in funding under the Companys receivables securitization program.



The Company used an accounts receivable securitization program to fund some of its working
capital requirements. At December 31, 2003 and June 30, 2003, approximately $29.3 million and $26.7 million, respectively, of net accounts receivable had been sold by the Companys wholly owned, bankruptcy-remote subsidiary without recourse to
an unrelated third party purchaser under the securitization program. The sales were reflected in the Condensed Consolidated Balance Sheets as a reduction of accounts receivable with the proceeds used to repay a corresponding amount of borrowing
under the Companys senior bank credit facility. On January 28, 2004, the Company terminated its accounts receivable securitization program concurrently with the refinancing of its senior bank credit facility resulting in an increase in
borrowing under the senior bank credit facility. Effective January 28, 2004, the accounts receivable are no longer sold to the wholly-owned, bankruptcy-remote subsidiary or to an unrelated third party purchaser. Therefore, the amount of reported
accounts receivable and borrowings under the senior bank credit facility on the Condensed Consolidated Balance Sheets will increase in the future.



19



---

##### Table of Contents

Long-term debt at December 31, 2003 totaled $133.2 million, compared to $134.0 million at June 30, 2003. Additionally,
the Company had $9.6 million and $12.8 million in current maturities of long-term debt at December 31, 2003 and June 30, 2003, respectively, which were scheduled to mature March 31, 2004. On January 28, 2004, the Company refinanced its senior bank
credit facility, which was to mature on March 31, 2004. The new senior bank credit facility provides for a $100 million revolving credit facility that will mature in January 2008. The facility, with a group of seven banks, is secured by
substantially all of the Companys real, personal and mixed property, is jointly and severally guaranteed by each of the Companys present and future significant subsidiaries, and is secured by a pledge of the capital stock of present and
future significant subsidiaries. The senior bank credit facility contains certain covenants regarding total leverage, senior leverage, fixed charge coverage and net worth, and contains other restrictions, including limitations on additional
borrowings, and the acquisition, disposition and securitization of assets.



The
Company remains a guarantor on real estate lease obligations, totaling approximately $0.4 million annually ($0.1 million quarterly) through September 2009, for a facility in Atlanta related to the Creative Marketing division, which was sold in the
third quarter of fiscal 2002, Additionally, the Company has entered into a $1.8 million contract to purchase a press for its Charlotte facility.



The primary cash requirements of the Company are for debt service, capital expenditures, working capital, taxes, pension funding and dividends. The primary sources of
liquidity are cash flow provided by operations and unused capacity under the senior bank credit facility. The future operating performance and the ability to service the Companys debt depends on the ability to implement the business strategy
and on general economic, financial, competitive, legislative, regulatory and other factors, many of which are beyond the control of the Company. Nevertheless, the Company believes that these sources will provide sufficient liquidity and capital
resources to meet its operating requirements for capital expenditures and working capital.



Statements contained in this report relating to Cadmus future prospects and performance are forward-looking statements that are subject to risks and uncertainties that could cause actual results
to differ materially from those expressed or implied by such statements. Factors that could cause actual results to differ materially from managements expectations include but are not limited to: (1) the overall economic environment, (2) the
equity market performance and interest rate environment, which can impact our pension liability, (3) our ability to develop and market new capabilities and services to take advantage of technology changes in the publishing process, especially for
scientific, technical and medical journals, (4) significant price pressure in the markets in which we compete, (5) the loss of significant customers or the decrease in demand from customers, (6) our ability to continue to obtain improved
efficiencies and lower production costs, (7) the financial condition and ability to pay of certain customers, (8) the impact of industry consolidation among key customers, and (9) our ability to operate effectively in markets outside of North
America. Other risk factors are detailed from time to time in our other Securities and Exchange Commission filings. The information provided in this report is provided only as of the date of this report, and we undertake no obligation to update any
forward-looking statements made herein.



20



---

##### Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Except as noted below, there have been no material changes to the information concerning the Companys Quantitative and Qualitative Disclosures about Market Risk as previously reported in the
Companys Report on Form 10-K for the year ended June 30, 2003. Additional information concerning the Companys quantitative and qualitative disclosures about market risk is included in Note 8 of the Notes to Condensed Consolidated
Financial Statements and under the caption Managements Discussion and Analysis  Liquidity and Capital Resources in this Report on Form 10-Q for the quarterly period ended December 31, 2003, and is incorporated herein by
reference.



ITEM 4. CONTROLS AND PROCEDURES



The Company
maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management on a timely basis. As required, management, including the Companys chief executive
officer and chief financial officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Companys
chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures were operating effectively to ensure that information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Additionally, no changes in the Companys
internal control over financial reporting occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



21



---

##### Table of Contents

PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



The Company is not
presently involved in any litigation, nor to its knowledge is any litigation threatened against the Company or its subsidiaries, that in managements opinion, would result in any material adverse effect on the Companys consolidated
financial position or results of operations, or which is not expected to be covered by the Companys liability insurance.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



| | (a) | At the 2003 Annual Meeting of Shareholders of the Company (Annual Meeting) held on November 5, 2003, 7,129,429 shares of the Companys outstanding common stock were
present in person or by proxy and entitled to vote.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | At the Annual Meeting, the following matters were voted upon and received the vote set forth below:
| | --- | ---------------------------------------------------------------------------------------------------



(1) Election of Class II Directors. The nominees for director were elected, having received the following vote:



|                 |  |           |  |          
|---------------- |  | --------- |  | ---------
|Nominee          |  | For       |  | Withheld 
|G. Waddy Garrett |  | 5,864,637 |  | 1,264,792
|Thomas C. Norris |  | 5,885,141 |  | 1,244,288
|Bruce V. Thomas  |  | 5,891,037 |  | 1,238,392



The following other
directors continued in office after the Annual Meeting:



Class
III Directors (serving until the 2004 Annual Meeting): Martina L. Bradford, Russell M. Robinson, II, James E. Rogers and Wallace Stettinius.



Class I Directors (serving until the 2005 Annual Meeting): Thomas E. Costello, Keith Hamill, Edward B. Hutton, Jr. and Nathu R. Puri.



(2) Ratification of designation of Ernst & Young LLP as independent
auditors for current fiscal year. Designation of the auditors was ratified, having received the following vote:



|                 |  |          
|---------------- |  | ---------
|For:             |  | 6,895,546
|Against:         |  | 233,126  
|Abstain:         |  | 757      
|Broker Non-vote: |  |         



22



---

##### Table of Contents

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | a) | Exhibits:
| | -- | ---------



| | 3.1 | Restated Articles of Incorporation of Cadmus Communications Corporation, as amended (incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 (Commission File No. 0-12954)).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3.2 | Bylaws of Cadmus Communications Corporation, as amended (incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K dated July 23, 2001 (Commission
File No. 0-12954)).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).
| | ---- | --------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).
| | ---- | --------------------------------------------------------------------



| | 32 | Certification Pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer and Chief Financial Officer.
| | -- | --------------------------------------------------------------------------------------------------------



| | b) | Reports on Form 8-K:
| | -- | --------------------



On October 30, 2003, the Company filed a report on Form 8-K furnishing its October 30, 2003, press release announcing its fiscal 2004 first quarter
results.



23



---

##### Table of Contents

SIGNATURES



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 thereunto duly authorized.



|      |  |                                                  
|----- |  | -------------------------------------------------
|      |  | CADMUS COMMUNICATIONS CORPORATION                
|      |  | (Registrant)                                     
|      | 
|Date: |  | February 9, 2004                                 
|      | 
|      |  | /s/ Bruce V. Thomas                              
|      |  | Bruce V. Thomas                                  
|      |  | President and Chief Executive Officer            
|      |  | (principal executive officer)                    
|      | 
|Date: |  | February 9, 2004                                 
|      | 
|      |  | /s/ Paul K. Suijk                                
|      |  | Paul K. Suijk                                    
|      |  | Senior Vice President and Chief Financial Officer
|      |  | (principal financial officer)                    





24